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(SUNLIFE LOGO)





Sun Life Financial Inc.



Managements Discussion and Analysisfor the Year Ended December 31, 2004









February 14, 2005







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Managements Discussion and Analysis TABLE OF CONTENTS FINANCIAL HIGHLIGHTS
    
    
    1ENTERPRISE MISSION, VISION AND STRATEGY
    
    
    2FINANCIAL PERFORMANCE AND OBJECTIVES
    
    
    3OVERVIEW OF BUSINESS
    
    
    4PERFORMANCE OVERVIEW
    
    
    5CONSOLIDATED RESULTS OF OPERATIONS
    
    
    7QUARTERLY INFORMATION
    
    
    9NON-GAAP FINANCIAL MEASURES
    
    
    10SUN LIFE FINANCIAL CANADA
    
    
    11SUN LIFE FINANCIAL UNITED STATES
    
    
    17MFS INVESTMENT MANAGEMENT
    
    
    22SUN LIFE FINANCIAL ASIA
    
    
    24SUN LIFE FINANCIAL UNITED KINGDOM
    
    
    27CORPORATE CAPITAL
    
    
    28CORPORATE DEVELOPMENTS
    
    
    29CRITICAL ACCOUNTING ESTIMATES
    
    
    30ACCOUNTING POLICIES
    
    
    33RISK MANAGEMENT
    
    
    34INVESTMENTS
    
    
    37FINANCIAL POSITION AND LIQUIDITY
    
    
    40LEGAL AND REGULATORY PROCEEDINGS
    
    
    46ADDITIONAL INFORMATION
    
    
    46
 In this Managements Discussion and Analysis (MD&A), Sun Life Financial Inc. (SLF Inc.) and its
consolidated subsidiaries, significant equity investments and joint ventures are collectively
referred to as Sun Life Financial or the Company. Unless otherwise indicated, all information
in this MD&A is presented as at and for the year ended December 31, 2004 and amounts are expressed
in Canadian dollars. Where information at and for the year ended December 31, 2004 is not
available, information available for the latest period before December 31, 2004 is used. Financial
information, except where otherwise noted, is presented in accordance with Canadian generally
accepted accounting principles (GAAP), and the accounting requirements of the Office of the
Superintendent of Financial Institutions, Canada (OSFI). Further information is available in SLF
Inc.s Annual Information Form (AIF) for the year ended December 31, 2004, filed with applicable
securities regulators in Canada, which may be accessed at
www.sedar.com, and with the United States
Securities and Exchange Commission (the SEC), which may be accessed at www.sec.gov. Use of Non-GAAP Financial
Measures

Management evaluates the Companys performance on the basis of financial measures prepared in
accordance with Canadian GAAP, including earnings, earnings per share (EPS) and return on equity
(ROE). Management also measures the Companys performance based on certain non-GAAP measures,
including operating earnings and other financial measures based on operating earnings, such as
operating EPS and operating ROE. These non-GAAP financial measures exclude certain special items
that are not operational or ongoing in nature. Management also uses financial performance measures
which exclude the impact of currency fluctuations during the period for which a comparison is made.
These amounts are determined by reference to the exchange rates of the corresponding periods.
Management believes that these non-GAAP financial measures provide information useful to investors
in understanding the Companys performance and facilitate the comparison of the quarterly and
full-year results of the Companys ongoing business operations. These non-GAAP financial measures
do not have any standardized meaning and may not be comparable with similar measures used by other
companies. They should not be viewed as alternative to measures of financial performance determined
in accordance with GAAP. Additional information concerning the Companys use of non-GAAP financial measures and a
reconciliation of those non-GAAP measures to the most directly comparable GAAP measures is included
in this MD&A under the heading Non-GAAP Financial Measures on page 10. Sun Life Financial Inc.




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Managements Discussion and Analysis  Forward-looking Statements Some of the statements contained or incorporated by reference in this MD&A, including those
relating to Sun Life Financials strategies and other statements that are predictive in nature,
that depend upon or refer to future events or conditions, or that include words such as expects,
anticipates, intends, plans, believes, estimates or similar expressions, are
forward-looking statements within the meaning of securities laws. Forward-looking statements
include, without limitation, the information concerning possible or assumed future results of
operations of Sun Life Financial set out under Enterprise Mission, Vision and Strategy, Overview
of Business, Performance Overview, Sun Life Financial Canada, Sun Life Financial United
States, MFS Investment Management, Sun Life Financial Asia, Sun Life Financial United
Kingdom, Corporate Capital, Investments and Financial Position and Liquidity. These
statements are not historical facts but instead represent only Sun Life Financials expectations,
estimates and projections regarding future events. The forward-looking statements contained or incorporated by reference in this MD&A are not
guarantees of future performance and involve certain risks and uncertainties that are difficult to
predict. The future results and stockholder value of SLF Inc. may differ materially from those
expressed in the forward-looking statements contained or incorporated by reference in this MD&A due
to, among other factors, the matters set out under Risk Factors contained in SLF Inc.s AIF and
the factors detailed in its other filings with Canadian and U.S. securities regulators, including
its annual and interim financial statements and the notes thereto. SLF Inc. does not undertake any
obligation to update or release any revisions to these forward-looking statements to reflect events
or circumstances after the date of this MD&A or to reflect the occurrence of unanticipated events,
except as required by law. Sun Life Financial Inc.




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Managements Discussion and Analysis FINANCIAL HIGHLIGHTS (in millions of Canadian dollars, except earnings and dividends per share)
    
    2004
    
    
    
    2003
    
    
    2002(1)Shareholders Net Income- Operating(2)
    
    
    1,740
    
    
    
    
    1,520
    
    
    
    1,260- Reported
    
    
    1,681
    
    
    
    
    1,309
    
    
    
    998Basic Earnings per Share (EPS)- Operating(2)
    
    
    2.91
    
    
    
    
    2.50
    
    
    
    2.32- Reported
    
    
    2.81
    
    
    
    
    2.15
    
    
    
    1.84Return on Shareholders Equity (ROE)- Operating(2)
    
    
    12.0
    %
    
    
    
    10.6
    %
    
    
    10.7
    %- Reported
    
    
    11.6
    %
    
    
    
    9.2
    %
    
    
    8.5
    %Dividends per Common Share
    
    
    0.86
    
    
    
    
    0.68
    
    
    
    0.56Dividend Payout Ratio(3)
    
    
    30
    %
    
    
    
    27
    %
    
    
    24
    %Fee Income
    
    
    2,903
    
    
    
    
    2,810
    
    
    
    3,095Total Revenue
    
    
    21,748
    
    
    
    
    22,056
    
    
    
    23,101Premiums, Deposits and Fund SalesPremium Revenue
    
    
    12,921
    
    
    
    
    13,543
    
    
    
    14,875Segregated Fund Deposits
    
    
    7,127
    
    
    
    
    5,968
    
    
    
    6,642Mutual Fund Sales
    
    
    19,061
    
    
    
    
    26,970
    
    
    
    31,668Managed Fund Sales
    
    
    23,981
    
    
    
    
    25,202
    
    
    
    29,683Total Premiums, Deposits and Fund Sales
    
    
    63,090
    
    
    
    
    71,683
    
    
    
    82,868Assets Under Management(at December 31)General Fund Assets
    
    
    107,757
    
    
    
    
    109,209
    
    
    
    123,452Segregated Fund Net Assets
    
    
    56,564
    
    
    
    
    54,086
    
    
    
    52,755Other Assets Under Management
    
    
    195,283
    
    
    
    
    195,729
    
    
    
    184,407Total Assets Under Management
    
    
    359,604
    
    
    
    
    359,024
    
    
    
    360,614Capital(at December 31)Subordinated Debt
    
    
    2,182
    
    
    
    
    2,504
    
    
    
    2,922Sun Life ExchangEable Capital Securities (SLEECS)
    
    
    1,150
    
    
    
    
    1,150
    
    
    
    1,150Preferred Shares
    
    
    152
    
    
    
    
    155
    
    
    
    158Total Equity
    
    
    14,412
    
    
    
    
    13,976
    
    
    
    14,909Total Capital
    
    
    17,896
    
    
    
    
    17,785
    
    
    
    19,139
 Shareholders
Net Income
Operating earnings(2) increased by 14% to $1,740 million in 2004 from
$1,520 million in 2003. Basic operating EPS were $2.91, up 16% from $2.50 in 2003. The
strong operating earnings performance reflected the Companys continuing success in
growing its core businesses and diversifying its earnings stream. Excluding the impact of
currency exchange rate changes, operating earnings would have been $1,787 million, up 18%
from 2003, and operating EPS would have been $2.99, up 20% from a year ago. For the year ended December 31, 2004, reported shareholders net income reached $1,681
million, representing an increase of $372 million over $1,309 million for the year ended

December 31, 2003. Basic EPS increased to $2.81 from $2.15 in 2003. The appreciation of
the Canadian dollar against foreign currencies in the year reduced shareholders net
income by $43 million. Financial Strength
Ratings - Sun Life Assurance Company of Canada (as at December 31, 2004) A.M. Best
    
    
    
    A++Moodys
    
    
    
    Aa2Standard & Poors
    
    
    
    AA+
   (1)
    
    Includes the results of Clarica Life Insurance Company from the date of acquisition May 29, 2002.(2)
    
    Operating earnings, operating EPS and operating ROE are non-GAAP measures and exclude special items described in this MD&A in
Non-GAAP Financial Measures on page 10.(3)
    
    Represents ratio of common shareholders dividends to shareholders operating net income. Sun Life Financial Inc. 1




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Managements Discussion and Analysis ENTERPRISE MISSION, VISION
AND STRATEGY 
Sun Life Financial is a leading international financial services organization providing a wide
range of life and health insurance, savings, retirement and pension products and services to
individual and corporate customers. The international financial services industry continues to undergo significant evolution driven by: 
    An accelerated pace of industry consolidation, with the largest, best capitalized industry
participants gaining greater market share
    Changing customer needs driven by demographic shifts, creating new product development
opportunities focussed on retirement planning
    Volatility in equity markets and low interest rates  the development of sophisticated
risk mitigation tools allows Sun Life Financial to operate profitably in this environment
    Maturing of North American markets  expertise gained from these markets in product development,
distribution and technology, is readily redeployed into Sun Life Financials rapidly
expanding Asian operations
    Advances in technology, allowing for faster, more efficient delivery of products and
services to customers
    Political, economic and regulatory uncertainties Sun Life Financial has developed a clear mission, vision and strategy supported by an established
international operating platform, a culture of compliance and solid financial capability,
positioning it to be a significant competitor in this environment. The Company operates under a
business model that strives to establish scale operations in diversified markets in which it
chooses to compete. It also balances the higher growth prospects of certain businesses with the
relative stability of earnings from more mature operations. Furthermore, the Companys operations
in insurance, retirement and savings products are complementary and form an integrated product
platform to provide a broad range of financial solutions for customers. The Companys mission,
vision, strategy and objectives are summarized below. (CHART) Sun Life Financial Inc. 2




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Managements Discussion and Analysis FINANCIAL PERFORMANCE AND OBJECTIVES  Measure
    
    
    Medium-term
    
    
    2004 Results
    
    
    2004Goals
    
    
    
    
    
    Achievementsvs.
GoalsOperating EPS(1)Growth
Sun Life Financials earnings are
sensitive to a number of external
factors including equity capital
markets, interest rates and currency
exchange rates
    
    
    10%*
    
    
    16.4%**
    
    
    Exceeded targetOperating ROE(1)Growth
Growth in ROE is a significant
driver of shareholder value and
continues to be a major focus for
    
    
    75 to 100
    
    
    140 basis
    
    
    Exceededmanagement across all businesses
    
    
    basis points*
    
    
    points**
    
    
    targetDividend Payout Ratio(2)
The payment of common share
dividends is an indicator of
managements confidence in the
Companys long-term ability to generate
capital as well as its significant
capital strength and flexibility
    
    
    25% - 35%
    
    
    30%
    
    
    Met target
 * The medium-term goals
assume the following conditions: 
    A rise in the average level of key equity market indices, primarily the S&P 500, by approximately 7% to 8%
    A steady increase in North American interest rates of approximately 100 basis points across the yield curve, with 5-year and 10-year
U.S. Treasury bonds the primary focus
    Stability in exchange rates between the Canadian dollar and foreign currencies, primarily the U.S. dollar and the pound sterling ** Excluding the impact of currency exchange rate changes, operating EPS and operating ROE would have been up 19.6% and 190 basis points,
respectively, from 2003.






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|(1) |  | Operating EPS and operating ROE are
non-GAAP measures. For additional information see the section under the
heading
Non-GAAP
Financial Measures on page 10.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Represents ratio of common
shareholders dividends to shareholders operating net income.                                                                      

Sun Life Financial Inc.

3



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Managements Discussion and Analysis OVERVIEW OF
BUSINESS Sun Life Financial is a leading international financial services organization,
operating under a balanced business model by providing a wide range of savings, investment
management, retirement, pension and life and health insurance products and services to individual
and corporate customers. Sun Life Financials operations are divided into reportable segments that
reflect its management and internal financial reporting structures. Each segment has its own
management and is responsible for its financial performance. Generally, the segments derive their
earnings from wealth management and protection products and services. As of December 31, 2004, the
Companys business segments were: Sun Life Financial Canada (SLF Canada), Sun Life Financial United
States (SLF U.S.), MFS Investment Management (MFS), Sun Life Financial Asia (SLF Asia), Sun Life
Financial United Kingdom (SLF U.K.) and Corporate Capital. Corporate Capital primarily included
investments and expenses of a corporate nature for which management responsibility resided in the
Companys corporate office. Where appropriate, information on a reportable segment has been
presented both in Canadian dollars and the segments local currency to facilitate the analysis of
underlying business trends. Drivers
of Profitability
The profitability of the Companys operations depends on, or is affected by, in large part,
the following primary factors: 
    External factors, including changes in equity market performance,
interest rates, currency exchange rates and regulations
    The amount and composition of assets under management
    The management of market and credit risks
    The maintenance of spreads between interest credited to
policyholders and investment returns
    The management of the risks inherent in products with guaranteed
benefit options
    Mortality and morbidity rates
    Surrender and lapse rates
    The management of product pricing
    Expense management A description of the Companys risk factors can be found in SLF Inc.s 2004 Annual Information Form
(AIF) under the heading Risk Factors. Products
and Services by Business Segment
The Companys portfolio of products and services by business segment is summarized in the
following table. (BUSINESS SEGMENT TABLE) Distribution The Company distributes its individual wealth and protection products through multiple
distribution channels, including career or direct sales agents, independent general agents and
brokers, financial intermediaries and banks. The Companys group life and health products are distributed through sales representatives in
co-operation with independent brokers and benefit consultants. Group retirement products are
distributed primarily through pension consultants, the Companys in-house sales force and brokers
and advisors. Sun Life Financial Inc. 4




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Managements Discussion and Analysis PERFORMANCE OVERVIEW 2004
Performance
The Company reported a fourth consecutive year of record earnings, with shareholders
operating net income(1) for the year of $1,740 million, up 14% compared to $1,520
million in 2003. The solid financial results were achieved despite the significant strengthening of
the Canadian dollar against foreign currencies during 2004, which reduced 2004 shareholders
operating net income by $47 million. Reported shareholders net income for the year was $1,681
million, up $372 million compared to $1,309 million in 2003. Reported shareholders net income for
2004 and 2003 included regulatory settlement provisions of $59 million and $211 million,
respectively, described in Non-GAAP FinancialMeasures on page 10. With the completion of the integration of Clarica Life Insurance Company (Clarica), SLF Canada
renewed its focus on customer service and product development. During 2004, the Group Benefits and
Group Retirement Services (GRS) business units launched new customer service websites and
introduced industry-leading technology to enhance the customer experience. GRS won awards from
Benefits Canadaand the Life Communicators Association for its excellence and innovation in
customer service and communications. In the fourth quarter of 2004, the Individual Insurance and
Investments business unit introduced a repriced universal life product to provide a more
competitive position in the wholesale distribution channel and began expanding wholesale
distribution relationships. SLF U.S. undertook several key initiatives in 2004 to achieve operational efficiencies, strengthen
customer relationships, and enhance its product lines. With the business strategy to streamline
operational and administrative functions across its business units, a new service centre was
created to provide centralized back-office services and a call centre for all of the business units
of SLF U.S. The service centre will help lower unit costs, while increasing efficiency and
improving service. In July 2004, the Group Life and Health business unit expanded its distribution
capabilities by opening four new sales offices, SLF U.S.s largest expansion of group sales offices
to date. This business unit also increased the size of its distribution force by 26% to 130
representatives in 2004. During 2004, the Annuities business unit rebranded and updated its
variable annuity line to include new minimum guarantees and living benefit features. The
equity-indexed annuity products were also updated. SLF U.S.s Multipoint product was the third best
selling indexed annuity product in the United States in 2004. During 2004, both SLF Canada and SLF U.S. revitalized their senior management teams, which are well
aligned to champion initiatives in customer focus, operational excellence and business growth. In 2004, MFS implemented a number of reforms to address regulatory issues affecting the U.S. mutual
fund industry and as a result of its settlements with the United States Securities and Exchange
Commission (SEC) and other U.S. regulators. It abolished the use of brokerage commissions, or soft
dollar arrangements, to acquire third-party research and market data services. Measures such as
increased staffing and systems capabilities and the imposition of redemption fees on mutual funds
were taken to enhance the monitoring of shareholder trading practices, and to deter market timing
and late trading. MFS also improved the transparency of its mutual fund operations through expanded
disclosure of fund expenses, portfolio turnover and brokerage costs. These reforms helped restore
investor confidence and MFSs reputation in the marketplace. SLF Asia demonstrated its high growth potential in 2004, reporting brisk sales in all business
units despite the stronger Canadian dollar. On a local currency basis, sales doubled from 2003,
primarily driven by robust individual life sales in India. In 2004, SLF Asia improved its
operational efficiencies through the integration of the three Philippine subsidiaries and the
migration to a new administration system in the Hong Kong operations. It also expanded its
distribution presence in Asia, with the number of career agents more than doubled in Hong Kong, up
45% in Indonesia, and up 29% in the Philippines. The Companys ability to maintain strong financial performance in the face of a challenging
operational environment and the weakening of foreign currencies against the Canadian dollar
reflects the strength of its diversified and well-balanced portfolio, prudent and disciplined
investment strategies and effective risk management. 2005
Outlook
Sun Life Financials earnings are affected by the international nature of its significant
operations in Canada, the United States, the United Kingdom, the Philippines, India, China and
other countries, and the economic, business, political, regulatory and capital market conditions in
these areas as well as fluctuations of foreign currencies. The Company has a disciplined risk
management program that includes a formal process for the identification and potential mitigation
of these risks to the Companys earnings, liquidity and capital strength. The Companys fixed income products, in particular, are affected by changes in interest rates.
Minimum rate   (1)
    
    Operating net income is a non-GAAP
measure and excludes the charges for the MFS regulatory settlements described
in this MD&A under the heading Non-GAAP
Financial Measures on
page 10. Sun Life Financial Inc. 5




