##### 



Exhibit 1

(SUN LIFE FINANCIAL LOGO)





Sun Life Financial Inc.



Consolidated
Financial Statements
December 31, 2003

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FINANCIAL REPORTING RESPONSIBILITIES

Financial Reporting Responsibilities

Management is responsible for preparing the consolidated financial statements.
This responsibility includes selecting appropriate accounting policies and
making estimates and other judgements consistent with Canadian generally
accepted accounting principles including the requirements of the Office of the
Superintendent of Financial Institutions Canada. It also includes ensuring the
use of appropriate accounting policies and estimates in the disclosure of the
information which was prepared following accounting principles generally
accepted in the United States of America. The financial information presented
elsewhere in the annual report to shareholders is consistent with these
statements.

The Board of Directors (Board) oversees managements responsibilities for
financial reporting. An Audit Committee of non-management directors is
appointed by the Board to review the financial statements and report to the
directors prior to their approval of the financial statements for issuance to
shareholders.

Management is also responsible for maintaining systems of internal control that
provide reasonable assurance that financial information is reliable, that all
financial transactions are properly authorized, that assets are safeguarded,
and that Sun Life Financial Inc. and its subsidiaries, collectively referred to
as the Company, adhere to legislative and regulatory requirements. These
systems include the communication of policies and the Companys Code of
Business Conduct throughout the organization. Internal controls are reviewed
and evaluated by the Companys internal auditors.

The Audit Committee also conducts such review and inquiry of management and the
internal and external auditors as it deems necessary towards establishing that
the Company is employing appropriate systems of internal control, is adhering
to legislative and regulatory requirements and is applying the Companys Code
of Business Conduct. Both the internal and external auditors and the
Appointed Actuary have full and
unrestricted access to the Audit Committee, with and
without the presence of management.

The Office of the Superintendent of Financial Institutions Canada conducts
periodic examinations of the Company. These examinations are designed to
evaluate compliance with provisions of the Insurance Companies Act of Canada
and to ensure that the interests of policyholders, depositors and the public
are safeguarded. The Companys foreign operations and foreign subsidiaries are
examined by regulators in their local jurisdictions.

The Appointed Actuary, who is a member of management, is appointed by the Board
to discharge the various actuarial responsibilities required under the
Insurance Companies Act of Canada, and conducts the valuation of the Companys
actuarial liabilities. The role of the Appointed Actuary is described in more
detail in Note 11 on page 28. The report of the Appointed Actuary appears on
page 50.

The Companys external auditors, Deloitte & Touche LLP, Chartered Accountants,
conduct an independent examination of the financial statements and meet
separately with both management and the Audit Committee to discuss the results
of their examination. The auditors report to the shareholders appears on page
50.

-s- Donald A. StewartDonald A. Stewart
Chief Executive Officer

-s- Paul W. DerksenPaul W. Derksen
Executive Vice-President and Chief Financial Officer

Toronto, February 12, 2004

1
Sun Life Financial Inc.

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CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Operations

YEARS ENDED DECEMBER 31 (in millions of Canadian dollars, except for per share amounts)



---

2003
    
    2002
    
    2001REVENUEPremium income:Annuities
    
    $
    4,805
    
    
    $
    7,402
    
    
    $
    4,196Life insurance
    
    
    6,325
    
    
    
    5,403
    
    
    
    3,759Health insurance
    
    
    2,413
    
    
    
    2,070
    
    
    
    1,48213,543
    
    
    
    14,875
    
    
    
    9,437Net investment income (Note 8)
    
    
    5,703
    
    
    
    5,131
    
    
    
    4,162Fee income
    
    
    2,810
    
    
    
    3,095
    
    
    
    3,21622,056
    
    
    
    23,101
    
    
    
    16,815POLICY BENEFITS AND EXPENSESPayments to policyholders, beneficiaries and depositors:Maturities and surrenders
    
    
    6,050
    
    
    
    5,476
    
    
    
    2,610Annuity payments
    
    
    1,567
    
    
    
    1,486
    
    
    
    952Death and disability benefits
    
    
    2,488
    
    
    
    2,067
    
    
    
    1,196Health benefits
    
    
    1,696
    
    
    
    1,573
    
    
    
    1,162Policyholder dividends and interest on claims and deposits
    
    
    1,011
    
    
    
    1,086
    
    
    
    96012,812
    
    
    
    11,688
    
    
    
    6,880Net transfers to segregated funds
    
    
    544
    
    
    
    1,329
    
    
    
    2,606Increase in actuarial liabilities (Note 11)
    
    
    1,624
    
    
    
    3,822
    
    
    
    1,697Commissions
    
    
    1,848
    
    
    
    1,909
    
    
    
    1,600Operating expenses (Note 19)
    
    
    3,088
    
    
    
    2,779
    
    
    
    2,496Premium taxes
    
    
    171
    
    
    
    168
    
    
    
    113Interest expense (Notes 13 and 14)
    
    
    209
    
    
    
    192
    
    
    
    16820,296
    
    
    
    21,887
    
    
    
    15,560OPERATING INCOME BEFORE INCOME TAXES AND NON-CONTROLLING INTERESTS
    
    
    1,760
    
    
    
    1,214
    
    
    
    1,255Income taxes (Note 20)
    
    
    387
    
    
    
    98
    
    
    
    306Non-controlling interests in net income of subsidiaries (Note 15)
    
    
    65
    
    
    
    83
    
    
    
    68NET INCOME FROM CONTINUING OPERATIONS
    
    
    1,308
    
    
    
    1,033
    
    
    
    881Loss from discontinued operations, net of income taxes (Note 5)
    
    
    
    
    
    
    36
    
    
    
    TOTAL NET INCOME
    
    
    1,308
    
    
    
    997
    
    
    
    881Less:Participating policyholders net income (loss)
    
    
    (1
    )
    
    
    (1
    )
    
    
    (1
    )SHAREHOLDERS NET INCOME
    
    $
    1,309
    
    
    $
    998
    
    
    $
    882Average exchange rates:U.S. Dollars
    
    
    1.4018
    
    
    
    1.5701
    
    
    
    1.148U.K. Pounds
    
    
    2.2874
    
    
    
    2.3567
    
    
    
    2.228Basic earnings per share from continuing operations(Note 17)
    
    $
    2.15
    
    
    $
    1.91
    
    
    $
    2.08Basic earnings per share(Note 17)
    
    $
    2.15
    
    
    $
    1.84
    
    
    $
    2.08Diluted earnings per share from continuing operations(Note 17)
    
    $
    2.15
    
    
    $
    1.90
    
    
    $
    2.07Diluted earnings per share(Note 17)
    
    $
    2.15
    
    
    $
    1.83
    
    
    $
    2.07


The attached notes form part of these consolidated financial statements.

2
www.sunlife.com Annual Report 2003



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CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Balance Sheets

AS AT DECEMBER 31 (in millions of Canadian dollars)



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2003
    
    2002*ASSETSBonds (Note 8)
    
    $
    66,090
    
    
    $
    73,367Mortgages (Note 8)
    
    
    13,601
    
    
    
    15,799Stocks (Note 8)
    
    
    3,473
    
    
    
    4,221Real estate (Note 8)
    
    
    3,067
    
    
    
    3,223Cash, cash equivalents and short-term securities
    
    
    4,972
    
    
    
    7,152Policy loans and other invested assets
    
    
    5,973
    
    
    
    6,726Invested assets
    
    
    97,176
    
    
    
    110,488Goodwill (Note 10)
    
    
    5,573
    
    
    
    5,969Other assets (Note 10)
    
    
    6,460
    
    
    
    6,995Total general fund assets
    
    $
    109,209
    
    
    $
    123,452Segregated funds net assets
    
    $
    54,086
    
    
    $
    52,755LIABILITIES AND EQUITYActuarial liabilities and other policy liabilities (Note 11)
    
    $
    77,354
    
    
    $
    89,912Amounts on deposit
    
    
    3,120
    
    
    
    3,262Deferred net realized gains (Note 8)
    
    
    3,124
    
    
    
    3,456Other liabilities (Note 12)
    
    
    7,795
    
    
    
    7,635Total general fund liabilities
    
    
    91,393
    
    
    
    104,265Subordinated debt (Note 14)
    
    
    2,504
    
    
    
    2,922Non-controlling interests in subsidiaries (Note 15)
    
    
    1,336
    
    
    
    1,356Total equity
    
    
    13,976
    
    
    
    14,909Total general fund liabilities and equity
    
    $
    109,209
    
    
    $
    123,452Segregated funds contract liabilities
    
    $
    54,086
    
    
    $
    52,755December 31 exchange rates:U.S. Dollars
    
    
    1.29
    
    
    
    1.58U.K. Pounds
    
    
    2.30
    
    
    
    2.53




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|* |  | As restated (Note 3).
|- |  | ---------------------

The attached notes form part of these consolidated financial statements.

Approved on behalf of the Board of Directors

-s- Donald A. StewartDonald A. Stewart
Chief Executive Officer

-s- Ronald W. OsborneRonald W. Osborne
Director

3
Sun Life Financial Inc.



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CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Equity

YEARS ENDED DECEMBER 31 (in millions of Canadian dollars)



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PARTICIPATINGPOLICYHOLDERS
    
    SHAREHOLDERS
    
    2003
    
    2002
    
    2001SHARE CAPITALBalance, beginning of year
    
    $
    
    
    
    $
    7,420
    
    
    $
    7,420
    
    
    $
    1,100
    
    
    $
    795Common shares issued, net of issuance costs,
as consideration for business acquisitions (Notes 3 and 16)
    
    
    
    
    
    
    63
    
    
    
    63
    
    
    
    6,281
    
    
    
    New common shares issued for cash (Note 16)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    330Stock options exercised (Note 18)
    
    
    
    
    
    
    28
    
    
    
    28
    
    
    
    39
    
    
    
    Commissions and offering costs, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23
    )Common shares purchased for cancellation (Note 16)
    
    
    
    
    
    
    (222
    )
    
    
    (222
    )
    
    
    
    
    
    
    (2
    )Balance, end of year
    
    
    
    
    
    
    7,289
    
    
    
    7,289
    
    
    
    7,420
    
    
    
    1,100CONTRIBUTED SURPLUSBalance, beginning of year
    
    
    
    
    
    
    57
    
    
    
    57
    
    
    
    
    
    
    
    Stock option compensation (Note 18)
    
    
    
    
    
    
    26
    
    
    
    26
    
    
    
    21
    
    
    
    Stock options exercised (Note 18)
    
    
    
    
    
    
    (7
    )
    
    
    (7
    )
    
    
    (12
    )
    
    
    Fair value of stock options granted as consideration
for business acquisition (Note 3)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    Balance, end of year
    
    
    
    
    
    
    76
    
    
    
    76
    
    
    
    57
    
    
    
    RETAINED EARNINGSBalance, beginning of year
    
    
    73
    
    
    
    6,621
    
    
    
    6,694
    
    
    
    5,994
    
    
    
    5,350Balance of participating policyholders account of
Clarica Life Insurance Company at date of acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    Net income (loss)
    
    
    (1
    )
    
    
    1,309
    
    
    
    1,308
    
    
    
    997
    
    
    
    881Dividends on common shares
    
    
    
    
    
    
    (413
    )
    
    
    (413
    )
    
    
    (294
    )
    
    
    (204
    )Common shares purchased for cancellation (Note 16)
    
    
    
    
    
    
    (305
    )
    
    
    (305
    )
    
    
    
    
    
    
    (33
    )Balance, end of year
    
    
    72
    
    
    
    7,212
    
    
    
    7,284
    
    
    
    6,694
    
    
    
    5,994CURRENCY TRANSLATION ACCOUNTBalance, beginning of year
    
    
    3
    
    
    
    735
    
    
    
    738
    
    
    
    631
    
    
    
    372Changes for the year
    
    
    (8
    )
    
    
    (1,403
    )
    
    
    (1,411
    )
    
    
    107
    
    
    
    259Balance, end of year
    
    
    (5
    )
    
    
    (668
    )
    
    
    (673
    )
    
    
    738
    
    
    
    631Total equity
    
    $
    67
    
    
    $
    13,909
    
    
    $
    13,976
    
    
    $
    14,909
    
    
    $
    7,725


The attached notes form part of these consolidated financial statements.

4
www.sunlife.com Annual Report 2003



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CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Cash Flows

YEARS ENDED DECEMBER 31 (in millions of Canadian dollars)



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2003
    
    2002*
    
    2001*CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIESNet income from continuing operations
    
    $
    1,308
    
    
    $
    1,033
    
    
    $
    881Items not affecting cash:Increase in actuarial and other policy related liabilities
    
    
    1,430
    
    
    
    3,795
    
    
    
    1,191Amortization of:Net deferred realized and unrealized gains on investments
    
    
    (356
    )
    
    
    (242
    )
    
    
    (449
    )Goodwill, deferred acquisition costs and intangible assets
    
    
    258
    
    
    
    333
    
    
    
    328Gain on sale of subsidiaries
    
    
    
    
    
    
    (177
    )
    
    
    (195
    )Future income taxes
    
    
    91
    
    
    
    (87
    )
    
    
    47Provisions for losses on investments
    
    
    113
    
    
    
    366
    
    
    
    4Stock option compensation (Note 18)
    
    
    26
    
    
    
    21
    
    
    
    Other changes in other assets and liabilities
    
    
    181
    
    
    
    (613
    )
    
    
    341New mutual fund business acquisition costs capitalized
    
    
    (152
    )
    
    
    (194
    )
    
    
    (296
    )Redemption fees of mutual funds
    
    
    73
    
    
    
    115
    
    
    
    105Net cash provided by operating activities
    
    
    2,972
    
    
    
    4,350
    
    
    
    1,957CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIESBorrowed funds
    
    
    (96
    )
    
    
    (103
    )
    
    
    (104
    )Issuance of subordinated debt (Note 14)
    
    
    
    
    
    
    799
    
    
    
    Redemption of subordinated debt (Note 14)
    
    
    (189
    )
    
    
    (337
    )
    
    
    Payments to underwriters
    
    
    
    
    
    
    
    
    
    
    (29
    )Issuance of common shares
    
    
    
    
    
    
    
    
    
    
    330Issuance of common shares on exercise of stock options (Note 16)
    
    
    21
    
    
    
    27
    
    
    
    Issuance of Sun Life ExchangEable Capital Securities  Series A and B (Note 15)
    
    
    
    
    
    
    200
    
    
    
    950Common shares purchased for cancellation (Note 16)
    
    
    (527
    )
    
    
    
    
    
    
    (35
    )Dividends paid on common shares
    
    
    (413
    )
    
    
    (294
    )
    
    
    (204
    )Net cash provided by (used in) financing activities
    
    
    (1,204
    )
    
    
    292
    
    
    
    908CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIESSales, maturities and repayments of:Bonds
    
    
    39,138
    
    
    
    30,556
    
    
    
    13,427Mortgages
    
    
    3,128
    
    
    
    3,528
    
    
    
    1,487Stocks
    
    
    1,416
    
    
    
    4,285
    
    
    
    3,241Real estate
    
    
    131
    
    
    
    432
    
    
    
    240Purchases of:Bonds
    
    
    (43,323
    )
    
    
    (38,300
    )
    
    
    (13,833
    )Mortgages
    
    
    (2,673
    )
    
    
    (2,904
    )
    
    
    (2,001
    )Stocks
    
    
    (1,267
    )
    
    
    (2,818
    )
    
    
    (3,278
    )Real estate
    
    
    (191
    )
    
    
    (227
    )
    
    
    (118
    )Policy loans
    
    
    (68
    )
    
    
    (151
    )
    
    
    (88
    )Short-term securities
    
    
    1,095
    
    
    
    (317
    )
    
    
    (249
    )Other investments
    
    
    316
    
    
    
    (39
    )
    
    
    (319
    )Acquisitions, net of cash acquired from continuing operations (Note 3)
    
    
    (266
    )
    
    
    2,749
    
    
    
    (1,825
    )Disposals, net of cash disposed of (Note 5)
    
    
    
    
    
    
    (10
    )
    
    
    363Net cash used in investing activities
    
    
    (2,564
    )
    
    
    (3,216
    )
    
    
    (2,953
    )Net cash provided by discontinued operations
    
    
    273
    
    
    
    103
    
    
    
    Changes due to fluctuations in exchange rates
    
    
    (455
    )
    
    
    44
    
    
    
    168Increase (decrease) in cash and cash equivalents
    
    
    (978
    )
    
    
    1,573
    
    
    
    80Cash and cash equivalents, beginning of year
    
    
    4,156
    
    
    
    2,583
    
    
    
    2,503Cash and cash equivalents, end of year
    
    
    3,178
    
    
    
    4,156
    
    
    
    2,583Short-term securities, end of year
    
    
    1,794
    
    
    
    2,996
    
    
    
    2,226Cash, cash equivalents and short-term securities, end of year
    
    $
    4,972
    
    
    $
    7,152
    
    
    $
    4,809Supplementary InformationCash and cash equivalents:Cash
    
    $
    489
    
    
    $
    328
    
    
    $
    396Cash equivalents
    
    
    2,689
    
    
    
    3,828
    
    
    
    2,187$
    3,178
    
    
    $
    4,156
    
    
    $
    2,583Cash disbursements made for:Interest on borrowed funds and subordinated debt
    
    $
    207
    
    
    $
    201
    
    
    $
    167Income taxes, net of refunds
    
    $
    149
    
    
    $
    229
    
    
    $
    269




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|* |  | As restated.
|- |  | ------------

The attached notes form part of these consolidated financial statements.

5
Sun Life Financial Inc.



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##### 



CONSOLIDATED FINANCIAL STATEMENTS

Consolidated Statements of Changes in Segregated Funds Net Assets

YEARS ENDED DECEMBER 31 (in millions of Canadian dollars)



---

2003
    
    2002
    
    2001ADDITIONS TO SEGREGATED FUNDSDeposits:Annuities
    
    $
    5,624
    
    
    $
    5,105
    
    
    $
    5,162Life insurance
    
    
    344
    
    
    
    1,537
    
    
    
    6895,968
    
    
    
    6,642
    
    
    
    5,851Net transfers from general funds
    
    
    544
    
    
    
    1,329
    
    
    
    2,606Net realized and unrealized gains (losses)
    
    
    6,456
    
    
    
    (8,658
    )
    
    
    (7,372
    )Other investment income
    
    
    1,411
    
    
    
    1,343
    
    
    
    1,49914,379
    
    
    
    656
    
    
    
    2,584DEDUCTIONS FROM SEGREGATED FUNDSPayments to policyholders and their beneficiaries
    
    
    6,776
    
    
    
    7,366
    
    
    
    6,480Management fees
    
    
    556
    
    
    
    564
    
    
    
    538Taxes and other expenses
    
    
    167
    
    
    
    57
    
    
    
    67Effect of changes in currency exchange rates
    
    
    5,549
    
    
    
    (349
    )
    
    
    (1,824
    )13,048
    
    
    
    7,638
    
    
    
    5,261Net additions (reductions) to segregated funds for the year
    
    
    1,331
    
    
    
    (6,982
    )
    
    
    (2,677
    )Acquisitions (Note 3)
    
    
    
    
    
    
    11,193
    
    
    
    3,882Disposals (Note 5)
    
    
    
    
    
    
    
    
    
    
    (2,194
    )Segregated funds net assets, beginning of year
    
    
    52,755
    
    
    
    48,544
    
    
    
    49,533Segregated funds net assets, end of year
    
    $
    54,086
    
    
    $
    52,755
    
    
    $
    48,544


Consolidated Statements of Segregated Funds Net Assets

AS AT DECEMBER 31 (in millions of Canadian dollars)



---

2003
    
    2002ASSETSSegregated and mutual fund units
    
    $
    40,721
    
    
    $
    38,377Stocks
    
    
    7,892
    
    
    
    7,452Bonds
    
    
    5,546
    
    
    
    5,896Cash, cash equivalents and short-term securities
    
    
    686
    
    
    
    1,530Real estate
    
    
    148
    
    
    
    170Mortgages
    
    
    78
    
    
    
    146Other assets
    
    
    580
    
    
    
    96555,651
    
    
    
    54,536LIABILITIES
    
    
    1,565
    
    
    
    1,781Net assets attributable to segregated funds policyholders
    
    $
    54,086
    
    
    $
    52,755


The attached notes form part of these consolidated financial statements.

6
www.sunlife.com Annual Report 2003



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##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Notes to the Consolidated Financial Statements(Amounts in millions of Canadian dollars, except for per share amounts and where otherwise stated)



|1. |  | Accounting Policies
|-- |  | -------------------

DESCRIPTION OF BUSINESS

At the Annual Meeting of the shareholders of Sun Life Financial Inc.
(formerly known as Sun Life Financial Services of Canada Inc.) on June 4,
2003, the shareholders approved the change of the Companys name pursuant
to Letters Patent of Amendment effective July 2, 2003. Sun Life Financial
Inc. is a publicly traded company and is the holding company of Sun Life
Assurance Company of Canada (Sun Life Assurance). Both companies are
registered under the Insurance Companies Act of Canada, and are regulated
by the Office of the Superintendent of Financial Institutions Canada
(OSFI).

Sun Life Financial Inc., together with all its subsidiaries, including the
wholly-owned consolidated subsidiary Sun Life Assurance, are collectively
referred to as Sun Life Financial or the Company. The Company is an
internationally diversified financial services organization providing
savings, retirement and pension products, and life and health insurance to
individuals and groups through its operations in Canada, the United
States, the United Kingdom and Asia. The Company also operates mutual
fund, investment management and trust businesses, primarily in Canada, the
United States and Asia.

BASIS OF PRESENTATION

The Company prepares its consolidated financial statements in accordance
with Canadian generally accepted accounting principles (GAAP) including
the accounting requirements of the OSFI.

The preparation of financial statements in conformity with Canadian GAAP
requires management to make estimates and assumptions that affect:

| |  | the reported amounts of assets and liabilities at the date of the financial statements,
|- |  | ---------------------------------------------------------------------------------------

| |  | the disclosure of contingent assets and liabilities at the date of the financial statements, and
|- |  | ------------------------------------------------------------------------------------------------

| |  | the reported amounts of revenues, policy benefits and expenses during the reporting period.
|- |  | -------------------------------------------------------------------------------------------

The significant accounting policies used in the preparation of these
consolidated financial statements are summarized below.

BASIS OF CONSOLIDATION

The consolidated financial statements reflect the accounts of the Company,
including life insurance and non-life insurance subsidiaries. Significant
intercompany balances and transactions have been eliminated. The purchase
method is used to account for subsidiaries. The difference between the
acquisition cost of a subsidiary and the fair value of the net
identifiable assets acquired is recorded as goodwill. Operating results
of the subsidiaries are included in the consolidated statements of
operations from the dates of their acquisition. The equity method is used
to account for other entities over which the Company is able to exercise a
significant influence. The Companys share of earnings of such entities
is reported in net investment income in the consolidated statements of
operations.

BONDS AND MORTGAGES

Bonds and mortgages are carried at amortized cost, net of allowances for
losses.

A bond or mortgage is classified as impaired where payment is 90 days past
due, foreclosure or power of sale procedures have started or other
circumstances warrant. Regular reviews are performed on portfolios during
which management considers various factors to identify invested assets of
potential concern. Consideration is given to general economic and
business conditions, industry trends, specific developments with regard to
security issuers and current market valuations. When an asset is
classified as impaired, allowances for losses are established to adjust
the carrying value of the asset to its net recoverable amount. Interest
is no longer accrued and previous interest accruals are reversed.
Allowances for losses, net of write-offs of specific investments and
recoveries, are charged against net investment income. Once the
conditions causing the impairment improve and future payments are
reasonably assured, allowances are reduced and the invested asset is no
longer classified as impaired. Sectoral allowances are also established
for classes of assets when there is concern about the ultimate collection
of principal or interest. The Companys actuarial liabilities include
additional provisions for possible future asset losses.

Realized gains and losses on the sales of bonds and mortgages are deferred
and amortized into net investment income on a constant yield basis over
the remaining period to maturity.

STOCKS

Stocks are originally recorded at cost and the carrying value is adjusted
towards fair value at 5% of the difference between fair value and carrying
value per quarter. Realized gains and losses on sales of stocks are
deferred and amortized into net investment income at the rate of 5% of the
unamortized balance each quarter. The Company records a write-down for
any other than temporary decline in the value of the entire stock
portfolio.

7
Sun Life Financial Inc.



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | Accounting Policies (Contd)
|-- |  | ----------------------------

REAL ESTATE

Real estate includes real estate held for investment and real estate held
for sale.

Real estate held for investment:Real estate held for investment is
originally recorded at cost. The carrying value is adjusted towards fair
value at 3% of the difference between fair value and carrying value per
quarter. Realized gains and losses on sales are deferred and amortized
into net investment income at the rate of 3% of the unamortized balance
each quarter.

Market value is determined for each property by qualified appraisers.
Appraisals are obtained annually for high value properties and at least
once every three years for other properties. The Company monitors the
values of these properties to determine that, in aggregate, the carrying
values used are not in excess of market values and records a write-down
for any other than temporary decline in the value of the portfolio.

Real estate held for sale:Properties held for sale are usually acquired
through foreclosure. They are measured at fair value less the cost to
sell. When the amount at which the foreclosed assets are initially
measured is different from the carrying amount of the loan, a gain or loss
is recorded at the time of foreclosure.

DERIVATIVE FINANCIAL INSTRUMENTS

The Companys derivative instruments include swaps, financial futures,
options and forward contracts and are used to manage risks or to replicate
the exposures associated with interest rate, currency and equity market
fluctuations. The Companys monitoring policies are described in Note 9.
The accounting policies for the various types of derivative instruments
used by the Company are described below.

Most of the Companys derivatives are used as part of a portfolio of
assets to match actuarial liabilities as to duration and amounts. The
most significant of these are interest rate swaps and options. The
accounting for these instruments is at amortized cost, consistent with
other fixed term portfolio investments. The net receivable or payable on
the interest rate swaps is accrued to other assets or other liabilities
with the net spread of the swaps recorded to net investment income.
Realized gains or losses associated with these derivatives are deferred
and amortized to net investment income. Premiums paid for interest rate
options are deferred in other invested assets and amortized to net
investment income over the terms of the options.

Many of the foreign currency swaps and forwards are used in combination
with other invested assets to generate a specific investment return.
These are accounted for at amortized cost. The net payable or receivable
on currency swaps is included in other assets or other liabilities with
the net spread of the swaps recorded to net investment income. Any
realized gains and losses resulting from the termination of these
derivative instruments are deferred and amortized into income on a basis
consistent with the foreign currency investments that the swaps and
forwards are combined with.

Certain of the equity futures, options and swaps are held for investment
purposes. The accounting policy for these investments is the same as that
of stocks.

Several derivative instruments are used for hedging specific risk
exposures and are accounted for using hedge accounting or are reported at
their fair values on the balance sheet. Certain interest rate swaps are
used to hedge a floating rate loan. The net receivable or payable on the
interest rate swaps is accrued to other assets or other liabilities with
the net spread of the swaps recorded to net investment income. The
Company uses currency swaps to reduce foreign exchange fluctuations
associated with foreign currency investment financing activity. The
accounting for these contracts is consistent with the underlying
investment. Changes in exchange gains or losses on currency swaps hedging
the investment financing activity are included in other liabilities and
the currency translation account in equity, offsetting the respective
exchange gains or losses arising from the conversion of the investment
financing activity. Equity index futures, swaps, options and forwards are
used to reduce exposure to the effect of stock market fluctuations in the
actuarial liabilities associated with certain products. The intrinsic
value of the options purchased to hedge the actuarial liabilities
associated with guaranteed minimum death benefit products (GMDB) is
included in other invested assets and the change in intrinsic value is
included as an increase in actuarial liabilities, offsetting the change in
actuarial liabilities from equity market fluctuation of these products.
The premiums paid for these options are deferred in other invested assets
and amortized to net investment income over the life of the options.

POLICY LOANS

Policy loans are carried at their unpaid balance and are fully secured by
the policy values on which the loans are made.

CASH, CASH EQUIVALENTS AND SHORT-TERM SECURITIES

Cash equivalents and short-term securities are highly liquid investments
and are carried at amortized cost. Cash equivalents have a term to
maturity of less than three months while short-term securities have a term
to maturity exceeding three months but less than one year.

OTHER INVESTED ASSETS

Other invested assets include the Companys investment in segregated
funds, investments accounted for by the equity method and investments in
equipment leases.

8
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | Accounting Policies (Contd)
|-- |  | ----------------------------

DEFERRED ACQUISITION COSTS

Deferred acquisition costs arising on mutual fund sales are amortized over
the periods of the related sales charges, which range from three to seven
years. Deferred acquisition costs arising on segregated funds are
calculated and included in actuarial liabilities. Actuarial liabilities
implicitly include acquisition costs on insurance and annuity product
sales.

GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of the cost of businesses acquired over the
fair value of the net identifiable tangible and intangible assets.
Goodwill arising from acquisitions before July 1, 2001 was amortized on a
straight-line basis over varying periods of up to 20 years in 2001.
Effective January 1, 2002, goodwill is no longer amortized. Identifiable
intangible assets consist of finite-life and indefinite-life intangible
assets. Finite-life intangible assets include the value of the banking
distribution channel, the sales potential of field force and asset
administration contracts. These intangible assets are amortized on a
straight-line basis over varying periods of up to 40 years. The
indefinite-life intangible assets include fund management contracts, brand
name and state licenses. The goodwill and indefinite-life intangible
assets are tested for impairment on an annual basis, based on the fair
values of the reporting units and the intangible assets.

CAPITAL ASSETS

Furniture, computers, other equipment and leasehold improvements are
carried at cost less accumulated depreciation and amortization.
Depreciation and amortization are recorded on a straight-line basis over
the estimated useful lives of these assets, which generally range from two
to ten years.

LOANS SECURITIZATION

The Company periodically securitizes assets, such as mortgages or bonds,
by selling them to trusts that issue securities to investors. These
transactions are accounted for as sales when control over the assets has
been surrendered and consideration other than beneficial interests in
these transferred assets has been received in exchange. Gains or losses
on these securitization transactions are included in deferred net realized
gains, and will be amortized into net investment income as described above
under Bonds and Mortgages. In determining the gain or loss on sale of the
assets, the carrying value of the assets sold is allocated between the
portion sold and the portion retained based on their relative fair values
on the date of sale. These fair values are determined using either quoted
market prices or discounted cash flows models. Interests in the
securitized assets, such as subordinated investments in the issued
securities or servicing rights, may be retained. These subordinated
investments and servicing rights are classified as bonds and other assets,
respectively.

SEGREGATED FUNDS

Segregated funds are lines of business in which the Company issues a
contract where the benefit amount is directly linked to the market value
of the investments held in the particular segregated fund. Although the
underlying assets are registered in the name of the Company and the
segregated fund contract holder has no direct access to the specific
assets, the contractual arrangements are such that the segregated fund
policyholder bears the risk and rewards of the funds investment
performance. In addition, certain individual contracts have guarantees
from the Company. The Company derives fee income from segregated funds,
which is included in fee income on the consolidated statements of
operations. Fee income includes fund management fees as well as
mortality, policy administration and surrender charges on segregated
funds. Changes in the Companys interest in the segregated funds,
including undistributed net investment income, are reflected in net
investment income. Policyholder transfers to and from investments in
general funds to segregated funds are included in net transfers to
segregated funds on the consolidated statements of operations.

Separate consolidated financial statements are provided for the segregated
funds. Segregated fund assets are carried at fair value. Fair values are
determined using quoted market values or, where quoted market values are
not available, estimated fair values as determined by the Company. The
investment results of the segregated funds are reflected directly in
segregated fund liabilities. Deposits to segregated funds are reported as
increases in segregated funds liabilities and are not reported as revenues
in the consolidated statements of operations. Segregated fund assets may
not be applied against liabilities that arise from any other business of
the Company.

AMOUNTS ON DEPOSIT

Amounts on deposit represent premiums paid in advance, reinvested policy
dividends and customer deposits in the Companys trust subsidiaries.

ACTUARIAL LIABILITIES

Actuarial liabilities and other policy liabilities, including policy
benefits payable and provision for policyholder dividends, are computed
using generally accepted actuarial practice in accordance with the
standards established by the Canadian Institute of Actuaries including the
requirements of OSFI.

9
Sun Life Financial Inc.



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|1. |  | Accounting Policies (Contd)
|-- |  | ----------------------------

INCOME TAXES

The Company uses the liability method of tax allocation. Under this
method, the income tax expense consists of both an expense for current
income taxes and an expense for future income taxes. Current income tax
expense (benefit) represents the expected payable (receivable) resulting
from the current years operations. Future income tax expense (benefit)
represents the movement during the year in the cumulative temporary
differences between the carrying value of the Companys assets and
liabilities on the balance sheet and their values for tax purposes.
Future income tax assets are recognized to the extent that they are more
likely than not to be realized. Future income tax liabilities and assets
are calculated based on income tax rates and laws that, at the balance
sheet date, are expected to apply when the liability or asset is realized,
which are normally those enacted or considered substantively enacted at
the consolidated balance sheet dates.

In determining the impact of taxes, the Company is required to comply with
the standards of both the Canadian Institute of Actuaries and the Canadian
Institute of Chartered Accountants (CICA). Actuarial standards require
that the projected timing of all cash flows associated with policy
liabilities, including income taxes, be included in the determination of
actuarial liabilities under the Canadian asset liability method. The
actuarial liabilities are first computed including all related income tax
effects on a discounted basis, including the effects of temporary
differences that have already occurred. Future income tax assets and/or
liabilities arising from temporary differences that have already occurred
are computed without discounting. The undiscounted future income tax
assets and/or liabilities are reclassified from the actuarial liabilities
to future income taxes on the balance sheets. The net result of this
reclassification is to leave the discounting effect of the future income
taxes in the actuarial liabilities.

PREMIUM INCOME AND RELATED EXPENSES

Gross premiums for all types of insurance contracts, and contracts with
limited mortality or morbidity risk, are generally recognized as revenue
when due. When premiums are recognized, actuarial liabilities are
computed, with the result that benefits and expenses are matched with such
revenue.

FOREIGN CURRENCY TRANSLATION

The Companys exchange gains and losses arising from the conversion of its
self-sustaining foreign operations are included in the currency
translation account of the consolidated statements of equity. Revenues
and expenses in foreign currencies, including amortized gains and losses
on foreign investments, are translated into Canadian dollars at an average
of the market exchange rates during the year. Assets and liabilities are
translated into Canadian dollars at market exchange rates at the end of
the year. The net translation adjustment is reported as a separate item
in the consolidated statements of equity.

PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS

Pension costs related to current service are charged to income as services
are rendered. Based on managements best estimate assumptions, actuarial
valuations of the pension obligations are determined using the projected
benefit method prorated on service. The estimated present value of
post-retirement health care and life insurance benefits is charged to
income over the employees years of service to the date of eligibility.
For the purpose of calculating the expected return on pension plan assets,
a market-related asset value is used which recognizes asset gains and
losses emerging after January 1, 2000 over a five-year period. Any
transition adjustments, as well as future adjustments arising from plan
amendments, are amortized to income over the estimated average remaining
service life of the members covered by the plan. Only future variations
in actuarial estimates in excess of certain minimums will be amortized.

STOCK-BASED COMPENSATION AND OTHER STOCK-BASED PAYMENTS

Stock options granted to employees are accounted for using the fair value
method. Under the fair value method, fair value of the stock options is
estimated at the grant date and the total fair value of the options is
amortized over the vesting periods as compensation expense with an offset
to contributed surplus. For options that are forfeited before vesting,
the compensation expense that has previously been recognized in operating
expenses and contributed surplus is reversed. When options are exercised,
contributed surplus is reversed and the shares issued are credited to
share capital in the consolidated statements of equity.



|2. |  | Changes in Accounting Policies
|-- |  | ------------------------------

ADOPTED IN 2003

Disclosure of Guarantees:The Company adopted the new accounting
requirements in CICA Handbook Accounting Guideline 14, Disclosure of
Guarantees, on January 1, 2003. This Accounting Guideline defines a
guarantee to be a contract (including an indemnity) that contingently
requires the guarantor to make payments to a guaranteed party based on (a)
changes in an underlying economic characteristic that is related to an
asset, liability or an equity security of the guaranteed party; (b)
failure of a third party to perform under an obligating agreement; or (c)
failure of a third party to pay its indebtedness when due. This
Accounting Guideline requires that significant guarantees and
indemnification agreements provided by a guarantor be disclosed without
regard to whether the guarantor will have to make any payments under the
guarantees or the indemnification agreements. This change in accounting
policy did not have a material impact on these consolidated financial
statements.

10
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|2. |  | Changes in Accounting Policies (Contd)
|-- |  | ---------------------------------------

Impaired Loans:The Company adopted the new accounting requirements in
CICA Handbook Section 3025, Impaired Loans, for asset foreclosures
occurring on and after May 1, 2003. A long-lived foreclosed asset is
classified as held for sale only if certain criteria in the CICA Handbook
Section 3475, Disposal of Long-Lived Assets and Discontinued Operations,
are met. A long-lived foreclosed asset classified as held for sale is
measured at fair value less cost to sell. Foreclosed assets, other than
long-lived assets that meet the criteria to be classified as held for
sale, are initially measured at fair value. When the amount at which the
foreclosed assets are initially measured is different from the carrying
amount of the loan, a gain or loss will be recorded at the time of
foreclosure. This change in accounting policy did not have a material
impact on these consolidated financial statements.

FUTURE IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS

Hedging Relationships:The Company will adopt Hedging Relationships, CICA
Handbook Accounting Guideline 13, on January 1, 2004. This Accounting
Guideline requires that all conditions with respect to identification,
documentation, designation and effectiveness of hedges be satisfied before
companies choose to use hedge accounting. These conditions are applicable
to hedges existing on or after January 1, 2004. As preparation for the
adoption of this Guideline, the Company reviewed the nature of its
existing hedging derivative financial instruments and its current
accounting policy for these instruments. Certain derivatives that are
considered to be part of a hedging relationship, including the options
that hedge the GMDB products, will not qualify for hedge accounting under
the new requirements in Accounting Guideline 13. As a result, these
derivatives will be carried at their fair values effective January 1,
2004. The resulting transitional gain of $46 will be deferred and
recognized into income in the same period as the original hedged items.
Subsequent increases or decreases in the fair values of these derivatives
will be reported in net investment income in the consolidated statements
of operations.

Consolidation of Variable Interest Entities: The Company will adopt
Consolidation of Variable Interest Entities, CICA Handbook Accounting
Guideline 15 on January 1, 2005. This Guideline provides guidance for
application of consolidation principles, to those entities defined as
variable interest entities (VIEs), 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.

The CICA is monitoring the developments of the Financial Accounting
Standards Board (FASB) relating to recently issued revised FASB
Interpretation No. 46, Consolidation of Variable Interest Entities, the
U.S. GAAP equivalent of Accounting Guideline 15, since the intention is to
harmonize the Accounting Guideline with U.S. GAAP. The Company will
continue to review the status of VIEs as this harmonization occurs. For
additional information refer to section C) xii) Variable Interest
Entities in Note 23.

Financial Instruments  Disclosure and Presentation:The Company will
adopt the amendments to the accounting requirements in CICA Handbook
Section 3860, Financial Instruments-Disclosure and Presentation on January
1, 2005. Securities issued by the Company that give the Company an
unrestricted obligation to settle the principal amount in cash or in the
equivalent value of its own shares, must be classified as debt.

In the third quarter of the 2003 interim financial statements, the Company
indicated that it would adopt these amendments on January 1, 2004.
Subsequent to the issue of those financial statements, the CICA announced
the postponement of the effective date of implementation to January 1,
2005. As a result, the Company will not be adopting the new accounting
requirements until January 1, 2005, and therefore will no longer be
required to reclassify the Sun Life ExchangEable Capital Securities
(SLEECS) issued by Sun Life Capital Trust (the Trust) from non-controlling
interests in subsidiaries to other liabilities, as it is expected that the
Trust will be deconsolidated upon the adoption of the Consolidation of
Variable Interest Entities, Accounting Guideline 15, on the same date.
The Company expects the accounting for the SLEECS to be consistent with
U.S. GAAP as described in Note 23 (C) xii in 2005.

Impairment of Long-Lived Assets:The Company will adopt Impairment of
Long-Lived Assets, CICA Handbook Section 3063, on January 1, 2004. Under
this standard, the impairment test of long-lived assets is a two-step
process with the first step determining when an impairment is recognized
and the second step measuring the amount of the impairment. To test for
and measure impairment, assets are grouped at the lowest level for which
identifiable cash flows are largely independent. An impairment loss is
recognized when the carrying amount of an asset to be held and used
exceeds the sum of the undiscounted cash flows expected from its use and
eventual disposition. An impairment loss is measured as the amount by
which the assets carrying amount exceeds its fair value. An asset
classified as held for sale is measured at the lower of its carrying
amount or fair value less cost to sell. The Company does not expect this
standard to have a material effect on the consolidated financial
statements.

11
Sun Life Financial Inc.



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|3. |  | Acquisitions
|-- |  | ------------

Effective July 25, 2002, the Company acquired approximately 71 million
common shares of CI Fund Management Inc. (CI) in exchange for all the
shares of Spectrum Investment Management Limited (Spectrum) and Clarica
Diversico Ltd. (Diversico). The 71 million common shares of CI were
valued at the weighted average price of $9.15 per share on July 24, 2002.
These common shares, together with those that were already beneficially
owned by the Company as general fund assets, represented a 31.7% economic
interest in CI on July 25, 2002. The Company recorded a gain of $177
before taxes in net investment income for the sales of the two
subsidiaries. Previously unrecognized net capital losses were used to
fully offset the tax on the gain. The acquired intangible asset consists
of fund management contracts of $510 that are not subject to amortization.
The investment is accounted for using the equity method of accounting and
is included in other invested assets on the consolidated balance sheets.

Effective March 20, 2003, the Company increased its ownership percentage
in CI to 34% by issuing approximately 2 million common shares of Sun Life
Financial Inc. in exchange for approximately 5 million common shares of
CI. The 2 million common shares of Sun Life Financial Inc. were recorded
at a total fair value of $63. The acquired non-amortizable intangible
asset consists of fund management contracts of $43.

In August 2003, CI announced that it had entered into agreements to
acquire the Canadian operations of Assante Corporation (Assante) and
Synergy Asset Management Inc. (Synergy). CI completed these acquisitions
by issuing shares and a payment of cash to Assante and Synergy
shareholders. The Company agreed to support these acquisitions by
purchasing additional common shares of CI. The Company purchased
approximately 21 million common shares of CI during the fourth quarter for
$266 in order to maintain its ownership percentage of 34%. The intangible
assets acquired through these two transactions consist of non-amortizable
fund management contracts of $180 and amortizable asset administration
contracts of $11.

Effective May 29, 2002, the Company acquired all the outstanding common
shares of Clarica Life Insurance Company (Clarica) that were not already
beneficially owned by the Company as general fund assets for an ascribed
price of $51.28 per Clarica common share, and Clarica became a
wholly-owned subsidiary of Sun Life Financial Inc. The business acquired
includes both general and segregated funds businesses. Effective December
31, 2002, Clarica amalgamated with Sun Life Assurance Company of Canada
and the amalgamated company continues to operate under the name of Sun
Life Assurance Company of Canada.

The acquisition was completed by way of a capital reorganization of
Clarica pursuant to which holders of Clarica common shares received 1.5135
common shares of Sun Life Financial Inc. for each Clarica common share
held. Approximately 185 million common shares of Sun Life Financial Inc.
were issued at an ascribed price of $33.88 per share based on a
volume-weighted average closing price of the common shares for the period
from December 13 to 19, 2001. The common shares of Clarica that were
beneficially owned by the Company as general fund assets had a carrying
value of $540 at the date of acquisition. In addition, all the unvested
Clarica stock options vested immediately prior to the closing date and on
May 29, 2002, these Clarica stock options were exercisable to acquire
approximately 5 million common shares of Sun Life Financial Inc. as
described in Note 18. The Company recorded $48 as part of the purchase
consideration and share capital, representing the fair value of the
outstanding Clarica stock options based on the average share price of
Clarica from December 13 to 19, 2001.

The following supplemental unaudited pro forma information has been
prepared to give effect to the acquisition of Clarica, as if the
transaction had been completed at the beginning of each year. This
information is calculated by combining the results of operations of the
Company for 2002 and 2001 with that of Clarica prior to the acquisition
date and adjusting for the amortization of Claricas identifiable
intangible assets, net of taxes ($7 in 2002 and $15 in 2001) and the
elimination of amortization of net unrealized gains and deferred net
realized gains as a result of fair value adjustments to the assets and
liabilities of Clarica, net of taxes ($13 in 2002 and $31 in 2001). The
pro forma information is not intended to reflect what would have actually
resulted had the transaction been completed at the beginning of each
respective year or what may be obtained in the future.

Supplemental unaudited pro forma condensed information:

2002
    
    2001Revenue
    
    $
    25,217
    
    
    $
    21,819Shareholders net income
    
    $
    1,186
    
    
    $
    1,250Weighted average number of shares outstanding (in millions)
    
    
    618
    
    
    
    609Basic earnings per share
    
    $
    1.92
    
    
    $
    2.05Shareholders net income on a diluted basis
    
    $
    1,186
    
    
    $
    1,250Weighted average number of shares outstanding on a diluted basis (in millions)
    
    
    618
    
    
    
    610Diluted earnings per share
    
    $
    1.92
    
    
    $
    2.05


Effective October 31, 2001, the Company acquired all the outstanding
common shares of Keyport Life Insurance Company (Keyport) and Independent
Financial Marketing Group, Inc. (IFMG) for a cash payment of U.S.$1,702.
In 2002, adjustments were made to the purchase price allocations of
Keyport and IFMG. This resulted in an increase in other assets, goodwill,
actuarial liabilities and other liabilities of $108, $30, $102 and $11,
respectively, and a decrease in invested assets of $25. The goodwill of
Keyport and IFMG was allocated to the SLF United States segment, of which
$330 is expected to be deductible for tax purposes.

12
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|3. |  | Acquisitions (Contd)
|-- |  | ---------------------

The transactions are summarized below:

2003
    
    2002
    
    2002
    
    2001Keyport/CI(2)
    
    CI
    
    Clarica*
    
    IFMGPercentage of shares acquired
    
    
    2.3
    %
    
    
    31.7
    %
    
    
    100
    %
    
    
    100
    %Invested assets acquired
    
    $
    72
    
    
    $
    23
    
    
    $
    31,637
    
    
    $
    22,479Other assets acquired
    
    
    235
    
    
    
    722
    
    
    
    2,672
    
    
    
    1,436307
    
    
    
    745
    
    
    
    34,309
    
    
    
    23,915Actuarial liabilities and other policy liabilities acquired
    
    
    
    
    
    
    
    
    
    
    24,835
    
    
    
    22,656Amounts on deposit acquired
    
    
    
    
    
    
    
    
    
    
    1,277
    
    
    
    Other liabilities acquired
    
    
    168
    
    
    
    231
    
    
    
    5,059
    (1)
    
    
    493168
    
    
    
    231
    
    
    
    31,171
    
    
    
    23,149Net balance sheet assets acquired
    
    $
    139
    
    
    $
    514
    
    
    $
    3,138
    
    
    $
    766Considerations:Common shares issued or exchanged
    
    $
    63
    
    
    $
    571
    
    
    $
    6,284
    
    
    $
    Carrying value of investments in acquirees shares
    
    
    
    
    
    
    36
    
    
    
    540
    
    
    
    Fair value of outstanding Clarica stock options
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    Transaction and other related costs
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    Cash cost of acquisition
    
    
    266
    
    
    
    
    
    
    
    
    
    
    
    2,744Total consideration
    
    $
    329
    
    
    $
    607
    
    
    $
    6,929
    
    
    $
    2,744Goodwill on acquisition
    
    $
    190
    
    
    $
    93
    
    
    $
    3,791
    
    
    $
    1,978Cash and cash equivalents acquired
    
    
    
    
    
    
    
    
    
    $
    2,816
    
    
    $
    919




---

|(1) |  | Other liabilities acquired included subordinated debt of $746 and
preferred shares of $160.                
|--- |  | -----------------------------------------------------------------------------------------------------------
|(2) |  | Net impact of all 2003 transactions related to CI. Other assets
acquired include $234 of intangible assets.
|*   |  | As restated, as described below.                                                                           

In the second quarter of 2003, the Company reviewed the fair value
calculations for certain non-marketable securities and the reserves for
the run-off reinsurance related to the acquisition of Clarica. For the
non-marketable securities, it was identified that the fair value was
overstated. For the run-off reinsurance reserves, a provision for adverse
deviations had been omitted. As at December 31, 2002, the combined impact
of these error corrections was to restate actuarial and other policy
liabilities and goodwill upwards by $50 and $70, respectively. Bonds and
other liabilities were restated downwards by $56 and $36, respectively.



|4. |  | Reorganization, Restructuring and Other Related Charges
|-- |  | -------------------------------------------------------

In conjunction with the acquisition of Clarica in 2002, the Company
developed a plan to restructure the combined operations of its
consolidated subsidiaries, Sun Life Assurance and Clarica. The Company
recorded an increase in actuarial liabilities and a charge for
restructuring costs in 2002. These accruals cover increased renewal
commission expenses, severance, the elimination of duplicate systems,
facilities and operations, as well as other exiting costs. As at December
31, 2003, the remaining balance on these expected costs, other than
commissions, was as follows:

Balance at
    
    Utilized during
    
    Balance atbeginning of year
    
    the year
    
    end of yearEliminating duplicate systems and
operations(1)
    
    $
    274
    
    
    $
    212
    
    
    $
    62Costs of consolidating facilities
    
    
    24
    
    
    
    5
    
    
    
    19Other
    
    
    3
    
    
    
    
    
    
    
    3Total
    
    $
    301
    
    
    $
    217
    
    
    $
    84




---

|(1) |  | Includes compensation costs.
|--- |  | ----------------------------

In February 2001, the Board of Directors (Board) approved a reorganization
of the Companys United Kingdom operations. As a result, the Company has
exited from the direct sales force distribution channel and significantly
reduced the scale of its operations. During 2001, severance, asset
write-offs and other related costs of $195 were expensed as part of the
operating expenses in the consolidated statements of operations.

On January 14, 2002, the Company announced an agreement with the
Marlborough Stirling group to outsource the administration of the
Companys individual life and pension business in the United Kingdom which
had already been closed for new business. During 2003, expenses related
to the outsourcing contract, closing branches, contract cancellations,
system migrations and other related costs of $33 ($88 in 2002) were
included in the operating expenses in the consolidated statements of
operations. As at December 31, 2003, the accruals for the
reorganizational costs were $30 ($49 in 2002).

13
Sun Life Financial Inc.



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|5. |  | Disposals and Discontinued Operations
|-- |  | -------------------------------------

Effective February 28, 2003, the Company sold its United Kingdom group
insurance business to Unum Limited (UnumProvident), a United Kingdom
subsidiary of UnumProvident Corporation. Under the agreements,
UnumProvident acquired the Companys United Kingdom group income
protection business together with the renewal rights to the group life
business. The transaction resulted in a gain that is not considered
material to these consolidated financial statements.

Effective January 7, 2003, the Company sold all the common shares of
Clarica U.S., Inc. (Clarica U.S.) to Midland National Life Insurance
Company for $414 in cash. A loss of $48 on the sale of Clarica U.S. was
accrued in 2002.

Effective December 7, 2001 and November 30, 2001, respectively, the
Company sold all the common shares of SLC Asset Management Limited
(SLCAM), an asset management company, together with two affiliated
companies, and all the common shares of Sun Bank plc (SB), a bank
specializing in mortgage and savings products. The sale of SLCAM and its
affiliated companies resulted in a reduction in segregated fund net assets
in respect of funds invested for third party pooled pension customers.
The gains on sales of the United Kingdom subsidiaries were $195 before
related taxes of $70 and these gains were included in net investment
income. Proceeds from the sales of the subsidiaries were used for general
corporate purposes. The proceeds presented in this note are net of
disposition costs of $34 and $7 for SLCAM and SB, respectively. These
costs were primarily professional fees, commissions and the impact on
actuarial liabilities.

The transactions are summarized below:

2003
    
    2002
    
    2002
    
    2001
    
    2001Clarica U.S.
    
    Spectrum(1)
    
    Diversico(1)
    
    SLCAM
    
    SBPercentage of shares disposed of
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %Invested assets disposed of
    
    $
    5,047
    
    
    $
    9
    
    
    $
    2
    
    
    $
    67
    
    
    $
    2,604Other assets disposed of
    
    
    225
    
    
    
    96
    
    
    
    315
    
    
    
    41
    
    
    
    375,272
    
    
    
    105
    
    
    
    317
    
    
    
    108
    
    
    
    2,641Actuarial liabilities and other policy liabilities disposed of
    
    
    4,265
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Amounts on deposit disposed of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,417Other liabilities disposed of
    
    
    553
    
    
    
    36
    
    
    
    4
    
    
    
    41
    
    
    
    1004,818
    
    
    
    36
    
    
    
    4
    
    
    
    41
    
    
    
    2,517Net balance sheet assets disposed of
    
    $
    454
    
    
    $
    69
    
    
    $
    313
    
    
    $
    67
    
    
    $
    124Considerations:Common shares exchanged
    
    $
    
    
    
    $
    249
    
    
    $
    322
    
    
    $
    
    
    
    $
    Transaction and other related costs
    
    
    (8
    )
    
    
    (7
    )
    
    
    (5
    )
    
    
    
    
    
    
    Net proceeds of disposal
    
    
    414
    
    
    
    
    
    
    
    
    
    
    
    242
    
    
    
    144Total consideration
    
    $
    406
    
    
    $
    242
    
    
    $
    317
    
    
    $
    242
    
    
    $
    144Pre-tax gain (loss) on sale
    
    $
    (48)
    (2)
    
    $
    173
    
    
    $
    4
    
    
    $
    175
    
    
    $
    20Cash and cash equivalents disposed of
    
    $
    133
    
    
    $
    8
    
    
    $
    2
    
    
    $
    23
    
    
    $
    




---

|(1) |  | For summary information see Note 3.                                                         
|--- |  | --------------------------------------------------------------------------------------------
|(2) |  | Loss accrued in 2002 and reported as part of the income (loss) from
discontinued operations.