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Managements Discussion and Analysis guarantees built into certain annuity products reduce the spread between the Companys interest
earned and interest-credited rates in a low interest environment. Management will continue to take
the required actions, including changes in product design and pricing, to help provide for
long-term profitability. As more U.S. states enact legislation reducing statutory required minimum
interest rate guarantees, the Company will continue to adjust credited interest rates on new
products as permitted. The Company also uses derivatives and asset/liability matching programs to
help reduce the impact of interest rate volatility on its earnings. A portion of the Companys earnings is also affected by volatility in the equity markets due to
asset-based fees, equity-based investment income and segregated fund and annuity guarantees. The
Company attempts to reduce the impact of this volatility, on guarantees in particular, through
hedging by using derivative arrangements. The Canadian life insurance industry is now heavily influenced by three companies, of which Sun
Life Financial is one. The Company has completed its major integration activities, arising from its
acquisition of Clarica, ahead of the competition and is well positioned to capitalize on the
operational efficiencies attained and to re-focus on product development and customer service in
2005 to achieve long-term growth. The Company is also positioned to achieve top-line growth in 2005 with the planned revitalization
of the wholesale distribution channel in Canada, expansion of its wholesale annuity and group
insurance distribution networks in the United States, and expected continuation of the sales
momentum achieved in SLF Asia in 2004. In addition, MFS is positioned to benefit from growth in
equity markets. It is expected that the regulatory environment in the North American insurance and investment
industries will continue to evolve in 2005, with ongoing investigations into contingent
commissions, market timing, frequent trading and other matters. The economic environment in the
Asian jurisdictions in which the Company operates continues to change with legislative proposals
for easing of foreign ownership restrictions in India, changes in China providing for geographical
and product segment expansion, and a new government in Indonesia. Management views these changes as
positive growth opportunities for 2005 and beyond. The South Asia region suffered the disastrous effects of a tsunami in late 2004, which caused
significant loss of life and devastation. In addition to an immediate $100,000 donation, Sun Life
Financial, along with its employees and advisors, has established a special campaign and hopes
jointly to raise $1 million to contribute to the relief efforts. Sun Life Financials operations in
this region were not materially affected and Sun Life Financial suffered no material financial
losses. In 2004, almost half of the Companys earnings were derived from jurisdictions outside of Canada
and were affected by the fluctuations of foreign currencies, in particular the U.S. dollar, against
the Canadian dollar. The strengthening of the Canadian dollar during 2004 reduced reported
shareholders net income by $43 million. Continued strengthening of the Canadian dollar in the
future could suppress earnings levels. In spite of the factors outlined above that may affect the Companys earnings, management believes
the Companys long-term growth momentum remains sound. In particular, management believes its
balanced business model sufficiently diversifies the Companys operations geographically and
between the insurance and asset-based product lines to achieve stable long-term growth into the
future. Sun Life Financial Inc. 6




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Managements Discussion and Analysis CONSOLIDATED RESULTS OF OPERATIONS Shareholders
Net Income 
Operating earnings(1), which exclude special items outlined on page 10, increased
by 14% to $1,740 million in 2004 from $1,520 million in 2003. Basic operating EPS were $2.91, up
16% from $2.50 in 2003. The solid operating earnings performance reflected the Companys continuing
success in growing its core businesses and diversifying its earnings stream. Excluding the impact
of currency exchange rate changes, operating earnings would have been $1,787 million, up 18% from
2003, and operating EPS would have been $2.99, up 20% from a year ago. For the year ended December 31, 2004, reported shareholders net income reached $1,681 million,
representing an increase of $372 million over $1,309 million for the year ended December 31, 2003.
Basic EPS increased to $2.81 from $2.15 in 2003. The appreciation of the Canadian dollar against
foreign currencies in the year reduced shareholders net income by $43 million. Earnings and Earnings Per Share ($ millions)
    
    2004
    
    
    
    2003
    
    
    2002Net Income from
Continuing Operations
    
    
    1,694
    
    
    
    
    1,308
    
    
    
    1,033Less: Loss from
Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    
    36Total Net Income
    
    
    1,694
    
    
    
    
    1,308
    
    
    
    997Less: Participating
Policyholders Net Income
    
    
    13
    
    
    
    
    (1
    )
    
    
    (1
    )Shareholders Net Income
    
    
    1,681
    
    
    
    
    1,309
    
    
    
    998Less: Special Items
    
    
    (59
    )
    
    
    
    (211
    )
    
    
    (262
    )Operating Earnings
    
    
    1,740
    
    
    
    
    1,520
    
    
    
    1,260Basic EPS from:- Continuing Operations
    
    
    2.81
    
    
    
    
    2.15
    
    
    
    1.91- Shareholders Net
Income
    
    
    2.81
    
    
    
    
    2.15
    
    
    
    1.84- Operating Earnings
    
    
    2.91
    
    
    
    
    2.50
    
    
    
    2.32Diluted EPS from:- Continuing Operations
    
    
    2.79
    
    
    
    
    2.15
    
    
    
    1.90- Shareholders Net
Income
    
    
    2.79
    
    
    
    
    2.15
    
    
    
    1.83- Operating Earnings
    
    
    2.88
    
    
    
    
    2.50
    
    
    
    2.32
 SLF Canada produced solid results in 2004, with earnings rising to $967 million, 17% higher than
2003. Benefiting from favourable equity market conditions, Group Retire Services reported earnings
growth in excess of 20% and earnings from the Companys equity ownership in CI Fund Management Inc.
(CI Funds) grew 52%, reflecting in part the increasing benefits of the strategic partnership
between the Company and CI Funds. Improved Group Benefits results and better mortality experience
in the Reinsurance operations also contributed to the increase. Despite a 7% depreciation of the U.S. currency against the Canadian dollar during 2004, which
reduced SLF U.S. earnings by $30 million, SLF U.S. reported earnings of $391 million, an increase
of 29% from last year. The increase reflected the impact of higher equity market levels, improved
credit experience and a lower effective tax rate due to favourable experience in respect of prior
years audits and other items. As described on page 10, the Company took charges of $59 million after tax in the first quarter of
2004 and $211 million after tax in the fourth quarter of 2003 in relation to settlements reached
between MFS and certain regulators. Excluding these charges, MFS earnings increased 3% over the
prior year to $173 million in 2004. The impact of currency movements during 2004 reduced earnings
by $13 million. SLF Asia reported earnings of $45 million in 2004, or $8 million higher than 2003. The increase was
primarily driven by higher investment yields in Hong Kong and expense management initiatives in the
Philippines. On a local currency basis, earnings increased 40% compared to 2003. SLF U.K.s 2004 earnings declined 15% from 2003 primarily due to reduced earnings in the group life
business mostly arising from worse claims experience. The renewal rights on the existing block of
business were sold in 2003, and the group life business is expected to be substantially run off by
the end of 2005. Corporate Capital losses reduced by $11 million compared to a year ago, mostly reflecting better
results in the run-off reinsurance operations. The Companys need to strengthen certain actuarial liabilities reduced its operating income before
taxes and non-controlling interests. The impact of this on
shareholders net income was offset by the reduction in income taxes due to the resolution of prior years tax issues. (BAR CHART)   (1)
    
    Operating earnings and other financial
information based on operating earnings, such as operating earnings per share
and operating ROE, are non-GAAP measures and exclude the regulatory settlements
and other significant items described in this MD&A under the
heading Non-GAAP Financial Measures on page 10 . Sun Life Financial Inc. 7




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Managements Discussion and Analysis Return on Equity In 2004, ROE based on operating earnings was 12.0% compared to 10.6% in 2003. Return on
shareholders equity based on reported shareholders net income was 11.6% in 2004, compared to 9.2%
in 2003. The increase in ROE reflected higher earnings as well as the impact of the SLF Inc.s
share repurchases, increased dividend payments and currency exchange rates on average equity
levels. Excluding the impact of the strengthening of the Canadian dollar against foreign
currencies, ROE based on operating and reported earnings would have been 12.5% and 12.0%,
respectively, in 2004. Assets Under Management The Companys assets under management (AUM) comprise general funds, segregated funds and other
assets under management, which include mutual and managed funds consisting of institutional and
other third-party assets that are managed by the Company. Total AUM were $359.6 billion as at
December 31, 2004, up $580 million, compared to $359.0 billion as at December 31, 2003. Increases
due to market improvements and continuing business growth more than offset reductions due to net
outflows of mutual, managed and segregated funds and the strengthening of the Canadian dollar
against foreign currencies. The Companys general fund assets decreased to $107.7 billion, down $1.5 billion, or 1%, from the
December 31, 2003 level. The decrease was primarily due to the strengthening of the Canadian dollar
against foreign currencies, which reduced asset values by $3.3 billion. This decrease was partially
offset by business growth primarily in the SLF Canada Individual Insurance and Investments and the
SLF U.S. Individual Life operations. Segregated fund assets increased to $56.6 billion as at December 31, 2004, up 5% from the December
31, 2003 level. Increases in asset values of $4.6 billion due to market improvements were partially
offset by an unfavourable impact of $1.8 billion due to the strengthening of the Canadian dollar
and net outflows of $323 million as claims and withdrawals exceeded new sales. Other assets under management, not including the assets managed by CI Funds, decreased slightly to
$195.3 billion, down $446 million from the December 31, 2003 level. Market growth of $20.0 billion
was offset by net outflows of $9.2 billion and the unfavourable impact of $11.2 billion due to the
strengthening of the Canadian dollar. (BAR CHART) Revenue In 2004, the Companys total revenue decreased to $21.7 billion, down $308 million from 2003,
primarily as a result of the unfavourable impact of $911 million due to the stronger Canadian
dollar. Excluding the effect of currency, revenue increased $603 million with all operating
business groups, except SLF U.K., reporting revenue growth. SLF U.K.s revenues declined due to the
continued run-off of the closed-block business. Life insurance premiums declined by $359 million primarily due to an unfavourable impact of $250
million arising from the strengthening of the Canadian dollar. The run-off of SLF U.K.s individual
and group life insurance operations also contributed $207 million to the decline. Health insurance
premiums were largely unchanged from the prior years level as higher premiums in SLF Canada and
SLF U.S. were offset by the impact of the sale of SLF U.K.s group business in 2003 and an
unfavourable currency exchange rate impact of $47 million. Annuity premiums decreased 5% to $4.6 billion in 2004 compared to $4.8 billion in 2003 primarily
due to the currency impact of a strengthening Canadian dollar. Investment income increased $221 million or 4% in 2004 from $5.7 billion in 2003. The increase was
primarily due to lower provisions for investment losses and higher equity-based income, partially
offset by the impact of the strengthening of the Canadian dollar, which reduced investment income
by $180 million. Fee income climbed to $2.9 billion in 2004, or 3% above the 2003 level. The increase reflected
growth in fee-based assets, partially offset by an unfavourable impact of $174
million due to the strengthening of the Canadian dollar versus foreign currencies. Sun Life Financial Inc. 8




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##### 



Managements Discussion and Analysis Total Revenue ($ millions)
    
    2004
    
    
    
    2003
    
    
    2002PremiumsAnnuities
    
    
    4,588
    
    
    
    
    4,805
    
    
    
    7,402Life Insurance
    
    
    5,966
    
    
    
    
    6,325
    
    
    
    5,403Health Insurance
    
    
    2,367
    
    
    
    
    2,413
    
    
    
    2,070Total Premiums
    
    
    12,921
    
    
    
    
    13,543
    
    
    
    14,875Net Investment Income
    
    
    5,924
    
    
    
    
    5,703
    
    
    
    5,131Fee Income
    
    
    2,903
    
    
    
    
    2,810
    
    
    
    3,095Total
    
    
    21,748
    
    
    
    
    22,056
    
    
    
    23,101
 Benefit Payments The Company has a variety of current and future benefit payment obligations that affect
overall earnings performance. Payments to policyholders, beneficiaries and depositors in 2004 were
$12.5 billion, down $394 million from 2003, primarily due to the effect of the strengthening of the
Canadian dollar. Transfers to segregated funds increased 10%, reflecting higher demand for equity
market-based products. The 2004 increase in actuarial liabilities was $85 million lower than 2003,
reflecting primarily the impact of a stronger Canadian dollar and the net outflow of fixed annuity
products, partially offset by the impact of higher U.S. equity-indexed annuity sales. Benefit Payments ($ millions)
    
    2004
    
    
    
    2003
    
    
    2002Payments to Policyholders,
Beneficiaries and Depositors
    
    
    12,532
    
    
    
    
    12,926
    
    
    
    11,688Net Transfers to Segregated
Funds
    
    
    600
    
    
    
    
    544
    
    
    
    1,329Increase in Actuarial
Liabilities
    
    
    1,425
    
    
    
    
    1,510
    
    
    
    3,822Total
    
    
    14,557
    
    
    
    
    14,980
    
    
    
    16,839
 Expenses and Other Commission expenses increased $68 million in 2004, up 4% from 2003. The increase reflected
primarily the impact of higher equity-indexed annuity sales in the U.S., partially offset by the
strengthening of the Canadian dollar against the U.S. currency. Excluding pre-tax regulatory-related charges of $62 million in 2004 and $320 million in 2003
related to MFS regulatory settlements, 2004 operating expenses of $2.8 billion were comparable to
2003. The increase as a result of increased investments in customer service initiatives in SLF
Canada, as well as higher MFS operating expenses related to compliance with 2003 regulatory issues,
was mostly offset by the $123 million impact of a stronger Canadian dollar. Interest expense decreased $14 million to $195 million in 2004 compared to $209 million in 2003.
The decrease primarily reflected the impact of the redemption of $165 million of subordinated notes
by Sun Canada Financial Co., a subsidiary of SLF Inc., in September 2003, as well as the impact of
the weakened U.S. currency on U.S. dollar denominated interest payments. Expenses and Other ($ millions)
    
    2004
    
    
    
    2003
    
    
    2002Commissions
    
    
    1,916
    
    
    
    
    1,848
    
    
    
    1,909Operating Expenses
    
    
    2,769
    
    
    
    
    2,768
    
    
    
    2,779Regulatory
Settlement Provisions Related to MFS
    
    
    62
    
    
    
    
    320
    
    
    
    Premium Taxes
    
    
    182
    
    
    
    
    171
    
    
    
    168Interest Expense
    
    
    195
    
    
    
    
    209
    
    
    
    192Income Taxes
    
    
    293
    
    
    
    
    387
    
    
    
    98Non-Controlling Interests in
Net Income of Subsidiaries
    
    
    80
    
    
    
    
    65
    
    
    
    83Loss from Discontinued
Operations, Net of Taxes
    
    
    
    
    
    
    
    
    
    
    
    36Participating Policyholders
Net Income (Loss)
    
    
    13
    
    
    
    
    (1
    )
    
    
    (1
    )Total
    
    
    5,510
    
    
    
    
    5,767
    
    
    
    5,264
 Quarterly Information Key quarterly financial information for the most recent two fiscal years is summarized
in the table below: Quarterly Information ($ millions)
    
    2004
    
    
    
    2003Q4
    
    
    Q3
    
    
    Q2
    
    
    Q1
    
    
    
    Q4
    
    
    Q3
    
    
    Q2
    
    
    Q1Shareholders Net Income- Operating(1)
    
    
    438
    
    
    
    439
    
    
    
    438
    
    
    
    425
    
    
    
    
    417
    
    
    
    394
    
    
    
    366
    
    
    
    343- Reported
    
    
    438
    
    
    
    439
    
    
    
    438
    
    
    
    366
    
    
    
    
    206
    
    
    
    394
    
    
    
    366
    
    
    
    343Basic EPS- Operating(1)
    
    
    0.74
    
    
    
    0.73
    
    
    
    0.73
    
    
    
    0.71
    
    
    
    
    0.69
    
    
    
    0.65
    
    
    
    0.60
    
    
    
    0.56- Reported
    
    
    0.74
    
    
    
    0.73
    
    
    
    0.73
    
    
    
    0.61
    
    
    
    
    0.34
    
    
    
    0.65
    
    
    
    0.60
    
    
    
    0.56Total Revenue
    
    
    5,269
    
    
    
    5,390
    
    
    
    5,551
    
    
    
    5,538
    
    
    
    
    5,437
    
    
    
    5,282
    
    
    
    5,579
    
    
    
    5,758Total Assets Under Management
    
    
    359,915
    
    
    
    359,604
    
    
    
    372,956
    
    
    
    369,602
    
    
    
    
    359,024
    
    
    
    348,481
    
    
    
    342,176
    
    
    
    336,803
   (1)
    
    Operating earnings, operating EPS and operating ROE are non-GAAP measures and exclude special items described on page 10. For additional information
see the section under the heading Non-GAAP Financial Measures on page 10. Sun Life Financial Inc. 9




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##### 



Managements Discussion and Analysis NON-GAAP FINANCIAL MEASURES Management evaluates the Companys performance on the basis of financial measures
prepared in accordance with Canadian generally accepted accounting principles (GAAP), including
earnings, EPS and ROE. Management also measures the Companys performance based on certain non-GAAP
measures, including operating earnings and other financial measures based on operating earnings,
such as operating EPS and operating ROE. These non-GAAP financial measures exclude certain special
items that are not operational or ongoing in nature. Management believes that these non-GAAP
financial measures provide information useful to investors in understanding the Companys
performance and facilitate the comparison of the quarterly and full-year results of the Companys
ongoing business operations. These non-GAAP financial measures do not have any standardized
meaning and may not be comparable with similar measures used by other companies. They should not be
viewed as alternative to measures of financial performance determined in accordance with GAAP.
Financial results and measures used in this MD&A that are not referred to as operating and not
expressed as excluding the impact of currency fluctuations have been determined in accordance with
GAAP. The special items discussed below are not included in the Companys operating earnings, operating
EPS and operating ROE. The Company recorded a $59 million after tax charge to income in the first quarter of 2004 in
connection with the March 31, 2004 settlements by MFS of an administrative proceeding with the SEC
regarding disclosure of brokerage allocation practices. Under the terms of that settlement MFS
agreed to pay a US$50 million penalty to compensate certain MFS funds. The Company recorded a $211 million after-tax charge to income in the fourth quarter of 2003 in
connection with the February 5, 2004, settlements with federal and state regulators with respect to
alleged false and misleading information in certain MFS fund prospectuses regarding market timing
and related issues. In these settlements, MFS agreed to pay US$225 million to compensate investors
in certain funds. Additional information concerning these MFS regulatory settlements is included in this MD&A under
the headings MFS Investment Management and Legal and Regulatory Proceedings. In 2002, the Companys net income was reduced by $262 million, as a result of the following special
items: (i) the $173 million after-tax gain on the sale of Spectrum Investment Management Limited
(Spectrum) to CI Funds, (ii) the net loss of $48 million on the disposition of Clarica U.S., (iii)
after-tax restructuring and other charges of $217 million in connection with the acquisition of
Clarica, (iv) an after-tax charge of $150 million related to guaranteed minimum income benefits and
non Unicover-related accident and health risks in the Companys run-off reinsurance business, and
(v) other special items which had a net unfavourable impact of $20 million on net income. The earnings per share impact of the items described above is summarized in the following table. Impact of Special Items on Basic Earnings Per Share ($ per share)
    
    
    2004
    
    
    
    
    2003
    
    
    

    2002EPS
 Reported (GAAP-based)
    
    
    2.81
    
    
    
    
    2.15
    
    
    