As a result of the plan of disposal for Clarica U.S., it was accounted for
as a discontinued operation in 2002. The components of the $36 loss from
discontinued operations for 2002 shown in the consolidated statements of
operations are as follows:

2002REVENUE
    
    $
    945EXPENSES
    
    
    923Net operating income before income taxes
    
    
    22Income taxes expense
    
    
    10Net operating income
    
    
    12Gain (loss) on sale of Clarica U.S.
    
    
    (48
    )Income (loss) from discontinued operations, net of income taxes
    
    $
    (36
    )


14
www.sunlife.com Annual Report 2003



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|5. |  | Disposals and Discontinued Operations (Contd)
|-- |  | ----------------------------------------------

The following amounts relating to discontinued operations are included in
the consolidated balance sheets for 2002:

2002ASSETSInvested assets
    
    $
    5,103Other assets
    
    
    227Total assets
    
    $
    5,330LIABILITIES AND EQUITYActuarial liabilities and other policy liabilities
    
    $
    4,373Other liabilities
    
    
    497Equity
    
    
    460Total liabilities and equity
    
    $
    5,330




|6. |  | Segmented Information
|-- |  | ---------------------

The Company has six reportable segments: SLF Canada, SLF United States,
MFS Investment Management (MFS), SLF Asia, SLF United Kingdom, and
Corporate Capital. These reportable segments reflect the Companys
management structure and internal financial reporting. Each of these
segments operate in the financial services industry and have their own
management. They derive their revenues principally from wealth management
operations (mutual funds, investment management and annuities), protection
services (life and health insurance, life retrocession and financial
reinsurance) and other (primarily investments of a corporate nature and
earnings on capital not attributed to the strategic business units).

Corporate Capital includes the run-off reinsurance operations and those
other operations for which management responsibility resides in head
office. Net income (loss) from continuing operations in this category is
shown net of certain expenses borne centrally.

As Clarica U.S. has been discontinued and the sale was completed on
January 7, 2003, revenue, expenses and net income (loss) from continuing
operations do not include these results. However, the assets of the
discontinued operation are included in SLF United States assets at
December 31, 2002.

Inter-segment transactions consist primarily of internal financing
agreements. They are measured at market values prevailing when the
arrangements were negotiated. Inter-segment revenue consists of interest
of $352 in 2003 ($306 in 2002 and $140 in 2001) and fee income of $45 in
2003 ($68 in 2002 and $48 in 2001).

The results of the segments operations are discussed in the Managements
Discussion and Analysis. The results for MFS include the $211 provision
for regulatory issues and other actions.

Results by segment for the years ended December 31United StatesUnited
    
    Corporate
    
    ConsolidationCanada
    
    Sun Life
    
    MFS
    
    Asia
    
    Kingdom
    
    Capital
    
    Adjustments
    
    Total2003Revenue
    
    $
    8,636
    
    
    $
    9,663
    
    
    $
    1,684
    
    
    $
    587
    
    
    $
    1,443
    
    
    $
    440
    
    
    $
    (397
    )
    
    $
    22,056Change in actuarial liabilities
    
    $
    519
    
    
    $
    1,056
    
    
    $
    
    
    
    $
    221
    
    
    $
    (17
    )
    
    $
    (155
    )
    
    $
    
    
    
    $
    1,624Interest on claims and deposits
    
    $
    84
    
    
    $
    18
    
    
    $
    
    
    
    $
    29
    
    
    $
    3
    
    
    $
    1
    
    
    $
    
    
    
    $
    135Interest expenses
    
    $
    117
    
    
    $
    152
    
    
    $
    23
    
    
    $
    
    
    
    $
    25
    
    
    $
    246
    
    
    $
    (354
    )
    
    $
    209Income taxes (benefit)
    
    $
    342
    
    
    $
    97
    
    
    $
    5
    
    
    $
    12
    
    
    $
    8
    
    
    $
    (77
    )
    
    $
    
    
    
    $
    387Net income (loss) from
continuing operations
    
    $
    826
    
    
    $
    305
    
    
    $
    (43
    )
    
    $
    37
    
    
    $
    203
    
    
    $
    (20
    )
    
    $
    
    
    
    $
    1,3082002Revenue
    
    $
    6,563
    
    
    $
    11,877
    
    
    $
    1,979
    
    
    $
    661
    
    
    $
    1,828
    
    
    $
    567
    
    
    $
    (374
    )
    
    $
    23,101Change in actuarial liabilities
    
    $
    535
    
    
    $
    2,500
    
    
    $
    
    
    
    $
    293
    
    
    $
    168
    
    
    $
    326
    
    
    $
    
    
    
    $
    3,822Interest on claims and deposits
    
    $
    74
    
    
    $
    29
    
    
    $
    
    
    
    $
    30
    
    
    $
    2
    
    
    $
    
    
    
    $
    
    
    
    $
    135Interest expenses
    
    $
    77
    
    
    $
    154
    
    
    $
    29
    
    
    $
    
    
    
    $
    28
    
    
    $
    211
    
    
    $
    (307
    )
    
    $
    192Income taxes (benefit)
    
    $
    191
    
    
    $
    38
    
    
    $
    109
    
    
    $
    11
    
    
    $
    (18
    )
    
    $
    (233
    )
    
    $
    
    
    
    $
    98Net income (loss) from
continuing operations
    
    $
    514
    
    
    $
    360
    
    
    $
    174
    
    
    $
    24
    
    
    $
    190
    
    
    $
    (229
    )
    
    $
    
    
    
    $
    1,0332001Revenue
    
    $
    3,855
    
    
    $
    7,811
    
    
    $
    2,273
    
    
    $
    464
    
    
    $
    2,067
    
    
    $
    533
    
    
    $
    (188
    )
    
    $
    16,815Change in actuarial liabilities
    
    $
    552
    
    
    $
    675
    
    
    $
    
    
    
    $
    136
    
    
    $
    298
    
    
    $
    36
    
    
    $
    
    
    
    $
    1,697Interest on claims and deposits
    
    $
    47
    
    
    $
    21
    
    
    $
    
    
    
    $
    28
    
    
    $
    121
    
    
    $
    1
    
    
    $
    
    
    
    $
    218Interest expenses
    
    $
    36
    
    
    $
    69
    
    
    $
    31
    
    
    $
    
    
    
    $
    31
    
    
    $
    141
    
    
    $
    (140
    )
    
    $
    168Income taxes (benefit)
    
    $
    106
    
    
    $
    25
    
    
    $
    144
    
    
    $
    5
    
    
    $
    (7
    )
    
    $
    33
    
    
    $
    
    
    
    $
    306Net income (loss) from
continuing operations
    
    $
    207
    
    
    $
    226
    
    
    $
    231
    
    
    $
    20
    
    
    $
    180
    
    
    $
    17
    
    
    $
    
    
    
    $
    881


15
Sun Life Financial Inc.



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|6. |  | Segmented Information (Contd)
|-- |  | ------------------------------

Assets by segment as at December 31*United StatesUnited
    
    Corporate
    
    ConsolidationCanada
    
    Sun Life
    
    MFS
    
    Asia
    
    Kingdom
    
    Capital
    
    Adjustments
    
    Total2003General fund assets
    
    $
    51,522
    
    
    $
    40,763
    
    
    $
    1,084
    
    
    $
    2,021
    
    
    $
    10,532
    
    
    $
    4,057
    
    
    $
    (770
    )
    
    $
    109,209Segregated funds net assets
    
    $
    22,535
    
    
    $
    24,519
    
    
    $
    
    
    
    $
    11
    
    
    $
    7,021
    
    
    $
    
    
    
    $
    
    
    
    $
    54,086Other assets under management
    
    $
    26,119
    
    
    $
    2,731
    
    
    $
    180,898
    
    
    $
    100
    
    
    $
    
    
    
    $
    
    
    
    $
    (14,119
    )
    
    $
    195,7292002General fund assets
    
    $
    50,256
    
    
    $
    54,154
    
    
    $
    1,424
    
    
    $
    2,147
    
    
    $
    12,610
    
    
    $
    3,948
    
    
    $
    (1,087
    )
    
    $
    123,452Segregated funds net assets
    
    $
    19,029
    
    
    $
    26,519
    
    
    $
    
    
    
    $
    3
    
    
    $
    7,204
    
    
    $
    
    
    
    $
    
    
    
    $
    52,755Other assets under management
    
    $
    19,878
    
    
    $
    2,628
    
    
    $
    177,960
    
    
    $
    79
    
    
    $
    
    
    
    $
    
    
    
    $
    (16,138
    )
    
    $
    184,407




---

|* |  | As restated (Note 3).
|- |  | ---------------------

The following table shows revenue, net income (loss) from continuing
operations and assets by territory for Corporate Capital:

2003
    
    2002
    
    2001RevenueUnited States
    
    $
    134
    
    
    $
    181
    
    
    $
    231Other Countries
    
    
    306
    
    
    
    386
    
    
    
    302Total revenue
    
    $
    440
    
    
    $
    567
    
    
    $
    533Net income (loss) from continuing operations:United States
    
    $
    (63
    )
    
    $
    (241
    )
    
    $
    28Other Countries
    
    
    43
    
    
    
    12
    
    
    
    (11
    )Total net income (loss) from continuing operations
    
    $
    (20
    )
    
    $
    (229
    )
    
    $
    17Assets:General funds:United States
    
    $
    1,838
    
    
    $
    1,160Other countries
    
    
    2,219
    
    
    
    2,788Total assets
    
    $
    4,057
    
    
    $
    3,948




|7. |  | Fair Value of Financial Instruments
|-- |  | -----------------------------------

Financial instruments are contractual rights or obligations to either
receive or deliver an asset. In an exchange of financial instruments,
fair value refers to the amount that would be agreed upon between
willing knowledgeable parties. Estimated fair values do not necessarily
represent the values for which these financial instruments could have been
sold at the dates of the consolidated balance sheets.

A significant portion of any difference between fair values and carrying
values relates to invested assets that are matched to liabilities as to
duration, within specified limits. If these assets are sold before
maturity, the Company will reinvest the proceeds to ensure there are
sufficient assets to match liabilities. Consequently, changes in the fair
values of assets backing liabilities will tend to be offset by changes in
the fair values of those liabilities.

The fair values and the methods and assumptions used to estimate fair
values for invested assets are discussed in Note 8. Derivative financial
instruments are discussed in Note 9. Fair values of actuarial
liabilities, future income taxes related to life insurance companies and
deferred net realized gains are disclosed in Note 11. The fair values and
discussion of the method for estimating these values for subordinated debt
are included in Note 14. The carrying value and fair value of amounts on
deposit are $3,120 and $3,139, respectively, as at December 31, 2003
($3,262 and $ 3,287, respectively, as at December 31, 2002). Fair values
of fixed rate deposits are determined by discounting the expected future
cash flows using current market interest rates for similar deposits. For
amounts on deposit with no stated maturity, fair value is equal to
carrying value.

16
www.sunlife.com Annual Report 2003



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|8. |  | Invested Assets and Income
|-- |  | --------------------------

The Company invests primarily in bonds, mortgages, stocks and real estate.
The accounting policy for each type of invested asset is described in
Note 1.



|A) |  | FAIR VALUE OF INVESTED ASSETS
|-- |  | -----------------------------

The carrying values and fair values of the Companys invested assets are
shown in the following table.

2003
    
    2002*Carrying
    
    Fair
    
    
    
    
    
    Carrying
    
    FairValue
    
    Value
    
    Yield %
    
    Value
    
    Value
    
    Yield %ASSETSBonds
    
    $
    66,090
    
    
    $
    70,092
    
    
    
    5.98
    
    
    $
    73,367
    
    
    $
    77,541
    
    
    
    5.87Mortgages
    
    
    13,601
    
    
    
    14,381
    
    
    
    7.00
    
    
    
    15,799
    
    
    
    17,072
    
    
    
    7.17Stocks
    
    
    3,473
    
    
    
    3,102
    
    
    
    7.48
    
    
    
    4,221
    
    
    
    3,104
    
    
    
    5.74Real estate
    
    
    3,067
    
    
    
    3,287
    
    
    
    8.89
    
    
    
    3,223
    
    
    
    3,437
    
    
    
    9.78Policy loans
    
    
    3,003
    
    
    
    3,003
    
    
    
    6.99
    
    
    
    3,390
    
    
    
    3,390
    
    
    
    6.41Cash, cash
equivalents and
short-term
securities
    
    
    4,972
    
    
    
    4,973
    
    
    
    n/a
    
    
    
    7,152
    
    
    
    7,152
    
    
    
    n/aOther invested assets
    
    
    2,970
    
    
    
    3,414
    
    
    
    n/a
    
    
    
    3,336
    
    
    
    3,297
    
    
    
    n/aTotal invested assets
    
    $
    97,176
    
    
    $
    102,252
    
    
    
    5.79
    
    
    $
    110,488
    
    
    $
    114,993
    
    
    
    5.71




---

|* |  | As restated (Note 3).
|- |  | ---------------------

The fair value of publicly traded bonds is determined using quoted market
prices. For non-publicly traded bonds, fair value is determined using a
discounted cash flow approach that includes provisions for credit risk and
assumes that the securities will be held to maturity. Fair value of
mortgages is determined by discounting the expected future cash flows
using current market interest rates for mortgages with similar credit
risks and terms to maturity. Fair value of stocks is based on quoted
market prices, usually the last trade values. Fair value of real estate
is determined by reference to sales of comparable properties in the market
place and the net present value of the expected future cash flows,
discounted using current interest rates. Due to their nature, the fair
values of policy loans and cash and cash equivalents are assumed to be
equal to their carrying values. The fair values of short-term securities
are based on market yields. The fair values of other invested assets are
determined by reference to market prices for similar investments.
Other invested assets in the table above includes the Companys
investment in CI with a fair value of $1,407 and a carrying value of
$987 ($740 and $619, respectively, in 2002). Yield
is calculated based on total net investment income divided by the total of
the average carrying value of invested assets including accrued investment
income less deferred net realized gains.



|B) |  | INVESTMENT POLICIES
|-- |  | -------------------

It is the Companys policy to diversify all investment portfolios. The
Companys mortgage loans, stocks and real estate investments are
diversified by type and location and, for mortgage loans, by borrower.
Interest rate risk, which is the potential for loss due to interest rate
fluctuations, is discussed in Note 11.

Credit risk is the risk of financial loss resulting from the failure of
debtors to make payments of interest or principal when due. The Company
controls this risk through detailed credit and underwriting policies, as
well as through setting counterparty exposure limits. Company policy
limits credit exposure to 4% of consolidated equity invested in any single
issuer and to 8% of consolidated equity invested in any associated group
of issuers. The exceptions are for investments in securities which are
issued or guaranteed by either the Government of Canada, United States or
United Kingdom and issuers for which the Board has granted specific
approval. Mortgage loans are collateralized by the related property and
generally do not exceed 75% of the value of the property at the time the
original loan is made.



|C) |  | INVESTED ASSETS BY TYPE
|-- |  | -----------------------



|i) |  | BONDS
|-- |  | -----

The carrying value and fair value of bonds by rating are shown in the
table below.

2003
    
    2002*Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    ValueBonds by credit
rating:AAA
    
    $
    18,714
    
    
    $
    19,499
    
    
    $
    23,483
    
    
    $
    24,573AA
    
    
    7,915
    
    
    
    8,438
    
    
    
    8,951
    
    
    
    9,817A
    
    
    18,952
    
    
    
    20,393
    
    
    
    20,252
    
    
    
    21,670BBB
    
    
    17,980
    
    
    
    19,080
    
    
    
    17,910
    
    
    
    18,848BB & lower
    
    
    2,529
    
    
    
    2,682
    
    
    
    2,771
    
    
    
    2,633Total bonds
    
    $
    66,090
    
    
    $
    70,092
    
    
    $
    73,367
    
    
    $
    77,541




---

|* |  | As restated (Note 3).
|- |  | ---------------------

Investment grade bonds are those rated BBB and above. The Companys bond
portfolio has 96.2% (96.2% in 2002) invested in investment grade bonds
based on carrying value.

Gross unrealized gains (losses) on bonds are shown in the tables below.
Gross unrealized gains and losses are not brought into income or included
in the carrying value on the consolidated balance sheets.

17
Sun Life Financial Inc.



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|8. |  | Invested Assets and Income (Contd)
|-- |  | -----------------------------------

2003Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    (Losses)
    
    ValueIssued or guaranteed by:Canadian federal government
    
    $
    6,209
    
    
    $
    161
    
    
    $
    (1
    )
    
    $
    6,369Canadian provincial and municipal
governments
    
    
    5,106
    
    
    
    588
    
    
    
    (3
    )
    
    
    5,691U.S. Treasury and other U.S. agencies
    
    
    1,143
    
    
    
    44
    
    
    
    (13
    )
    
    
    1,174Other foreign governments
    
    
    3,437
    
    
    
    196
    
    
    
    (32
    )
    
    
    3,601Corporate
    
    
    40,604
    
    
    
    3,118
    
    
    
    (151
    )
    
    
    43,571Asset-backed securities
    
    
    9,591
    
    
    
    208
    
    
    
    (113
    )
    
    
    9,686Total bonds
    
    $
    66,090
    
    
    $
    4,315
    
    
    $
    (313
    )
    
    $
    70,092


2002*Gross
    
    Gross
    
    EstimatedAmortized
    
    Unrealized
    
    Unrealized
    
    FairCost
    
    Gains
    
    (Losses)
    
    ValueIssued or guaranteed by:Canadian federal government
    
    $
    6,110
    
    
    $
    281
    
    
    $
    (2
    )
    
    $
    6,389Canadian provincial and municipal governments
    
    
    5,280
    
    
    
    587
    
    
    
    (8
    )
    
    
    5,859U.S. Treasury and other U.S. agencies
    
    
    3,024
    
    
    
    176
    
    
    
    (2
    )
    
    
    3,198Other foreign governments
    
    
    3,901
    
    
    
    293
    
    
    
    (4
    )
    
    
    4,190Corporate
    
    
    43,246
    
    
    
    3,078
    
    
    
    (456
    )
    
    
    45,868Asset-backed securities
    
    
    11,806
    
    
    
    371
    
    
    
    (140
    )
    
    
    12,037Total bonds
    
    $
    73,367
    
    
    $
    4,786
    
    
    $
    (612
    )
    
    $
    77,541


The carrying value of bonds by issuer country is as follows:

2003
    
    2002*Canada
    
    $
    25,708
    
    
    $
    24,920United States
    
    
    29,036
    
    
    
    36,764United Kingdom
    
    
    7,465
    
    
    
    8,083Other
    
    
    3,881
    
    
    
    3,600Total bonds
    
    $
    66,090
    
    
    $
    73,367


The contractual maturities of bonds as at December 31 are shown in the
table below. Bonds that are not due at a single maturity date are
included in the table in the year of final maturity. Asset-backed
securities that are not due at a single maturity date are shown
separately. Actual maturities could differ from contractual maturities
because of the borrowers right to call or right to prepay obligations,
with or without prepayment penalties.

2003
    
    2002*Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    ValueDue in one year or less
    
    $
    3,449
    
    
    $
    3,487
    
    
    $
    2,973
    
    
    $
    3,016Due in years two through
five
    
    
    15,366
    
    
    
    16,011
    
    
    
    18,642
    
    
    
    19,439Due in years six through ten
    
    
    14,318
    
    
    
    15,269
    
    
    
    16,260
    
    
    
    17,256Due after ten years
    
    
    23,366
    
    
    
    25,639
    
    
    
    23,686
    
    
    
    25,793Asset-backed securities
    
    
    9,591
    
    
    
    9,686
    
    
    
    11,806
    
    
    
    12,037Total bonds
    
    $
    66,090
    
    
    $
    70,092
    
    
    $
    73,367
    
    
    $
    77,541




---

|* |  | As restated (Note 3).
|- |  | ---------------------



|ii) |  | MORTGAGES
|--- |  | ---------

The carrying value of non-residential and residential mortgages by
geographic location is shown in the table below. Residential mortgages
include mortgages for single and multiple family dwellings.

2003
    
    2002Non-residential
    
    Residential
    
    Total
    
    Non-residential
    
    Residential
    
    TotalCanada
    
    $
    5,799
    
    
    $
    3,952
    
    
    $
    9,751
    
    
    $
    5,993
    
    
    $
    4,106
    
    
    $
    10,099United States
    
    
    3,465
    
    
    
    92
    
    
    
    3,557
    
    
    
    5,180
    
    
    
    188
    
    
    
    5,368United Kingdom
    
    
    292
    
    
    
    1
    
    
    
    293
    
    
    
    331
    
    
    
    1
    
    
    
    332Total mortgages
    
    $
    9,556
    
    
    $
    4,045
    
    
    $
    13,601
    
    
    $
    11,504
    
    
    $
    4,295
    
    
    $
    15,799


18
www.sunlife.com Annual Report 2003



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##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|8. |  | Invested Assets and Income (Contd)
|-- |  | -----------------------------------

At December 31, 2003, scheduled mortgages loan maturities, before
allowances for losses, are as follows:

Year
    
    Amount2004
    
    $
    1,4012005
    
    
    8892006
    
    
    1,4172007
    
    
    1,3712008
    
    
    1,424Thereafter
    
    
    7,141Total mortgages
    
    $
    13,643


Actual payments could differ from the scheduled mortgage loan maturities
because borrowers may have the right to prepay obligations, with or
without prepayment penalties.



|iii) |  | STOCKS
|---- |  | ------

The carrying value of stocks by issuer country is as follows:

2003
    
    2002Canada
    
    $
    802
    
    
    $
    734United States
    
    
    1,014
    
    
    
    1,036United Kingdom
    
    
    1,505
    
    
    
    2,236Other
    
    
    152
    
    
    
    215Total stocks
    
    $
    3,473
    
    
    $
    4,221


Gross unrealized gains (losses) on stocks are shown in the following
table.

Gross
    
    Gross
    
    EstimatedCarrying
    
    Original
    
    Unrealized
    
    Unrealized
    
    FairValue
    
    Cost
    
    Gains
    
    (Losses)
    
    ValueTotal 2003
    
    $
    3,473
    
    
    $
    2,660
    
    
    $
    549
    
    
    $
    (107
    )
    
    $
    3,102Total 2002
    
    $
    4,221
    
    
    $
    3,159
    
    
    $
    400
    
    
    $
    (455
    )
    
    $
    3,104




|iv) |  | REAL ESTATE
|--- |  | -----------

The carrying value of real estate by geographic location is as follows:

2003
    
    2002Canada
    
    $
    1,874
    
    
    $
    1,885United States
    
    
    837
    
    
    
    946United Kingdom
    
    
    354
    
    
    
    390Other
    
    
    2
    
    
    
    2Total real estate
    
    $
    3,067
    
    
    $
    3,223


Real estate includes real estate held for investment and real estate held
for sale, as described in Note 1. The carrying value and fair value of
real estate in each of these categories is shown in the table below.

2003
    
    2002Carrying
    
    Fair
    
    Carrying
    
    FairValue
    
    Value
    
    Value
    
    ValueReal estate held for
investment
    
    $
    3,057
    
    
    $
    3,273
    
    
    $
    3,205
    
    
    $
    3,415Real estate held for sale
    
    
    10
    
    
    
    14
    
    
    
    18
    
    
    
    22Total real estate
    
    $
    3,067
    
    
    $
    3,287
    
    
    $
    3,223
    
    
    $
    3,437


19
Sun Life Financial Inc.



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|8. |  | Invested Assets and Income (Contd)
|-- |  | -----------------------------------



|D) |  | IMPAIRED INVESTED ASSETS
|-- |  | ------------------------

The Company has impaired invested assets with specific allowances and
other sectoral allowances, at December 31, as follows:

2003
    
    2002Impaired
    
    Allowance
    
    Impaired
    
    AllowanceCarrying Value(1)
    
    for Losses(2)
    
    Carrying Value(1)
    
    for Losses(2)Bonds
    
    $
    574
    
    
    $
    302
    
    
    $
    815
    
    
    $
    417Mortgages
    
    
    79
    
    
    
    42
    
    
    
    87
    
    
    
    63Foreclosed
properties
    
    
    14
    
    
    
    3
    
    
    
    18
    
    
    
    1Other
    
    
    32
    
    
    
    19
    
    
    
    32
    
    
    
    14Total
    
    $
    699
    
    
    $
    366
    
    
    $
    952
    
    
    $
    495




---

|(1) |  | Impaired carrying value shown above is shown gross, before
allowance for losses. Includes $25 in 2003 ($30 in 2002) of impaired
mortgages that have no allowance for losses. Impaired mortgage loans
with no allowance for losses are loans for which, at a minimum,
either the fair value of the collateral or the expected future cash
flows exceed the carrying value.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Includes sectoral allowances of $92 and $32 for bonds and
mortgages, respectively, in 2003 ($112 and $51, respectively, in
2002). The remaining allowances are specific allowances.                                                                                                                                                                                      

Additional information related to impaired invested assets is shown in the
following table.

2003
    
    2002Mortgages with scheduled payments 90 days or more in arrears:Carrying value
    
    $
    20
    
    
    $
    65Percentage of total mortgages before allowances
    
    
    0.2
    %
    
    
    0.4
    %Weighted average recorded investment in impaired mortgage loans, before allowances
    
    $
    85
    
    
    $
    67Interest received on impaired mortgage loans (recorded as received)
    
    $
    5
    
    
    $
    5Carrying value of bonds, mortgages and real estate (including specific allowances)
that were non-income producing for the preceding twelve months
    
    $
    129
    
    
    $
    46


The changes in the allowances for losses are as follows:

Foreclosed PropertiesBonds
    
    Mortgages
    
    and Other
    
    TotalBalance, January 1, 2002
    
    $
    66
    
    
    $
    60
    
    
    $
    5
    
    
    $
    131Provision for losses(1)
    
    
    366
    
    
    
    (6
    )
    
    
    5
    
    
    
    365Write-offs, net of recoveries
    
    
    (13
    )
    
    
    9
    
    
    
    5
    
    
    
    1Effect of changes in currency exchange rates
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    (2
    )Balance, December 31, 2002
    
    $
    417
    
    
    $
    63
    
    
    $
    15
    
    
    $
    495Provision for losses
    
    
    108
    
    
    
    (6
    )
    
    
    11
    
    
    
    113Write-offs, net of recoveries
    
    
    (159
    )
    
    
    (7
    )
    
    
    (2
    )
    
    
    (168
    )Effect of changes in currency exchange rates
    
    
    (64
    )
    
    
    (8
    )
    
    
    (2
    )
    
    
    (74
    )Balance, December 31, 2003
    
    $
    302
    
    
    $
    42
    
    
    $
    22
    
    
    $
    366




---

|(1) |  | Includes $(1) related to discontinued operations.
|--- |  | -------------------------------------------------



|E) |  | DEFERRED NET REALIZED GAINS
|-- |  | ---------------------------

Deferred net realized gains are realized gains and losses which have not
yet been recognized in income. The changes in deferred net realized gains
are shown in the table below.

Bonds
    
    Mortgages
    
    Stocks
    
    Real Estate
    
    Derivatives
    
    TotalBalance, January 1, 2002
    
    $
    1,678
    
    
    $
    62
    
    
    $
    1,851
    
    
    $
    165
    
    
    $
    (12
    )
    
    $
    3,744Net realized gains (losses) for the period
    
    
    220
    
    
    
    43
    
    
    
    (240
    )
    
    
    39
    
    
    
    (99
    )
    
    
    (37
    )Amortization of deferred net realized gains
    
    
    (165
    )
    
    
    (22
    )
    
    
    (247
    )
    
    
    (20
    )
    
    
    21
    
    
    
    (433
    )Effect of changes in currency exchange
rates
    
    
    99
    
    
    
    
    
    
    
    86
    
    
    
    7
    
    
    
    (10
    )
    
    
    182Balance, December 31, 2002
    
    $
    1,832
    
    
    $
    83
    
    
    $
    1,450
    
    
    $
    191
    
    
    $
    (100
    )
    
    $
    3,456Net realized gains (losses) for the period
    
    
    509
    
    
    
    87
    
    
    
    (4
    )
    
    
    7
    
    
    
    (59
    )
    
    
    540Amortization of deferred net realized gains
    
    
    (221
    )
    
    
    (28
    )
    
    
    (240
    )
    
    
    (21
    )
    
    
    14
    
    
    
    (496
    )Effect of changes in currency exchange
rates
    
    
    (208
    )
    
    
    (7
    )
    
    
    (150
    )
    
    
    (13
    )
    
    
    2
    
    
    
    (376
    )Balance, December 31, 2003
    
    $
    1,912
    
    
    $
    135
    
    
    $
    1,056
    
    
    $
    164
    
    
    $
    (143
    )
    
    $
    3,124


20
www.sunlife.com Annual Report 2003



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---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|8. |  | Invested Assets and Income (Contd)
|-- |  | -----------------------------------



|F) |  | NET INVESTMENT INCOME
|-- |  | ---------------------

Net investment income has the following components:

2003
    
    2002
    
    2001Interest from:Bonds
    
    $
    3,831
    
    
    $
    3,810
    
    
    $
    2,242Mortgages
    
    
    951
    
    
    
    899
    
    
    
    852Policy loans
    
    
    224
    
    
    
    195
    
    
    
    119Cash, cash equivalents and short-term securities
    
    
    134
    
    
    
    122
    
    
    
    116Interest income
    
    
    5,140
    
    
    
    5,026
    
    
    
    3,329Dividends from stocks
    
    
    103
    
    
    
    135
    
    
    
    95Real estate income (net)
    
    
    222
    
    
    
    223
    
    
    
    192Amortization of deferred net realized gains
    
    
    496
    
    
    
    433
    
    
    
    517Amortization of unrealized gains and losses
    
    
    (140
    )
    
    
    (186
    )
    
    
    (68
    )Derivative realized and unrealized gains and
losses(1)
    
    
    (85
    )
    
    
    (89
    )
    
    
    17Other items (net)(2)
    
    
    184
    
    
    
    203
    
    
    
    1455,920
    
    
    
    5,745
    
    
    
    4,227Provisions for losses on investments
    
    
    (113
    )
    
    
    (365
    )
    
    
    (4
    )Investment expenses and taxes
    
    
    (104
    )
    
    
    (99
    )
    
    
    (61
    )Impact of discontinued operations
    
    
    
    
    
    
    (150
    )
    
    
    Total net investment income
    
    $
    5,703
    
    
    $
    5,131
    
    
    $
    4,162




---

|(1) |  | Consists of realized and unrealized gains on derivatives that
are reported at fair value. Additional derivative income of $(47)
($(122) in 2002, $(82) in 2001) is included in net investment income.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Includes gains and losses on sales of subsidiaries (Note 5).                                                                                                                                         



|G) |  | SECURITIES LENDING
|-- |  | ------------------

The Company engages in securities lending to generate additional income.
Certain securities from its portfolio are loaned to other institutions for
short periods. Collateral, which exceeds the market value of the loaned
securities, is deposited by the borrower with a lending agent, usually a
securities custodian, and retained by the lending agent until the
underlying security has been returned to the Company. The market value of
the loaned securities is monitored on a daily basis with additional
collateral obtained or refunded as the market values fluctuate. It is
Company practice to obtain a guarantee from the lending agent against
counterparty default, including collateral deficiency. At December 31,
2003, the Company had loaned securities (which are included in invested
assets) with a carrying value and market value of approximately $568 and
$609, respectively.



|H) |  | LOAN SECURITIZATIONS
|-- |  | --------------------

During the year, the Company sold commercial mortgages to a trust which
subsequently issued securities backed by the commercial mortgages. The
Company was retained to service and administer the mortgages and also
retained a subordinated investment interest in the issued securities.
Similar transactions occurred in 2002 and 2001. Details of these
transactions are shown in the following table.

2003
    
    2002
    
    2001Carrying value of mortgages sold
    
    $
    623
    
    
    $
    497
    
    
    $
    265Gain on sale
    
    $
    70
    
    
    $
    28
    
    
    $
    4


As at December 31, 2003, the key assumptions of the discounted cash flows
models and the sensitivity of the fair values of the retained interests to
an immediate 10% and 20% (10% and 20% in 2002) adverse change in key
assumptions are as follows:

2003
    
    2002Mortgages
    
    Bonds
    
    Mortgages
    
    BondsCarrying value of retained interests
    
    $
    161
    
    
    $
    4
    
    
    $
    128
    
    
    $
    8Fair value of retained interests
    
    $
    174
    
    
    $
    5
    
    
    $
    130
    
    
    $
    8Weighted-average remaining life (in years)
    
    
    5.5-21.24
    
    
    
    8.7
    
    
    
    3.8-9.6
    
    
    
    9.7Discount rate
    
    
    2.5-7.0
    %
    
    
    11.1
    %
    
    
    6.0-7.9
    %
    
    
    11.1
    %Impact on fair value of 10% adverse
change
    
    $
    6
    
    
    $
    1
    
    
    $
    4
    
    
    $
    1Impact on fair value of 20% adverse
change
    
    $
    10
    
    
    $
    1
    
    
    $
    7
    
    
    $
    1Anticipated credit losses
    
    
    
    
    
    
    0.6
    %
    
    
    
    
    
    
    0.6
    %Impact on fair value of 10% adverse
change
    
    
    
    
    
    $
    1
    
    
    
    
    
    
    $
    1Impact on fair value of 20% adverse
change
    
    
    
    
    
    $
    2
    
    
    
    
    
    
    $
    2


The sensitivity analysis in the table above is hypothetical and should be
used with caution. As the figures indicate, changes in fair value based
on variations in assumptions generally cannot be extrapolated because the
relationship of the change in the assumption to the change in fair value
may not be linear. Also, in this table, the effect of a variation in a
particular assumption on the fair value of the retained interest is
calculated without changing any other assumption. In reality, changes in
one factor may result in changes in another, which might magnify or
counteract the sensitivities.

The credit losses, net of recoveries, of the securitized bond portfolio
for 2003 were $4 ($23 in 2002). As at December 31, 2003, the securitized
bond portfolio included bonds of $17 that were 90 days or more past due
($24 in 2002).

21
Sun Life Financial Inc.



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|8. |  | Invested Assets and Income (Contd)
|-- |  | -----------------------------------

The following table summarizes certain cash flows received from
securitization trusts in 2003, 2002 and 2001:

2003
    
    2002
    
    2001Mortgages
    
    Bonds
    
    Mortgages
    
    Bonds
    
    Mortgages
    
    BondsProceeds from new securitizations
    
    $
    693
    
    
    $
    
    
    
    $
    525
    
    
    $
    
    
    
    $
    269
    
    
    $
    Cash flows received on retained
interests and servicing fees
    
    $
    26
    
    
    $
    
    
    
    $
    17
    
    
    $
    2
    
    
    $
    9
    
    
    $
    4




|9. |  | Derivative Financial Instruments
|-- |  | --------------------------------

The Company uses derivative instruments for hedging and risk management
purposes or in replication strategies to reproduce permissible
investments. The accounting policies for the derivative financial
instruments are described in Note 1. The Company monitors the gap in
market sensitivities between liabilities and supporting assets for its
hedging strategies. That gap is managed within defined tolerance limits
by, where appropriate, the use of derivative instruments. Models and
techniques are used by the Company to ensure the continuing effectiveness
of its hedging strategies.

Derivative instruments are either exchange-traded or over-the-counter
contracts negotiated between two counterparties. The notional amount is
the basis for calculating payments and is generally not the actual amount
exchanged. Since counterparty failure in an over-the-counter derivative
transaction could render it ineffective for hedging purposes, the Company
transacts its derivative contracts with counterparties rated AA or better.
In limited circumstances, the Company will enter into transactions with
lower rated counterparties if credit enhancement features are included.
As at December 31, 2003, the Company had assets of $94 ($188 in 2002)
pledged as collateral for derivative contracts.

The Company has the following amounts outstanding at December 31:

2003Notional AmountsTerm to MaturityFair Value
    
    
    
    Total
    
    Credit
    
    Risk-Under
    
    One to
    
    Over
    
    Notional
    
    Equivalent
    
    WeightedPositive(1)
    
    Net
    
    1 year
    
    5 years
    
    5 years
    
    Amount
    
    Amount(2)
    
    Amount(3)Interest rate contracts
    
    $
    249
    
    
    $
    (173
    )
    
    $
    2,271
    
    
    $
    5,781
    
    
    $
    6,325
    
    
    $
    14,377
    
    
    $
    361
    
    
    $
    7Foreign exchange contracts
    
    
    599
    
    
    
    570
    
    
    
    892
    
    
    
    1,119
    
    
    
    1,657
    
    
    
    3,668
    
    
    
    777
    
    
    
    21Equity and other contracts
    
    
    385
    
    
    
    318
    
    
    
    3,836
    
    
    
    1,770
    
    
    
    2,512
    
    
    
    8,118
    
    
    
    1,111
    
    
    
    25Total
    
    $
    1,233
    
    
    $
    715
    
    
    $
    6,999
    
    
    $
    8,670
    
    
    $
    10,494
    
    
    $
    26,163
    
    
    $
    2,249
    
    
    $
    53Over-the-counter contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    25,924Exchange-traded contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    239


2002Notional AmountsTerm to MaturityFair Value
    
    
    
    Total
    
    Credit
    
    Risk-Under
    
    One to
    
    Over
    
    Notional
    
    Equivalent
    
    WeightedPositive(1)
    
    Net
    
    1 year
    
    5 years
    
    5 years
    
    Amount
    
    Amount(2)
    
    Amount(3)Interest rate contracts
    
    $
    495
    
    
    $
    (294
    )
    
    $
    544
    
    
    $
    7,788
    
    
    $
    6,401
    
    
    $
    14,733
    
    
    $
    630
    
    
    $
    14Foreign exchange contracts
    
    
    198
    
    
    
    27
    
    
    
    740
    
    
    
    981
    
    
    
    1,894
    
    
    
    3,615
    
    
    
    397
    
    
    
    13Equity and other contracts
    
    
    524
    
    
    
    397
    
    
    
    2,132
    
    
    
    1,943
    
    
    
    2,435
    
    
    
    6,510
    
    
    
    1,223
    
    
    
    21Total
    
    $
    1,217
    
    
    $
    130
    
    
    $
    3,416
    
    
    $
    10,712
    
    
    $
    10,730
    
    
    $
    24,858
    
    
    $
    2,250
    
    
    $
    48Over-the-counter contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    24,192Exchange-traded contracts
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    666


---

|(1) |  | Used to determine the credit risk exposure if the
counterparties were to default. The credit risk exposure is the cost
of replacing, at current market rates, all contracts with a positive
fair value.                                                                                                                                                       
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | The credit risk exposure plus an amount for potential future
credit exposure. Determined in accordance with guidelines provided
by the OSFI.                                                                                                                                                                                                                  
|(3) |  | This measure is used to determine the amount of capital
necessary to support derivative transactions for certain Canadian
regulatory purposes. It is determined in accordance with guidelines
provided by the OSFI, and reflects the credit equivalent amount
weighted according to the nature of the derivative and the
creditworthiness of the counterparty.

Fair values of interest rate swap contracts and foreign exchange swap
contracts are determined by discounting expected future cash flows using
current market interest and exchange rates for similar instruments. Fair
values of options, financial futures, and common stock index swaps are
based on the quoted market prices or the value of underlying securities or
indices.

22
www.sunlife.com Annual Report 2003



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|10. |  | Other Assets and Goodwill
|--- |  | -------------------------

Other assets consist of the following:

2003
    
    2002Accounts receivable
    
    $
    1,415
    
    
    $
    1,433Investment income due and accrued
    
    
    1,153
    
    
    
    1,326Future income taxes (Note 20)
    
    
    977
    
    
    
    1,032Deferred acquisition costs
    
    
    548
    
    
    
    849Intangible assets
    
    
    763
    
    
    
    786Prepaid expenses
    
    
    623
    
    
    
    536Outstanding premiums
    
    
    389
    
    
    
    384Capital assets
    
    
    196
    
    
    
    230Other
    
    
    396
    
    
    
    419Total other assets
    
    $
    6,460
    
    
    $
    6,995


Amortization of deferred acquisition costs charged to income amounted to
$234 in 2003 ($316 and $305 in 2002 and 2001, respectively).

Capital assets are carried at a cost of $601 ($630 in 2002), less
accumulated depreciation and amortization of $405 ($400 in 2002).
Depreciation and amortization charged to income totalled $67 ($75 and $66
in 2002 and 2001, respectively).

INTANGIBLE ASSETS

In addition to the intangible assets of $763 ($786 in 2002) shown in the
table above, intangible assets of $744 ($510 in 2002) for investments
accounted for by the equity method are included in other invested assets.
Amortization of intangible assets recorded in operating expenses during
the year was $24 ($17 in 2002 and $4 in 2001). As at December 31, 2003,
the components of the intangible assets included in other invested assets
and other assets are as follows:

2003
    
    2002Gross carrying
    
    Accumulated
    
    Net
    
    Gross carrying
    
    Accumulated
    
    Netamount
    
    amortization
    
    amount
    
    amount
    
    amortization
    
    amountAmortizable intangible assets:Sales potential of field force
    
    $
    400
    
    
    $
    16
    
    
    $
    384
    
    
    $
    400
    
    
    $
    6
    
    
    $
    394Asset administration contracts
    
    
    201
    
    
    
    14
    
    
    
    187
    
    
    
    195
    
    
    
    9
    
    
    
    186Banking distribution channel
    
    
    36
    
    
    
    8
    
    
    
    28
    
    
    
    43
    
    
    
    5
    
    
    
    38Other
    
    
    3
    
    
    
    1
    
    
    
    2
    
    
    
    8
    
    
    
    1
    
    
    
    7640
    
    
    
    39
    
    
    
    601
    
    
    
    646
    
    
    
    21
    
    
    
    625Non-amortizable intangible assets:Fund management contracts
    
    
    839
    
    
    
    
    
    
    
    839
    
    
    
    601
    
    
    
    
    
    
    
    601Brand name
    
    
    54
    
    
    
    
    
    
    
    54
    
    
    
    54
    
    
    
    
    
    
    
    54State licenses
    
    
    13
    
    
    
    
    
    
    
    13
    
    
    
    16
    
    
    
    
    
    
    
    16906
    
    
    
    
    
    
    
    906
    
    
    
    671
    
    
    
    
    
    
    
    671Total intangible assets
    
    $
    1,546
    
    
    $
    39
    
    
    $
    1,507
    
    
    $
    1,317
    
    
    $
    21
    
    
    $
    1,296


GOODWILL

In addition to the goodwill of $5,573 ($5,969 in 2002) shown on the
consolidated balance sheets, goodwill of $396 ($209 in 2002) for
investments accounted for by the equity method is included in other
invested assets. Goodwill amortization ceased in 2002. The amount
charged to net investment income or operating expenses was $9 and $10,
respectively, in 2001.

Changes in goodwill of subsidiaries and investments accounted for by the
equity method are as follows:

United
    
    
    
    
    
    CorporateCanada
    
    States
    
    Asia
    
    Capital
    
    TotalBalance, January 1, 2002
    
    $
    66
    
    
    $
    2,016
    
    
    $
    30
    
    
    $
    91
    
    
    $
    2,203Acquisitions*
    
    
    3,815
    
    
    
    199
    
    
    
    
    
    
    
    
    
    
    
    4,014Dispositions
    
    
    (20
    )
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    (52
    )Adjustments (Note 3)
    
    
    
    
    
    
    30
    
    
    
    
    
    
    
    
    
    
    
    30Effect of changes in currency exchange rates
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    (8
    )
    
    
    (17
    )Balance, December 31, 2002
    
    
    3,861
    
    
    
    2,204
    
    
    
    30
    
    
    
    83
    
    
    
    6,178Acquisitions
    
    
    190
    
    
    
    48
    
    
    
    
    
    
    
    
    
    
    
    238Dispositions
    
    
    (3
    )
    
    
    (41
    )
    
    
    (1
    )
    
    
    
    
    
    
    (45
    )Effect of changes in currency exchange rates
    
    
    
    
    
    
    (402
    )
    
    
    
    
    
    
    
    
    
    
    (402
    )Balance, December 31, 2003
    
    $
    4,048
    
    
    $
    1,809
    
    
    $
    29
    
    
    $
    83
    
    
    $
    5,969




---

|* |  | As restated (Note 3).
|- |  | ---------------------

23
Sun Life Financial Inc.



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|11. |  | Actuarial Liabilities and Other Policy Liabilities
|--- |  | --------------------------------------------------



|A) |  | ACTUARIAL POLICIES
|-- |  | ------------------

Actuarial liabilities and other policy liabilities represent the estimated
amounts which, together with estimated future premiums and net investment
income, will provide for outstanding claims, estimated future benefits,
policyholders dividends, taxes (other than income taxes) and expenses on
in-force policies.

In calculating actuarial liabilities and other policy liabilities,
assumptions must be made about the timing and amount of many events,
including death, accident or sickness, investment, inflation, policy
termination, expenses, taxes, premiums, commissions and policyholder
dividends. The assumptions used by the Company in determining the
actuarial liabilities are described in detail later in this note.

The Company uses best estimate assumptions for expected future experience.
Uncertainty is inherent in the process, as no one can accurately predict
the future. Some assumptions relate to events that are anticipated to
occur many years in the future and are likely to require subsequent
revision. Additional provisions are included in the actuarial liabilities
to provide for possible adverse deviations from the best estimates. If
the assumption is more susceptible to change or if the actuary is less
certain about the underlying best estimate assumption, a correspondingly
larger provision is included in the actuarial liabilities.

In determining these provisions, the Company ensures:



| |  |  | When taken one at a time, each provision is reasonable with
respect to the underlying best estimate assumption, and the extent of
uncertainty present in making that assumption.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In total, the cumulative effect of all provisions is reasonable
with respect to the total actuarial liabilities.
| | - |  | ----------------------------------------------------------------------------------------------------------------

With the passage of time and resulting reduction in estimation risk, the
provisions are released into income. Due to 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.



|B) |  | COMPOSITION OF ACTUARIAL LIABILITIES AND OTHER POLICY LIABILITIES
|-- |  | -----------------------------------------------------------------

The actuarial liabilities and other policy liabilities consist of the following:

2003United
    
    
    
    
    
    United
    
    OtherCanada
    
    States
    
    Asia
    
    Kingdom
    
    Operations(1)
    
    TotalIndividual participating life
    
    $
    10,735
    
    
    $
    5,235
    
    
    $
    1,015
    
    
    $
    3,689
    
    
    $
    84
    
    
    $
    20,758Individual non-participating life(2)
    
    
    1,605
    
    
    
    3,359
    
    
    
    
    
    
    
    (27
    )
    
    
    313
    
    
    
    5,250Group life
    
    
    1,333
    
    
    
    116
    
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    1,474Individual annuities
    
    
    10,680
    
    
    
    19,315
    
    
    
    
    
    
    
    3,433
    
    
    
    
    
    
    
    33,428Group annuities
    
    
    6,181
    
    
    
    4,397
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,578Health insurance
    
    
    3,131
    
    
    
    451
    
    
    
    
    
    
    
    
    
    
    
    54
    
    
    
    3,636Total actuarial liabilities
    
    
    33,665
    
    
    
    32,873
    
    
    
    1,015
    
    
    
    7,120
    
    
    
    451
    
    
    
    75,124Add: other policy liabilities(3)
    
    
    784
    
    
    
    523
    
    
    
    72
    
    
    
    178
    
    
    
    673
    
    
    
    2,230Actuarial liabilities and other policy liabilities
    
    $
    34,449
    
    
    $
    33,396
    
    
    $
    1,087
    
    
    $
    7,298
    
    
    $
    1,124
    
    
    $
    77,354


2002United
    
    
    
    United
    
    OtherCanada
    
    States
    
    Asia
    
    Kingdom
    
    Operations(1)
    
    TotalIndividual participating life
    
    $
    10,241
    
    
    $
    5,959
    
    
    $
    1,011
    
    
    $
    4,131
    
    
    $
    87
    
    
    $
    21,429Individual non-participating life
    
    
    1,525
    
    
    
    8,507
    
    
    
    
    
    
    
    (21
    )
    
    
    296
    
    
    
    10,307Group life
    
    
    1,417
    
    
    
    132
    
    
    
    
    
    
    
    43
    
    
    
    
    
    
    
    1,592Individual annuities
    
    
    10,769
    
    
    
    21,375
    
    
    
    
    
    
    
    3,718
    
    
    
    
    
    
    
    35,862Group annuities
    
    
    6,441
    
    
    
    7,084
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,525Health insurance
    
    
    3,375
    
    
    
    600
    
    
    
    
    
    
    
    395
    
    
    
    80
    
    
    
    4,450Total actuarial liabilities
    
    
    33,768
    
    
    
    43,657
    
    
    
    1,011
    
    
    
    8,266
    
    
    
    463
    
    
    
    87,165Add: other policy liabilities(3), (4)
    
    
    870
    
    
    
    551
    
    
    
    77
    
    
    
    381
    
    
    
    868
    
    
    
    2,747Actuarial liabilities and other policy liabilities
    
    $
    34,638
    
    
    $
    44,208
    
    
    $
    1,088
    
    
    $
    8,647
    
    
    $
    1,331
    
    
    $
    89,912




---

|(1) |  | Primarily business from the run-off reinsurance operations.                                                                                               
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Decrease from 2002 due to the sale of Clarica U.S. in January 2003
(Note 5).                                                                              
|(3) |  | Consists of policy benefits payable, provisions for unreported
claims, provisions for policyholder dividends and provisions for experience
rating refunds.
|(4) |  | As restated (Note 3).                                                                                                                                     

24
www.sunlife.com Annual Report 2003



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|11. |  | Actuarial Liabilities and Other Policy Liabilities (Contd)
|--- |  | -----------------------------------------------------------



|C) |  | TOTAL ASSETS SUPPORTING ACTUARIAL LIABILITIES, EQUITY AND OTHER
|-- |  | ---------------------------------------------------------------

Bonds and mortgages are used extensively to support actuarial liabilities,
particularly in the annuity and group businesses. Stocks and real estate
are primarily used to support individual participating life insurance
business where the Company has some ability to adjust policyholder
dividends. Equity and other includes assets in both insurance and
non-insurance operations of the Company. The following tables show the
total assets supporting actuarial liabilities, equity and other:

2003Bonds
    
    Mortgages
    
    Stocks
    
    Real Estate
    
    Other
    
    TotalIndividual participating life
    
    $
    12,713
    
    
    $
    3,641
    
    
    $
    2,711
    
    
    $
    2,094
    
    
    $
    4,681
    
    
    $
    25,840Individual non-participating life
    
    
    4,124
    
    
    
    870
    
    
    
    239
    
    
    
    5
    
    
    
    1,149
    
    
    
    6,387Group life
    
    
    1,672
    
    
    
    573
    
    
    
    17
    
    
    
    21
    
    
    
    346
    
    
    
    2,629Individual annuities
    
    
    28,163
    
    
    
    4,535
    
    
    
    58
    
    
    
    26
    
    
    
    4,808
    
    
    
    37,590Group annuities
    
    
    8,524
    
    
    
    2,436
    
    
    
    26
    
    
    
    118
    
    
    
    781
    
    
    
    11,885Health insurance
    
    
    4,431
    
    
    
    1,298
    
    
    
    15
    
    
    
    16
    
    
    
    874
    
    
    
    6,634Equity and other
    
    
    6,463
    
    
    
    248
    
    
    
    407
    
    
    
    787
    
    
    
    10,339
    
    
    
    18,244Total assets
    
    $
    66,090
    
    
    $
    13,601
    
    
    $
    3,473
    
    
    $
    3,067
    
    
    $
    22,978
    
    
    $
    109,209


2002*Bonds
    
    Mortgages
    
    Stocks
    
    Real Estate
    
    Other
    
    TotalIndividual participating life
    
    $
    12,627
    
    
    $
    4,226
    
    
    $
    3,378
    
    
    $
    2,213
    
    
    $
    4,646
    
    
    $
    27,090Individual non-participating life
    
    
    7,776
    
    
    
    1,451
    
    
    
    162
    
    
    
    12
    
    
    
    2,102
    
    
    
    11,503Group life
    
    
    1,809
    
    
    
    643
    
    
    
    17
    
    
    
    17
    
    
    
    274
    
    
    
    2,760Individual annuities
    
    
    30,002
    
    
    
    4,988
    
    
    
    130
    
    
    
    42
    
    
    
    4,828
    
    
    
    39,990Group annuities
    
    
    10,595
    
    
    
    2,845
    
    
    
    61
    
    
    
    161
    
    
    
    1,207
    
    
    
    14,869Health insurance
    
    
    4,340
    
    
    
    1,330
    
    
    
    30
    
    
    
    24
    
    
    
    917
    
    
    
    6,641Equity and other
    
    
    6,218
    
    
    
    316
    
    
    
    443
    
    
    
    754
    
    
    
    12,868
    
    
    
    20,599Total assets
    
    $
    73,367
    
    
    $
    15,799
    
    
    $
    4,221
    
    
    $
    3,223
    
    
    $
    26,842
    
    
    $
    123,452




---

|* |  | As restated (Note 3).
|- |  | ---------------------



|D) |  | CHANGES IN ACTUARIAL LIABILITIES
|-- |  | --------------------------------

Changes in actuarial liabilities during the year are as follows:

2003
    
    2002Actuarial liabilities, January 1
    
    $
    87,165
    
    
    $
    57,858Change in liabilities on in-force business
    
    
    (1,777
    )
    
    
    (3,288
    )Liabilities arising from new policies
    
    
    3,225
    
    
    
    7,110Significant changes in assumptions or methodology:(1)Gross increases
    
    
    313
    
    
    
    Gross decreases
    
    
    (137
    )
    
    
    Increase in actuarial liabilities
    
    
    1,624
    
    
    
    3,822Acquisition
    
    
    
    
    
    
    23,929Discontinued operations
    
    
    
    
    
    
    643Changes in intrinsic value of options that hedge the GMDB(2)
    
    
    (199
    )
    
    
    224Increases related to the restructuring of Sun Life Assurance and Clarica (Note 4)
    
    
    
    
    
    
    104Dispositions and other
    
    
    (4,603
    )
    
    
    (18
    )Change due to ceding reinsurance agreements
    
    
    (465
    )
    
    
    Effect of changes in currency exchange rates
    
    
    (8,398
    )
    
    
    603Actuarial liabilities, December 31
    
    
    75,124
    
    
    
    87,165Add: other policy liabilities(3)
    
    
    2,230
    
    
    
    2,747Actuarial liabilities and other policy liabilities, December 31
    
    $
    77,354
    
    
    $
    89,912




---

|(1) |  | During the second quarter of 2003, the Company implemented a
number of changes to its U.S. actuarial liability calculations.
These changes reflect improved modeling capabilities now permitted
under the updated Canadian Institute of Actuaries Consolidated
Standards of Practice and the impact of lower interest rates on the
cost of certain guarantees. The net impact of these changes resulted
in an increase to actuarial liabilities of $6 (gross increases of
$143 net of gross decreases of $137). The actuarial liability for
segregated fund guarantees was increased by approximately $170 in the
fourth quarter of 2003 to protect against increased downside risk
following the rise in the equity markets.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | The changes in intrinsic value of the options that hedge GMDB
products are included in the increase in actuarial liabilities in the
consolidated statements of operations and other invested assets in
the consolidated balance sheets.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|(3) |  | As restated (Note 3).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

25
Sun Life Financial Inc.



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##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|11. |  | Actuarial Liabilities and Other Policy Liabilities (Contd)
|--- |  | -----------------------------------------------------------



|E) |  | FAIR VALUE OF ACTUARIAL LIABILITIES, FUTURE INCOME TAXES AND
DEFERRED NET REALIZED GAINS
|-- |  | ----------------------------------------------------------------------------------------

The fair value of total actuarial liabilities shown in the tables above is
$81,513 in 2003 and $93,360 in 2002, as restated. Fair value of actuarial
liabilities is determined by reference to the fair value of the assets
supporting those liabilities. The fair value of the net deferred income
tax asset related to life insurance companies is $(25) in 2003 (carrying
value of $426) and $213 in 2002, as restated (carrying value of $840).
Fair value of income taxes represents the amount that would be recognized
on the balance sheet if the financial instruments were measured at fair
value. Deferred net realized gains, which are taken into account in
establishing the actuarial liabilities, no longer exist when financial
assets and liabilities are measured at fair value.



|F) |  | ASSUMPTIONS AND MEASUREMENT UNCERTAINTY
|-- |  | ---------------------------------------

Mortality

Mortality refers to the rate at which death occurs for a defined group of
people. Insurance mortality is generally based on the Companys average
five-year experience. For annuities, Company experience is combined with
industry experience, since the Companys own experience is insufficient to
be statistically reliable. Assumed future mortality rates on annuities
are adjusted to reflect expected improvements in mortality. Assumed
mortality rates for life insurance contracts do not reflect any future
improvement which might occur.