    1.84Net Gains (Losses)
on Special Items
    
    
    (0.10
    )
    
    
    
    (0.35
    )
    
    
    (0.48
    )EPS  Operating
    
    
    2.91
    
    
    
    
    2.50
    
    
    
    2.32
 Reconciliation of Operating Earnings ($ millions)
    
    2004
    
    
    
    2003
    
    
    
    2002Q4
    
    
    Q3
    
    
    Q2
    
    
    Q1
    
    
    Total
    
    
    
    Q4
    
    
    Q3
    
    
    Q2
    
    
    Q1
    
    
    Total
    
    
    
    TotalReported Earnings(GAAP-based)
    
    
    438
    
    
    
    439
    
    
    
    438
    
    
    
    366
    
    
    
    1,681
    
    
    
    
    206
    
    
    
    394
    
    
    
    366
    
    
    
    343
    
    
    
    1,309
    
    
    
    
    998After-Tax Gains (Losses) on Special ItemsProvisions for MFS Regulatory Settlements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59
    )
    
    
    (59
    )
    
    
    
    (211
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (211
    )Net Gain on Sale of Spectrum
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    173Net Loss on Sale of Clarica U.S.
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48
    )SLF Canada Restructuring and Other Charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (217
    )Charge to
the Run-off Block of Reinsurance Business
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (150
    )Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (20
    )Total Special Items
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (59
    )
    
    
    (59
    )
    
    
    
    (211
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (211
    )
    
    
    
    (262
    )Operating Earnings
    
    
    438
    
    
    
    439
    
    
    
    438
    
    
    
    425
    
    
    
    1,740
    
    
    
    
    417
    
    
    
    394
    
    
    
    366
    
    
    
    343
    
    
    
    1,520
    
    
    
    
    1,260
 Sun Life Financial Inc. 10




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Managements Discussion and Analysis SUN LIFE FINANCIAL CANADA  Business
Profile
 SLF Canada has a leadership position in the Canadian market with a customer base exceeding 7 million people,
representing almost a quarter of Canadas population. Through its four operating units  Individual Insurance and
Investments (including the Companys 34% interest in CI Funds), Group Benefits, Group Retirement Services, and
Reinsurance, McLean Budden and Other, SLF Canada offers a full range of financial products and services including
individual life and health insurance, individual annuities, mutual funds, group life and health insurance and group
retirement products and services. SLF Canada also offers investment management services primarily conducted by the
56%-owned subsidiary McLean Budden Limited (McLean Budden). In 2004, SLF Canadas operations also included a life
retrocession reinsurance operation.   Industry Profile
 The life insurance industry in Canada has undergone considerable consolidation in the past decade, resulting
in three large insurers, a handful of medium-sized companies and a number of smaller companies operating in niche
markets. The three largest companies collectively represent approximately two-thirds of Canadian life and health
insurance and annuity market segments by in-force business. With a slow-growing Canadian population, the Canadian
insurance market is faced with limited growth. However, the aging of the population creates opportunities in other
markets such as health and retirement products. Given this industry structure and demographic trend, economy of
scale, customer service experience, distribution capabilities and technology innovation become increasingly
critical to business success. Competitive Position(1) Sun Life Financial is one of three major Canadian life insurance organizations and is a significant and
leading player in most of the Canadian markets in which it chooses to compete. It has the necessary scale and
critical mass to successfully compete in these markets. It has the largest exclusive sales force in the Canadian
life insurance industry. SLF Canada is: 
    1st in defined contribution pension plans based on assets under administration
    2nd in individual life insurance based on direct premiums
    2nd in individual critical illness based on annualized premiums in force
    3rd in group benefits based on annualized premiums and premium equivalents in force
    3rd in individual annuities sales based on premiums and deposits In addition, CI Funds is the second largest Canadian investment fund company based on long-term assets under
management.(2) Strategy SLF Canada offers the domestic market competitive products and delivery systems through two recognizable
brands. The Sun Life Financial brand is used for group retirement services, group benefits and selected individual
products and distribution channels. The Clarica brand is used to serve the individual retail market through its
exclusive sales force. SLF Canadas strategy is to: 
    Solidify its leadership position in its core businesses with focus on scale and operating
capabilities
    Aggressively grow its Individual Insurance and Investments business by expanding its distribution
network and leveraging the industry-leading brands
    Grow the group businesses by leveraging its ability to provide integrated service to both Group
Benefits and Group Retirement Services clients
    Be a high performance and customer-focused organization 
   (1)
    
    Competitive statistics are based on published
information at and for the year ended December 31, 2004 or the information
available for the latest period before December 31, 2004.(2)
    
    Long-term assets under management include
mutual, segregated, labour-sponsored and other funds and pools and exclude
money market funds. Sun Life Financial Inc. 11




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##### 



Managements Discussion and Analysis 2004 Accomplishments  
    Shareholders net income increased to $967 million, up 17% over 2003
    ROE increased 150 basis points from 11.9 % in 2003 to 13.4% in 2004
    Ranked #1 supplier of defined contribution plans, group
Registered Retirement Savings Plans (RRSPs) and
deferred profit sharing plans by Benefits Canadain 2004
    Introduced a unique critical illness insurance product providing coverage for childhood diseases
    Reached agreement with Assicurazioni Generali SpA to be the exclusive Canadian member of the
international Generali Employee Benefits Network, enabling Sun Life Financial to offer plan members access to
local benefit programs in more than 70 countries
    Continued to see enhanced satisfaction ratings in all business areas in regular customer surveys
    Continued to leverage synergies, streamline operations and optimize administrative functions
resulting in reduced expenses
    The SLF Canada integration of Clarica and Sun Life Assurance Company of Canada (Sun Life Assurance)
operations was recognized as Project of the Year at the ProjectWorld Canada National Conference and Trade
Show for excellence in project management
    GRS received six awards for investor education and advertising from the Life Communicators Association 2005 Priorities  
    Grow its Individual Insurance and Investments business by increasing distribution strength to
achieve $25 million in sales in the wholesale channel, increasing the productivity of its exclusive Clarica
Sales Force and developing more competitive products
    Leverage the unique Total Benefits offering in the Group Benefits and GRS businesses
    Take advantage of the opportunity created by being the first of the big three insurers to complete
integration by refocusing on product development and customer service to gain market share
    Continue to increase customer and advisor satisfaction and loyalty
    Continue to streamline business processes to reduce operating costs and enhance the customer
experience 
 Financial and Business Results
 SLF Canada shareholders net income increased to $967 million, up $138 million or 17%
from $829 million in 2003. The increase was primarily due to increased earnings from the investment
in CI Funds, improved equity markets, improved mortality experience in Reinsurance and higher
earnings in Group Benefits. Revenue for the year was $8.6 billion, comparable to the 2003 level. Driven by the shift in
consumer preference for equity market-based products, individual annuity premiums decreased $192
million, offsetting business growth in other areas of SLF Canada. Improving equity markets
throughout the year and increased deposits and sales in the asset-based lines of business helped
increase fee income by 11% to $536 million. ROE rose to 13.4% compared to 11.9% a year ago, reflecting the strong growth in earnings. Total assets under management were $106.3 billion at the end of 2004, up 6% from the 2003 level.
The growth was driven by higher equity market levels and net sales of segregated and managed funds. Outlook With consolidation in the Canadian life insurance market largely complete, competition is
increasingly based upon customer experience and operational excellence. Being the first of the major Canadian life
insurance companies to complete the integration of its recent acquisition, SLF Canada has refocused
on customer service, product development, technological innovation and operational efficiencies,
and is well positioned to capitalize on its competitive strengths to retain existing customers and
acquire new business. Summary Statement of Operations ($ millions, except as noted)
    
    2004
    
    
    
    2003
    
    
    2002Premiums
    
    
    5,372
    
    
    
    
    5,605
    
    
    
    4,145Net Investment Income
    
    
    2,706
    
    
    
    
    2,546
    
    
    
    1,974Fee Income
    
    
    536
    
    
    
    
    485
    
    
    
    444Total Revenue
    
    
    8,614
    
    
    
    
    8,636
    
    
    
    6,563Client Disbursements & Change
in Actuarial Liabilities
    
    
    5,649
    
    
    
    
    5,891
    
    
    
    4,625Commissions & Other Expenses
    
    
    1,683
    
    
    
    
    1,566
    
    
    
    1,219Income Taxes
    
    
    289
    
    
    
    
    342
    
    
    
    191Non-Controlling Interests in
Net Income of Subsidiaries
    
    
    14
    
    
    
    
    11
    
    
    
    14Par Policyholders Income (Loss)
    
    
    12
    
    
    
    
    (3
    )
    
    
    1Shareholders Net Income
    
    
    967
    
    
    
    
    829
    
    
    
    513Selected Financial InformationReturn on Equity
    
    
    13.4
    %
    
    
    
    11.9
    %
    
    
    11.3
    %Total AUM ($billions)
    
    
    106.3
    
    
    
    
    100.2
    
    
    
    89.2
 Sun Life Financial Inc. 12




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##### 



Managements Discussion and Analysis Sun
Life Financial Canada  Individual Insurance and Investments Business
Profile
SLF Canadas Individual Insurance and Investments business unit offers a full range of life
and health insurance products as well as savings and retirement products tailored to the needs of
individual customers. Its principal insurance products include universal life, term life,
permanent life, critical illness, long-term care and personal health insurance. Its principal
investment products include payout and accumulation annuities, market-based funds and Registered
Retirement Income Funds. These products are marketed through a distinctive, multi-channel
distribution model comprising the exclusive Clarica Sales Force with sales advisors, managers and
product specialists helping customers meet their financial needs through face-to-face advice, and
a wholesale distribution channel built upon partnerships with investment dealers, mutual fund
dealers, other insurance companies and managing general agents
(MGA). The Companys earnings from its 34% ownership interest in CI Funds are included in the results of
SLF Canadas Individual Insurance and Investments unit. As one of Canadas largest investment fund
companies, CI Funds had assets under management of $51.5 billion as at December 31, 2004. The
Clarica Sales Force is an important contributor to CI Funds sales.   2004 Accomplishments
  
    Earnings of $493 million were up 18% over 2003
    Individual health insurance sales increased to $29 million, up 16% from 2003
    Sales in market-based products through the Clarica Sales Force increased 51% over
2003
    Launched new critical illness and joint term life insurance products, and repriced
level cost of insurance universal life products
    Re-entered the MGA channel by contracting with a number of new MGAs across Canada   Financial and Business Results
 In response to customer and advisor needs, Individual Insurance and Investments
successfully launched several new products during 2004. In particular, SLF Canadas new critical
illness product offers coverage for two additional illnesses and provides access to the Best
Doctors service to give customers access to medical advice. The focus of the business unit will
continue to be on increasing sales through the wholesale channel, improving advisor productivity,
developing innovative products, and enhancing customer and advisor services. Earnings increased to $493 million from $419 million in 2003. These increased earnings resulted
from improved mortality and morbidity, better investment spreads primarily due to favourable credit
experience, stronger stock market performance, improved pricing for segregated fund guarantees and
reduced unit expenses, partially offset by higher new business acquisition costs and unfavourable
lapse experience. The increased scale and synergy savings from the Clarica acquisition continued to improve operating
margins and reduce unit costs during 2004. Increased productivity in the Clarica-branded exclusive sales force offset by lower sales in the
wholesale channel resulted in an overall decrease in 2004 life and health insurance sales by 4%
from the 2003 level to $136 million. SLF Canada is committed to profitable sales through the
wholesale channel and will increase its life and health insurance product offerings, expand the
number of its investment dealer and MGA relationships, and enhance its underwriting, sales
illustrations and services to this channel. Consumer preference for market-based funds due to strong market performance and lower interest
rates resulted in increased segregated fund deposits, partially offset by lower premiums from guaranteed products. In total, wealth product sales were up 8% over 2003. Summary Statement of Operations ($ millions)
    
    2004
    
    
    
    2003
    
    
    2002Premiums
    
    
    2,267
    
    
    
    
    2,508
    
    
    
    1,816Net Investment Income
    
    
    1,787
    
    
    
    
    1,657
    
    
    
    1,126Fee Income
    
    
    142
    
    
    
    
    141
    
    
    
    209Total Revenue
    
    
    4,196
    
    
    
    
    4,306
    
    
    
    3,151Client Disbursement & Change
in Actuarial Liabilities
    
    
    2,681
    
    
    
    
    2,880
    
    
    
    2,152Commissions & Other Expenses
    
    
    863
    
    
    
    
    835
    
    
    
    696Income Taxes
    
    
    147
    
    
    
    
    175
    
    
    
    79Non-Controlling Interests in
Net Income of Subsidiaries
    
    
    
    
    
    
    
    
    
    
    
    Par Policyholders Net Income (Loss)
    
    
    12
    
    
    
    
    (3
    )
    
    
    1Shareholders Net Income
    
    
    493
    
    
    
    
    419
    
    
    
    223Selected Financial InformationIndividual WealthPremiums and Deposits*
    
    
    1,442
    
    
    
    
    1,340
    
    
    
    835Individual Life and HealthSales  New Annualized Premiums
    
    
    136
    
    
    
    
    141
    
    
    
    116
   *
    
    Excludes sales of CI Funds by Clarica Sales Force. Sun Life Financial Inc. 13




---



##### 



Managements Discussion and Analysis Sun
Life Financial Canada  Group Benefits  Business Profile
 SLF Canadas Group Benefits business unit is a leading provider of group
life and health insurance products in Canada. The Company has a market share of
approximately 21% based on premium and premium equivalents, and provides
services to more than 10,000 employers in Canada. The business unit provides
life, dental, drug, extended health care, health spending accounts, disability
and flexible benefit plans to employers of all sizes. SLF Canada competes on
its strength of scale, product offerings, regional delivery model,
industry-leading technology and e-business capabilities. The group benefit
products are marketed and distributed across Canada by experienced sales
representatives in co-operation with independent brokers and benefit
consultants. 
 2004 Accomplishments
  
    Achieved earnings of $246 million, up 6% from 2003
    Sales increased to $212 million, up 17% from 2003. Good client
retention, with cancellation rates at less than 4% of premium and premium
equivalents
    Industry-leading technology provided through a new member
services website and launching Benefits Explorer on the website used by
plan members 
 Financial and Business Results
 In 2004, Group Benefits increased investments in customer service initiatives aimed at improving retention of existing
customers and winning new business. The new service initiatives focused on incorporating the voice
of the customer to enhance customer satisfaction and loyalty. Group Benefits continued to grow profitably through its innovative approach of providing integrated
group benefits and group retirement services. This integrated approach allows plan members to
manage their group benefits and retirement investments through a single point of access and a
branded member site specific to their employer. The launch of Benefits Explorer, a web-based tool,
further enhanced the plan member experience by providing easy access to relevant benefits coverage
information. In addition to introducing new technology innovations, Group Benefits launched a new group critical
illness product and announced new international benefits solutions for clients with employees
working outside Canada. Group Benefits reported earnings of $246 million in 2004, an increase of $13 million or 6%,
compared to 2003. The increase in earnings reflected continued growth in the business in-force. Revenue for the year grew by $42 million, or 2%, to $2.8 billion primarily due to increased
premiums from business growth. Sales, measured by annualized premiums and premium equivalents, increased 17% to $212 million for
2004. The increase reflected the addition of several large cases. Summary Statement of Operations($ millions)
    
    2004
    
    
    
    2003
    
    
    2002Premiums
    
    
    2,284
    
    
    
    
    2,244
    
    
    
    1,765Net Investment Income
    
    
    382
    
    
    
    
    383
    
    
    
    358Fee Income
    
    
    120
    
    
    
    
    117
    
    
    
    90Total Revenue
    
    
    2,786
    
    
    
    
    2,744
    
    
    
    2,213Client Disbursement & Change
in Actuarial Liabilities
    
    
    1,962
    
    
    
    
    1,964
    
    
    
    1,629Commissions & Other Expenses
    
    
    489
    
    
    
    
    451
    
    
    
    345Income Taxes
    
    
    89
    
    
    
    
    96
    
    
    
    82Shareholders Net Income
    
    
    246
    
    
    
    
    233
    
    
    
    157
 Selected Financial InformationSales
 Annualized Premiums
and ASO Premium Equivalents
    
    
    212
    
    
    
    
    181
    
    
    
    192
 Sun Life Financial Inc.
    
    14




---



##### 



Managements Discussion and Analysis Sun Life Financial Canada  Group Retirement Services  Business
Profile
 SLF Canadas Group Retirement Services business unit is the number one
provider of defined contribution plans in Canada.(1) GRS also offers
other group retirement services and products, including investment only
segregated funds and fixed rate annuities, group life annuities and pensioner
payroll services. With its strength in product and investment offerings, plan
sponsor and member services and technology capabilities, GRS is well equipped
to meet the complex plan and service requirements of medium to large
corporations and associations, and to provide cost-effective solutions to
smaller markets. GRS had a market share of approximately 32% in Canada based on
assets under management, and its group products covered almost 1.2 million plan
participants at the end of 2004. GRSs products and services are distributed
through pension consultants, brokers and advisors. 
 2004 Accomplishments
  
    Led the Canadian industry in new business performance in 2004, with $1.8 billion in sales
    Earnings increased to $106 million, up 20% from 2003
    Ranked top supplier of defined contribution plans, group RRSPs and deferred profit sharing
plans by Benefits Canadain 2004
    Successful ISO 9001:2000 certification for National Account Plan Administration
    Received six awards for investor education and advertising from the Life Communicators
Association
    Achieved record asset retention levels with over $315 million retained in 2004 
 Financial and Business Results
 With the Clarica
integration completed, GRS increased its focus on sales, asset retention and improving member
experience in 2004. GRSs net income increased $18 million or 20% over 2003, mainly due to an
increase in fees earned on higher average asset levels, improved investment gains, and higher
mortality and experience gains related to payout annuities. Sales increased 78% to $1.8 billion,
with improvement in all product categories including small clients, large clients, payout annuities
and asset retention products. Fee income increased $14 million, mainly due to strong equity markets, positive cash flow and new
sales. Guaranteed annuity premiums were down 6% in 2004 compared to 2003 as participants
increasingly shifted their contributions toward market-based products over guaranteed funds. Summary Statement of Operations($ millions)
    
    2004
    
    
    
    2003
    
    2002Premiums
    
    
    419
    
    
    
    
    445
    
    
    
    335Net Investment Income
    
    
    417
    
    
    
    
    434
    
    
    
    435Fee Income
    
    
    166
    
    
    
    
    152
    
    
    
    101Total Revenue
    
    
    1,002
    
    
    
    
    1,031
    
    
    
    871Client Disbursement & Change
    
    
    679
    
    
    
    
    743
    
    
    
    668in Actuarial Liabilities
Commissions & Other Expenses
    
    
    175
    
    
    
    
    162
    
    
    
    115Income Taxes
    
    
    42
    
    
    
    
    38
    
    
    
    31Shareholders Net Income
    
    
    106
    
    
    
    
    88
    
    
    
    57Selected Financial InformationAUM ($ billions)
    
    
    26.4
    
    
    
    
    25.8
    
    
    
    23.3Number of Defined Contribution
Plan Participants (000s)
    
    
    1,162
    
    
    
    
    1,082
    
    
    
    1,067
 (GROSS SALES BAR CHART)   (1)
 Sun Life Financial Inc.
    