For products where higher mortality would be financially adverse to the
Company, a 1% increase in the best estimate assumption would decrease the
net income by $84. For products where lower mortality would be
financially adverse to the Company, a 1% reduction in the mortality
assumption would decrease the net income by $30.

Morbidity

Morbidity refers to the rate of accident or sickness, and recovery
therefrom, for a defined group of people. Most of the Companys
disability insurance is marketed on a group basis. In Canada, the Company
offers critical illness policies and long-term care on an individual
basis. Medical stop loss insurance is offered on a group basis in the
United States. In Canada, group morbidity assumptions are based on the
Companys five-year average experience, modified to reflect the trend in
recovery rates. For long-term care and critical illness insurance,
assumptions are developed in collaboration with our reinsurers and are
largely based on their experience. In the United States, Company
experience is used for both medical stop loss and disability assumptions,
with some consideration for industry experience. Larger provisions for
adverse deviation are used for those benefits where Company or industry
experience is limited. For products where the morbidity is a significant
assumption, a 1% change in that assumption would reduce the net income by
$17.

Investment Return

The Company generally maintains distinct asset portfolios for each line of
business. To ensure the adequacy of assets backing the liabilities, the
Company does cash flow testing using a set of plausible future interest
rates and economic environments as well as a set of prescribed scenarios.
In each test, asset and liability cash flows are projected. Net cash
flows are invested in new assets, if positive, or assets are sold to meet
cash needs, in accordance with the assumptions in the test and the
standards of the Canadian Institute of Actuaries. Whenever needed,
specific assumptions are made for cyclical credit risks that exceed the
long-term expectation. Deferred net realized gains are taken into account
in establishing the actuarial liabilities.

Asset Default

In addition to the allowances for losses on invested assets outlined in
Note 8, the actuarial liabilities include an amount of $2,005 determined
on a pre-tax basis ($1,869 in 2002) to provide for possible future asset
defaults and loss of asset value. This provision results from a reduction
in the expected future investment yield or a reduction in the value of
equity assets recognized in the computation of actuarial liabilities. The
reduction varies depending on the creditworthiness of the class of asset.

Segregated Fund Guarantees

The Company has a large volume of accumulation annuities primarily in the
United States subject to equity market movements. The Company also
reinsures the guarantees offered on accumulation annuities issued by other
insurance companies in the United States, although the Company no longer
accepts new business on these reinsurance treaties. The Company monitors
its experience for these guarantees on a monthly basis, and has hedged a
large percentage of its exposure with long dated put options against the
S&P 500.

The Company has a block of unit linked products in the United Kingdom
which offer guaranteed annuity purchase price options. While not
segregated fund guarantees, the exposure to the annuity options is
dependent on the equity market movements.

The Company used stochastic modelling techniques which test a large number
of different scenarios of future market returns to estimate the actuarial
liability for the various guarantees offered under these products. The
sensitivity of the actuarial liability to changes in expected equity
market returns is significant for those blocks of business. For example,
a 1% reduction in the expected long-term equity market return assumption
would decrease the net income for segregated fund guarantees by $77.

26
www.sunlife.com Annual Report 2003



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##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|11. |  | Actuarial Liabilities and Other Policy Liabilities (Contd)
|--- |  | -----------------------------------------------------------

Interest Rate

Interest rate risk is the potential for financial loss arising from
changes in interest rates. For example, the Company is exposed to this
risk when the cash flows from assets and the policy obligations they
support are significantly mismatched, as this may result in the need to
either sell assets to meet policy payments and expenses, or re-invest
excess asset cash flows under unfavourable interest environments.

To manage this risk, a matching policy is established for each portfolio
of assets and related liabilities. Asset/liability management programs
are in place to implement this policy. The primary approach used is
duration gap analysis, which measures the sensitivity of assets and
liabilities to interest rate changes across the entire yield curve. Key
rate duration analysis is used to examine the duration gap of assets and
liabilities at discrete intervals on the yield curve. These gaps are
managed within specified tolerance limits.

Interest rate sensitivity is provided for in the actuarial liabilities for
all policies, with adequate provisions to absorb moderate changes in
interest rates.

For certain product types, including participating insurance and certain
forms of universal life policies and annuities, the effect of changes in
the interest rate environment will be largely passed through to
policyholders as changes to the amount of dividends declared or to the
rate of interest credited. These changes occur routinely as interest
rates change, and reflect the normal operation of these policies according
to their contractual terms.

For the Companys actuarial liabilities, an immediate 1% parallel increase
in interest rates at December 31, 2003 across the entire yield curve,
assuming the Company was unable to take any investment action to mitigate
the impact of this change, would result in an estimated increase in net
income of $145. Conversely, an immediate 1% parallel decrease in interest
rates, again, assuming no other investment action, would result in an
estimated decrease in net income of $252. These sensitivities do not
reflect any hedging that has taken place since year-end.

Among the different lines of insurance business, annuities are one of the
most sensitive to changes in interest rates. Asset and liability cash
flows by year for this business are set out in the table below.

2003Under
    
    1 to
    
    Over 5 years
    
    Over1 year
    
    5 years
    
    to 10 years
    
    10 years
    
    TotalCANADAAssets
    
    $
    3,593
    
    
    $
    8,514
    
    
    $
    4,184
    
    
    $
    8,877
    
    
    $
    25,168Liabilities
    
    
    3,486
    
    
    
    8,946
    
    
    
    3,972
    
    
    
    9,121
    
    
    
    25,525Cash flow gap
    
    $
    107
    
    
    $
    (432
    )
    
    $
    212
    
    
    $
    (244
    )
    
    $
    (357
    )UNITED STATESAssets
    
    $
    3,758
    
    
    $
    11,712
    
    
    $
    8,601
    
    
    $
    5,113
    
    
    $
    29,184Liabilities
    
    
    2,849
    
    
    
    13,751
    
    
    
    7,294
    
    
    
    6,537
    
    
    
    30,431Cash flow gap
    
    $
    909
    
    
    $
    (2,039
    )
    
    $
    1,307
    
    
    $
    (1,424
    )
    
    $
    (1,247
    )UNITED KINGDOMAssets
    
    $
    364
    
    
    $
    970
    
    
    $
    1,309
    
    
    $
    5,031
    
    
    $
    7,674Liabilities
    
    
    265
    
    
    
    1,053
    
    
    
    1,297
    
    
    
    5,121
    
    
    
    7,736Cash flow gap
    
    $
    99
    
    
    $
    (83
    )
    
    $
    12
    
    
    $
    (90
    )
    
    $
    (62
    )


Policy Termination Rates

Policyholders may allow their policies to terminate prior to the end of
the Contractual Coverage period by choosing not to continue to pay
premiums or by exercising one of the non-forfeiture options in the
contract. Assumptions for termination experience on life insurance are
generally based on the Companys average five-year experience.
Termination rates vary by plan, age at issue, method of premium payment
and policy duration. For universal life contracts, it is also necessary
to set assumptions about premium cessation occurring prior to termination
of the policy. Studies prepared by industry or actuarial bodies are used
for certain products where the Companys experience is too limited to be
statistically valid.

For individual life insurance products where fewer terminations would be
financially adverse to the Company, net income would be decreased by $56
if the termination rate assumption was reduced by 10% starting in policy
year six (5% for participating policies and policies with adjustable
premiums). For products where more terminations would be financially
adverse to the Company, net income would be decreased by $61 if an extra
1% of the in-force policies were assumed to terminate each year beginning
in policy year six (0.5% for participating policies and policies with
adjustable premiums).

Operating Expenses and Inflation

Actuarial liabilities provide for future policy-related expenses. These
include the costs of premium collection, claims adjudication and
processing, actuarial calculations, preparation and mailing of policy
statements and related indirect expenses and overhead. Expense
assumptions are mainly based upon 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
$238.

27
Sun Life Financial Inc.



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---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|11. |  | Actuarial Liabilities and Other Policy Liabilities (Contd)
|--- |  | -----------------------------------------------------------

Provision for Policyholder Dividends

An amount equal to the policyholder dividends expected to be allotted to
policyholders over the next twelve months is shown as a provision for
policyholder dividends. Actuarial liabilities provide for the payment of
future policyholder dividends beyond the next twelve months. Both
liabilities are determined taking into account the scale of dividends
approved by the Board and the expectation that future dividends will be
adjusted to reflect future experience. Policyholder dividends of $753 are
included in policyholder dividends and interest on claims and deposits in
the consolidated statements of operations ($856 and $737 in 2002 and 2001,
respectively).



|G) |  | REINSURANCE AGREEMENTS
|-- |  | ----------------------

Reinsurance is used primarily to limit exposure to large losses. The
Board approves the Companys individual life insurance retention policy
and limits which require that such arrangements be placed with
well-established, highly rated reinsurers. Coverage is well diversified
and controls are in place to manage exposure to reinsurance
counterparties. While reinsurance arrangements provide for the recovery
of claims arising from the liabilities ceded, the Company retains primary
responsibility to the policyholders. The effect of reinsurance on
premiums and payments to policyholders, beneficiaries and depositors is
summarized as follows:

2003
    
    2002
    
    2001Premiums:Direct premiums
    
    $
    13,688
    
    
    $
    15,061
    
    
    $
    9,722Reinsurance assumed
    
    
    723
    
    
    
    577
    
    
    
    169Reinsurance ceded
    
    
    (868
    )
    
    
    (763
    )
    
    
    (454
    )$
    13,543
    
    
    $
    14,875
    
    
    $
    9,437Payments to policyholders, beneficiaries and depositors:Direct payments
    
    $
    12,922
    
    
    $
    11,585
    
    
    $
    6,937Reinsurance assumed
    
    
    809
    
    
    
    511
    
    
    
    235Reinsurance ceded
    
    
    (919
    )
    
    
    (408
    )
    
    
    (292
    )$
    12,812
    
    
    $
    11,688
    
    
    $
    6,880


Actuarial liabilities are shown net of ceded reinsurance of $2,528 in 2003
($1,805 in 2002).



|H) |  | ROLE OF THE APPOINTED ACTUARY
|-- |  | -----------------------------

The Appointed Actuary is appointed by the Board and is responsible for
ensuring that the assumptions and methods used in the valuation of policy
liabilities are in accordance with accepted actuarial practice, applicable
legislation and associated regulations or directives.

The Appointed Actuary is required to provide an opinion regarding the
appropriateness of the policy liabilities at the balance sheet dates to
meet all obligations to policyholders of the Company. Examination of
supporting data for accuracy and completeness and analysis of Company
assets for their ability to support the amount of policy liabilities are
important elements of the work required to form this opinion.

The Appointed Actuary is required each year to analyze the financial
condition of the Company and prepare a report for the Board. The 2003
analysis tested the capital adequacy of the Company until December 31,
2007 under various adverse economic and business conditions. The
Appointed Actuary reviews the calculation of the Companys Canadian
Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio, which
is calculated on its worldwide insurance operations. The MCCSR ratio at
December 31, 2003 was well in excess of the minimum requirement. In
addition, foreign operations and foreign subsidiaries of the Company must
comply with local capital requirements in each of the jurisdictions in
which they operate. Furthermore, the Company is required to appropriate
retained earnings of $2,406 ($2,246 in 2002). All of these regulatory
requirements constrain the Companys ability to distribute its retained
earnings.



|12. |  | Other Liabilities
|--- |  | -----------------

Other liabilities consist of the following:

2003
    
    2002*Accounts payable
    
    $
    3,368
    
    
    $
    3,248Bond repurchase agreements
    
    
    1,458
    
    
    
    1,570Accrued expenses and taxes
    
    
    1,425
    
    
    
    1,041Borrowed funds (Note 13)
    
    
    123
    
    
    
    306Future income taxes (Note 20)
    
    
    515
    
    
    
    346Provisions for future policyholder costs
    
    
    173
    
    
    
    227Other
    
    
    733
    
    
    
    897Total other liabilities
    
    $
    7,795
    
    
    $
    7,635




---

|* |  | As restated (Note 3).
|- |  | ---------------------

The Company enters into bond repurchase agreements for operational funding
and liquidity purposes. Bond repurchase agreements have maturities
ranging from 2 to 135 days, averaging 35 days, and bearing interest rates
averaging 2.67% as at December 31, 2003 (2.82% in 2002). As at December
31, 2003, the Company had assets with a total market value of $1,457
($1,566 in 2002) pledged as collateral for the bond repurchase agreements.

28
www.sunlife.com Annual Report 2003



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##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|13. |  | Borrowed Funds
|--- |  | --------------

The following obligations are included in borrowed funds:

Currency of Borrowing
    
    Maturity
    
    2003
    
    2002Bank credit facilities(1)
    
    U.S. dollars
    
    
    2005
    
    
    $
    39
    
    
    $
    237Encumbrances on real estate
    
    Canadian dollars
    
    
    2004-2012
    
    
    
    34
    
    
    
    28U.S. dollars
    
    
    2004-2014
    
    
    
    50
    
    
    
    41Total borrowed funds
    
    
    
    
    
    
    
    
    
    $
    123
    
    
    $
    306




---

|(1) |  | At a floating rate, linked to London InterBank Offered Rate.
|--- |  | ------------------------------------------------------------

At December 31, 2003, aggregate maturities of encumbrances on real estate
are as follows:

Year
    
    Amount2004
    
    $
    132005
    
    
    32006
    
    
    62007
    
    
    152008
    
    
    17Thereafter
    
    
    30Total
    
    $
    84


At December 31, 2003, bank credit facilities are $39 ($237 in 2002) and
the weighted average interest rates related to those borrowings is 1.47%
(2.05% in 2002). The U.S. dollar bank credit facility is secured by the
future distribution fee stream of the mutual funds under the management of
MFS.

At December 31, 2003, the Company had $323 in a line of credit from a
financial institution of which $284 was unused. This line of credit has a
term of two years.

Interest expense for the borrowed funds was $15, $26 and $30 for 2003,
2002 and 2001 respectively.



|14. |  | Subordinated Debt
|--- |  | -----------------

The following obligations are included in subordinated debt:

InterestCurrency
    
    Rate
    
    Maturity
    
    2003
    
    2002Subordinated debentures(1)
    
    Canadian dollars
    
    
    5.80
    %
    
    
    2013
    
    
    $
    253
    
    
    $
    253Subordinated debentures(2)
    
    Canadian dollars
    
    
    6.65
    %
    
    
    2015
    
    
    
    300
    
    
    
    300Subordinated debentures(3)
    
    Canadian dollars
    
    
    6.15
    %
    
    
    2022
    
    
    
    799
    
    
    
    799Subordinated debentures(4)
    
    Canadian dollars
    
    
    6.30
    %
    
    
    2028
    
    
    
    150
    
    
    
    150Subordinated notes
    
    U.S. dollars
    
    
    6.63
    %
    
    
    2007
    
    
    
    35
    
    
    
    236Subordinated notes
    
    U.S. dollars
    
    
    7.25
    %
    
    
    2015
    
    
    
    193
    
    
    
    236Cumulative capital securities(5)
    
    U.S. dollars
    
    
    8.53
    %
    
    
    
    
    
    
    774
    
    
    
    948Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,504
    
    
    $
    2,922Fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    2,771
    
    
    $
    3,119




---

|(1) |  | After May 15, 2008, interest is payable at 1% over the 90-day Bankers
Acceptance Rate. Redeemable in whole or in part at any time.                                                                                                                                                                                                                                                                                                                                                                                                                               
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | After October 12, 2010, interest is payable at 1% over the
90-day Bankers Acceptance Rate. Redeemable in whole or in part at
any time prior to October 12, 2010. On or after October 12, 2010,
redeemable in whole on interest payment date.                                                                                                                                                                                                                                                                                                                     
|(3) |  | Issued June 25, 2002. After June 30 2012, interest is payable
at 1.54% over the 90-day Bankers Acceptance Rate. Redeemable in
whole or in part at any time.                                                                                                                                                                                                                                                                                                                                                                                                      
|(4) |  | Redeemable in whole or in part at any time.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|(5) |  | On May 6, 1997, Sun Life of Canada (U.S.) Capital Trust I, a
Delaware statutory business trust of the Company, issued U.S.$600 of
8.53% cumulative capital securities (Securities). These Securities
have no scheduled maturity date. Distributions are payable
semi-annually in arrears and are indirectly guaranteed by Sun Life
Assurance Company of Canada on a subordinated basis. As at December
31, 2003, the Securities have been reclassified from cumulative
capital securities of a subsidiary to subordinated debt on the
consolidated balance sheets.

Fair value is based on market prices for the same or similar instruments
as appropriate. Interest expense on subordinated debt was $194, $166 and
$138 for 2003, 2002 and 2001, respectively.

On September 16, 2003, the Companys wholly-owned subsidiary, Sun Canada
Financial Co. notified the holders of its 6.63% U.S. dollar subordinated
notes of its offer to redeem the notes prior to the maturity date of
December 15, 2007. When the offer expired on September 23, 2003, $165
(81.6% of the originally issued notes) had been redeemed. Redemption
premiums of $24 ($14 net of taxes) were recorded in net investment income
in 2003.

On January 28, 2002, the Company redeemed $300 principal amount of
debentures prior to the maturity date. Redemption premiums of $30, net of
taxes of $7, were recorded in 2001.

All of the subordinated debt and cumulative capital securities qualify as
capital for Canadian regulatory purposes.

29
Sun Life Financial Inc.



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##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|15. |  | Non-controlling Interests in Subsidiaries
|--- |  | -----------------------------------------

Non-controlling interests in the consolidated balance sheets consist of the following:

2003
    
    2002SLEECS issued by the Trust
    
    $
    1,150
    
    
    $
    1,150Preferred shares of Sun Life Assurance Company of Canada(1)
    
    
    155
    
    
    
    158Non-controlling interests in MFS and McLean Budden Limited
    
    
    31
    
    
    
    48Total non-controlling interests in subsidiaries
    
    $
    1,336
    
    
    $
    1,356




---

|(1) |  | These preferred shares were issued by Clarica before amalgamating with
Sun Life Assurance.
|--- |  | ------------------------------------------------------------------------------------------

Non-controlling interests in net income of subsidiaries include the
preferred shares dividend payments of $7 ($5 in 2002 and nil in 2001),
non-controlling interests in the Trust of $51 ($45 in 2002 and $7 in 2001)
and non-controlling interests in MFS and McLean Budden Limited of $7 ($33
in 2002 and $61 in 2001).

On June 25, 2002, the Trust, a controlled trust of Sun Life Assurance
Company of Canada, issued $200 of non-voting Sun Life ExchangEable Capital
Securities  Series B (SLEECS Series B). Holders of the SLEECS Series B
are entitled to receive a semi-annual non-cumulative fixed cash
distribution of $35.465 per SLEECS Series B, representing an annual yield
of 7.093% of the one thousand dollar initial issue price, payable out of
the Trusts net distributable funds. The SLEECS Series B are subject to
terms that are similar to those of the prior Sun Life ExchangEable Capital
Securities Series A (SLEECS Series A) offering as described below. The
proceeds of this offering were used for general corporate purposes,
including investments in subsidiaries.

On October 19, 2001, the Trust issued $950 of non-voting SLEECS Series A.
Holders of the SLEECS Series A are entitled to receive a semi-annual
non-cumulative fixed cash distribution of $34.325 per SLEECS Series A,
representing an annual yield of 6.865% of the one thousand dollars initial
issue price, payable out of the Trusts net distributable funds. If Sun
Life Assurance Company of Canada has not declared dividends on its Class B
Non-cumulative Preferred Shares Series A or on any of its preferred shares
listed on a stock exchange, cash distributions will not be made on the
SLEECS Series A. Subject to regulatory approval, the Trust may redeem the
SLEECS Series A at any time after the fifth anniversary of the date of
issuance and, in certain limited circumstances, may also redeem the SLEECS
Series A during the first five years. The holders of the SLEECS Series A
have the right at any time to surrender each one thousand dollars face
amount of SLEECS Series A and to receive from the Trust in exchange 40
Class A Non-cumulative Preferred Shares Series Z of Sun Life Assurance
Company of Canada, subject to compliance with the Declaration of Trust.
Proceeds of issuing the SLEECS Series A were used to finance in part the
acquisition of Keyport and IFMG. Both SLEECS Series A and SLEECS Series B
qualify as capital for Canadian regulatory purposes.

Pursuant to the Share Exchange Agreement, Sun Life Financial Inc. and Sun
Life Assurance Company of Canada agreed that if the Trust fails to pay on
any regular distribution date the required cash distributions on the
SLEECS in full, Sun Life Assurance Company of Canada will not pay
dividends on its public preferred shares.



|16. |  | Share Capital and Normal Course Issuer Bid
|--- |  | ------------------------------------------

The authorized share capital of Sun Life Financial Inc. consists of the
following:



| |  | An unlimited number of common shares without nominal or par
value. Each common share is entitled to one vote at meetings of the
shareholders of Sun Life Financial Inc. There are no pre-emptive,
redemption, purchase or conversion rights attached to the common
shares.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | An unlimited number of Class A and Class B non-voting preferred
shares, issuable in series. The Board is authorized to fix before
issuing the shares, the number, the consideration per share, the
designation of and the rights and restrictions of the Class A and
Class B shares of each series, subject to the special rights and
restrictions attached to all the Class A and Class B shares.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The changes and the number of shares issued and outstanding are as
follows:

2003
    
    2002
    
    2001Number
    
    
    
    
    
    Number
    
    
    
    
    
    Numberof shares
    
    Amount
    
    of shares
    
    Amount
    
    of shares
    
    AmountCommon shares (in millions of shares)Balance, January 1
    
    
    618
    
    
    $
    7,420
    
    
    
    432
    
    
    $
    1,100
    
    
    
    422
    
    
    $
    795Common shares issued, net of issuance costs and fair
value of stock options granted as consideration for
business acquisition (Note 3)
    
    
    2
    
    
    
    63
    
    
    
    185
    
    
    
    6,281
    
    
    
    
    
    
    
    Shares issued for cash
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11
    
    
    
    330Stock options exercised (Note 18)
    
    
    1
    
    
    
    28
    
    
    
    1
    
    
    
    39
    
    
    
    
    
    
    
    Commissions and offering costs, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23
    )Common shares purchased for cancellation
    
    
    (18
    )
    
    
    (222
    )
    
    
    
    
    
    
    
    
    
    
    (1
    )
    
    
    (2
    )Common shares cancelled for lost policyholders
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Balance, December 31
    
    
    600
    
    
    $
    7,289
    
    
    
    618
    
    
    $
    7,420
    
    
    
    432
    
    
    $
    1,100


30
www.sunlife.com Annual Report 2003



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##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|16. |  | Share Capital and Normal Course Issuer Bid (Contd)
|--- |  | ---------------------------------------------------

On February 12, 2003, the Company announced that the Board of Directors
had authorized the purchase of up to 31 million common shares,
representing approximately 5% of the common shares issued and outstanding
at that time. The purchases are made under a normal course issuer bid in
accordance with the rules of The Toronto Stock Exchange (Exchange). The
normal course issuer bid covers the period from February 14, 2003 to
January 5, 2004, unless the maximum number of common shares is purchased
before January 5, 2004. Transactions are executed on the Exchange at the
prevailing market price in amounts and times determined by the Company.
The Company will make no purchases of common shares other than open-market
purchases. The shares purchased as part of the normal course issuer bid
are cancelled following purchases. As at December 31, 2003, the Company
had purchased approximately 18 million of its common shares at an average
price of $28.88 per share for a total amount of $527. Of this amount,
purchases of approximately $6 were not cancelled until January, 2004. An
additional $5 were subscribed for but not settled at December 31, 2003.