    15




---



##### 



Managements Discussion and Analysis Sun Life Financial Canada  Reinsurance, McLean Budden and Other Operations  Business Profile
 In 2004, SLF Canadas Reinsurance, McLean Budden and Other operations included the
business groups reinsurance business, the 56%-owned subsidiary McLean Budden, and investment
income and expenses not directly attributable to SLF Canadas core business units. Sun Life Financials Reinsurance operations provide customized reinsurance solutions with a
primary focus on the life retrocession business in North America. The business unit is a
market leader in North America with a 29% market share based on individual life retrocession
in force. The business units leadership position in life retrocession reflects its strong
expertise in pricing and mortality risk management as well as Sun Life Assurances high
financial strength rating. McLean Budden is one of the premier institutional providers of investment management services
in Canada with assets under management of $34.7 billion as at December 31, 2004. 
 2004 Accomplishments
  
    Strong earnings of $122 million, up 37% from 2003
    Reinsurance sales included two large blocks of in-force life retrocession
business
    Implemented new ceded reinsurance administration system to enhance productivity
    McLean Budden awarded a large global investment management mandate, bringing
total 2004 global mandate accounts to over $1.7 billion, up 62% from 2003 
 Financial and Business Results
 Reinsurance, McLean Budden
and Other operations reported earnings of $122 million in 2004 compared to $89 million in 2003. The
increased earnings reflected better results in the Reinsurance operations primarily due to better
mortality experience, and stronger performance in McLean Budden due to improved equity markets. Excluding the impact of the strengthening of the Canadian dollar against the U.S. currency,
Reinsurance revenue increased 9% over the 2003 level, reflecting robust growth within the group
life and critical illness lines of business. Sales of in-force insurance were $24 billion and
included the successful placement of two sizeable in-force mortality blocks. Although sales were
down slightly from 2003, this reflected strong performance given the ongoing consolidation within
the life reinsurance market. With higher equity market levels in 2004, McLean Buddens assets under management were $34.7
billion as at December 31, 2004, up 18% from $29.3 billion a year ago. Summary Statement of Operations($ millions)
    
    2004
    
    
    
    

    2003
    
    
    
    2002Premiums
    
    
    402
    
    
    
    
    408
    
    
    
    229Net Investment Income
    
    
    120
    
    
    
    
    72
    
    
    
    55Fee Income
    
    
    108
    
    
    
    
    75
    
    
    
    44Total Revenue
    
    
    630
    
    
    
    
    555
    
    
    
    328Client Disbursement & Change
in Actuarial Liabilities
    
    
    327
    
    
    
    
    304
    
    
    
    176Commissions & Other Expenses
    
    
    156
    
    
    
    
    118
    
    
    
    63Income Taxes
    
    
    11
    
    
    
    
    33
    
    
    
    (1
    )Non-controlling Interests
    
    
    14
    
    
    
    
    11
    
    
    
    14Shareholders Net Income
    
    
    122
    
    
    
    
    89
    
    
    
    76
 Selected Financial InformationReinsuranceSales (in-force, $ billions)
    
    
    24
    
    
    
    
    28
    
    
    
    16Business (in-force, $ billions)
    
    
    153
    
    
    
    
    160
    
    
    
    183McLean BuddenAUM ($ billions)
    
    
    34.7
    
    
    
    
    29.3
    
    
    
    22.6
 Sun Life Financial Inc.
    
    16




---



##### 



Managements Discussion and Analysis SUN LIFE FINANCIAL UNITED STATES  Business Profile
 SLF U.S. has three core businesses: annuities, individual life insurance for affluent consumers and business owners, and
group life and health insurance for small to medium-sized companies. The Annuities business unit offers fixed annuities, variable
annuities, equity-indexed annuities and investment management services. The Individual Life business unit offers single and joint
universal life and variable universal life, COLI/BOLI, and private placement
variable annuities and variable universal life for high net worth clients. The Group Life and Health unit offers group life
insurance and group health insurance, which includes short- and long-term disability benefits and medical stop-loss plans. 
 Industry Profile
 The life, health and annuity insurance markets in the United States comprise a large number of industry players. Ongoing
consolidation has led to dominance by the top 10 competitors in many of those markets, representing a market share of over 50%.
The marginalization of smaller players creates potential acquisition opportunities for larger, better-capitalized organizations.
The continued growth in the baby boomer market, which now exceeds 76 million in the United States, continues to provide
significant opportunities for SLF U.S. An increasing number of Americans are entering retirement, and their life expectancies are
on the rise. Together with a heightened consumer awareness of the value of asset allocation and diversification, these demographic
trends provide a significant opportunity for both wealth accumulation and protection products in the United States. Competitive Position(1) SLF U.S. is a significant player in the U.S. annuity and high-end specialty insurance markets:  
    1st in third party distribution of annuities through banks, thrifts and credit unions
    3rd in medical stop-loss insurance based on business in force
    3rd in sales of equity-indexed annuities, featuring Multipoint, the #3 best selling product in the
industry Strategy SLF U.S.s long-term objective is to achieve a top 10 market rank in selected markets through the following strategies:  
    Achieve recognition as product and solution experts by leveraging customer knowledge, risk management and investment
expertise
    Strengthen operational scale and efficiency as a result of the implementation of the service centre multi-site
strategy
    Focus and enhance distribution capabilities and coverage by increasing the size of the individual life and annuity
wholesale and group field representative networks
    Pursue acquisitions to increase scale 
 2004
Accomplishments
  
    Earnings improved by 38% on a local currency basis and ROE was up 310 basis points over 2003 levels
    Achieved sales growth in all business lines
    Opened four new group sales offices
    Rose to #3 ranking in equity-indexed annuity sales in the United States
    Achieved net sales of US$105 million in Group Life and Health, up 31% from 2003
    Advanced the service centre multi-site strategy by establishing a call centre in Lethbridge, Alberta, and
transferring certain information services functions to SLF U.S.s Ireland technology centre
    Enhanced capital efficiency through product design and structural reorganization   (1) Competitive statistics are based on
published information at and for the year ended December 31, 2004 or the
information available for the latest period before December 31, 2004. Sun Life Financial Inc.
    
    17




---



##### 



Managements Discussion and Analysis 2005 Priorities  
    Continue to build distribution capabilities across all businesses. Significant investments will be made to grow
the annuities wholesale distribution force and improve productivity levels
    Continue service centre cost improvement initiatives
    Pursue acquisitions for scale efficiencies and enhanced growth potential 
 Financial
and Business Results
 For the year ended December 31, 2004, SLF U.S. reported earnings of $391 million, up $88
million or 29%, from 2003. The strengthening of the Canadian dollar against the U.S. currency
during 2004 decreased earnings by $30 million. On a local currency basis, earnings increased 38% to US$300 million, primarily due to improved
equity markets, improved credit experience, and a lower effective tax rate due to favourable
experience in respect of prior years audits and other items. Revenue for the year was US$7.2
billion, up US$358 million or 5% from 2003, as the increase in equity-indexed annuity sales more
than offset the decline in fixed annuity sales. ROE improved to 10.4% in 2004 from 7.3% in 2003 as a result of improved earnings and the benefits
of continued capital efficiency measures. Outlook


The U.S. marketplace is defined by increasing levels of competition and regulation as the
industry continues to consolidate. The core business units of SLF U.S. will benefit from scale
efficiencies resulting from service centre improvements, the organic growth from distribution
expansion and external growth from potential acquisitions. Summary Statement of Operations(C$ millions)
    
    2004
    
    
    
    2003
    
    
    2002Premiums
    
    
    6,465
    
    
    
    
    6,666
    
    
    
    9,165Net Investment Income
    
    
    2,355
    
    
    
    
    2,433
    
    
    
    2,069Fee Income
    
    
    609
    
    
    
    
    564
    
    
    
    643Total Revenue
    
    
    9,429
    
    
    
    
    9,663
    
    
    
    11,877Client Disbursement & Change
in Actuarial Liabilities
    
    
    7,330
    
    
    
    
    7,709
    
    
    
    9,838Commissions & Other Expenses
    
    
    1,652
    
    
    
    
    1,552
    
    
    
    1,641Income Taxes
    
    
    55
    
    
    
    
    97
    
    
    
    38Par Policyholders Income (Loss)
    
    
    1
    
    
    
    
    2
    
    
    
    (2
    )Loss (Income) from Discontinued
Operations
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Shareholders Net Income
    
    
    391
    
    
    
    
    303
    
    
    
    374
 Selected Financial Information(US$ millions, except as noted)Total Revenue
    
    
    7,245
    
    
    
    
    6,887
    
    
    
    7,562Shareholders Net Income
    
    
    300
    
    
    
    
    218
    
    
    
    238Return on Equity
    
    
    10.4
    %
    
    
    
    7.3
    %
    
    
    7.3
    %Total AUM (US$ billions)
    
    
    56.1
    
    
    
    
    52.7
    
    
    
    52.7
 Sun Life Financial Inc.
    
    18




---



##### 



Managements Discussion and Analysis Sun Life Financial United States  Annuities  Business Profile
 SLF U.S.s Annuities business unit represents an integral part of the Companys
growth platform in the United States. Annuities is a nationwide provider of individual
annuity products in the U.S. market. The business unit offers a complete portfolio of
fixed, variable and equity-indexed annuity products supported by broad distribution,
and product and solution capabilities arising from a combination of market focus and
investment and risk management expertise. The Annuities business unit includes SLF
U.S. distribution subsidiaries, Sun Life Financial Distributors, Inc. and Independent
Financial Marketing Group, Inc. (IFMG). 
 2004 Accomplishments
  
    Improved earnings by 66% on a local currency basis
    Tripled equity-indexed annuity sales to achieve #3 ranking in the
industry
    Achieved #4 ranking out of 15, up two positions from 2003, in the
Operations Managers Roundtable (annuity industry insurance carrier and broker
dealer survey)
    Launched combination Guaranteed Minimum Accumulation Benefit and
Guaranteed Minimum Withdrawal Benefit (GMAB/GMWB) features
    Launched innovative Secured Returns 2 rider, which has unique living
benefit features to suit a bear market and a unique bull market refund of fees
at maturity 
 Financial
and Business Results
 Earnings improved to US$184 million,
up 66% from 2003. The increase was primarily due to the impact of improved equity markets, higher
spreads on fixed annuities mostly from improved credit experience and a lower effective tax rate
attributable to favourable experience from prior years audits. Revenue for the year increased US$257 million, 6% higher than the 2003 level due to the increased
sales of equity-indexed annuities and the impact of improved equity markets on fee income. Overall annuity sales for 2004 improved to US$4.1 billion, up 13% from 2003, primarily on the
strength of equity-indexed annuity sales. Sales of equity-indexed annuities tripled from a year
ago primarily due to increased participation rates in the Multipoint product, advancing the Company
to the #3 ranking in nationwide equity-indexed annuity sales. During 2004, SLF U.S. more than
doubled the number of agents contracted to sell equity-indexed annuities. Fixed annuity sales of US$472 million decreased 57% from 2003, as the low interest rate environment
continued to challenge the sales of fixed income products. Variable annuity sales declined slightly from 2003, as the impact of the restructuring of the sales
force in 2004 more than offset the impact of the 2003 introduction of the living benefit feature
and the 2004 introduction of the Secured Returns 2 product rider. At December 31, 2004, total AUM were US$42.4 billion, up 5% from a year ago, primarily due to
equity market improvements. Summary Statement of Operations(C$ millions)
    
    2004
    
    
    
    2003
    
    
    2002Premiums
    
    
    3,482
    
    
    
    
    3,503
    
    
    
    6,297Net Investment Income
    
    
    1,601
    
    
    
    
    1,702
    
    
    
    1,288Fee Income
    
    
    577
    
    
    
    
    539
    
    
    
    621Total Revenue
    
    
    5,660
    
    
    
    
    5,744
    
    
    
    8,206Client Disbursement & Change
in Actuarial Liabilities
    
    
    4,435
    
    
    
    
    4,693
    
    
    
    7,073Commissions & Other Expenses
    
    
    975
    
    
    
    
    859
    
    
    
    965Income Taxes
    
    
    11
    
    
    
    
    37
    
    
    
    (27
    )Loss (Income) from
Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    
    (12
    )Shareholders Net Income
    
    
    239
    
    
    
    
    155
    
    
    
    207
 Selected Financial Information(US$ millions, except as noted)Total Revenue
    
    
    4,340
    
    
    
    
    4,083
    
    
    
    5,223Shareholders Net Income
    
    
    184
    
    
    
    
    111
    
    
    
    132Gross SalesVariable Annuities
    
    
    1,953
    
    
    
    
    1,973
    
    
    
    2,539Fixed Annuities
    
    
    472
    
    
    
    
    1,091
    
    
    
    1,690Equity-Indexed Annuities
    
    
    1,637
    
    
    
    
    525
    
    
    
    332Total
    
    
    4,062
    
    
    
    
    3,589
    
    
    
    4,561Total AUM(US$ billions)
    
    
    42.4
    
    
    
    
    40.3
    
    
    
    39.3
 Sun Life Financial Inc.
    
    19




---



##### 



Managements Discussion and Analysis Sun Life Financial United States  Individual Life  Business Profile
 SLF U.S.s Individual Life operations are primarily focused on servicing
high net worth individuals in the U.S. market. The business unit focuses on
competitively priced, high-quality products including single and joint
universal life and variable universal life, COLI/BOLI, and private placement variable annuities and variable
universal life products targeted at high net worth customers. The business
units core distribution channels, consisting principally of general agents and
third-party intermediaries, provide access to its target customers of affluent
individuals and business owners. 
 2004 Accomplishments
  
    Implemented a universal life product hedge strategy to help
minimize the impact of a low interest rate environment
    High net worth private placement variable annuities and private
placement variable universal life sales grew to US$65 million, a 282%
increase from 2003 
 Financial and Business Results
 Revenue for the year increased US$23 million, reflecting higher investment income and increased
sales in core products, partially offset by lower sales in other lines primarily due to the
lowering of credited interest rates in 2004. Sales, excluding COLI and BOLI, were up 20% over 2003. The increase reflected higher sales of the
business units high net worth private placement products. COLI and BOLI sales were higher in
2004 as 2003 sales were suppressed by the potential for unfavourable legislative proposals, which
were favourably modified in 2004. Summary Statement of Operations(C$ millions)
    
    2004
    
    
    
    2003
    
    
    2002Premiums
    
    
    2,033
    
    
    
    
    2,243
    
    
    
    1,943Net Investment Income
    
    
    683
    
    
    
    
    662
    
    
    
    701Fee Income
    
    
    28
    
    
    
    
    22
    
    
    
    19Total Revenue
    
    
    2,744
    
    
    
    
    2,927
    
    
    
    2,663Client Disbursement & Change
in Actuarial Liabilities
    
    
    2,200
    
    
    
    
    2,320
    
    
    
    2,066Commissions & Other Expenses
    
    
    417
    
    
    
    
    456
    
    
    
    435Income Taxes
    
    
    19
    
    
    
    
    43
    
    
    
    46Par Policyholders Income (Loss)
    
    
    1
    
    
    
    
    2
    
    
    
    (2
    )Shareholders Net Income
    
    
    107
    
    
    
    
    106
    
    
    
    118
 Selected Financial Information(US$ millions)Total Revenue
    
    
    2,119
    
    
    
    
    2,096
    
    
    
    1,697Shareholders Net Income
    
    
    81
    
    
    
    
    77
    
    
    
    75Sales  New Annualized PremiumsCOLI and BOLI
    
    
    105
    
    
    
    
    47
    
    
    
    138Other Individual
    
    
    207
    
    
    
    
    172
    
    
    
    120Premiums and Deposits
    
    
    2,015
    
    
    
    
    1,818
    
    
    
    2,167
 Sun Life Financial Inc.
    
    20




---



##### 



Managements Discussion and Analysis Sun Life Financial United States  Group Life and Health Business
Profile SLF U.S.s Group Life and Health operations provide customer-focused products and services to meet the group
benefits needs of primarily small- to medium-sized companies. Group Life and Health leverages its extensive
distribution capabilities to market group life, long-term and short-term disability and medical stop-loss
products throughout the United States. With strong underwriting expertise and distribution capabilities, the
business unit is a competitive provider of group life and disability products to nearly 4 million group plan
members. The business units group insurance products are marketed and distributed by its 130 sales
representatives in 24 regional sales offices in the United States. These representatives maintain close
relationships with independent brokers and consultants who deal directly with employers. 
 2004
Accomplishments
  
    Opened four new sales offices
    Maintained #3 ranking in the stop-loss market based on business in-force
    Achieved net sales of US$105 million, an increase of 31% from 2003
    Maintained #9 ranking in group life sales and #13 ranking based on in-force premiums
    Improved to #14 ranking in long-term disability sales from #15 in 2003, based on annualized premiums
    Improved to #15 ranking in short-term disability sales from #19 in 2003, based on annualized
premiums 
 Financial and Business Results
 Group Life and Health
earnings were US$35 million, an increase of 17% compared to 2003. The increase was primarily due to
favourable long-term disability claims experience. The operating expense-to-insurance premium ratio
increased slightly to 14% in 2004 from 13% a year ago due to additional investment in sales office
expansion. Revenue for the year increased to US$786 million, up US$78 million or 11% primarily driven by
higher sales and lower lapses. Summary Statement of Operations(C$ millions)
    
    2004
    
    
    
    2003
    
    
    2002Premiums
    
    
    950
    
    
    
    
    920
    
    
    
    925Net Investment Income
    
    
    71
    
    
    
    
    69
    
    
    
    80Fee Income
    
    
    4
    
    
    
    
    3
    
    
    
    3Total Revenue
    
    
    1,025
    
    
    
    
    992
    
    
    
    1,008Client
Disbursement & Change in Actuarial Liabilities
    
    
    695
    
    
    
    
    696
    
    
    
    699Commissions & Other Expenses
    
    
    260
    
    
    
    
    237
    
    
    
    241Income Taxes
    
    
    25
    
    
    
    
    17
    
    
    
    19Shareholders Net Income
    
    
    45
    
    
    
    

    42
    
    
    
    49
 Selected Financial Information(US$ millions)Total Revenue
    
    
    786
    
    
    
    
    708
    
    
    
    642Shareholders Net Income
    
    
    35
    
    
    
    
    30
    
    
    
    31Business In-Force
    
    
    874
    
    
    
    
    764
    
    
    
    683
 Sun Life Financial Inc.
    
    21




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##### 



Managements Discussion and Analysis MFS INVESTMENT MANAGEMENT  Business Profile
 
 Industry Profile
 Competitive Position 

MFS is a global asset manager with total assets under management of US$146.2 billion as at December 31, 2004.  
    11th largest retail mutual fund company based on long-term assets under management(1) of US$75
billion at December 31, 2004
    5th largest investment manager of variable annuity assets as at September 30, 2004
    Over 25% of gross sales are sourced from non-U.S. retail and institutional clients supported by 15 global offices
    Serves over 5 million investor accounts Strategy  
    Achieve superior long-term investment performance built on the strength of investment research
    Broaden business platform to include added focus on institutional and international products
    Improve position in the U.S. retail distribution channel with superior products, quality service and value-added
sales support
    Diversify mix of assets under management across full range of asset categories
    Capitalize on efficient operating infrastructure 
 2004
Accomplishments
  
    Implemented operational and compliance changes to address regulatory concerns
    Launched industry-leading initiatives in elimination of soft dollar arrangements, improved shareholder expense
reporting and independent fund governance
    82% of funds ranked in the top half of their respective categories by Lipper Inc.(2) for 1-year
performance 2005 Priorities  
    Continue to re-establish investor confidence in the MFS brand
    Continue to improve performance in U.S. equity products
    Build on global diversification of product lines 
   (1)
    
    Long-term open-end mutual funds,
excluding closed-end and money market funds .(2)
    
    Lipper Inc. is an independent company
providing mutual fund analysis and benchmarking services. Sun Life Financial Inc.
    
    22




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##### 



Managements Discussion and Analysis

Financial and Business Results 

MFSs 2004 operating earnings were up $5 million or 3% from 2003 levels in spite of the
strengthening of the Canadian dollar against the U.S. currency during
2004, which decreased MFSs
earnings by $13 million. Additional costs for legal and compliance initiatives as well as higher
expenses due to the elimination of soft dollar arrangements added to ongoing operating expenses.
MFS incurred negative net asset flows of US$8.9 billion in 2004; however, this was more than offset
by positive market action. Overall, assets under management were US$146 billion as at December 31,
2004, an increase of 4% for the year.

Revenue for the year of US$1.3 billion was up 8% on higher average net assets. Net income for MFS
totalled US$88 million compared to a loss of US$39 million for 2003. Excluding the after-tax
charges of US$45 million in 2004 and US$160 million in 2003 for the cost of regulatory settlements,
operating earnings increased 10% from US$121 million in 2003 to US$133 million in 2004. This
increase reflected the benefits of improved equity markets, partially offset by increased expenses
and a reduction in revenues resulting from previous regulatory issues.

Summary Statement of Operations(C$ millions)
    
    2004
    
    
    
    2003
    
    
    2002Net Investment Income
    
    
    (1
    )
    
    
    
    (9
    )
    
    
    9Fee Income
    
    
    1,701
    
    
    
    
    1,693
    
    
    
    1,970Total Revenue
    
    
    1,700
    
    
    
    
    1,684
    
    
    
    1,979Commissions & Other
Expenses
    
    
    1,471
    
    
    
    
    1,727
    
    
    
    1,673Income Taxes
    
    
    108
    
    
    
    
    5
    
    
    
    109Non-Controlling Interests in
Net Income of Subsidiaries
    
    
    7
    
    
    
    
    (5
    )
    
    
    23Shareholders Net Income
(Loss)  Reported
    
    
    114
    
    
    
    
    (43
    )
    
    
    174Less Regulatory Settlement
Provisions
    
    
    (59
    )
    
    
    
    (211
    )
    
    
    Shareholders Net Income
- Operating
    
    
    173
    
    
    
    
    168
    
    
    
    174


Selected Financial Information(US$ millions, except as noted)Total Revenue
    
    
    1,306
    
    
    
    
    1,206
    
    
    
    1,260Shareholders Net Income- Reported
    
    
    88
    
    
    
    
    (39
    )
    
    
    111- Operating
    
    
    133
    
    
    
    
    121
    
    
    
    111Sales (US$ billions)Gross
    
    
    29.5
    
    
    
    
    34.2
    
    
    
    35.8Net
    
    
    (8.9
    )
    
    
    
    4.2
    
    
    
    3.2AUM (US$ billions)
    
    
    146
    
    
    
    
    140
    
    
    
    113Average Net Assets (US$ billions)
    
    
    138
    
    
    
    
    125
    
    
    
    123


Gross sales remained strong despite a difficult retail mutual fund environment. Total sales by MFS
for the year ended December 31, 2004 of US$29.5 billion were down 14% from 2003 primarily due to a
decline of US$4.4 billion in sales of retail funds.

Redemptions slowed and net sales showed significant signs of improvement in the second half of
2004. Net outflows peaked in the second quarter of 2004 due to regulatory concerns and
underperformance in certain investment categories. Net flows improved to US$139 million in the
fourth quarter of 2004 driven by demand for institutional products.

(MONTHLY NET FLOWS LINE GRAPH)

MFSs portfolio of assets under management has become more diversified, with its mutual fund assets
as a percentage of total AUM decreasing from 66% in 2002 to 59% in 2004.

Outlook


Positive net asset flows are expected to return in 2005 with a continued slowing of redemption
activity combined with ongoing expansion in institutional and offshore distribution channels.

MFS made significant progress in 2004 in instituting investor-friendly reforms to address
regulatory issues affecting the U.S. mutual fund industry and to implement its settlements with the
SEC and other U.S. regulators. During 2004, MFS hired several industry veterans to oversee
corporate governance and compliance issues, strengthened measures to discourage frequent trading of
its funds, eliminated soft-dollar arrangements with brokers that trade stocks on MFSs behalf,
and lowered management fees on certain of its funds. These initiatives are restoring investor
confidence in the MFS brand and will enhance future growth potential.

In the regulatory settlement with the Office of the New York Attorney General on February 5, 2004,
MFS agreed to reduce its fees on certain funds by approximately US$25 million per year for five
years.

Sun Life Financial Inc.
    
    23






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##### 



Managements Discussion and Analysis SUN LIFE FINANCIAL ASIA Business
Profile





SLF Asia operates through subsidiaries in the Philippines, Hong Kong and Indonesia, and through joint
ventures with local partners in India and China. The Companys Hong Kong-based Regional Headquarters provides
an oversight role, acts as a value-added catalyst by providing general business development support to the
business units and is responsible for regional expansion. SLF Asia provides individual life insurance products and services in all business units, and savings,
retirement and pension products and services in India and the Philippines. Group insurance is also offered in
the Philippines and India. 
 Industry
Profile   (1)
 Competitive Position(2)  
    2nd in life insurance by total premiums and 3rd in mutual funds by
assets under management in the Philippines
    2nd largest private insurer for individual and group business in India through joint venture
operations, based on adjusted annualized first year premiums(3) Strategy SLF Asias goal is to become a significant contributor to the Companys consolidated revenues and net
income over the medium term. The business segments strategy is to focus on becoming or remaining among one
of the top three participants in each of the market segments in which it operates. 
 2004
Accomplishments
  
    Sales grew by 88% over 2003 to $240 million. Without currency fluctuations, the growth
rate would have been 98%
    In April 2004, the China joint venture started selling life insurance products in Beijing, the
capital of the Peoples Republic of China
    The Indonesia operations field force increased by 45%, driving a sales increase of 93% over
2003
    Strengthened the agency channel by increasing the number of agents across the region by 18%
    Completed the migration to a new life insurance administration system in Hong Kong with a
similar initiative to be completed in Indonesia in the first quarter of 2005, providing increased
efficiencies, cross business unit synergy, and a platform for improved customer service
    Integrated the operations of the three subsidiaries in the Philippines resulting in significant
productivity improvement
    On November 19, 2004, Sun Life Everbright Life Insurance Company Limited (Sun Life Everbright),
the Companys joint venture in China, signed a national cooperation agreement with the Agricultural
Bank of China to market life insurance through the banks branches nationwide, starting in Tianjin and
Beijing
    Agreed to acquire the mutual fund business of Alliance Capital Management (India) Private
Limited in India. The transaction is expected to close during the second quarter of 2005   (1)
    
    Premium as percentage of Gross Domestic
Product. Source: Swiss Re  Sigma, volume 3/2004.(2)
    
    Competitive statistics are based on
published information at and for the year ended December 31, 2004 or the
information available for the latest period before December 31, 2004.(3)
    
Adjusted annualized first year premiums
include single premium at 10%. Sun Life Financial Inc.
    
    24




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##### 



Managements Discussion and Analysis 2005 Priorities  
    Focus on building capability to support market expansion in China
    Continue to focus on sales growth with further expansion of career agency channel in all
country operations and additional focus on channel diversification
    Continue to focus on customer service initiatives to leverage recent investments in individual
insurance administration technology
    Integrate the Alliance Capital mutual fund assets under management with India operations to
maximize the benefits of this acquisition 
 Financial
and Business Results
 Notwithstanding a continued depreciation in local currencies relative to the Canadian dollar in
2004, SLF Asias premium revenue grew by 22% over 2003 with strong sales and good persistency. Higher profitability combined with prudent capital investments for long-term growth improved SLF
Asias ROE to 10.3% from 7.8% a year ago. Summary Statement of Operations($millions, except as noted)
    
    2004
    
    
    
    2003
    
    
    2002Premiums
    
    
    515
    
    
    
    
    421
    
    
    
    504Net Investment Income
    
    
    179
    
    
    
    
    162
    
    
    
    155Fee Income
    
    
    3
    
    
    
    
    4
    
    
    
    2Total Revenue
    
    
    697
    
    
    
    
    587
    
    
    
    661Client
Disbursements & Change in Actuarial Liabilities
    
    
    482
    
    
    
    
    388
    
    
    
    450Commissions & Other Expenses
    
    
    156
    
    
    
    
    150
    
    
    
    176Income Taxes
    
    
    14
    
    
    
    
    12
    
    
    
    11Shareholders Net Income
    
    
    45
    
    
    
    
    37
    
    
    
    24Selected Financial InformationReturn on Equity
    
    
    10.3
    %
    
    
    
    7.8
    %
    
    
    4.8
    %Sales  New Annualized PremiumsIndividual Life *
    
    
    240
    
    
    
    
    128
    

    
    
    105Total AUM ($ billions)
    
    
    2.4
    
    
    
    
    2.1
    
    
    
    2.2
    The Philippines The Company offers customized financial product solutions in the Philippines, including individual
life insurance, group insurance, educational and pension savings plans, and mutual funds. These
products are distributed mainly to high net worth individuals, business owners and professional
communities, primarily through a career agency force as well as institutional dealers and brokers.
With a solid reputation in the country, Sun Life Financials Philippines operations had a #2
position in the life insurance market by total insurance premiums, #3 in mutual funds by assets
under management, and reached #5 in sales of savings plans in 2004 based on initial contribution.
The Philippines registered a 25% increase in sales in local currency, driven largely by higher
savings plan sales. Hong Kong Sun Life Financials Hong Kong operation offers traditional, universal life and unit-linked
products to the mass and affluent markets in Hong Kong through a multi-channel distribution
strategy. Sales of HK$240 million in 2004 improved 41% over 2003 as actions to strengthen the operations
agency channel were realized and agent numbers more than doubled. The Hong Kong operation is
pursuing additional bancassurance arrangements and is in the final stages of developing a new
distribution arrangement for unit-linked products. India Birla Sun Life Insurance Company Limited (Birla Sun Life), the Companys life insurance joint
venture in India, markets a full line of individual life insurance and pension products to the
upscale market segment through a career agent sales force of over 9,500 as well as bancassurance
and alternate channels. In addition, Birla Sun Life provides group life and pension products to
multi-national corporations and some of the largest local companies. Birla Sun Life completed its third year of operations in 2004 with total individual and group
insurance sales growth of 178% over the prior year in local currency. The success of Birla Sun Life
can be attributed to strong brand recognition, product innovation and a multi-channel distribution
network. As at the end of 2004, Birla Sun Life ranked second in the private sector in individual
life insurance with adjusted first year premiums of $142 million and was one of the leading group insurance and pension providers. Sun Life Financial Inc.
    
    25




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##### 



Managements Discussion and Analysis (BIRLA SUN LIFE BAR CHART) Birla Sun Life Asset Management Company Limited, the Companys asset management joint venture in
India, offers a full array of mutual fund products through over 2,500 distributors. At the end of
2004, it was the fifth largest private mutual fund company in India by assets under management. China Sun Life Everbright, the Companys joint venture in China, attained a significant milestone in
April 2004, expanding operations into Beijing. Sun Life Everbright sells a comprehensive range of
traditional, unit-linked and participating life insurance products in both Tianjin and Beijing
primarily through career agents. (SUN LIFE EVERBRIGHT BAR CHART) Indonesia SLF Asias Indonesian operations distribute traditional and unit-linked individual life insurance
in Indonesia through a career agency force. With a 45% increase in number of agents, higher agent productivity and larger average case size,
total sales in 2004 doubled the 2003 level in local currency. Outlook



Notwithstanding the challenges specific to each market, all regions and markets in which SLF
Asia participates offer opportunity for long-term organic growth. In the Philippines, while
competition is intensifying and the government is expected to tighten its policies to curb
inflation, the Company is well positioned to take on the challenges ahead with the recent
integration of its three subsidiaries and the diversification and expansion of its distribution
channels. While competition in the Indian insurance and mutual fund industries continues to intensify, the
Company believes its joint ventures have the brand recognition, solid infrastructure, and necessary
economies of scale to compete effectively in this high growth market. The Company has the right to
increase ownership in Birla Sun Life when the restrictions on foreign ownership of Indian insurance
companies are lifted. With the removal of most restrictions on geographical and cross-industry
expansion in late 2004 in accordance with WTO accession, China presents excellent growth
opportunities. To capitalize on these opportunities, Sun Life Everbright is focusing on agent
recruitment, expansion into new cities, and the evaluation of entering the group insurance market
in China. Sun Life Financial Inc.
    
    26




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##### 



SUN LIFE FINANCIAL UNITED KINGDOM Business
Profile

SLF U.K. manages a large block of in-force life and pension policies. SLF U.K. no longer offers products to
new customers and the in-force policies constitute a run-off block of business. This business is managed by a small
corporate governance team and most functions have been outsourced to
external service providers. 
 Strategy
  
    Realize the underlying value of in-force business
    Maximize ROE by effective capital management
    Minimize operational risks and regulatory exposure 
 2004
Accomplishments
  
    Continued to produce 20% ROE and maximize shareholder value
    Continued to maintain a high level of customer service
    Reduced unit administration costs of in-force individual insurance business by 11% from 2003
    Established a risk-based capital regime to provide greater certainty to future capital plans 2005 Priorities  
    Deliver stable net income from the underlying insurance business
    Continue to manage costs to maintain the current level of unit administration costs of in-force
business
    Continue to improve quality and content of customer service communications
    Continue to maximize shareholder value 
 Financial
and Business Results
 In local currency, 2004 earnings of £73 million were £16 million pounds lower than 2003. The
decrease was primarily due to additional provisions for policyholder liabilities and reduced
earnings in the group life business as a result of adverse claims experience, partially offset by
the effect of a lower effective tax rate due to the favourable outcome of tax negotiations in the
fourth quarter of 2004. ROE decreased to 20.6% from 21.5% in 2003, primarily reflecting the impact
of lower earnings from the group insurance business. Revenue declined by £103 million in 2004 compared to 2003 primarily due to the sale of the group
business and lower individual insurance premiums as the closed block of business runs off. The
group life business will have substantially run off by the end of 2005. Summary Statement of Operations(C$ millions)
    
    2004
    
    
    
    2003
    
    
    2002Premiums
    
    
    530
    
    
    
    
    724
    
    
    
    990Net Investment Income
    
    
    630
    
    
    
    
    626
    
    
    
    730Fee Income
    
    
    98
    
    
    
    
    93
    
    
    
    108Total Revenue
    
    
    1,258
    
    
    
    
    1,443
    
    
    
    1,828Client
Disbursement & Change in Actuarial Liabilities
    
    
    958
    
    
    
    
    1069
    
    
    
    1426Commissions & Other Expenses
    
    
    131
    
    
    
    
    163
    
    
    
    230Income Taxes
    
    
    (4
    )
    
    
    
    8
    
    
    
    (18
    )Shareholders Net Income
    
    
    173
    
    
    
    
    203
    
    
    
    190
 Selected Financial Information(£ millions, except as noted)Total Revenue
    
    
    528
    
    
    
    
    631
    
    
    
    779Shareholders Net Income
    
    
    73
    
    
    
    
    89
    
    
    
    81Return on Equity
    
    
    20.6
    %
    
    
    
    21.5
    %
    
    
    21.9
    %Total AUM (£ billions)
    
    
    7.5
    
    
    
    
    7.7
    
    
    
    7.8
 Sun Life Financial Inc.
    
    27




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##### 



Managements Discussion and Analysis CORPORATE CAPITAL Business
Profile

Corporate Capital refers to investment income, expenses, capital and other items not
allocated to the Companys operating units. This business segment also includes the Companys
run-off reinsurance line, which is a closed block of mostly accident and health reinsurance
business. 
 2004
Accomplishments
  
    Purchased and cancelled approximately 10 million shares as part of the stock repurchase
program
    Redeemed $250 million of subordinated debentures 2005 Priorities  
    Use the capital management flexibility created by the corporate
reorganization(1) and continue to optimize the Companys overall capital
structure
    Enhance shareholder value through share repurchases of up to $500 million 
 Financial
and Business Results
 Summary Statement of Operations*($ millions)
    
    2004
    
    
    
    2003
    
    
    2002**Premiums
    
    
    39
    
    
    
    
    127
    
    
    
    71Net Investment Income
    
    
    55
    
    
    
    
    (55
    )
    
    
    194Fee Income
    
    
    (44
    )
    
    
    
    (29
    )
    
    
    (72
    )Total Revenue
    
    
    50
    
    
    
    
    43
    
    
    
    193Client Disbursements & Change
in Actuarial Liabilities
    
    
    138
    
    
    
    
    (77
    )
    
    
    500Commissions & Other Expenses
    
    
    31
    
    
    
    
    158
    
    
    
    109Income Taxes
    
    
    (169
    )
    
    
    
    (77
    )
    
    
    (233
    )Non-controlling Interests in
Net Income of Subsidiaries
    
    
    59
    
    
    
    
    59
    
    
    
    46Loss (Income) from
Discontinued Operations
    
    
    
    
    
    
    
    
    
    
    
    48Shareholders Net Income (Loss)
    
    
    (9
    )
    
    
    
    (20
    )
    
    
    (277
    )
   *
    
    Including consolidation adjustments related to activities between
segments.**
    
    As restated.   (1)
    
    As described in this MD&A under Corporate Developments - Corporate Reorganization on page
29. Sun Life Financial Inc.
    