On January 8, 2004, the Company announced that the Board of Directors had
authorized the purchase of up to 30 million common shares, representing
approximately 5% of the common shares issued and outstanding at that time.
The purchases will be made under a renewed normal course issuer bid
pursuant to the rules of the Toronto Stock Exchange.

In accordance with the provisions of the Demutualization Plan of Sun Life
Assurance Company of Canada and the share capital by-law of Sun Life
Financial Inc., unclaimed demutualization benefits issued to eligible
policyholders whose addresses were not known to the Company (lost
policyholders) were cancelled on February 22, 2003. The unclaimed
demutualization benefits that were cancelled on February 22, 2003 include
approximately three million common shares of Sun Life Financial Inc. with
a nominal share capital, accumulated dividends of approximately $3 and
demutualization benefits payable in cash of approximately $10. Under the
Demutualization Plan, lost policyholders may claim their cancelled
demutualization benefits (including all unpaid dividends on shares) at any
time without interest.

On October 4, 2001, Sun Life Financial Inc. issued 11 million common
shares at $30.00 per share for $330. Underwriting commissions and
offering costs of issuing the common shares amounted to $23 and were
deducted from the share capital of Sun Life Financial Inc. Proceeds of
issuing the common shares were used to finance in part the acquisition of
Keyport and IFMG.

Commencing in May 2001, pursuant to a one-year normal course issuer bid,
the Company purchased and cancelled approximately one million of its
common shares at an average price of $32.00 per share for a total amount
of $35.



|17. |  | Earnings Per Share
|--- |  | ------------------

2003
    
    2002
    
    2001BASIC EARNINGS PER SHAREShareholders net income from continuing operations
    
    $
    1,309
    
    
    $
    1,034
    
    
    $
    882Income (loss) from discontinued operations, net of income taxes
    
    
    
    
    
    
    (36
    )
    
    
    Shareholders net income
    
    $
    1,309
    
    
    $
    998
    
    
    $
    882Shareholders net income excluding goodwill amortization
    
    $
    1,309
    
    
    $
    998
    
    
    $
    901
    (2)Weighted average number of shares outstanding (in millions)
    
    
    608
    
    
    
    543
    
    
    
    424Basic earnings per share from continuing operations
    
    $
    2.15
    
    
    $
    1.91
    
    
    $
    2.08Basic earnings (loss) per share from discontinued operations
    
    
    
    
    
    
    (0.07
    )
    
    
    Basic earnings per share
    
    $
    2.15
    
    
    $
    1.84
    
    
    $
    2.08Basic earnings per share excluding goodwill amortization
    
    $
    2.15
    
    
    $
    1.84
    
    
    $
    2.13DILUTED EARNINGS PER SHAREShareholders net income from continuing operations
    
    $
    1,309
    
    
    $
    1,034
    
    
    $
    882Less:
Effect of stock options of subsidiaries(1)
    
    
    
    
    
    
    3
    
    
    
    5Shareholders net income from continuing operations on a diluted basis
    
    $
    1,309
    
    
    $
    1,031
    
    
    $
    877Income (loss) from discontinued operations, net of income taxes
    
    
    
    
    
    
    (36
    )
    
    
    Shareholders net income on a diluted basis
    
    $
    1,309
    
    
    $
    995
    
    
    $
    877Shareholders net income excluding goodwill amortization on a diluted basis
    
    $
    1,309
    
    
    $
    995
    
    
    $
    896
    (2)Weighted average number of shares outstanding on a diluted
basis (in millions)(1),(4)
    
    
    608
    (3)
    
    
    543
    (3)
    
    
    424Diluted earnings per share from continuing operations
    
    $
    2.15
    
    
    $
    1.90
    
    
    $
    2.07Diluted earnings (loss) per share from discontinued operations
    
    
    
    
    
    
    (0.07
    )
    
    
    Diluted earnings per share
    
    $
    2.15
    
    
    $
    1.83
    
    
    $
    2.07Diluted earnings per share excluding goodwill amortization
    
    $
    2.15
    
    
    $
    1.83
    
    
    $
    2.11




---

|(1) |  | The effect of stock options is calculated based on the treasury
stock method requirements which assume that unrecognized compensation
as well as any proceeds from the exercise of the options would be
used to purchase common shares at the average market prices during
the period.                                                                  
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Goodwill amortization of $19 for the year ended December 31,
2001 was added back to shareholders net income for the calculation
of basic and diluted earnings per share excluding goodwill
amortization.                                                                                                                                               
|(3) |  | Clarica stock options have been included in the calculations of
the diluted earnings per share for the years ended December 31, 2003
and 2002, as they are exercisable to acquire common shares of Sun
Life Financial Inc.                                                                                                                              
|(4) |  | Options to purchase approximately 4 million shares of Sun Life
Financial Inc. at the average exercise price of $33.22 per share were
outstanding as at December 31, 2003. However, they were not included
in the diluted earnings per share calculations, because their
exercise prices were greater than the average market price of the
common shares.

31
Sun Life Financial Inc.



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|18. |  | Stock-based Compensation
|--- |  | ------------------------

STOCK OPTION PLANS

Sun Life Financial Inc. granted stock options to certain employees and
directors under the Executive Stock Option Plan and the Director Stock
Option Plan and to all eligible employees under the Special 2001 Stock
Option Award Plan. These options may be exercised at the closing price of
the common shares on the Exchange on the trading day preceding the grant
date. The options granted under the stock option plans will vest at
various times: over a five-year period under the Executive Stock Option
Plan, two years after the grant date under the Special 2001 Stock Option
Award Plan and over a two-year period or immediately upon death or
attainment of the mandatory age for retirement under the Director Stock
Option Plan. All options have a maximum exercise period of 10 years. The
maximum number of common shares that may be issued under the Executive
Stock Option Plan, the Special 2001 Stock Option Award Plan and the
Director Stock Option Plan are 29,525,000 shares, 1,150,000 shares and
150,000 shares, respectively. Effective April 2, 2003, further grants
under the Sun Life Financial Inc. Director Stock Option Plan were
discontinued.

As described in Note 3, all of the Clarica stock options vested
immediately prior to the closing date of the acquisition and each
unexercised Clarica stock option outstanding on May 29, 2002 became
exercisable to acquire common shares of Sun Life Financial Inc. These
Clarica stock options are included with those of Sun Life Financial Inc.
in the following tables.

The activities in the stock option plans for the years ended December 31
are as follows:

2003
    
    2002
    
    2001Number of
    
    Weighted
    
    Number of
    
    Weighted
    
    Number of
    
    Weightedstock options
    
    average
    
    stock options
    
    average
    
    stock options
    
    average(thousands)
    
    exercise price
    
    (thousands)
    
    exercise price
    
    (thousands)
    
    exercise priceBalance, January 1
    
    
    12,421
    
    
    $
    29.84
    
    
    
    5,545
    
    
    $
    29.87
    
    
    
    
    
    
    $
    Granted
    
    
    4,778
    
    
    
    27.70
    
    
    
    4,467
    
    
    
    33.16
    
    
    
    5,711
    
    
    
    29.86Granted as consideration
for business acquisition (Note 3)
    
    
    
    
    
    
    
    
    
    
    4,503
    
    
    
    24.78
    
    
    
    
    
    
    
    Exercised
    
    
    863
    
    
    
    23.88
    
    
    
    1,196
    
    
    
    22.58
    
    
    
    
    
    
    
    Forfeited
    
    
    1,097
    
    
    
    31.07
    
    
    
    898
    
    
    
    30.82
    
    
    
    166
    
    
    
    29.60Balance, December 31
    
    
    15,239
    
    
    $
    29.41
    
    
    
    12,421
    
    
    $
    29.84
    
    
    
    5,545
    
    
    $
    29.87Exercisable, December 31
    
    
    5,291
    
    
    $
    28.69
    
    
    
    4,065
    
    
    $
    26.37
    
    
    
    2
    
    
    $
    31.00


The stock options outstanding and exercisable as at December 31, 2003, by exercise price, are as follows:

Options Outstanding
    
    Options ExercisableNumber of
    
    Weighted average
    
    Weighted
    
    Number of
    
    Weightedstock options
    
    remaining contractual
    
    average
    
    stock options
    
    averageRange of exercise prices
    
    (thousands)
    
    life (years)
    
    exercise price
    
    (thousands)
    
    exercise price$19.05 to $25.28
    
    
    1,224
    
    
    
    6.8
    
    
    $
    21.93
    
    
    
    1,224
    
    
    $
    21.93$26.87 to $30.91
    
    
    8,872
    
    
    
    8.2
    
    
    
    28.47
    
    
    
    1,976
    
    
    
    29.15$31.00 to $33.53
    
    
    5,062
    
    
    
    8.1
    
    
    
    32.75
    
    
    
    2,051
    
    
    
    32.15$36.50 to $38.50
    
    
    81
    
    
    
    7.9
    
    
    
    36.69
    
    
    
    40
    
    
    
    36.7015,239
    
    
    
    8.1
    
    
    $
    29.41
    
    
    
    5,291
    
    
    $
    28.69


The weighted average fair values of the stock options, calculated using
the Black-Scholes option-pricing model, granted during the year ended
December 31, 2003 was $7.61 ($10.62 and $9.66 for 2002 and 2001,
respectively). The assumptions for Black-Scholes option pricing model to
determine the fair value as at December 31 are as follows:

Weighted-average assumptions
    
    2003
    
    2002
    
    2001Risk-free interest rate
    
    
    5.0
    %
    
    
    5.4
    %
    
    4.2% to 5.4%Expected volatility
    
    
    25.0
    %
    
    
    25.0
    %
    
    
    26.0
    %Dividend yield
    
    
    2.5
    %
    
    
    1.7
    %
    
    
    1.5
    %Expected life of the option (in years)
    
    
    7
    
    
    
    7
    
    
    
    7


For the options issued prior to January 1, 2001, no compensation expense
was recognized as the options exercise price was not less than the market
price of the underlying stock on the day of grant. When the options are
exercised, the proceeds received are credited to common shares.

EMPLOYEE SHARE OWNERSHIP PLAN

The Company matches employees contributions to the Sun Life Financial
Employee Stock Plan (Plan) for eligible employees in Canada who may
contribute from 1% to 20% of their base earnings to the Plan. The Company
matches 50% of the lower of the employee contributions and 5% of the
employees base earnings to an annual maximum of one thousand five hundred
dollars. The Companys contributions vest immediately and are expensed.

32
www.sunlife.com Annual Report 2003



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##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|18. |  | Stock-based Compensation (Contd)
|--- |  | ---------------------------------

OTHER STOCK-BASED COMPENSATION PLANS

All other stock-based compensation plans use notional units that are
valued based on Sun Life Financial Inc.s common share price on the
Toronto Stock Exchange. Any fluctuation in the Sun Life Financial Inc.s
common share price changes the value of the units, which affects the
Companys stock-based compensation expense. Upon exercise of these units,
payments are made to the employees with a corresponding reduction in the
accrued liability. In 2003, an aggregate expense of $9 ($2 and $1 for 2002
and 2001, respectively), was recognized in operating expenses in the
consolidated statements of operations for changes in the amount of the
Companys liability for these units. Details of these plans are as
follows:

Senior Executives Deferred Share Unit (DSU) Plan:Under the DSU plan,
designated executives may elect to receive all or a portion of their
annual incentive award (which is expensed for the year awarded in
operating expenses in the consolidated statements of operations) in the
form of DSUs. Each DSU is equivalent to one common share and earns
dividend equivalents in the form of additional DSUs at the same rate as
the dividends on common shares. The designated executives must elect to
participate in the plan prior to the beginning of the plan year and this
election is irrevocable. Awards generally vest immediately, however,
participants are not permitted to redeem the DSUs until termination, death
or retirement. The value at the time of redemption will be based on the
fair market value of the common shares immediately before their
conversion. As at December 31, 2003, there were 582,031 units outstanding
(344,989 and 194,746 for 2002 and 2001, respectively).

Restricted Share Unit (RSU) Plan:Under the RSU plan, participants are
granted units that are equivalent to one common share and have a fair
market value of a common share on the date of grant. Plan participants
must hold RSUs for 36 months from the date of grant. RSUs earn dividend
equivalents in the form of additional RSUs at the same rate as the
dividends on common shares. The redemption value is the fair market value
of an equal number of common shares. As at December 31, 2003, there were
663,753 RSUs awarded and outstanding (176,379 and nil for 2002 and 2001,
respectively).

Performance Share Unit (PSU) Plan:Under the PSU plan, participants are
granted units that are the equivalent to one common share and have a fair
market value of a common share on the date of grant. Plan participants
must hold PSUs for 36 months from the date of grant. PSUs earn dividend
equivalents in the form of additional PSUs at the same rate as the
dividends on common shares. No PSUs will vest or become payable unless
the Company meets its threshold targets with respect to specified
performance targets. The plan provides for an enhanced payout if the
Company achieves superior levels of performance to motivate participants
to achieve a higher return for shareholders.

Payments to participants are based on the number of PSUs earned multiplied
by the market value of the common shares at the end of the three-year
performance period. As at December 31, 2003 no PSUs were awarded and
outstanding.



|19. |  | Operating Expenses
|--- |  | ------------------

Operating expenses consist of the following:

2003
    
    2002
    
    2001Compensation costs
    
    $
    1,510
    
    
    $
    1,684
    
    
    $
    1,528Premises and equipment costs
    
    
    287
    
    
    
    299
    
    
    
    264Restructuring and other related charges (Note 4)
    
    
    128
    
    
    
    158
    
    
    
    Capital asset depreciation and amortization (Note 10)
    
    
    67
    
    
    
    76
    
    
    
    66Goodwill amortization (Note 10)
    
    
    
    
    
    
    
    
    
    
    10Other(1)
    
    
    1,096
    
    
    
    605
    
    
    
    628Impact of discontinued operations
    
    
    
    
    
    
    (43
    )
    
    
    Total operating expenses
    
    $
    3,088
    
    
    $
    2,779
    
    
    $
    2,496




---

|(1) |  | Other for 2003 includes a $338
pre-tax provision for MFS regulatory issues and other actions.
|--- |  | ---------------------------------------------------------------------------------------------

33
Sun Life Financial Inc.



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|20. |  | Income Taxes
|--- |  | ------------

In the consolidated statements of operations, the income tax expense for
the Companys worldwide operations has the following components:

2003
    
    2002
    
    2001CONTINUING OPERATIONSCanadian income tax expense (benefit):Current
    
    $
    61
    
    
    $
    116
    
    
    $
    23Future
    
    
    222
    
    
    
    (72
    )
    
    
    113Total
    
    
    283
    
    
    
    44
    
    
    
    136Foreign income tax expense (benefit):Current
    
    
    235
    
    
    
    69
    
    
    
    236Future
    
    
    (131
    )
    
    
    (15
    )
    
    
    (66
    )Total
    
    
    104
    
    
    
    54
    
    
    
    170Income tax expense related to continuing operations
    
    
    387
    
    
    
    98
    
    
    
    306DISCONTINUED OPERATIONSForeign income tax expense (benefit):Current
    
    
    
    
    
    
    (1
    )
    
    
    Future
    
    
    
    
    
    
    11
    
    
    
    Total
    
    
    
    
    
    
    10
    
    
    
    Income tax expense related to discontinued operations
    
    
    
    
    
    
    10
    
    
    
    Total income taxes
    
    $
    387
    
    
    $
    108
    
    
    $
    306


The after tax undistributed earnings of most non-Canadian subsidiaries
would be taxed only upon their repatriation to Canada. The Company
recognizes a future tax liability, if any, on these undistributed earnings
to the extent that management expects they will be repatriated in the
foreseeable future. As repatriation of such earnings is not currently
planned, the Company has not recognized the future tax liability. If the
undistributed earnings of all non-Canadian subsidiaries were repatriated,
additional taxes that would be payable are estimated to be $67 as at
December 31, 2003 ($56 and $33 in 2002 and 2001, respectively).

The Companys effective worldwide income tax rate differs from the
combined Canadian federal and provincial statutory income tax rate, as
follows:

2003
    
    2002
    
    2001%
    
    
    
    
    
    %
    
    
    
    
    
    %Net income from continuing operations
    
    $
    1,308
    
    
    
    
    
    
    $
    1,033
    
    
    
    
    
    
    $
    881Add: Income taxes
    
    
    387
    
    
    
    
    
    
    
    98
    
    
    
    
    
    
    
    306Non-controlling interests in net income of subsidiaries
    
    
    65
    
    
    
    
    
    
    
    83
    
    
    
    
    
    
    
    68Net income from continuing operations before income taxes
and non-controlling interests in net income of subsidiaries
    
    $
    1,760
    
    
    
    
    
    
    $
    1,214
    
    
    
    
    
    
    $
    1,255Taxes at the combined Canadian federal and
provincial statutory income tax rate
    
    $
    607
    
    
    
    34.5
    
    
    $
    456
    
    
    
    37.6
    
    
    $
    520
    
    
    
    41.4Increase (decrease) in rate resulting from:Higher (lower) effective rates on income
subject to taxation in foreign jurisdictions
    
    
    (134
    )
    
    
    (7.6
    )
    
    
    (183
    )
    
    
    (15.1
    )
    
    
    (193
    )
    
    
    (15.4
    )Tax (benefit) cost of unrecognized losses
    
    
    (37
    )
    
    
    (2.1
    )
    
    
    (103
    )
    
    
    (8.5
    )
    
    
    (23
    )
    
    
    (1.8
    )Tax exempt investment income
    
    
    (91
    )
    
    
    (5.1
    )
    
    
    (107
    )
    
    
    (8.8
    )
    
    
    (39
    )
    
    
    (3.1
    )Capital taxes
    
    
    11
    
    
    
    0.6
    
    
    
    8
    
    
    
    0.7
    
    
    
    6
    
    
    
    0.5Changes to statutory income tax rates
    
    
    29
    
    
    
    1.6
    
    
    
    (2
    )
    
    
    (0.2
    )
    
    
    6
    
    
    
    0.5Other
    
    
    2
    
    
    
    0.1
    
    
    
    29
    
    
    
    2.4
    
    
    
    29
    
    
    
    2.3Companys effective worldwide income taxes
    
    $
    387
    
    
    
    22.0
    
    
    $
    98
    
    
    
    8.1
    
    
    $
    306
    
    
    
    24.4


34
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##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|20. |  | Income Taxes (Contd)
|--- |  | ---------------------

The Company has accumulated tax losses, primarily in the United Kingdom,
totaling $2,530 ($3,282 in 2002). The benefit of these tax losses has
been recognized to the extent that they are more likely than not to be
realized in the amount of $320 ($581 in 2002, as restated) in future
income taxes. The Company will realize this benefit in future years
through a reduction in current income taxes as and when the losses are
utilized. These tax losses are subject to examination by various tax
authorities and could be reduced as a result of the adjustments to tax
returns. Furthermore, legislative, business or other changes may limit
the Companys ability to utilize these losses.

The following is future tax assets and liabilities in the consolidated
balance sheets by source of temporary differences:

2003
    
    2002Assets
    
    Liabilities
    
    Assets
    
    Liabilities*Investments
    
    $
    182
    
    
    $
    613
    
    
    $
    229
    
    
    $
    629Actuarial liabilities
    
    
    54
    
    
    
    (78
    )
    
    
    (68
    )
    
    
    (196
    )Deferred acquisition costs
    
    
    324
    
    
    
    (9
    )
    
    
    300
    
    
    
    24Losses available for carry forward
    
    
    506
    
    
    
    (117
    )
    
    
    702
    
    
    
    (165
    )Other
    
    
    214
    
    
    
    106
    
    
    
    153
    
    
    
    541,280
    
    
    
    515
    
    
    
    1,316
    
    
    
    346Valuation allowance
    
    
    (303
    )
    
    
    
    
    
    
    (284
    )
    
    
    Total
    
    $
    977
    
    
    $
    515
    
    
    $
    1,032
    
    
    $
    346




---

|* |  | As restated (Note 3).
|- |  | ---------------------

Future income taxes are the result of temporary differences between the
carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The sources of
these temporary differences and the recognized tax effects for continuing
operations in the consolidated statements of operations are as follows:

2003
    
    2002
    
    2001Investments
    
    $
    (65
    )
    
    $
    (128
    )
    
    $
    273Actuarial liabilities
    
    
    113
    
    
    
    454
    
    
    
    (188
    )Deferred acquisition costs
    
    
    (144
    )
    
    
    (128
    )
    
    
    (166
    )Losses (incurred) utilized
    
    
    148
    
    
    
    (268
    )
    
    
    158Other
    
    
    39
    
    
    
    (17
    )
    
    
    (30
    )Future income tax expense (benefit) related to continuing operations
    
    $
    91
    
    
    $
    (87
    )
    
    $
    47




|21. |  | Commitments, Guarantees and Contingencies
|--- |  | -----------------------------------------

LEASE COMMITMENTS

The Company leases offices and certain equipment. These are operating
leases with rents charged to operations in the year to which they relate.
Total future rental payments for the remainder of these leases are as
follows:

2004
    
    2005
    
    2006
    
    2007
    
    2008
    
    thereafterFuture rental payments
    
    $
    120
    
    
    $
    107
    
    
    $
    93
    
    
    $
    80
    
    
    $
    46
    
    
    $
    164


CONTRACTUAL COMMITMENTS

In the normal course of business, various contractual commitments are
outstanding which are not reflected in the consolidated financial
statements. At December 31, 2003, there were outstanding contractual
commitments as follows:

Expires in
    
    Expires in
    
    Expires in30 days
    
    31 to 366 days
    
    2005 or later
    
    TotalContractual commitments
    
    $
    151
    
    
    $
    1,006
    
    
    $
    543
    
    
    $
    1,700


The majority of these commitments are to extend credit under commercial
and residential mortgage loans and private placements.

LETTERS OF CREDIT

The Company issues commercial letters of credit in the normal course of
business. At December 31, 2003, letters of credit in the amount of $514
have been issued.

REINSURANCE MATTERS

Certain of the arrangements in the Companys run-off reinsurance
operations are subject to litigation or arbitration. In particular, the
Company has been engaged in arbitration proceedings in the United States
and England with certain of the companies that have contracts to provide
reinsurance to the Company. Those companies are disputing their
obligation to provide retrocession cover to the Company under their
respective contracts of reinsurance. In late 2003, the Company initiated
arbitration proceedings against two such companies including its largest
retrocessionaire. The Unicover dispute that was discussed in Note 26 of
the 2002 annual report has been largely resolved, other than in respect of
recovery from some of the Companys retrocessionaires who are disputing
coverage.

The liabilities of the Company under these arrangements are subject to
measurement uncertainty, but they are not expected to have a material
adverse effect on the consolidated financial position of the Company.

35
Sun Life Financial Inc.



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|21. |  | Commitments, Guarantees and Contingencies (Contd)
|--- |  | --------------------------------------------------

INDEMNITIES

In the normal course of its business, the Company has entered into
agreements that include indemnities in favour of third parties, such as
purchase and sale agreements, confidentiality agreements, engagement
letters with advisors and consultants, outsourcing agreements, leasing
contracts, trademark licensing agreements, underwriting and agency
agreements, information technology agreements, distribution agreements and
service agreements. These indemnification agreements may require the
Company to compensate the counterparties for losses incurred by the
counterparties as a result of breaches in representation and regulations
(including tax matters) or as a result of litigation claims or statutory
sanctions that may be suffered by the counterparty as a consequence of the
transaction. The Company has also agreed to indemnify its directors and
certain of its officers and employees in accordance with the Companys
by-laws. The indemnification provisions in these agreements may require
the Company to compensate the counterparties to the agreements for
damages, losses and costs they incur in connection with the agreements.
These indemnification provisions will vary based upon the nature and terms
of the agreements. In many cases, these indemnification provisions do not
contain limits on the Companys liability and the occurrence of contingent
events that will trigger payment under these indemnities is difficult to
predict. As a result, the Company cannot estimate its maximum potential
liability under these indemnities. The Company believes that the
likelihood of conditions arising that would trigger these indemnities is
remote and, historically, the Company has not made any significant payment
under such indemnification provisions.

In certain cases, the Company has recourse against third parties with
respect to the aforesaid indemnities and the Company also maintains
insurance policies that may provide coverage against certain of these
claims.

LEGAL
AND REGULATORY PROCEEDINGS

On February 5, 2004, MFS reached settlements with U.S. federal and state
regulators related to administrative proceedings against MFS alleging
false and misleading information in certain MFS fund prospectuses
regarding market timing and related issues. Under the terms of the
settlements, MFS neither admitted nor denied wrongdoing. As part of the
settlement with the United States Securities and Exchange Commission
(SEC), MFS
agreed to pay US$225 to compensate certain fund shareholders, of
which US$50 is a penalty and agreed with the New Hampshire Bureau of
Securities Regulation to pay an administrative fine in the amount of
US$1. The Company recorded a $211 after-tax
charge to income in the fourth quarter of 2003 in connection with the
matters discussed above. MFS further agreed with the Attorney
General of the State of New York to reduce fees on the funds it advises by
approximately US$25 annually over the next five years.

The Company and MFS, along with certain MFS funds and trustees who serve
on the Board of Trustees of these MFS funds, have been named as defendants
in purported class action lawsuits filed in the United States since December 2003
seeking damages of unspecified amounts. The lawsuits were purportedly
filed on behalf of people who purchased, owned and/or redeemed shares of
MFS funds during specified periods. The suits allege that certain
defendants permitted market timing and late trading in the MFS funds which
allegedly caused financial injury to the funds shareholders. All of
these lawsuits seek an unspecified amount of damages. The defendants are
reviewing the allegations and will respond appropriately. Additional
lawsuits based upon similar allegations may be filed in the future.
Although it is expected that the payments required under the terms of the
settlement with the regulators will largely mitigate any damages payable
under the class action lawsuits initiated in respect of these matters, the
Company cannot predict the outcome of these actions with certainty and is
accordingly unable to determine the total potential impact that they may
have on the Companys results of operations, financial position and cash
flows.

In
November 2003, the SEC and Morgan Stanley DW, Inc. (Morgan
Stanley) settled an enforcement action against Morgan Stanley
relating to the undisclosed receipt of fees from certain mutual fund
companies in return for preferred marketing of their funds. MFS was
one of the 14 fund companies reported to be on Morgan Stanleys
preferred list. As a result, MFS has been under investigation by the
SEC relating to its directed brokerage and revenue-sharing
arrangements with various distributors of its products, including
Morgan Stanley. MFS is cooperating with the SECs investigation,
which is ongoing. In addition, certain of the Companys
subsidiaries have received requests for information from the SEC and
other regulators in connection with enquiries into directed brokerage
and revenue-sharing arrangements and are responding to these
requests. The outcome of these investigations is not yet determinable
and may result in sanctions, compensation payments or other financial
penalties.

Further details regarding MFS and related issues are provided in the
Business Development, Financial Overview and MFS Investment Management
sections of the 2003 Managements Discussion and Analysis.

PROVISIONS
IN THE UNITED KINGDOM

Sun
Life Financials United Kingdom operations continue to
be subject to regulatory overview in the United Kingdom, including reviews of past
business sold, and the Company has regularly engaged in discussions
with United Kingdom regulators with respect to these and other
matters.