    28




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##### 



Managements Discussion and Analysis CORPORATE DEVELOPMENTS The following significant developments occurred in 2004. Corporate Reorganization 

On October 28, 2004, SLF Inc. and its wholly-owned subsidiary, Sun Life Assurance, announced
their intention, subject to receipt of regulatory approvals, to carry out a reorganization plan
under which most of Sun Life Assurances asset management businesses in Canada and the United
States, including the majority of its U.S. annuities business, would be transferred to Sun Life
Financial Corp., a newly incorporated subsidiary of SLF Inc. (the Reorganization). The
Reorganization was completed on January 4, 2005. Under the Reorganization, Sun Life Assurance transferred its shares of CI Funds, McLean Budden,
Massachusetts Financial Services Company and its other U.S. subsidiaries to the new subsidiary.
After the Reorganization, the operations remaining in Sun Life Assurance consist primarily of the
life, health and annuities businesses of the Companys Canadian operations, most of the life and
health businesses of its United States operations, and all of its operations in the United Kingdom
and Asia. The Reorganization allows Sun Life Financial to position itself to benefit from the revised draft
capital guidelines for life insurance holding companies recently issued by OSFI. Sale of IQON and Synera to CI Funds

On June 3, 2004, Sun Life Assurance sold two distribution subsidiaries, IQON and Synera
Financial Services Inc., to Assante Corporation, a subsidiary of CI Funds in which the Company
holds a 34% equity interest. The sale reflects the further development of the Companys strategic
partnership with CI Funds, as well as another step in the evolution of its wholesale distribution
strategy in Canada. Beijing Expansion

In April 2004, Sun Life Everbright started selling life insurance products in Beijing, China.
Between its start-up and the end of 2004, the Beijing operations accounted for 14% of the joint
ventures total sales in local currency. The Company is actively seeking to expand into other
cities in China. Share Repurchase Program 

SLF Inc. continued its share repurchase program in 2004, and repurchased approximately 10
million common shares at a cost of $388 million. On January 6, 2005, SLF Inc. renewed its
repurchase program for 2005 for the purchase of up to 5% of its outstanding common shares, starting
January 12, 2005. Increased Quarterly Shareholder Dividends

In 2004, SLF Inc. increased its quarterly common share dividend by 29%, reflecting the
Companys strong financial performance, continued capital strength and positive outlook for the
Companys future. The quarterly dividend payout per common share was increased from $0.17 to $0.21
in the first quarter of 2004, and from $0.21 to $0.22 in the third quarter of 2004. In July 2004,
the Board of Directors set a new target dividend payout ratio of 25% to 35%, up from the previous
level of 20% to 30%. On January 27, 2005, the Board of Directors approved an additional 9% increase in the quarterly
dividend to $0.24 per share. Redemption of Subordinated Debentures

On November 15, 2004, Sun Life Assurance redeemed $250 million of its outstanding debentures,
representing all of the 5.8% Debentures, Series 1, due May 15, 2013. The debentures were originally
issued by Clarica. Issuance of Preferred Shares

On February 8, 2005, the Board of Directors of SLF Inc. announced a domestic public offering
of $300 million of Class A Non-Cumulative Preferred Shares, Series 1. The preferred shares
will be priced at $25 per share and will pay non-cumulative quarterly
dividends of $0.297 per
share, yielding 4.75% annually. Redemption of Class E Preferred Shares 

On February 8, 2005, Sun Life Assurance announced that, subject to receipt of regulatory
approval, it intends to redeem all of its Non-Cumulative Redeemable Class E Preferred Shares,
Series 1 on June 30, 2005, for $25.00 per share plus declared but unpaid dividends thereon. Sun Life Financial Inc.
    
    29




---



##### 



Managements Discussion and Analysis CRITICAL ACCOUNTING ESTIMATES SLF Inc.s significant accounting and actuarial policies are described in detail in
Notes 1, 2, 8, 9 and 12 to SLF Inc.s 2004 Consolidated Financial Statements. These policies
require management to make judgments involving assumptions and estimates, some of which may relate
to matters that are inherently uncertain. The estimates described below are considered particularly
significant to understanding the Companys financial performance. As part of the Companys
financial control and reporting, judgments involving assumptions and estimates are reviewed
internally, by SLF Inc.s independent auditor and by other independent advisors on a periodic
basis. Accounting policies requiring estimates are applied consistently in the determination of the
Companys financial results. BENEFITS TO POLICYHOLDERS

The Companys benefit payment obligations over the life of its annuity and insurance products
are determined by internal valuation models and are recorded in its financial statements, primarily
in the form of actuarial liabilities. The determination of the value of these obligations is
fundamental to the Companys financial results and requires management to make certain assumptions
about mortality and morbidity rates, policy terminations, equity market performance, interest
rates, asset default, inflation, expenses and other factors over the life of its products. 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 the assumptions used by SLF Inc. are described later in this section. SLF Inc. 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; and
    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. 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 that might occur. For products for which higher mortality would be financially adverse to the Company, a 1% increase
in the best estimate assumption would decrease net income by $106 million. For products for which
lower mortality would be financially adverse to the Company, a 1% reduction in the mortality
assumption would decrease net income by $32 million. 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 for which the morbidity is a
significant assumption, a 1% change in that assumption would reduce net income by $13 million. Policy Termination Rates Policyholders may allow their policies to terminate prior to the end of the contractual coverage
periods 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 Sun Life Financial Inc.
    
    30




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Managements Discussion and Analysis 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 for which fewer terminations would be financially adverse to
the Company, net income would be decreased by $62 million 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 for which more terminations would be financially adverse to the
Company, net income would be decreased by $62 million 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). Equity Markets For certain products, the value of the Companys obligations to policyholders is dependent on
assumptions about the future level of equity markets. The equity market return sensitivity is
provided for in the actuarial liabilities for all such products, with adequate provisions to absorb
moderate changes in rates of equity market return. For participating insurance products, the effect of changes in equity market movements is largely
passed through to policyholders as changes to the amount of dividends declared in accordance with
the normal operation of these policies according to their contractual terms. The actuarial liabilities for guarantees offered under certain blocks of business have significant
sensitivity to changes in expected equity market returns. For example, for variable annuity
guarantees primarily in the U.S. (including reinsured business) and for certain annuity options in
the U.K., a 1% reduction in the expected long-term equity market return assumption would decrease
net income by $65 million in respect of these guarantees. Interest Rates 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 policies and certain forms of
universal life policies and annuities, the effect of changes in the interest rate environment is
largely passed through to policyholders as changes in the amount of dividends declared or in 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. An immediate 1% parallel increase in interest rates at December 31, 2004, across the entire yield
curve would result in an estimated increase in net income of $36 million arising from the change in
actuarial liabilities. Conversely, an immediate 1% parallel decrease in interest rates would result
in an estimated decrease in net income of $134 million. Asset Default In addition to the allowances for losses on invested assets outlined in Note 8 to SLF Inc.s 2004
Consolidated Financial Statements, the actuarial liabilities at December 31, 2004, included an
amount of $2.2 billion determined on a pre-tax basis 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. 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 million. FAIR VALUE OF INVESTMENTS

As described in Note 1 to SLF Inc.s 2004 Consolidated Financial Statements, stocks, including
certain other equity type investments, and real estate are originally recorded at cost and the
carrying value is adjusted toward fair value each quarter at rates of 5% for stocks and 3% for real
estate. Fair values of stocks and certain other equity investments are disclosed in Note 8 of SLF
Inc.s 2004 Consolidated Financial Statements and are based on quoted market prices or references
to market values for similar investments. For real estate, market values are determined by
qualified appraisers. Appraisals are obtained annually for high value properties and at least once
every three years for other properties. Certain equity derivatives are accounted for on the same basis as stocks, while other equity index
futures, swaps, forwards and options are reported at their fair values on the balance sheet with
increases and decreases in their values reported in net investment income. Further details are set
out in Note 1 to SLF Inc.s 2004 Consolidated Financial Statements. Fair values of interest rate
swap and foreign exchange contracts are determined by discounting expected future cash flows using
market interest and exchange rates for similar instruments. Fair values of options, financial
futures and common stock index swaps are based on quoted market prices or the value of the
underlying securities or indices. Sun Life Financial Inc.
    
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Managements Discussion and Analysis Market values are subject to fluctuations as economic and business conditions change. Where a
readily observable market value is not available, management judgment is required in the process of
determining fair market values. As at December 31, 2004, the market value of stocks, including
certain other equity type investments, and real estate comprised approximately 8% of the market
value of total invested assets. ALLOWANCE FOR INVESTMENT LOSSES

The Company had total general fund invested assets of $96.9 billion as at December 31, 2004,
the majority of which was invested in medium- to long-term, high-quality fixed income instruments.
The Company maintains a prudent policy in setting the allowance for investment losses.
Comprehensive reviews are performed on the Companys invested assets on a regular basis. Management
considers various factors to identify invested assets of potential concern. In addition to the
Companys ability and intent to hold the invested assets to maturity or until a recovery in value,
consideration is given to general economic and business conditions, industry trends, specific
developments with regard to security issuers, and available market values. When an asset is classified as impaired, allowances for losses are established to adjust the
carrying value of the asset to its estimated recoverable amount. The determination of the estimated
recoverable amount is based on estimates of net realizable value. The use of different
methodologies and assumptions may have a material effect on the estimates of net realizable value.
Sectoral allowances are also established for classes of assets when there is concern about the
ultimate collection of principal or interest because of a general deterioration of a particular
business sector. These allowances represent managements best estimate, based on market conditions,
of probable losses within a portfolio that have not yet been specifically identified. Provisions
for losses on investments, which increase the allowances, are charged against net investment
income. Write-offs, net of any recoveries, reduce the allowances. As at December 31, 2004, the Companys total impaired assets, net of specific allowances of $165
million, amounted to $276 million. The corresponding market value of these impaired assets was
approximately $286 million as at December 31, 2004. GOODWILL AND OTHER INTANGIBLES

Goodwill represents the excess of the cost of businesses acquired over the fair value of the
net identifiable tangible and intangible assets. Goodwill is not amortized. The Company had a
carrying value of $5.5 billion in goodwill as at December 31, 2004, consisting primarily of $3.7
billion arising from the Clarica acquisition and $1.5 billion arising from the acquisition of
Keyport Life Insurance Company in the United States. Identifiable intangible assets consist of finite-life and indefinite-life intangible assets. As at
December 31, 2004, the Companys finite-life intangible assets had a carrying value of $579
million, reflecting primarily the value of certain distribution channels and asset administration
contracts acquired as part of the IFMG and Clarica acquisitions. The Companys indefinite-life
intangible assets had a carrying value of $916 million, reflecting fund management contracts, brand
name and state licenses. 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. 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. The fair value is determined using various valuation models. These models require management to
make certain judgments and assumptions that could affect the fair value estimates and resulting
impairment write-downs. Management believes that the assumptions used are reasonable and
supportable based on the current economic and industry environment. As at December 31, 2004, the
fair values of the appropriate operating business segments, including any associated subsidiary
segments as required, and the fair values of the indefinite-life intangible assets were well in
excess of their carrying values. INCOME
TAXES 

Sun Life Financials provision for income taxes is calculated based on the expected tax treatment of
transactions recorded in the Companys consolidated statements of operations for a particular
period. The determination of the required provision for current and future income taxes requires
the Company to interpret tax legislation in the jurisdictions in which it operates and to make
assumptions about the expected timing of realization of future tax assets and liabilities. To the
extent that the Companys interpretations differ from those of tax authorities or the timing of
realization is not as expected, the provision for income taxes may increase or decrease in future
periods to reflect actual experience. The amount of any increases or decreases cannot be
reasonably estimated. Sun Life Financial Inc.
    
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Managements Discussion and Analysis ACCOUNTING POLICIES Changes in Accounting Policies in 2004 In 2004, SLF Inc. adopted certain new accounting standards and policies that are detailed in Note 2 to SLF Inc.s 2004
Consolidated Financial Statements. None of these changes are considered material to the
determination of the Companys financial position or results. Future Adoption Consolidation of Variable Interest Entities

The Company adopted Consolidation of Variable Interest Entities, Canadian Institute of Chartered
Accountants (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), in which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties. The Guideline
requires that all entities be designated as either voting interest entities or variable interest
entities. VIEs are subject to consolidation by the Primary Beneficiary which is defined as the
party who has exposure to the majority of a VIEs expected losses and/or expected residual returns,
as defined in the Guideline. In August 2004, Accounting Guideline 15 was revised to ensure that the original CICA Handbook
Guideline was harmonized with revised Financial Accounting Standards Board (FASB) Interpretation
No. 46, Consolidation of Variable Interest Entities, the U.S. GAAP equivalent of Accounting
Guideline 15. The impact of this change was that SLF Inc. reclassified approximately $1.2 billion
of non-controlling interest in subsidiaries to senior debentures recorded in other liabilities.
Additional details of the impact of this Guideline are summarized in Section D, Variable Interest
Entities, in Note 23 to SLF Inc.s 2004 Consolidated Financial Statements. Financial Instruments
 Disclosure and Presentation The Company adopted 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 its consolidated financial statements. Sun Life Financial Inc.
    
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Managements Discussion and Analysis RISK MANAGEMENT

Introduction


The Companys enterprise-wide risk management framework establishes processes and requirements
for risk measurement and worldwide practices. It provides oversight to the risk management
activities within major operating areas and business units. It is designed to provide discipline
and consistency to the practice of risk management in all business units. Risk Framework Objectives

The framework specifies the four key objectives of the risk management program: (i) avoid risks
that could materially affect the value of the Company, (ii) contribute to sustainable earnings,
(iii) take risks that the Company can manage in order to increase returns, and (iv) provide
transparency of the Companys risks through internal and external reporting. Risk Philosophy The Company is in the business of accepting risks for appropriate return. It will take on those
risks that meet the objectives of the organization. The program design aligns risk management with
the corporate vision and strategy and embeds it within the business management practices of the
business units. Risk Culture The Company aspires to a risk culture that supports an effective risk management program. The
elements of this risk culture include (i) acting with integrity, (ii) understanding the impact of
risk on our customers, (iii) embedding risk management into the
business, (iv) promoting full and
transparent communications, (v) collaboration and (vi) alignment of objectives and incentives. Accountabilities Accountability provides clear lines of responsibility and authority for risk acceptance and risk
taking. The Risk Review Committee of SLF Inc.s Board of Directors, composed of independent
directors, oversees managements approach to risk management. The committees key areas of focus
include responsibility for ensuring that the major areas of risk of the Companys business
activities are identified and reviewed by management, and approving, and reviewing compliance with,
the policies and programs implemented by the Company for the management and control of risk.
Management is responsible for the management of risk and for reporting on key risk issues to the
committee on a regular basis. Key Risk Processes

The Company has a formal risk management program implemented by management in each business
group. This program includes a process that applies qualitative and quantitative analysis of the
risk exposures, with appropriate reporting to senior management and the Board of Directors. The
results of this reporting are used to develop an annual Company-wide view of the most significant
risks, which is reported to the Risk Review Committee. Risk Identification The Company has established a formal risk identification program in which management of each
business group identifies the current key risks that may impact the business. Exposures to these
risks are assessed on a qualitative and quantitative basis. Risk control programs are documented
and action plans are established for mitigating the exposure. Using the input from the business
groups, the Company also identifies the key risks that may materially impact the organization as a
whole. These risks are monitored by senior management and reported to the Risk Review Committee on
an annual basis. Business Practices Reviews The Company reviews its business practices on an ongoing basis in light of evolving and emerging
business practices and standards and legal and regulatory requirements. Risk Categories

The risks facing the Company can generally be classified into four categories: 
    Market risk:the uncertainty arising from changes in market prices or indices and the
cost of embedded options and guarantees related to equity markets and/or interest rates
    Credit risk:the uncertainty surrounding the likelihood of default or credit downgrade
    Insurance risk:the uncertainty due to differences between the actual and expected
amounts of claims and benefit payments and the cost of embedded options and guarantees
related to insurance risks
    Operational risk:the uncertainty arising from events caused by failures of people,
process and technology as well as external dependencies Risk Measurement Market Risk Tolerance and
Earnings-at-Risk
The Company has established market risk tolerance limits that set out the maximum target income
sensitivity of business groups to changes in interest rates, and equity and foreign exchange
markets. These limits are based on the sensitivity of a one-year forward projection of income
tested by business groups against a set of internally prescribed market shocks. Deviations from the
applicable limits are reported to the Risk Review Committee. To complement the above, the Company has also developed an Earnings-at-Risk measurement model. The Sun Life Financial Inc.
    
    34




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Managements Discussion and Analysis model provides to management and the Risk Review Committee an analysis of capital market risks. The
Earnings-at-Risk model is also able to project a distribution of possible deviations of earnings to
further assist in risk management activities. Sensitivity of Earnings The following table sets out the sensitivity of the Companys earnings to changes in the interest
rate environment and equity markets based on the existing business mix. These amounts are estimated
assuming limited management actions to mitigate the impact of the changes. Increase (Decrease)($ millions)
    
    in EarningsInterest Rate Sensitivity (1)1% Increase
    
    
    451% Decrease
    
    
    (99
    )Equity Market Sensitivity (2)10% Increase
    
    
    7510% Decrease
    
    
    (91
    )
   (1)
    
    Represents a 100 basis point parallel shift in assumed interest rates across
the entire yield curve.(2)
    
    Represents the percentage change in equity markets. Risk
Policies

The Company has adopted worldwide consolidated risk management policies to provide a
consistent approach to measurement, mitigation and control and monitoring of risk exposures. Risk
policies have been established with respect to the major risks facing the Company. Market Risk Asset/Liability
Management
The Companys asset/liability management maximizes the long-term economic value within established
risk tolerance limits and constraints. The Companys insurance liabilities are segmented according
to major product type with investment guidelines established for each segment. Asset mix, asset
quality, liquidity and interest rate exposure are regularly measured and compared to policy
objectives and liability requirements for each product segment.  Interest rate risk is the risk of asset-liability mismatch resulting from interest rate
volatility.
 To manage interest rate risk, the Company has a matching policy for each portfolio of assets and
associated liabilities in order to keep potential losses within acceptable limits. For
interest-sensitive business lines, such as individual and group annuities, the primary approach is
to manage the sensitivity of the duration gap between assets, liabilities and off-balance sheet
instruments to interest rate changes. Specifically, the Company employs a key rate duration
technique that examines the duration gap of assets and liabilities at discrete points on the yield
curve. These gaps are managed within specified tolerance limits.  Market risk is the uncertainty arising from changes in market prices or indices and the cost of
embedded options and guarantees related to equity markets and/or interest rates.
 The Companys exposure to market risk is monitored and managed against established risk tolerance
limits, using the Earnings-at-Risk monitoring tools noted above. Individual Added by SLF U.S. to
distinguish from VA stock holdings stock holdings are diversified by industry type and corporate
entity. Real estate holdings are diversified by location and property type. The effects of a large and
sustained adverse market movement in real estate values are regularly monitored through Dynamic
Capital Adequacy Testing and other stress-testing techniques. Other important factors to consider in assessing the Companys exposure to market risk include the
use of derivatives and the Companys policies regarding liquidity management and foreign exchange
risk. For additional discussion on the Companys use of derivatives and its policies on liquidity
management, see pages 40 to 45 in this MD&A under the heading Financial Position and Liquidity.
Discussion of the impact of currency fluctuations and other risk factors can be found on pages 22
to 26 in SLF Inc.s 2004 AIF under the heading Risk Factors. Credit Risk Credit Risk Management  Credit risk is the uncertainty surrounding the likelihood of default or credit downgrade.
 To manage credit risk associated with fixed income investments, the Company uses detailed credit
and underwriting policies, detailed diversification requirements, comprehensive due diligence and
aggregate counterparty exposure limits within fixed income portfolios. A numerical credit risk
factor is assigned to all fixed income investments and an aggregate credit risk factor is developed
for major operations and the Company in aggregate, which are monitored against pre-established
limits and reported periodically to the Board of Directors. Provisions for impaired assets are
charged against the carrying value of the assets. Allowances for possible future asset defaults are
also provided for in the actuarial liabilities of the Company. Sun Life Financial Inc.
    
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Managements Discussion and Analysis Reinsurance Ceded Risk Management  Reinsurance ceded risk is the counterparty risk relating to externally reinsuring exposures.
 The Company maintains a reinsurance ceded policy to establish limits and to monitor the level of
reinsurance ceded to any single reinsurer or group of reinsurers. These limits are also
consolidated across operations to capture total exposure to any single reinsurer. Insurance Risk Product Design and Pricing Risk  Product design and pricing risk arises from inappropriate or inadequate product design and pricing
including deviations from the assumptions used in pricing products as a result of uncertainty
concerning future investment yields, mortality and morbidity experience, expenses, rates of policy
termination, and taxes.
 To manage product design and pricing risk the Company sets standards and guidelines that address
product design and pricing methods, pricing assumptions, profit margin objectives, required
scenario analysis, documentation, internal peer review and pricing approval processes. The product
design and pricing risk management process also includes completion of an annual compliance
assessment by all business units and the internal audit of business unit pricing processes on a
rotating basis. Mortality and Morbidity Risk Management  Mortality and morbidity risk is the risk of incurring higher than anticipated mortality and
morbidity claim losses on any one policy or group of policies.
 To manage mortality and morbidity risk, the Company follows detailed uniform underwriting
procedures to determine the insurability of applicants and to manage exposure to large claims.
Underwriting requirements are regularly scrutinized against industry guidelines. Group insurance policies are underwritten prior to the issue of the policy and again at each
renewal period. The Companys group insurance underwriting is driven by risk selection, plan design
and rating techniques. The risk policies approved by the Board of Directors include limits on the maximum amount of
insurance that may be issued under one policy and the maximum amount that may be retained. These
limits vary by geographic region. Amounts in excess of these limits are reinsured. Operational Risk Operational Risk Management  Operational risk is the uncertainty arising from events caused by failures of people, processes or
technology as well as external dependencies.
 To manage operational risk, the Company has worldwide policies and guidelines as well as specific
policies and guidelines for each business which it operates. The Company also maintains a comprehensive insurance program that provides protection against
potential losses. This program includes appropriate levels of self-insurance. The Companys
environmental risk management program is designed to help protect investment assets from losses due
to environmental issues and to help ensure compliance with applicable laws. Environmental risks
arise primarily from the Companys real estate, mortgage and structured finance portfolios. The
senior investment officer in each business group is responsible for ensuring that the local
environmental policy is appropriate for local operating conditions. A description of the Companys risk factors can be found on pages 22 to 26 of SLF Inc.s 2004 AIF
under the heading Risk Factors. Sun Life Financial Inc.
    
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Managements Discussion and Analysis INVESTMENTS The Company holds a diverse set of investment portfolios for its
general funds. The Company maintains prudent, uniform investment policies for the general funds
with specific guidelines appropriate for each of its business groups and focuses on maintaining
high-quality, well-diversified portfolios that are appropriate for its general fund obligations.
The investment of the Companys general funds is described below. Investment Policies The primary aim of the Company for its general fund assets is to ensure that all investments
are properly aligned with business objectives, including ensuring policyholder obligations are
being met and that adequate liquidity is maintained at all times. The Risk Review Committee
regularly reviews and approves investment policies that set prudent standards and procedures for
the investment of the Companys general fund assets. These policies include requirements,
restrictions and limitations for interest rate, credit, equity market, real estate market,
liquidity, concentration, currency and derivative risks. Compliance with these policies is
monitored on a regular basis. Management is also required to advise the Risk Review Committee
annually whether there has been adherence to these policies. Investment Profile The Company had total consolidated general fund invested assets of $96.9 billion at December
31, 2004, compared to $97.2 billion at December 31, 2003. The decrease was primarily due to the
strengthening of the Canadian dollar against foreign currencies during 2004, which reduced assets
by $3.0 billion, partially offset by the impact of growth in business during the year. The investment portfolio is broadly diversified and carefully managed with respect to the nature of
the Companys underlying policyholder obligations. The Company invests the majority of its general
funds in medium- to long-term fixed income instruments such as bonds and mortgages. The Companys
portfolio composition is very conservative, with approximately 90 Includes policy loans but exclude
stocks, real estates, and other invested assets% of the general funds in cash and fixed income
investments as at December 31, 2004. Real estate comprised 3% of the general funds, of which
approximately 68% related to the participating policyholders account. Common stock comprised
approximately 4% of the general funds, of which approximately 73% was related to the participating
policyholders account. The Companys shareholders net income is not materially affected by the
performance of investments held in the participating policyholders account. Bonds The Companys bond portfolio represented 67% of invested assets at December 31, 2004, compared
to 68% at the end of the previous year. The Companys bond portfolio is actively managed through a
regular program of purchases and sales directed at optimizing yield, quality and liquidity, while
ensuring that the asset portfolio remains matched to liability requirements. At December 31, 2004,
the bond portfolio had a carrying value of $64.5 billion and a market value of $68.6 billion
compared with $66.1 billion and $70.1 billion, respectively, at the end of 2003. The decrease in
bond investments was primarily attributable to the strengthening of the Canadian dollar against
foreign currencies, which had the effect of reducing bonds by $2.3 billion. (BONDS BY INVESTMENT GRADE PIE CHART) Investments ($ millions)
    2004
    
    2003
    
    2002Carrying
    
    % of
    
    
    
    Carrying
    
    % of
    
    
    Carrying
    
    % ofValue
    
    Total
    
    
    Value
    
    Total
    
    
    Value
    
    TotalBonds
    
    
    64,496
    
    
    
    67
    
    
    
    
    66,090
    
    
    
    68
    
    
    
    
    73,367
    
    
    
    66Mortgages
    
    
    13,862
    
    
    
    14
    
    
    
    
    13,601
    
    
    
    14
    
    
    
    
    15,799
    
    
    
    14Stocks
    
    
    3,463
    
    
    
    4
    
    
    
    
    3,473
    
    
    
    4
    
    
    
    
    4,221
    
    
    
    4Real Estate
    
    
    3,148
    
    
    
    3
    
    
    
    
    3,067
    
    
    
    3
    
    
    
    
    3,223
    
    
    
    3Cash and Equivalent Investments
    
    
    5,966
    
    
    
    6
    
    
    
    
    4,972
    
    
    
    5
    
    
    
    
    7,152
    
    
    
    7Policy Loans and Other Invested Assets
    
    
    5,982
    
    
    
    6
    
    
    
    
    5,973
    
    
    
    6
    
    
    
    
    6,726
    
    
    
    6Total Carrying Value
    
    
    96,917
    
    
    
    100
    
    
    
    
    97,176
    
    
    
    100
    
    
    
    
    110,488
    
    
    
    100Total Market Value
    
    
    102,798
    
    
    
    
    
    
    
    
    102,252
    
    
    
    
    
    
    
    
    114,993
 Sun Life Financial Inc.
    
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Managements Discussion and Analysis At December 31, 2004, the Company held $15.5 billion of non-public bonds, which constituted 24% of
the Companys overall bond portfolio. Non-public bonds rated A or higher represented 59% of total
non-public bonds, and non-public bonds rated BBB or higher represented 94% of total non-public
bonds at December 31, 2004. The Companys bond portfolio is also diversified by country. As at December 31, 2004, based on the
jurisdiction of the incorporation of issuers, 40% of the total bond portfolio was invested in
Canada, 43% in the U.S. and 11% in the U.K. Mortgages
The Companys mortgage portfolio represented 14% of invested assets at December 31, 2004,
unchanged from the end of 2003. The Companys mortgage portfolio totalled approximately $13.9
billion compared to $13.6 billion at the end of 2003. As at December 31, 2004, 67% of the total
mortgage portfolio was invested in Canada, 31% in the U.S., and 2% in the U.K. The Companys mortgage portfolio is almost entirely first mortgages. While the Company generally
requires a maximum loan to value ratio of 75%, it may invest in mortgages with a higher loan to
value ratio in Canada if the mortgage is insured. As at December 31, 2004, commercial mortgages accounted for 72% and residential mortgages accounted
for 28% of the Companys total mortgage portfolio. Approximately 44% of mortgage loans mature by
December 31, 2009. As part of its ongoing investment activities, the Company seeks to renew a
significant proportion of those mortgages that meet the Companys investment criteria. The Company also originates and manages mortgage-backed investments for institutional clients. This
fee-based business allows the Company to leverage its extensive commercial mortgage underwriting
expertise and enhance its asset management strength. In 2004, the Company securitized $161 million
of commercial mortgage-backed securities. The Company had $1.7 billion in managed mortgage assets
as at December 31, 2004, compared to $1.9 billion at the end of 2003. Stocks
The Companys equity portfolio represented 4% of invested assets at December 31, 2004,
unchanged from the end of 2003. At December 31, 2004, the stock portfolio had a carrying value of
$3.5 billion, unchanged from the 2003 level. The market value of its stock portfolio rose to $3.4
billion at the end of 2004, up 9% from the end of 2003 as higher equity market values more than
offset the unfavourable currency impact due to the strengthening of the Canadian dollar against
foreign currencies. The Companys equity portfolio is diversified by country. At December 31, 2004, $791 million or 23%
of the Companys equity portfolio related to Canadian issuers, $1.1 billion or 32% to U.S. issuers,
$1.4 billion or 41% to U.K. issuers, and $150 million or 4% to issuers from other jurisdictions.
The portfolio is also well diversified by specific issuer. Excluding the Companys equity interest
in CI Funds, no single issuer exceeded 2% of the portfolio at December 31, 2004. Real Estate
The Companys real estate portfolio represented 3% of invested assets at December 31, 2004,
unchanged from the end of 2003. At December 31, 2004, 59% of the portfolio was located in Canada,
29% in the United States and 12% in the United Kingdom. The Companys real estate portfolio had a
carrying value of approximately $3.1 billion and a market value of approximately $3.4 billion at
December 31, 2004, compared with $3.1 billion and $3.3 billion, respectively, at the end of 2003. Commercial office properties are the major component of the real estate portfolio, representing
approximately 46% of real estate investments at December 31, 2004. During 2004, the Company sold the majority of its property management contracts pertaining to its
commercial properties in Canada to Bentall Capital LP, enabling the investment management team of
the Company to better focus on the core asset management aspects of the real estate portfolio. Impaired Assets 
Total impaired assets, net of total specific and sectoral allowances, amounted to $178 million
at December 31, 2004, compared to $333 million as at December 31, 2003. The decrease of $155
million reflects the disposal of certain impaired holdings, the impact of the additional allowances
taken during the year, and the strengthening of the Canadian dollar against foreign currencies. The
Companys net impaired ratio, defined as net impaired assets to total invested assets, decreased to
0.18% at December 31, 2004, from 0.34% at the end of 2003. The Company had allowances of $263 million against gross impaired assets of $441 million as at
December 31, 2004, compared to $366 million and $699 million respectively, at December 31, 2003.
Impaired assets are primarily bonds related to the U.S. securitization, transportation and
utilities sectors. In addition, the Company had $2.2 billion for possible future asset defaults included in its
actuarial liabilities as at December 31, 2004, compared with $2.0 billion in 2003. Sun Life Financial Inc.
    
    38




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##### 



Managements Discussion and Analysis The Company takes provisions for certain bonds and mortgages designated as impaired. In 2004, the
Company took provisions of $21 million on invested assets compared to provisions of $113 million in 2003. The 2004 provisions reflect an improvement in impaired asset
levels. The 2003 provisions were primarily related to investments in the airline and securitization
sectors in both the United States and Canada. Deferred Net Realized Gains
Deferred net realized gains represent net gains on the sale of invested assets that have not
yet been recognized in income. In accordance with Canadian generally accepted accounting principles
for insurance companies, net realized gains on the sales of bonds and mortgages are deferred and
amortized into future investment income on a constant yield basis over the remaining period to
maturity. Net realized gains on the sale of stocks and real estate are deferred and amortized into
future investment income at the quarterly rate of 5% and 3%, respectively, of the unamortized
balance. The Company had $3.5 billion in deferred net realized gains as at December 31, 2004, of which $2.6
billion represented net gains on invested assets backing actuarial liabilities and $0.9 billion
represented net gains on invested assets backing capital. Gains on bonds and stocks collectively
represented 90% of total deferred net realized gains as at December 31, 2004. Net Unrealized Gains 
Net unrealized gains represent the difference between market value and carrying value of
investments, which are not recorded on the Companys balance sheet other than with respect to
stocks and real estate. Carrying values for stocks and real estate are determined on a moving
average market method of accounting whereby a portion of unrealized gains or losses is included in
the carrying value of investments. The related changes in unrealized gains and losses are credited
to or charged against income. The Company had $5.9 billion in net unrealized gains as at December 31, 2004 compared to $5.1
billion as at December 31, 2003. A significant portion of the net unrealized gains relate to
invested assets backing actuarial liabilities. Additional information is provided in Notes 7 and 8
to SLF Inc.s 2004 Consolidated Financial Statements. Sun Life Financial Inc.
    
    39




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##### 



Managements Discussion and Analysis FINANCIAL POSITION AND LIQUIDITY The Company maintains a strong financial position and adequate liquidity to ensure it
can meet its obligations. Principal Sources of Funds
The primary source of funds for the Company is cash provided by operating activities,
including premiums, investment management fees and net investment income. These funds are used
primarily to pay policy benefits, dividends to policyholders, claims, commissions, operating
expenses and interest. Cash flows generated from operating activities are generally invested to
support future payment requirements, including the payment of dividends to shareholders. The
Company may also raise funds from time to time through borrowing and issuing of securities to
finance growth, acquisitions or other needs. Net cash, cash equivalents and short-term securities increased by $994 million in 2004 primarily
because of lower net cash used in investing activities, lower negative impact of currency exchange
fluctuations and reduced net cash used in financing activities. Net cash used in investing
activities was lower primarily due to a net reduction in the level of investments in long-term
assets compared to a year ago. Net cash used in financing activities was lower in 2004 primarily
reflecting $106 million higher repayment of borrowed funds in 2003 and an increase of $37 million
in proceeds from share issuance related to the exercise of employee stock options. Lower share
repurchases by $139 million in 2004 were mostly offset by an increase in common share dividend
payments of $102 million. In addition, financing activities reflect debt redemptions of $267
million and $189 million in 2004 and 2003, respectively. At December 31, 2004, the Company maintained cash, cash equivalents and short-term securities
totalling $6.0 billion, of which 32% were held in relation to certain derivative strategies and
bond repurchase agreements. The corresponding percentage was 34% at the end of 2003. In addition to
providing for near-term funding commitments, cash, cash equivalents and short-term securities
include amounts which support short-term liabilities. Cash Flow ($ millions )
    
    2004
    
    
    
    2003
    
    
    2002Net Cash Provided by Operating Activities *
    
    
    3,230
    
    
    
    
    3,245
    
    
    
    4,453Net Cash Provided by (Used in) Financing Activities
    
    
    (1,102
    )
    
    
    
    (1,204
    )
    
    
    292Net Cash Provided by (Used in) Investing Activities
    
    
    (1,460
    )
    
    
    
    (2,564
    )
    
    
    (3,216
    )Changes due to Fluctuations in Exchange Rates
    
    
    (90
    )
    
    
    
    (455
    )
    
    
    44Increase (Decrease) in Cash and Cash Equivalents
    
    
    578
    
    
    
    
    (978
    )
    
    
    1,573Cash and Cash Equivalents, beginning of period
    
    
    3,178
    
    
    
    
    4,156
    
    
    
    2,583Cash and Cash Equivalents, end of period
    
    
    3,756
    
    
    
    
    3,178
    
    
    
    4,156Short-term Securities, end of period
    
    
    2,210
    
    
    
    
    1,794
    
    
    
    2,996Cash, Cash Equivalents and Short-term Securities, end of period
    
    
    5,966
    
    
    
    
    4,972
    
    
    
    7,152
   *
    
    Includes net cash provided by discontinued operations. Sun Life Financial Inc.
    
    40




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##### 



Managements Discussion and Analysis Liquidity
The Companys primary liquidity requirement is to meet operating cash obligations such as the
payment of claims and expenses and debt servicing, and to ensure its ability to pay shareholder
dividends. The Company generally maintains a conservative liquidity position that exceeds all the
liabilities payable on demand. To further strengthen its liquidity, the Company actively manages
and monitors its capital levels, its asset/liability matching position, diversification and credit
quality of its investments, and its cash forecasts and actual amounts against established targets.
In addition, the Company maintains standby credit facilities with a variety of banks. The
agreements relating to the Companys debt, letters of credit, and lines of credit contain covenants
of the nature normally found in these types of agreements relating to solvency, credit ratings and
other such matters. The Company is in material compliance with all covenants in these agreements. The Company is subject to various regulations in the jurisdictions in which it operates. The
ability of SLF Inc.s subsidiaries to pay dividends and transfer funds is regulated in certain
jurisdictions and may require local regulatory approvals and the satisfaction of specific
conditions in certain circumstances. Through effective cash management and capital planning, SLF
Inc. ensures that its subsidiaries, as a whole and on a stand-alone basis, are properly funded and
maintain adequate liquidity to meet obligations, both individually and in aggregate. Based on the Companys historic cash flows and current strong financial performance, management
believes that the cash flow from the Companys operating activities will continue to provide
sufficient liquidity for the Company to satisfy debt service obligations and to pay other expenses. Capital Structure
As at December 31, 2004, the Companys capital consisted of common shares issued by SLF Inc.,
preferred shares and subordinated debentures issued by Sun Life Assurance and its subsidiary, Sun
Canada Financial Co., Sun Life ExchangEable Capital Securities (SLEECS) issued by Sun Life Capital
Trust (SLCT), which qualified as Tier 1 capital for regulatory capital purposes, and cumulative
capital securities issued by a subsidiary of Sun Life Assurance. As at December 31, 2004, shareholders equity was $14.3 billion, up $426 million from the December
31, 2003 level. The increase was primarily due to shareholders net income of $1.7 billion,
partially offset by net share repurchases of $330 million, payment of shareholder dividends of $515
million, and a $421 million reduction due to the strengthening of the Canadian dollar against
foreign currencies. The number of SLF Inc. common shares outstanding decreased to 592 million as at December 31, 2004,
compared to 600 million as at December 31, 2003. The reduction was primarily due to SLF Inc.s
share repurchase program, through which approximately 10 million common shares were repurchased in
2004. SLF Inc. granted stock options to certain employees and directors, which may be exercised at the
closing price of the common shares on the trading day preceding the grant date. As at January 31, 2005, there were 592,235,890 SLF Inc. common shares and 12,244,744 stock options
outstanding. Sun Life Assurance had 6,000,000 preferred Class E Shares, Series 1 outstanding with a principal
amount of $150 million as at December 31, 2004. These shares carry a dividend yield of 6.5% and
were originally issued by Clarica. As at December 31, 2004, $950 million of SLEECS-Series A and $200 million of SLEECS-Series B were
outstanding. The SLEECS were issued by SLCT, a subsidiary of Sun Life Assurance. Holders of the
SLEECS have the right to surrender each $1,000 face amount of SLEECS in exchange for 40
non-cumulative preferred Class A Shares of Sun Life Assurance. These preferred shares may be
exchanged for common shares of SLF Inc. Details on the SLEECS are described in Note 15 to SLF
Inc.s 2004 Consolidated Financial Statements. Effective January 1, 2005, as a result of the change
in accounting guidelines described in Note 2 to SLF Inc.s 2004 Consolidated Financial Statements,
SLCT was deconsolidated from SLF Inc. As a result, SLF Inc. deconsolidated $1,150 million of
non-controlling interest in subsidiaries and recorded $1,200 million of senior debentures payable
to SLCT in other liabilities. The senior debentures issued by Sun Life Assurance comprised a $990
million issue bearing 6.865% interest due December 31, 2031, and a $210 million issue bearing
7.093% interest due June 30, 2052. For regulatory reporting purposes, the SLEECS remain as a part
of the Companys capital structure. The Companys long-term debt decreased with the redemption by Sun Life Assurance of $250 million of
its 5.8% debentures in November 2004. At December 31, 2004, the Companys long-term debt consisted
of (i) cumulative capital securities of $720 million, which were issued in U.S. dollars with no
scheduled maturity date, (ii) $1.2 billion of subordinated debentures issued in Canadian dollars
with maturities between 2015 and 2028, and (iii) subordinated notes of $213 million issued in U.S.
dollars with maturities between 2007 and 2015. Sun Life Financials debt-to-total capital ratio, including the SLEECS and Sun Life Assurances
Class E Preferred Shares Series 1 as part of debt, decreased to 19% as at December 31, 2004, from
21% at December 31, 2003. Sun Life Financial Inc.
    