Sun
Life Financials past business sold includes a variety of
endowment products in the United Kingdom. Endowment policies are
sometimes sold to provide customers with a method of repaying
mortgage debt at the end of a mortgage term. There can be no
assurance that United Kingdom regulators will not, in the future,
require providers of endowment products to bear some or all of the
additional costs required to ensure that such policies meet their
target mortgage debts.

At
December 31, 2003, the Company had provisions of $130 ($242 in
2002) for future compensation payments and related expenses relating
to all reviews of past business sold.



|22. |  | Pension Plans and Other Post-Retirement Benefits
|--- |  | ------------------------------------------------

The Company sponsors non-contributory defined benefit pension plans for
eligible employees, primarily in Canada, the United States, the United
Kingdom and the Philippines. The defined benefit pension plans offer
benefits based on length of service and final average earnings and certain
plans offer some indexation of benefits. The specific features of these
plans vary in accordance with the employee group and countries in which
employees are located. In addition, the Company maintains supplementary
non-contributory pension arrangements for eligible employees, primarily
for benefits which do not qualify for funding under the various registered
pension plans.

36
www.sunlife.com Annual Report 2003



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|22. |  | Pension Plans and Other Post-Retirement Benefits (Contd)
|--- |  | ---------------------------------------------------------

The Company has also established defined contribution pension plans for
eligible qualifying employees. Generally, the Company contributions are a
set percentage of employees annual income and matched against employee
contributions. The total contribution made by the Company to such plans
was $35 in 2003, $42 in 2002 and $38 in 2001.

In addition to the Companys pension plans, in some countries the Company
provides certain post-retirement medical, dental and life insurance
benefits to eligible qualifying employees, and to their dependents upon
meeting certain requirements. Eligible retirees may be required to pay a
portion of the premiums for these benefits and, in general, deductible
amounts and co-insurance percentages apply to benefit payments. A
significant portion of the Companys employees may become eligible for
these benefits upon retirement. These post-retirement benefits are not
pre-funded.

The following tables set forth the status of these plans.

Pension
    
    Post-Retirement2003
    
    2002
    
    2003
    
    2002Change in benefit obligation:Benefit obligation, January 1
    
    $
    1,981
    
    
    $
    1,436
    
    
    $
    269
    
    
    $
    186Change in January 1 balance due to:acquisitions and disposals
    
    
    (21
    )
    
    
    436
    
    
    
    (8
    )
    
    
    102change in measurement date(1)
    
    
    (3
    )
    
    
    
    
    
    
    
    
    
    
    Service cost
    
    
    52
    
    
    
    80
    
    
    
    8
    
    
    
    8Interest cost
    
    
    112
    
    
    
    106
    
    
    
    17
    
    
    
    15Actuarial losses (gains)
    
    
    150
    
    
    
    (63
    )
    
    
    26
    
    
    
    (21
    )Benefits paid
    
    
    (95
    )
    
    
    (81
    )
    
    
    (10
    )
    
    
    (8
    )Curtailments, settlements and plan amendments
    
    
    2
    
    
    
    10
    
    
    
    
    
    
    
    (12
    )Effect of changes in currency exchange rates
    
    
    (125
    )
    
    
    57
    
    
    
    (11
    )
    
    
    (1
    )Benefit obligation, December 31
    
    $
    2,053
    
    
    $
    1,981
    
    
    $
    291
    
    
    $
    269Change in plan assets:Fair value of plan assets, January 1
    
    $
    2,044
    
    
    $
    1,710
    
    
    $
    
    
    
    $
    Change in January 1 balance due to:acquisitions and disposals
    
    
    (20
    )
    
    
    446
    
    
    
    
    
    
    
    change in measurement date(1)
    
    
    (18
    )
    
    
    
    
    
    
    
    
    
    
    Net actual return on plan assets
    
    
    253
    
    
    
    (85
    )
    
    
    
    
    
    
    Employer contributions
    
    
    27
    
    
    
    11
    
    
    
    10
    
    
    
    8Benefits paid
    
    
    (95
    )
    
    
    (81
    )
    
    
    (10
    )
    
    
    (8
    )Effect of changes in currency exchange rates
    
    
    (114
    )
    
    
    43
    
    
    
    
    
    
    
    Fair value of plan assets, December 31
    
    $
    2,077
    
    
    $
    2,044
    
    
    $
    
    
    
    $
    Net funded status, December 31
    
    $
    24
    
    
    $
    63
    
    
    $
    (291
    )
    
    $
    (269
    )Unamortized net actuarial loss (gain)
    
    
    371
    
    
    
    357
    
    
    
    39
    
    
    
    20Unamortized past service cost
    
    
    13
    
    
    
    14
    
    
    
    (4
    )
    
    
    (5
    )Unamortized transition obligation (asset)
    
    
    (152
    )
    
    
    (184
    )
    
    
    (12
    )
    
    
    (13
    )Contributions (transfers), October 1 to December 31
    
    
    (1
    )
    
    
    
    
    
    
    1
    
    
    
    Prepaid (accrued) benefit asset (liability), December 31
    
    $
    255
    
    
    $
    250
    
    
    $
    (267
    )
    
    $
    (267
    )Pension Plans with projected benefit obligations in excess of plan assets:Projected benefit obligations
    
    $
    1,408
    
    
    $
    1,410Plan assets
    
    $
    1,173
    
    
    $
    1,196Weighted-average assumptions as at December 31:Discount rate
    
    
    6.0
    %
    
    
    6.4
    %
    
    
    6.2
    %
    
    
    6.7
    %Expected long-term rate of return on plan assets
    
    
    7.2
    %
    
    
    7.5
    %
    
    
    
    
    
    
    Rate of compensation increase
    
    
    3.9
    %
    
    
    3.9
    %
    
    
    
    
    
    
    


Pension(2)
    
    Post-Retirement(2),(3)2003
    
    2002
    
    2001
    
    2003
    
    2002
    
    2001Components of net periodic benefit cost:Service cost, curtailments and settlements
    
    $
    54
    
    
    $
    91
    
    
    $
    42
    
    
    $
    8
    
    
    $
    1
    
    
    $
    4Interest cost
    
    
    112
    
    
    
    106
    
    
    
    85
    
    
    
    17
    
    
    
    15
    
    
    
    11Expected return on plan assets
    
    
    (154
    )
    
    
    (152
    )
    
    
    (134
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of actuarial losses (gains)
    
    
    15
    
    
    
    3
    
    
    
    (2
    )
    
    
    1
    
    
    
    1
    
    
    
    1Amortization of transition obligation (asset)
    
    
    (20
    )
    
    
    (21
    )
    
    
    (21
    )
    
    
    (2
    )
    
    
    (2
    )
    
    
    (1
    )Amortization of past service cost and other
    
    
    3
    
    
    
    
    
    
    
    (9
    )
    
    
    
    
    
    
    
    
    
    
    Net periodic benefit cost (income)
    
    $
    10
    
    
    $
    27
    
    
    $
    (39
    )
    
    $
    24
    
    
    $
    15
    
    
    $
    15




---

|(1) |  | The measurement date for most of the defined benefit plans in the
United States changed to September 30 in 2003.
|--- |  | ----------------------------------------------------------------------------------------------------------------

|(2) |  | The assumed discount rates, the expected long-term rates of
return on plan assets and the rates of increase in future
compensation used in determining the actuarial present value of the
projected benefit obligations vary according to the economic
conditions of the countries in which the pension plans are situated.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The assumed medical cost trend rate used in measuring the
accumulated post-retirement benefits obligation in Canada in 2003 was
7.5%, decreasing by 0.5% each year until 2006, after which it remains
at 6%. In the United States in 2003, the assumed rate was 10%,
decreasing evenly to 5.5% by 2009, and remaining at that level
thereafter. The assumed dental cost trend rate is 5.5% in Canada and
5.2% in 2003, decreasing to 5.1% in 2004 and to 5% in 2005 and
thereafter in the United States.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

37
Sun Life Financial Inc.



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|22. |  | Pension Plans and Other Post-Retirement Benefits (Contd)
|--- |  | ---------------------------------------------------------

Health care cost calculations are based on trend rate assumptions which
may differ from actual results. Changes in trend rate assumptions by 1%
in either direction will change the health care cost as follows:

1%Increase
    
    DecreaseEffect on post-retirement benefit obligations
    
    $
    43
    
    
    $
    (37
    )Effect on aggregated service and interest costs
    
    $
    4
    
    
    $
    (4
    )




|23. |  | Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States
|--- |  | -------------------------------------------------------------------------------------------------------------------

The Companys consolidated financial statements are prepared in accordance
with accounting principles generally accepted in Canada (Cdn. GAAP),
including the accounting requirements of the OSFI. These accounting
principles differ in certain material respects from accounting principles
generally accepted in the United States (U.S. GAAP). The differing basis
of accounting changes the incidence of profit recognition over the life of
an insurance contract. Regardless of the accounting basis chosen, the
total profit of an insurance contract will not change. The financial
statement impact and a description of the material differences follow.



|A) |  | Reconciliation of selected Cdn. GAAP financial statement
information to U.S. GAAP:
|-- |  | ----------------------------------------------------------------------------------



|i) |  | Consolidated statements of operations:
|-- |  | --------------------------------------

2003
    
    2002
    
    2001Cdn.
    
    U.S.
    
    Cdn.
    
    U.S.
    
    Cdn.
    
    U.S.GAAP
    
    GAAP
    
    GAAP
    
    GAAP*
    
    GAAP
    
    GAAPREVENUEPremiums
    
    $
    13,543
    
    
    $
    7,229
    
    
    $
    14,875
    
    
    $
    6,531
    
    
    $
    9,437
    
    
    $
    4,860Net investment income
    
    
    5,703
    
    
    
    5,758
    
    
    
    5,131
    
    
    
    4,448
    
    
    
    4,162
    
    
    
    3,274Net realized gains (losses)
    
    
    
    
    
    
    373
    
    
    
    
    
    
    
    (44
    )
    
    
    
    
    
    
    379Fee income
    
    
    2,810
    
    
    
    3,053
    
    
    
    3,095
    
    
    
    3,258
    
    
    
    3,216
    
    
    
    3,20622,056
    
    
    
    16,413
    
    
    
    23,101
    
    
    
    14,193
    
    
    
    16,815
    
    
    
    11,719POLICY BENEFITS AND EXPENSESPayments to policyholders, beneficiaries and depositors
    
    
    13,356
    
    
    
    9,159
    
    
    
    13,017
    
    
    
    7,966
    
    
    
    9,486
    
    
    
    5,581Increase in actuarial liabilities
    
    
    1,624
    
    
    
    1,109
    
    
    
    3,822
    
    
    
    1,377
    
    
    
    1,697
    
    
    
    1,000Acquisition expense amortization
    
    
    234
    
    
    
    613
    
    
    
    316
    
    
    
    950
    
    
    
    305
    
    
    
    698Other expenses
    
    
    5,082
    
    
    
    4,015
    
    
    
    4,732
    
    
    
    3,654
    
    
    
    4,072
    
    
    
    3,28520,296
    
    
    
    14,896
    
    
    
    21,887
    
    
    
    13,947
    
    
    
    15,560
    
    
    
    10,564OPERATING INCOME BEFORE INCOME TAXES AND
NON-CONTROLLING INTERESTS
    
    
    1,760
    
    
    
    1,517
    
    
    
    1,214
    
    
    
    246
    
    
    
    1,255
    
    
    
    1,155Income taxes expense (benefit)
    
    
    387
    
    
    
    307
    
    
    
    98
    
    
    
    (250
    )
    
    
    306
    
    
    
    291Non-controlling interests in net income of subsidiaries
    
    
    65
    
    
    
    65
    
    
    
    83
    
    
    
    83
    
    
    
    68
    
    
    
    68NET OPERATING INCOME FROM CONTINUING
OPERATIONS
    
    
    1,308
    
    
    
    1,145
    
    
    
    1,033
    
    
    
    413
    
    
    
    881
    
    
    
    796Discontinued operations:Gain (loss) on sale of Clarica U.S.
    
    
    
    
    
    
    
    
    
    
    (48
    )
    
    
    (58
    )
    
    
    
    
    
    
    Net operating income of Clarica U.S.
    
    
    
    
    
    
    
    
    
    
    12
    
    
    
    22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    (36
    )
    
    
    
    
    
    
    TOTAL NET INCOME
    
    
    1,308
    
    
    
    1,145
    
    
    
    997
    
    
    
    377
    
    
    
    881
    
    
    
    796Less:Participating policyholders net income (loss)
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    SHAREHOLDERS NET INCOME
    
    $
    1,309
    
    
    $
    1,145
    
    
    $
    998
    
    
    $
    377
    
    
    $
    882
    
    
    $
    796Basic earnings per share from continuing operations
    
    $
    2.15
    
    
    $
    1.88
    
    
    $
    1.91
    
    
    $
    0.76
    
    
    $
    2.08
    
    
    $
    1.88Basic earnings per share
    
    $
    2.15
    
    
    $
    1.88
    
    
    $
    1.84
    
    
    $
    0.69
    
    
    $
    2.08
    
    
    $
    1.88Diluted earnings per share from continuing operations
    
    $
    2.15
    
    
    $
    1.88
    
    
    $
    1.90
    
    
    $
    0.76
    
    
    $
    2.07
    
    
    $
    1.87Diluted earnings per share
    
    $
    2.15
    
    
    $
    1.88
    
    
    $
    1.83
    
    
    $
    0.69
    
    
    $
    2.07
    
    
    $
    1.87




---

|* |  | As restated.
|- |  | ------------



|ii) |  | Comprehensive income:
|--- |  | ---------------------

U.S. GAAP includes the concept of comprehensive income. Comprehensive
income is a measure of changes in the equity of the Company during the
year. It includes both net income and other comprehensive income. Other
comprehensive income includes the movement in the foreign currency
translation account, unrealized gains and losses on available for sale
securities as well as the income tax impact arising there from, changes
to deferred acquisition costs and other liabilities.

38
www.sunlife.com Annual Report 2003



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|23. |  | Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------



|ii) |  | Comprehensive income (Contd.):
|--- |  | -------------------------------

2003
    
    2002
    
    2001Other comprehensive income:Foreign currency translation account movement for the year*
    
    $
    (1,688
    )
    
    $
    127
    
    
    $
    331Unrealized gains and losses movement for the yearUnrealized gains and (losses) on available for sale bonds
    
    
    921
    
    
    
    2,644
    
    
    
    (66
    )Unrealized gains and (losses) on available for sale stocks and segregated fund units
    
    
    386
    
    
    
    (364
    )
    
    
    (202
    )Less: reclassification adjustment for gains (losses) included in net income
    
    
    (711
    )
    
    
    (54
    )
    
    
    115596
    
    
    
    2,226
    
    
    
    (153
    )Changes to deferred acquisition costs and other liabilities
    
    
    (328
    )
    
    
    (709
    )
    
    
    (22
    )Other
    
    
    (226
    )
    
    
    57
    
    
    
    (9
    )Additional minimum pension liability
    
    
    (22
    )
    
    
    (50
    )
    
    
    Income taxes
    
    
    (83
    )
    
    
    (493
    )
    
    
    22(63
    )
    
    
    1,031
    
    
    
    (162
    )Total other comprehensive income (loss)
    
    
    (1,751
    )
    
    
    1,158
    
    
    
    169Total net income based on U.S. GAAP
    
    
    1,145
    
    
    
    377
    
    
    
    796Shareholders
comprehensive income (loss)
    
    $
    (606
    )
    
    $
    1,535
    
    
    $
    965




---

|* |  | Shown as part of consolidated statements of equity under Cdn. GAAP.
|- |  | -------------------------------------------------------------------



|iii) |  | Consolidated balance sheets:
|---- |  | ----------------------------

2003
    
    2002Cdn.
    
    U.S.
    
    Cdn.
    
    U.S.GAAP
    
    GAAP
    
    GAAP*
    
    GAAP*ASSETSBonds
    
    $
    66,090
    
    
    
    
    
    
    $
    73,367Bonds  available for sale (amortized cost: 2003 - $58,987;
2002 - $67,203)
    
    
    
    
    
    $
    62,465
    
    
    
    
    
    
    $
    70,952Bonds  trading
    
    
    
    
    
    
    4,341
    
    
    
    
    
    
    
    4,518Mortgages and corporate loans
    
    
    13,601
    
    
    
    16,656
    
    
    
    15,799
    
    
    
    17,809Stocks
    
    
    3,473
    
    
    
    
    
    
    
    4,221Stocks  available for sale (amortized cost: 2003 - $1,681;
2002 - $1,862)
    
    
    
    
    
    
    1,884
    
    
    
    
    
    
    
    1,693Stocks  trading
    
    
    
    
    
    
    1,218
    
    
    
    
    
    
    
    1,411Real estate, net of accumulated depreciation (amortized
cost: 2003 - $329;
2002 - $362)
    
    
    3,067
    
    
    
    2,188
    
    
    
    3,223
    
    
    
    2,362Policy loans
    
    
    3,003
    
    
    
    3,003
    
    
    
    3,390
    
    
    
    3,390Cash and cash equivalents
    
    
    3,178
    
    
    
    3,178
    
    
    
    4,156
    
    
    
    4,156Short-term securities(1)
    
    
    1,794
    
    
    
    1,794
    
    
    
    2,996
    
    
    
    2,996Other invested assets
    
    
    2,970
    
    
    
    2,956
    
    
    
    3,336
    
    
    
    3,260Total invested assets
    
    
    97,176
    
    
    
    99,683
    
    
    
    110,488
    
    
    
    112,547Deferred acquisition costs
    
    
    548
    
    
    
    5,580
    
    
    
    849
    
    
    
    6,234Future income taxes(2)
    
    
    977
    
    
    
    261
    
    
    
    1,032
    
    
    
    400Goodwill
    
    
    5,573
    
    
    
    4,626
    
    
    
    5,969
    
    
    
    4,916Other assets
    
    
    4,935
    
    
    
    9,600
    
    
    
    5,114
    
    
    
    9,592Segregated funds assets(3)
    
    
    
    
    
    
    54,488
    
    
    
    
    
    
    
    53,152Total consolidated assets
    
    $
    109,209
    
    
    $
    174,238
    
    
    $
    123,452
    
    
    $
    186,841Segregated funds net assets(3)
    
    $
    54,086
    
    
    
    
    
    
    $
    52,755LIABILITIES AND EQUITYActuarial liabilities
    
    $
    75,124
    
    
    $
    47,148
    
    
    $
    87,165
    
    
    $
    49,634Contract holder deposits
    
    
    
    
    
    
    37,784
    
    
    
    
    
    
    
    46,666Other policy liabilities
    
    
    2,230
    
    
    
    2,652
    
    
    
    2,747
    
    
    
    2,718Amounts on deposit
    
    
    3,120
    
    
    
    3,110
    
    
    
    3,262
    
    
    
    3,242Future income taxes(2)
    
    
    515
    
    
    
    1,100
    
    
    
    346
    
    
    
    1,261Deferred net realized gains
    
    
    3,124
    
    
    
    
    
    
    
    3,456Other liabilities
    
    
    7,280
    
    
    
    8,547
    
    
    
    7,289
    
    
    
    8,903Total consolidated liabilities
    
    
    91,393
    
    
    
    100,341
    
    
    
    104,265
    
    
    
    112,424Subordinated debt
    
    
    2,504
    
    
    
    2,535
    
    
    
    2,922
    
    
    
    2,962Non-controlling interests in subsidiaries
    
    
    1,336
    
    
    
    1,336
    
    
    
    1,356
    
    
    
    1,356Segregated funds liabilities(3)
    
    
    
    
    
    
    54,077
    
    
    
    
    
    
    
    52,753Equity
    
    
    13,976
    
    
    
    15,949
    
    
    
    14,909
    
    
    
    17,346Total consolidated liabilities and equity
    
    $
    109,209
    
    
    $
    174,238
    
    
    $
    123,452
    
    
    $
    186,841Segregated funds contract liabilities(3)
    
    $
    54,086
    
    
    
    
    
    
    $
    52,755




---

|(1) |  | U.S. GAAP terminology is short-term investments.
|--- |  | ------------------------------------------------
|(2) |  | U.S. GAAP terminology is deferred income tax.   
|(3) |  | U.S. GAAP terminology is separate accounts.     
|*   |  | As restated.                                    

39
Sun Life Financial Inc.



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|23. |  | Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------



|iv) |  | Consolidated statements of equity:
|--- |  | ----------------------------------

2003
    
    2002Cdn.
    
    U.S.
    
    Cdn.
    
    U.S.GAAP
    
    GAAP
    
    GAAP
    
    GAAPPARTICIPATING POLICYHOLDERS CAPITAL ACCOUNT:Balance, January 1
    
    $
    73
    
    
    $
    
    
    
    $
    77
    
    
    $
    Balance of participating policyholders account of Clarica at date
of acquisition
    
    
    
    
    
    
    
    
    
    
    (3
    )
    
    
    Net income (loss) as a stock company for participating policyholders
    
    
    (1
    )
    
    
    
    
    
    
    (1
    )
    
    
    Balance, December 31
    
    
    72
    
    
    
    
    
    
    
    73
    
    
    
    SHAREHOLDERS EQUITY:PAID IN CAPITALBalance, January 1
    
    
    7,477
    
    
    
    13,740
    
    
    
    1,100
    
    
    
    7,352Common shares issued, net of issuance costs,
as consideration for business acquisition(1)
    
    
    63
    
    
    
    63
    
    
    
    6,281
    
    
    
    6,281Fair value of stock options granted as consideration
for business acquisition(2)
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    48New common shares issued for cash(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised(3)
    
    
    21
    
    
    
    21
    
    
    
    27
    
    
    
    27Commissions and offering costs, net of taxes(1)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Common shares purchased for cancellation(1)
    
    
    (222
    )
    
    
    (403
    )
    
    
    
    
    
    
    Stock option compensation(2)
    
    
    26
    
    
    
    27
    
    
    
    21
    
    
    
    23Subsidiary equity transaction
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    9Balance, December 31
    
    
    7,365
    
    
    
    13,486
    
    
    
    7,477
    
    
    
    13,740RETAINED EARNINGSBalance, January 1
    
    
    6,621
    
    
    
    1,488
    
    
    
    5,917
    
    
    
    1,408Net income for the period attributed to shareholders
    
    
    1,309
    
    
    
    1,145
    
    
    
    998
    
    
    
    377Balance of participating policyholders account of Clarica at date
of acquisition
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3
    )Dividends on common shares
    
    
    (413
    )
    
    
    (413
    )
    
    
    (294
    )
    
    
    (294
    )Common shares purchased for cancellation
    
    
    (305
    )
    
    
    (124
    )
    
    
    
    
    
    
    Balance, December 31
    
    
    7,212
    
    
    
    2,096
    
    
    
    6,621
    
    
    
    1,488CURRENCY TRANSLATION ACCOUNTBalance, January 1
    
    
    738
    
    
    
    855
    
    
    
    631
    
    
    
    728Changes for the period
    
    
    (1,411
    )
    
    
    (1,688
    )
    
    
    107
    
    
    
    127Balance, December 31
    
    
    (673
    )
    
    
    (833
    )
    
    
    738
    
    
    
    855UNREALIZED GAINS AND LOSSESBalance, January 1
    
    
    
    
    
    
    1,263
    
    
    
    
    
    
    
    232Changes for the period
    
    
    
    
    
    
    (63
    )
    
    
    
    
    
    
    1,031Balance, December 31
    
    
    
    
    
    
    1,200
    
    
    
    
    
    
    
    1,263Total equity
    
    $
    13,976
    
    
    $
    15,949
    
    
    $
    14,909
    
    
    $
    17,346




---

|(1) |  | Shown as share capital under Cdn. GAAP.                        
|--- |  | ---------------------------------------------------------------
|(2) |  | Shown as contributed surplus under Cdn. GAAP.                  
|(3) |  | Shown as share capital and contributed surplus under Cdn. GAAP.

40
Sun Life Financial Inc.



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|23. |  | Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------



|v) |  | Effect of material differences between Cdn. GAAP and U.S. GAAP net
income:
|-- |  | --------------------------------------------------------------------------

For the material differences between Cdn. GAAP and U.S. GAAP net income
listed below, please refer to the following section for a description of
the differences in accounting policies.

2003
    
    2002
    
    2001Total net income in accordance with Cdn. GAAP
    
    $
    1,308
    
    
    $
    997
    
    
    $
    881Adjustments related to:InvestmentsBonds
    
    
    274
    
    
    
    224
    
    
    
    33Stocks and segregated fund units
    
    
    (14
    )
    
    
    (691
    )
    
    
    (553
    )Derivative instruments
    
    
    453
    
    
    
    (22
    )
    
    
    18Real estate
    
    
    (83
    )
    
    
    (24
    )
    
    
    (9
    )Total investments
    
    
    630
    
    
    
    (513
    )
    
    
    (511
    )Deferred acquisition costsDeferred acquisition costs  deferred
    
    
    860
    
    
    
    881
    
    
    
    585Deferred acquisition costs  amortization and interest
    
    
    (440
    )
    
    
    (634
    )
    
    
    (393
    )Total deferred acquisition costs
    
    
    420
    
    
    
    247
    
    
    
    192Actuarial liabilities & other policyholder revenues and expensesPremium and fees revenue
    
    
    (5,786
    )
    
    
    (7,863
    )
    
    
    (4,228
    )Payments to policyholders, beneficiaries and depositors
    
    
    4,197
    
    
    
    5,051
    
    
    
    3,905Actuarial liabilities
    
    
    515
    
    
    
    2,445
    
    
    
    697Total actuarial liabilities & other policyholder revenues and expenses
    
    
    (1,074
    )
    
    
    (367
    )
    
    
    374Other
    
    
    (219
    )
    
    
    (305
    )
    
    
    (155
    )Income tax effect of above adjustments
    
    
    80
    
    
    
    348
    
    
    
    15Redemption premiums
    
    
    
    
    
    
    (30
    )
    
    
    Total net income in accordance with U.S. GAAP
    
    $
    1,145
    
    
    $
    377
    
    
    $
    796




|B) |  | The following describes the material accounting policy differences
between Cdn. GAAP and U.S. GAAP applicable to the Company:
|-- |  | -----------------------------------------------------------------------------------------------------------------------------

For a complete description of Cdn. GAAP accounting and actuarial policies,
please refer to Notes 1 and 11, respectively.

Cdn. GAAP
    
    U.S. GAAPBonds
    
    Bonds are carried at
amortized cost. Realized
gains and losses are
deferred and amortized to
income using the constant
yield method over the
remaining period to
maturity.
    
    Bonds are carried at market
value. The bonds are
classified as available for
sale or trading.
Unrealized gains and losses
are included in other
comprehensive income if
classified as available for
sale, and included in net
income if classified as
trading. Realized gains
and losses are included in
net income immediately.
Certain bonds are included
in mortgages and corporate
loans, as they do not meet
the definition of a
security.Stocks
    
    Stocks are originally
recorded at cost. The
carrying value is adjusted
towards the fair value at
5% of the difference
between fair value and
carrying value per quarter.
Realized gains and losses
are deferred and amortized
into net investment income
at the rate of 5% of the
unamortized balance each
quarter. The Company
records a write-down for
any other than temporary
decline in the value of the
entire stock portfolio.
    