    41




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##### 



Managements Discussion and Analysis (TOTAL DEBT-TO-TOTAL CAPITAL RATIO* BAR GRAPH) Shareholder Dividends
SLF Inc. increased its quarterly common shareholder dividend to $0.21 per share in the first
quarter of 2004 and to $0.22 per share in the third quarter of 2004. Total common shareholder
dividends paid in 2004 were $0.86 per share, up from $0.68 in 2003. On January 27, 2005, the Board
of Directors approved an additional 9% increase in quarterly dividends on SLF Inc.s common shares
to $0.24 per share. SLF Inc.s dividend policy is reviewed periodically by the Board of Directors,
and is dependent upon the Companys earnings, financial condition and capital requirements. (DIVIDENDS PER COMMON SHARE & DIVIDEND PAYOUT RATIO* BAR GRAPH) Capital Adequacy
The Company has a policy in place that ensures adequate capital is maintained in the countries
in which it has operations. In Canada, SLF Inc. and Sun Life Assurance are subject to the Minimum
Continuing Capital and Surplus Requirements (MCCSR) established by OSFI. In September 2003, OSFI
advised the life insurance industry that no minimum or targeted MCCSR would apply to insurance
holding companies on a consolidated basis. In addition, certain foreign life insurance companies
will not be subject to the MCCSR rules but instead will be allowed to rely on the capital adequacy
models developed by the foreign jurisdiction. On February 2, 2005, OSFI issued draft guidelines
incorporating these principles. It is anticipated that after the guidelines are finalized the
Companys principal operating life insurance company in the United States, Sun Life Assurance
Company of Canada (U.S.), will not be subject to the MCCSR requirements. The Company will revise
its capital policy to accommodate the new holding company capital rules when the guidelines are
finalized. Sun Life Assurance will continue to be subject to the MCCSR required capital for a life insurance
company in Canada. Under the current MCCSR guidelines, OSFI generally expects insurance companies
to maintain a minimum MCCSR ratio of 150%. Sun Life Assurances MCCSR ratio was well above the
minimum level as at December 31, 2004. Sun Life Assurance Company of Canada (U.S.) is subject to
the Risk-Based Capital rules under the National Association of Insurance Commissioners (NAIC). The
NAIC generally expects insurance companies to maintain 200% of minimum Risk-Based Capital. Sun Life
Assurance Company of Canada (U.S.)s Risk-Based Capital was well above the minimum level as at
December 31, 2004. In addition, other foreign operations and foreign subsidiaries of SLF Inc. must
comply with local capital requirements in the jurisdictions in which they operate. These foreign
operations and subsidiaries all maintained capital levels well above the minimum local requirements
as at December 31, 2004. (MCCSR RATIO* - SUN LIFE ASSURANCE BAR GRAPH) Off-Balance Sheet Arrangements
In the normal course of business, the Company is engaged in a variety of financial
arrangements. The principal purposes of these arrangements are: (i)
    to earn management fees and additional spread on a matched
book of business,(ii)
    to hedge and match the Companys liabilities, and reduce risks associated with currency,
interest rate and stock market fluctuations, and to reproduce
permissible investments, and(iii)
    to reduce financing costs. While most of these activities are reflected on the Companys balance sheet with respect to assets
and liabilities, certain of them are either not recorded or are recorded on the Companys balance
sheet in amounts that differ from the full contract or notional amounts. The types of off-balance
sheet activities the Company undertakes primarily include: 
    asset securitization
    securities lending
    financial derivatives Sun Life Financial Inc.
    
    42




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##### 



Managements Discussion and Analysis  
    financial reinsurance Asset Securitization
The Companys asset securitization program primarily comprises mortgage-backed securities and
collateralized bond obligations. The purpose of these structures is to leverage the Companys
investment expertise to source and manage assets for third-party customers for which the Company is
paid origination and/or management fees. The Company generally uses special purpose entities (SPEs) to carry out these activities. SPEs may
be organized as trusts, partnerships or corporations. In an asset securitization, the Company
transfers assets to an SPE in exchange for cash. The SPE obtains the cash needed to pay for the
assets it receives by issuing securities to investors. As part of the SPE arrangement, the Company
may subscribe to a subordinated investment in the securities issued by the SPE. The Company is
generally retained to manage the assets in the SPE on a fee-for-service basis. All of the asset
securitization transactions undertaken by the Company are structured on a non-recourse basis under
which the Company has no exposure to the default risks associated with the assets in the SPE, other
than through any retained interest held by the Company, which is not expected to be material. The Companys asset securitization program, excluding MFSs securitization activities, is
summarized in the following table. ($ millions)
    
    
    
    2004
    
    
    2003As at December 31Balance of Securitized Assets
    
    
    
    3,178
    
    
    
    3,075The
Companys Retained Interests
    
    
    
    138
    
    
    
    165For the
year ended December 31Cash Flow
Received on Retained Interests and Servicing Fees
    
    
    
    57
    
    
    
    26Sales Proceeds from New Securitizations
Including Gains Before Taxes
    
    
    
    179
    
    
    
    693
 During 2004, the Company sold commercial mortgages with a carrying value of $161 million to a trust
that subsequently issued securities backed by the commercial mortgages. The Company was retained by
the trust to service and administer the mortgages. It also retained a subordinated investment in
these securities. The 2004 transactions resulted in pre-tax gains of approximately $18 million.
These gains are being amortized into income over time. The Company, through MFS, manages collateralized debt obligations. The Companys exposure in these
collateralized debt obligations is limited to its equity investment and the management fee income
earned. The net carrying value of MFSs equity investment at December 31, 2004, was $6 million and
the expected annual management fees are approximately $5 million. Securities Lending
The Company maintains a securities lending program through which certain securities from its
investment portfolio are loaned to other institutions for short periods. The purpose of this
program is to generate additional fee income. The Company conducts its program only with
well-established, reputable banking institutions that carry a minimum credit rating of AA. It is
Company practice to obtain a guarantee from the lending agent against counterparty default,
including collateral deficiency, in securities lending transactions. The Companys securities lending program is summarized in the following table. ($ millions)
    
    
    2004
    
    
    2003As at December 31Balance of Securities Loaned
    
    
    
    2,071
    
    
    
    568Value of Collateral
    
    
    
    2,240
    
    
    
    642For the Year Ended December 31Fee Income Received
    
    
    
    3
    
    
    
    3
 The Companys loaned securities, which are included in invested assets, had a carrying value and
market value as at December 31, 2004 of approximately $2,071 million and $2,130 million,
respectively. As at December 31, 2003, the Companys loaned securities had a carrying value and
market value of approximately $568 million and $609 million, respectively. Financial Derivatives and Risk Mitigation
The Company uses derivative instruments for hedging and risk management purposes or in replication
strategies to reproduce permissible investments. The Company does not engage in speculative
investment in derivatives. The permissible derivative instruments under the Companys policy
include swaps, options, financial futures, and forward contracts to manage risks or to replicate
the exposures associated with interest rate, currency and equity market fluctuations. The Company generally enters into derivative transactions with counterparties with an AA credit
rating or better. Where a counterpartys rating is downgraded to below this level, the Company has
credit support arrangements in place which require additional collateral. The Company uses financial models and techniques to ensure the appropriateness of its risk
mitigation strategies. Generally, a derivative transaction will be pursued if the asset purchase or
sale is not considered as financially beneficial compared to an alternative transaction using
permissible derivative instruments. The Companys derivative instruments are summarized in the following table. Sun Life Financial Inc.
    
    43




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##### 



Managements Discussion and Analysis ($ millions)
    
    
    2004
    
    
    2003As at
December 31Total Notional Amount
    
    
    
    30,217
    
    
    
    26,163Net Fair Value
    
    
    
    1,080
    
    
    
    715Credit Equivalent Amount
    
    
    
    2,480
    
    
    
    2,249Risk-Weighted CreditEquivalent Amount
    
    
    
    59
    
    
    
    53
 Derivative transactions are measured in terms of notional amounts, which serve as the basis for
calculating payments and are generally not actual amounts that are exchanged. The net fair value
represents the unrealized gains, net of unrealized losses, of all derivative financial instruments.
The credit equivalent amount is determined as the replacement cost of the derivative contracts
having a positive fair value plus an amount representing the potential future credit exposure. The
risk-weighted credit equivalent amount is a measure used to determine the amount of capital
necessary to support derivative transactions for certain Canadian regulatory purposes. It is
determined by weighting the credit equivalent amount according to the nature of the derivative and the creditworthiness of the counterparties.
Both credit equivalent amount and risk-weighted credit equivalent amount are determined in
accordance with guidelines provided by OSFI. As at December 31, 2004, the credit equivalent amounts
for interest rate contracts, foreign exchange contracts, and equity and other contracts were $350
million, $838 million and $1,292 million, respectively. The corresponding risk-weighted credit
equivalent amounts were $8 million, $22 million and $29 million, respectively. Additional details in respect of derivatives are described in Notes 1, 8, 9 and 23 of SLF Inc.s
2004 Consolidated Financial Statements. The Companys use of derivatives for its material risk mitigation activities pertains mainly to
exposures with respect to movements in equity markets, interest rates and currency. Management of Sensitivity to Equity Market Movements
The Company sells variable annuities that contain guarantees the value of which is sensitive to
movement in equity markets. Derivatives are used to lower the sensitivity of income to significant
reductions in equity market levels. The Company has issued a large volume of such variable annuities primarily in the United States
where the guarantees on these annuities are managed using put options against the Standard and
Poors 500 Index over a range of strike prices and maturities. A hedging program has been
developed for variable annuities that involves dynamic trading of equity futures and options to
reflect market conditions and policyholder activity. Through its run-off reinsurance business, the Company also has reinsured the guarantees offered on
variable annuities issued by certain other insurance companies. The reserving requirements of these
guarantees are sensitive to movements in equity markets. During 2004, the Company purchased long
dated put options against the Standard and Poors 500 Index to reduce the income volatility
associated with this business. The Company sells equity-indexed annuity products in the United States that contain guarantees
related to equity market performance. The exposure is managed using equity-indexed futures and
options which are traded on a daily basis to reflect market conditions and policyholder activities. The asset mix of the With Profit Fund in the SLF U.K. business group includes a component of
equities. Derivatives are used to protect the fund from the impact of a significant fall in the
value of equities. A costless equity collar option on the FTSE 100 Index is currently being used as
a stop loss to protect the fund against a potential fall of the U.K. equity market below a
predetermined level while the fund in return would forfeit any potential increase in the U.K.
equity market above a specified threshold. Management of Sensitivity to Interest Rate Movements
The Company uses interest rate derivatives as part of its asset/liability management strategy,
which is described in more detail in the Risk Management section beginning on page 34 of this MD&A. The Company has exposure to decreases in interest rates on universal life contracts issued in the
United States. In Canada, the Company has exposure to decreases in interest rates on certain group
annuity contracts containing minimum interest guarantees. Interest rate floors, swaps and swaptions
are being used to lower the sensitivity of financial loss due to significant reductions in interest
rates. In the U.K., the Company has a portfolio of unit-linked pension products that offer guaranteed
annuity rate options. The value of these guarantees is sensitive to the level of interest rates at
the time of annuitization. The Company has purchased swaption contracts to reduce financial losses
due to interest rate movements. Management of Sensitivity to Currency Fluctuations
The Company uses cross currency swaps and forwards to reduce the sensitivity to currency
fluctuations. These derivative instruments are primarily used to match the value and cash flows of
specific assets denominated in one currency with the value and cash flows of the corresponding
liabilities denominated in another currency. Currency swaps are also used to hedge certain
investment and operations financing activities. Sun Life Financial Inc.
    
    44




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##### 



Managements Discussion and Analysis Financial Reinsurance
Although Sun Life Financial is currently not entering into any new financial reinsurance treaties,
the Company has previously engaged in financial reinsurance markets to generate fee income. The Companys in-force financial reinsurance program is summarized in the following table. ($ millions)
    
    
    2004
    
    
    2003As at December 31Business In-Force Equivalent
    
    
    
    148
    
    
    
    395Risk-Weighted Amount *
    
    
    
    1
    
    
    
    1For the Year Ended December 31Fee Income Received
    
    
    
    4
    
    
    
    5
   *
    
    Represents the risk equivalent amount weighted according to the nature of
the risk profile of each financial reinsurance treaty. COMMITMENTS, GUARANTEES, CONTINGENCIES AND REINSURANCE MATTERS In the normal course of business, the Company enters into leasing agreements, outsourcing
arrangements, and agreements involving indemnities to third parties. The Company is also engaged in
arbitration proceedings in the U.S. and U.K. with certain companies that have contracts to provide
reinsurance to the Company. Details regarding the Companys commitments, guarantees and
contingencies are summarized in Note 21 of SLF Inc.s 2004 Consolidated Financial Statements. 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 were $491 million as at December 31, 2004. Contractual Commitments
In the normal course of business, the Company provides credit instruments to its customers to
facilitate their financial needs. These various contractual commitments are not reflected in SLF
Inc.s 2004 Consolidated Financial Statements. At December 31, 2004, there were outstanding
contractual commitments of $1.8 billion. The majority of these commitments are to extend credit
under commercial and residential mortgage loans. Letters of Credit
The Company issues letters of credit in the normal course of business. At December 31, 2004,
letters of credit in the amount of $341 million have been issued. Outsourcing Agreements
The Company enters into long-term outsourcing contracts from time to time to allow the Company to
focus on its core business and enhance customer services. Its material long-term outsourcing
contracts are described below. In March 2002, the Company entered into a five-year outsourcing contract with Marlborough Stirling
Group, a U.K. based software and service provider specializing in the financial services sector, to
outsource the administration of its closed block of U.K. individual life and pension business,
consisting of approximately 723,000 policies as at December 31, 2004. The contract has subsequently
been extended by two years through to 2009. The value of the main contract is estimated at
approximately £138 million over its term. The future payments to Marlborough Stirling Group are
estimated to be approximately £14 million in 2005 and £39 million for the remaining term of this
contract after 2005. The outsourcing arrangement has reduced the Companys operating costs and
risks, enhanced its strategic flexibility in the U.K. market, and represented another step in the
implementation of the Companys strategic initiative to rationalize its U.K. operations. On
November 30, 2004, Marlborough Stirling Group announced that it was exploring the possibility of a
joint venture or sale of some or all of its business. Sun Life Financial is monitoring this
situation. In August 2002, the Company entered into an outsourcing contract with IBM Canada Limited (IBM),
under which IBM provides a wide range of technology services to the Company over a seven-year
period. The value of this contract is estimated to be approximately $250 million over its life.
Beginning in 2004, e-Messaging and mainframe services under the outsourcing arrangement were
broadened in scope. The future payments to IBM, based on currently anticipated usage levels, are
estimated to be approximately $37 million a year for the remaining term of this contract. Contractual Obligations Payments Due by Period($ millions)
    
    Total
    
    
    Within 1 Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    Over 5 YearsLong-Term Debt
    
    
    3,332
    
    
    
    
    
    
    
    
    
    
    
    33
    
    
    
    3,299Operating Leases
    
    
    491
    
    
    
    103
    
    
    
    172
    
    
    
    90
    
    
    
    126Credit-Related ArrangementsContractual Commitments
    
    
    1,754
    
    
    
    1,081
    
    
    
    673
    
    
    
    
    
    
    
    Letters of Credit
    
    
    341
    
    
    
    341
    
    
    
    
    
    
    
    
    
    
    
    Total Contractual Obligations
    
    
    5,918
    
    
    
    1,525
    
    
    
    845
    
    
    
    123
    
    
    
    3,425
 Sun Life Financial Inc.
    
    45




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##### 



Managements Discussion and Analysis LEGAL AND REGULATORY PROCEEDINGS In 2003, industry wide regulatory
investigations were launched in the U.S. investment industry regarding market timing, late trading
and other issues. On February 5, 2004, MFS reached settlements with federal and state regulators
with respect to alleged false and misleading information in certain MFS fund prospectuses regarding
market timing and related issues. In these settlements, MFS agreed to pay US$225 million to
compensate investors in certain funds, of which US$50 million was a penalty, and agreed to reduce
fees on certain MFS funds by approximately US$25 million annually for five years. Under these
settlements, MFS neither admitted nor denied any wrongdoing. The Company recorded a $211 million
after-tax charge to income in the fourth quarter of 2003 in connection with these settlements. On March 31, 2004, MFS settled an administrative proceeding with the United States 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 US$1.00 (US one dollar) in disgorgement and US$50 million in
penalty to compensate certain MFS funds. The Company recorded a $59 million after tax charge to net
income in the first quarter of 2004 in connection with this settlement. On December 16, 2004, the Ontario Securities Commission approved a settlement agreement with CI
Funds, in which CI Funds agreed to make a payment of $49.3 million plus interest to investors of
its mutual funds that were affected by frequent trading that CI Funds permitted to occur in certain
accounts. This settlement had an immaterial effect on the 2004 earnings of Sun Life Financial. The Company and its subsidiaries have received requests for information from and are cooperating
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. Since December 2003, SLF 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 U.S.
federal and state courts seeking damages of unspecified amounts. 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 the MFS
funds. The suits 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s internal policies concerning market timing and
such matters, (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s use of fund assets in this manner. The actions
assert that some or all of the defendants violated U.S. federal securities laws, 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 total 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 this MD&A under the
headings Non-GAAP Financial Measuresand MFS Investment Management, in Note 21 to SLF Inc.s
2004 Consolidated Financial Statements and in SLF Inc.s 2004 AIF under the heading Risk Factors 
Investigations into U.S. Investment and Insurance Industries. ADDITIONAL INFORMATION
Additional information relating to the Company can be found in SLF Inc.s Consolidated
Financial Statements and accompanying notes for the year ended December 31, 2004, SLF Inc.s 2004
AIF and other documents filed with applicable securities regulators in Canada, which may be
accessed at www.sedar.com and with the SEC, which may be accessed at www.sec.gov. Sun Life Financial Inc.
    
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