    Stocks are carried at
market value. The stocks
are classified as available
for sale or trading.
Unrealized gains and losses
are included in other
comprehensive income if
classified as available for
sale, and included in net
income if classified as
trading. Other than
temporary declines in the
value of stock results in a
write-down charged to
income.Real estate
    
    Real estate held for
investment is originally
recorded at cost. The
carrying value is adjusted
towards the fair value at
3% of the difference
between fair value and
carrying value per quarter.
Realized gains and losses
on sales are deferred and
amortized into net
investment income at the
rate of 3% of the
unamortized balance each
quarter. The Company
records a write-down for
any other than temporary
decline in the value of the
entire real estate
portfolio.
    
    Real estate held for
investment is carried at
depreciated cost. Realized
gains and losses on sales
are reflected in income
immediately. Other than
temporary declines in value
of specific properties
results in a write-down
charged to income.


41
Sun Life Financial Inc.



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|23. |  | Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

Cdn. GAAP
    
    U.S. GAAPDerivatives
    
    Most of the Companys
derivatives are
accounted for as
either fixed term
portfolio investments
or equity portfolio
investments.
Fixed-term portfolio
investment accounting
reports investments
at amortized cost.
Equity portfolio
investments are
carried at a value
calculated using a
moving average market
method. Realized
gains and losses on
the derivatives are
deferred and
amortized into net
investment income.
    
    Derivative
instruments are
carried at their fair
values. Changes in
fair values of
derivatives that are
not hedges are
recorded in income as
they arise. For fair
value hedges, the
gain and loss on the
derivative as well as
the related gain and
loss on the hedged
item is recognized in
income. For the cash
flow hedges, the
effective portion of
the changes in the
fair value of the
derivatives is
recorded in other
comprehensive income
and the ineffective
portion is recognized
in income.Certain derivative
instruments are
classified as hedges
and either accounted
for using hedge
accounting or fair
value accounting.
Under hedge
accounting, the
accounting for the
derivative follows
the underlying asset
or liability that is
being hedged. Under
fair value
accounting, the
derivative instrument
is recorded at fair
value on the balance
sheet with increases
or decreases recorded
to net investment
income.
    
    If an option within
an insurance contract
has economic
characteristics that
are different from
that of the insurance
contract and the
option meets the
definition of a
derivative
instrument, the
option is known as an
embedded derivative.
The embedded
derivatives are
separately accounted
for as stand-alone
derivatives and
carried at fair
values with the
changes in fair value
recorded in income.Deferred acquisition costs
    
    Deferred acquisition
costs arising on
mutual fund sales are
amortized over the
periods of the
related sales
charges, which range
from three to seven
years. 
Costs
of acquiring
new insurance and
annuity business,
primarily
commissions,
underwriting, issue
expenses and agency
expenses, are
implicitly recognized
in actuarial
liabilities for most
of the policies.
    
    Acquisition costs are
deferred and recorded
as an asset.
Amortization of such
costs is dependent on
the product to which
the costs relate.
For participating
life insurance
contracts, except for
participating
policies in the
United Kingdom,
amortization is based
on a constant
percentage of gross
margin. For
universal life and
investment-type
contracts,
amortization is based
on a constant
percentage of gross
profit. For other
non-participating
products, including
term, group and
disability insurance,
as well as
participating
policies in the
United Kingdom,
amortization is based
on a constant
percentage of
premium. In cases
where amortization is
based on gross profit
or margin, and
available for sale
bonds or stocks are
used to support the
underlying contract
liability or
actuarial reserve, a
portion of the
unrealized gains and
losses balance is
removed from equity
and netted against
the deferred
acquisition cost
balance.Actuarial liabilities
and contract holder
deposits
    
    Actuarial liabilities
are calculated in
accordance with
Canadian generally
accepted actuarial
practice. This
method uses best
estimate assumptions
for future experience
factors adjusted to
provide modest
margins for adverse
deviation in each
experience factor.
    
    The actuarial
liabilities for
participating life
policies, except
those in the United
Kingdom, are computed
using a net level
premium reserve
method with interest
and mortality
assumptions based
primarily upon those
assumptions used for
establishing the cash
surrender values in
the contract. For
universal life-type
and investment
contracts, contract
holder deposits
represent account
balances and U.S.
GAAP liabilities
primarily equal
account value
balances. The
account values
represent an
accumulation of gross
deposits received
plus credited
interest less
withdrawals, expenses
and mortality
charges. Other
non-participating
products include
term, group and
disability insurance.
For these products,
as well as
participating
contracts in the
United Kingdom, a net
level premium method
is used with
assumptions locked in
at time of issue,
unless the business
is in a loss
recognition position,
in which case a best
estimate gross
premium valuation is
used.Deferred net realized gains
    
    Realized gains and
losses on sales of
invested assets are
deferred and
amortized.
    
    Realized gains and
losses are recognized
in income
immediately.


42
www.sunlife.com Annual Report 2003



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|23. |  | Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

Cdn. GAAP
    
    U.S. GAAPPremium revenue, fee
income, maturities
and surrenders, and
interest on claims
and deposits
    
    Premiums for
universal life and
other investment-type
contracts are
recorded as revenue,
and a liability for
future policy
benefits is
established as a
charge to income.
Interest accrued on
contracts is shown as
an increase in
actuarial
liabilities.
Payments to contract
holders upon maturity
are reflected as an
expense with an
offsetting reduction
to the increase in
actuarial
liabilities.
    
    Amounts received for
universal life and
investment-type
contracts are not
included in the
income statement but
are reported as
deposits to contract
holder account
balances. Revenues
from these contracts
are limited to
amounts assessed
against
policyholders
account balances for
mortality, policy
administration and
surrender charges,
and are included in
fee income when
earned. Interest
accrued on contracts
is included in
interest on claims
and deposits.
Payments upon
maturity or surrender
are reflected as
reductions to the
contract holder
deposits on the
balance sheet. Other
payments in excess of
the account value,
such as death claims,
are reflected as an
expense.Minimum pension
liability
    
    There is no
requirement to record
the additional
minimum pension
liability.
    
    For a defined benefit
pension plan, an
additional minimum
pension liability is
required to be
recognized if an
unfunded Accumulated
Benefit Obligation
(ABO) exists and a
prepaid asset or an
accrued benefit
liability is recorded
for an amount less
than the unfunded
ABO. That is, the
additional minimum
liability is
calculated by
reference to the
excess of the ABO,
which is a smaller
obligation than the
Projected Benefit
Obligation (PBO)
since it does not
recognize projected
future compensation
increases, over the
fair value of plan
assets. If an
additional minimum
liability is required
to be recognized for
a defined benefit
pension plan, an
intangible asset is
recorded up to the
amount of any
unamortized past
service cost, or
unamortized
transitional
obligation and any
remaining excess is
recorded as part of
other comprehensive
income. The
additional minimum
liability is recorded
as an accrued pension
liability.Redemption of
subordinated debts
    
    Redemption premiums
are recorded once an
obligation to redeem
the principal amount
of capital debentures
is incurred.
    
    Redemption premiums
are recorded when the
principal amount of
the capital
debentures are
redeemed.Future income tax
asset and liability(1)
    
    Future income tax
liabilities and
assets are recognized
based on the
differences between
the accounting values
of assets and
liabilities and their
related tax bases
using income tax
rates of enacted or
substantially enacted
tax law.
    
    Future income tax
liabilities and
assets are recorded
based on income tax
rates of currently
enacted tax law.
Differences in the
provisions for income
taxes arise from
differing accounting
policies for assets
and liabilities and
differences in the
recognition of tax
rate changes are
disclosed in part C
(vi) of this Note.Segregated funds(2)
    
    Assets and
liabilities of
segregated funds are
shown separately from
general assets and
liabilities of the
Company. The
Companys investment
in segregated funds
is included in other
invested assets.
    
    Assets and
liabilities are
called separate
accounts and are
required to be
included within the
financial statements
of the Company. Any
excess of the
separate account
assets over separate
account liabilities
primarily represents
the Companys
investment in
segregated funds.




---

|(1) |  | U.S. GAAP terminology is deferred income tax.
|--- |  | ---------------------------------------------
|(2) |  | U.S. GAAP terminology is separate accounts.  



|C) |  | Additional information required to be reported under U.S. GAAP:
|-- |  | ---------------------------------------------------------------



|i) |  | Realized gains (losses) from sales and redemptions included in the net
realized gains for available for sale securities:
|-- |  | ------------------------------------------------------------------------------------------------------------------------

2003
    
    2002
    
    2001Bonds:Gross realized gains
    
    $
    618
    
    
    $
    475
    
    
    $
    225Gross realized losses
    
    $
    (266
    )
    
    $
    (530
    )
    
    $
    (17
    )Stocks:Gross realized gains
    
    $
    27
    
    
    $
    268
    
    
    $
    226Gross realized losses
    
    $
    (91
    )
    
    $
    (416
    )
    
    $
    (181
    )


43
Sun Life Financial Inc.



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|23. |  | Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------



|ii) |  | Change in net unrealized gains and (losses) included in net investment income for securities classified as trading:
|--- |  | -------------------------------------------------------------------------------------------------------------------

2003
    
    2002
    
    2001Bonds
    
    $
    54
    
    
    $
    82
    
    
    $
    (7
    )Stocks
    
    $
    113
    
    
    $
    (525
    )
    
    $
    (359
    )




|iii) |  | Real estate:The depreciation expense included in the U.S. GAAP other expenses is as follows:
|---- |  | --------------------------------------------------------------------------------------------

2003
    
    2002
    
    2001Depreciation expense
    
    $
    37
    
    
    $
    61
    
    
    $
    39


iv) Derivatives:The Company adopted Statement of Financial Accounting
Standards No. 133 Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) on January 1, 2001. The cumulative effect of
adopting SFAS 133 did not have a material impact on the Companys
consolidated results of operations, financial position or cash flows. At
the initial adoption of SFAS 133, the Company recorded total cumulative
gains of $8 in income to recognize the fair value of all derivatives that
were fair value hedges prior to the adoption of the standard. The Company
also recorded cumulative losses of $9 in income to recognize the
difference between the carrying and fair values of the related hedged
assets and liabilities. Additionally, the Company recorded a cumulative
loss of $2, net of taxes, in accumulated other comprehensive income (OCI)
to recognize the fair value of the derivatives that were cash flow hedges
prior to the adoption of SFAS 133.

When the Company enters into a derivative contract, management decides if
the derivative is designated as a hedge of the identified exposure under
SFAS 133. With the exception noted below, hedge accounting is not pursued
under SFAS 133 for most derivative instruments and the derivative is
recorded at fair value with changes in its fair value reported in income.
As at December 31, 2003, the Company designated certain interest rate
swaps as cash flow hedges of the interest rate risk related to a
floating-rate loan. For the period ended December 31, 2003, the change in
the fair value of the cash flow hedges was $3 after taxes ($4 in 2002) and
there was no ineffectiveness from the hedges. The Company does not expect
to reclassify any amounts from OCI to income during the next twelve months
($4 in 2002).

A few embedded derivatives were identified in the investments and
insurance products.

v) Stock-based compensation:The intrinsic value method of accounting was
used to account for stock options that were granted in 2001 under Cdn. and
U.S. GAAP. In 2002, the Company changed its accounting policy for stock
options granted to employees from the intrinsic value method to the fair
value method effective January 1, 2002 on a prospective basis. Had the
fair value method been used for the options granted in 2001, the net
income for the year ended December 31, 2003 would have been reduced by $6
($15 in 2002, $17 in 2001), and both basic and diluted earnings per share
reduced by $0.01 ($0.03 in 2002, $0.04 in 2001) per share.

vi) Future income tax asset and
liability(1):Differences between Cdn.
GAAP and U.S. GAAP that arise from differing accounting policies for
assets and liabilities and differences in the recognition of tax rate
changes are as follows:

2003Future income tax asset(1)
    
    Future income tax liability(1)Cdn.
    
    U.S.
    
    Cdn.
    
    U.S.GAAP
    
    GAAP
    
    GAAP
    
    GAAPInvestments
    
    $
    182
    
    
    $
    (205
    )
    
    $
    613
    
    
    $
    1,860Actuarial liabilities
    
    
    54
    
    
    
    773
    
    
    
    (78
    )
    
    
    (1,954
    )Deferred acquisition costs
    
    
    324
    
    
    
    (524
    )
    
    
    (9
    )
    
    
    675Losses available for carry forward
    
    
    506
    
    
    
    40
    
    
    
    (117
    )
    
    
    (601
    )Other
    
    
    214
    
    
    
    177
    
    
    
    106
    
    
    
    753Future tax asset/liability before valuation allowance
    
    
    1,280
    
    
    
    261
    
    
    
    515
    
    
    
    733Valuation allowance
    
    
    (303
    )
    
    
    
    
    
    
    
    
    
    
    367Total
    
    $
    977
    
    
    $
    261
    
    
    $
    515
    
    
    $
    1,100


2002Future income tax asset(1)
    
    Future income tax liability(1)Cdn.
    
    U.S.
    
    Cdn.
    
    U.S.GAAP
    
    GAAP
    
    GAAP*
    
    GAAP*Investments
    
    $
    229
    
    
    $
    (280
    )
    
    $
    629
    
    
    $
    1,514Actuarial liabilities
    
    
    (68
    )
    
    
    939
    
    
    
    (196
    )
    
    
    (1,738
    )Deferred acquisition costs
    
    
    300
    
    
    
    (332
    )
    
    
    24
    
    
    
    908Losses available for carry forward
    
    
    702
    
    
    
    13
    
    
    
    (165
    )
    
    
    (833
    )Other
    
    
    153
    
    
    
    74
    
    
    
    54
    
    
    
    1,095Future tax asset/liability before valuation allowance
    
    
    1,316
    
    
    
    414
    
    
    
    346
    
    
    
    946Valuation allowance
    
    
    (284
    )
    
    
    (14
    )
    
    
    
    
    
    
    315Total
    
    $
    1,032
    
    
    $
    400
    
    
    $
    346
    
    
    $
    1,261




---

|(1) |  | U.S. GAAP terminology is deferred income tax.
|--- |  | ---------------------------------------------
|*   |  | As restated.                                 

44
www.sunlife.com Annual Report 2003



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|23. |  | Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

vii) Acquisitions of Clarica, Keyport and IFMG:The Company acquired all
of the outstanding common shares of Clarica that were not beneficially
owned by the Company effective May 29, 2002 and acquired 100% of the
outstanding common shares of Keyport and IFMG effective October 31, 2001
as described in Note 3. The following amounts of the assets, liabilities
and goodwill at the dates of acquisition under Cdn. and U.S. GAAP are
different due to the different accounting policies used for the two
standards.

Clarica
    
    Keyport/IFMGCdn. GAAP*
    
    U.S. GAAP*
    
    Cdn. GAAP
    
    U.S. GAAPInvested assets acquired
    
    $
    31,637
    
    
    $
    31,641
    
    
    $
    22,479
    
    
    $
    24,168Other assets acquired(1)
    
    
    2,672
    
    
    
    5,374
    
    
    
    1,436
    
    
    
    1,104Segregated funds assets acquired
    
    
    
    
    
    
    11,204
    
    
    
    
    
    
    
    3,94434,309
    
    
    
    48,219
    
    
    
    23,915
    
    
    
    29,216Actuarial liabilities and other policy liabilities acquired
    
    
    24,835
    
    
    
    16,849
    
    
    
    22,656
    
    
    
    Amounts on deposit acquired
    
    
    1,277
    
    
    
    1,235
    
    
    
    
    
    
    
    Contract holder deposits acquired
    
    
    
    
    
    
    10,235
    
    
    
    
    
    
    
    21,518Other liabilities acquired
    
    
    5,059
    
    
    
    5,353
    
    
    
    493
    
    
    
    2,223Segregated funds liabilities acquired
    
    
    
    
    
    
    11,193
    
    
    
    
    
    
    
    3,90231,171
    
    
    
    44,865
    
    
    
    23,149
    
    
    
    27,643Net balance sheet assets acquired
    
    $
    3,138
    
    
    $
    3,354
    
    
    $
    766
    
    
    $
    1,573Considerations given:Common shares issued or exchanged
    
    $
    6,284
    
    
    $
    6,284
    
    
    $
    
    
    
    $
    Carrying value of investments in acquirees shares
    
    
    540
    
    
    
    540
    
    
    
    
    
    
    
    Fair value of outstanding Clarica stock options
    
    
    48
    
    
    
    48
    
    
    
    
    
    
    
    Transaction and other related costs
    
    
    57
    
    
    
    57
    
    
    
    
    
    
    
    Cash cost of acquisition
    
    
    
    
    
    
    
    
    
    
    2,744
    
    
    
    2,744$
    6,929
    
    
    $
    6,929
    
    
    $
    2,744
    
    
    $
    2,744Goodwill on acquisition
    
    $
    3,791
    
    
    $
    3,575
    
    
    $
    1,978
    
    
    $
    1,171




---

|(1) |  | Other assets acquired included value of business acquired of $2,368 under U.S. GAAP.
|--- |  | ------------------------------------------------------------------------------------
|*   |  | As restated.                                                                        

In 2002, adjustments were made to the purchase price allocations of
Keyport and IFMG. This resulted in an increase in other assets, contract
holder deposits and other liabilities of $75, $21 and $14, respectively,
and a decrease in other invested assets and goodwill of $20 and $20,
respectively, under U.S. GAAP.

In the second quarter of 2003, the Company reviewed the fair value
calculations for certain non-marketable securities and the reserves for
the run-off reinsurance related to the acquisition of Clarica. For the
non-marketable securities, it was identified that the fair value was
overstated. For the run-off reinsurance reserves, a provision for adverse
deviations had been omitted. As at December 31, 2002, the combined impact
of these error corrections was to restate actuarial and other policy
liabilities and goodwill upwards by $50 and $70, respectively. Bonds and
other liabilities were restated downwards by $56 and $36, respectively.

45
Sun Life Financial Inc.



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|23. |  | Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------



|viii) |  | Earnings per share:
|----- |  | -------------------

2003
    
    2002
    
    2001Cdn.
    
    U.S.
    
    Cdn.
    
    U.S.
    
    Cdn.
    
    U.S.GAAP
    
    GAAP
    
    GAAP
    
    GAAP*
    
    GAAP
    
    GAAPBasic earnings per shareShareholders net income from continuing operations
    
    $
    1,309
    
    
    $
    1,145
    
    
    $
    1,034
    
    
    $
    413
    
    
    $
    882
    
    
    $
    796Income (loss) from discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    (36
    )
    
    
    
    
    
    
    Shareholders net income
    
    $
    1,309
    
    
    $
    1,145
    
    
    $
    998
    
    
    $
    377
    
    
    $
    882
    
    
    $
    796Shareholders net income excluding goodwill amortization
    
    $
    1,309
    
    
    $
    1,145
    
    
    $
    998
    
    
    $
    377
    
    
    $
    901
    (1)
    
    $
    815
    (1)Weighted
average number of shares outstanding
(in millions)
    
    
    608
    
    
    
    608
    
    
    
    543
    
    
    
    543
    
    
    
    424
    
    
    
    424Basic earnings per share from continuing operations
    
    $
    2.15
    
    
    $
    1.88
    
    
    $
    1.91
    
    
    $
    0.76
    
    
    $
    2.08
    
    
    $
    1.88Basic earnings (loss) per share from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.07
    )
    
    
    (0.07
    )
    
    
    
    
    
    
    Basic earnings per share
    
    $
    2.15
    
    
    $
    1.88
    
    
    $
    1.84
    
    
    $
    0.69
    
    
    $
    2.08
    
    
    $
    1.88Basic earnings per share excluding goodwill amortization
    
    $
    2.15
    
    
    $
    1.88
    
    
    $
    1.84
    
    
    $
    0.69
    
    
    $
    2.13
    
    
    $
    1.92Diluted earnings per shareShareholders net income from continuing operations
    
    $
    1,309
    
    
    $
    1,145
    
    
    $
    1,034
    
    
    $
    413
    
    
    $
    882
    
    
    $
    796Less: Effect of stock options of subsidiaries
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    3
    
    
    
    5
    
    
    
    5Shareholders net income from continuing
operations on a diluted basis
    
    $
    1,309
    
    
    $
    1,145
    
    
    $
    1,031
    
    
    $
    410
    
    
    $
    877
    
    
    $
    791Income (loss) from discontinued operations, net of income taxes
    
    
    
    
    
    
    
    
    
    
    (36
    )
    
    
    (36
    )
    
    
    
    
    
    
    Shareholders net income on a diluted basis
    
    $
    1,309
    
    
    $
    1,145
    
    
    $
    995
    
    
    $
    374
    
    
    $
    877
    
    
    $
    791Shareholders net income excluding goodwill amortization
on a diluted basis
    
    $
    1,309
    
    
    $
    1,145
    
    
    $
    995
    
    
    $
    374
    
    
    $
    896
    (1)
    
    $
    810
    (1)Weighted average number of shares outstanding
on a diluted basis (in millions)
    
    
    608
    
    
    
    608
    
    
    
    543
    
    
    
    543
    
    
    
    424
    
    
    
    424Diluted earnings per share from continuing operations
    
    $
    2.15
    
    
    $
    1.88
    
    
    $
    1.90
    
    
    $
    0.76
    
    
    $
    2.07
    
    
    $
    1.87Diluted earnings (loss) per share from discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.07
    )
    
    
    (0.07
    )
    
    
    
    
    
    
    Diluted earnings per share
    
    $
    2.15
    
    
    $
    1.88
    
    
    $
    1.83
    
    
    $
    0.69
    
    
    $
    2.07
    
    
    $
    1.87Diluted earnings per share excluding goodwill amortization
    
    $
    2.15
    
    
    $
    1.88
    
    
    $
    1.83
    
    
    $
    0.69
    
    
    $
    2.11
    
    
    $
    1.91




---

|(1) |  | Goodwill amortization of $19 for 2001, respectively was added
back to shareholders net income for the calculation of basic and
diluted earnings per share excluding goodwill amortization.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|*   |  | As restated.                                                                                                                                                                               

ix) Statements of cash flows:Under Cdn. GAAP, deposits, maturities and
withdrawals related to investment-type contracts and universal life
contracts are included in operating activities. Under U.S. GAAP,
deposits, maturities and withdrawals are reflected as financing
activities; these cash flow items are as follows:

2003
    
    2002
    
    2001Deposits and withdrawals reclassified to financing activities:Deposits to policyholders accounts
    
    $
    6,102
    
    
    $
    13,327
    
    
    $
    4,276Withdrawals from policyholders accounts
    
    $
    6,363
    
    
    $
    6,680
    
    
    $
    4,724


x) Pension plans and other post-retirement benefits:In December 2003,
the FASB issued a revision to Statement of Financial Accounting Standards
No. 132, Employers Disclosures about Pensions and Other Post retirement
Benefits (SFAS 132(R)). The revised statement requires disclosure of
certain information about defined benefit pension and other
post-retirement benefit plans that are not currently required under
Canadian GAAP. Under the transitional provisions of SFAS 132(R), these
additional U.S. GAAP disclosure requirements only apply to domestic plans
for 2003.

The additional U.S. GAAP disclosures for the Companys Canadian domestic
plans are summarized below.



|1) |  | Composition of fair value of plan assets and Accumulated Benefit
Obligation, December 31:
|-- |  | -----------------------------------------------------------------------------------------

2003
    
    2002Equities
    
    
    56.3
    %
    
    
    52.4
    %Debt / fixed income
    
    
    40.0
    %
    
    
    42.6
    %Real Estate
    
    
    1.9
    %
    
    
    2.5
    %Other
    
    
    1.8
    %
    
    
    2.5
    %Total composition of fair value of plan assets
    
    
    100
    %
    
    
    100
    %Accumulated Benefit Obligation
    
    $
    1,000
    
    
    $
    875


46
www.sunlife.com Annual Report 2003



---



---



##### 



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|23. |  | Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------



|2) |  | Target allocation of plan assets, December 31:
|-- |  | ----------------------------------------------

2003
    
    2002Equities
    
    
    54.3
    %
    
    
    54.2
    %Debt / fixed income
    
    
    45.6
    %
    
    
    45.6
    %Other
    
    
    0.1
    %
    
    
    0.2
    %Total
    
    
    100
    %
    
    
    100
    %


The investments of the Canadian pension plans are primarily held in
segregated funds of the Company and are managed within the provisions of
the plans Statements of Investment Policies and Procedures.
Diversification of the investments is used to minimize credit, market, and
foreign currency risks. Due to the long-term nature of the pension
obligations and related cash flows, asset mix decisions include the
considerations of differences in the interest rate sensitivity of the
plans assets. The long-term investment objectives of the plans are to
exceed the real rate of investment return assumed in the actuarial
valuation of plan liabilities. Over shorter periods, the objective of the
plans is to exceed the average market returns of a well-diversified
portfolio. Portfolio liquidity is managed with consideration to the cash
flow requirements of the liabilities.

The allowable investment types of the plans include guaranteed funds,
annuities, as well as pooled and non-pooled variable accumulation funds of
the Company in addition to any other investment vehicle approved by the
Plan Sponsor which is eligible under pension regulations. The policy
statement for each fund or manager mandate either prohibits, or permits,
within specified constraints, the use of derivative instruments such as
options and futures. The use of derivative instruments is limited to
unleveraged substitution strategies. The assets of the plans shall not be
invested in securities of a related party or lent to any related party
unless such securities are publicly traded and selected by the Company or
its agents acting independently on behalf of all that managers
discretionary accounts or pooled funds having mandates similar to that of
the domestic pension plans.



|3) |  | Expected contributions for the next 12 months:
|-- |  | ----------------------------------------------

Pension
    
    $
    15Post-Retirement
    
    
    7Total
    
    $
    22




|4) |  | Weighted average assumptions for the Companys domestic and foreign
plans:
|-- |  | --------------------------------------------------------------------------

Pensions
    
    Post-RetirementTo measure benefit
    
    To measure the net
    
    To measure benefit
    
    To measure the netobligation as of
    
    benefit costs or
    
    obligation as of
    
    benefit costs orthe plans
    
    income for the
    
    the plans
    
    income for themeasurement date(1)
    
    period
    
    measurement date(1)
    
    periodDiscount rate
    
    
    6.0
    %
    
    
    6.4
    %
    
    
    6.2
    %
    
    
    6.7
    %Expected long-term
rate of return on
plan assets(2)
    
    
    7.2
    %
    
    
    7.5
    %
    
    
    
    
    
    
    Rate of
Compensation
increase
    
    
    3.9
    %
    
    
    3.9
    %
    
    
    
    
    
    
    




---

|(1) |  | The measurement date for most of the plans is December 31.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) |  | Based on Managements best estimate of the weighted-average
returns for the target allocation at plan assets. The assumption for
the expected long-term rate of return on plan assets is based on a
review of the historical asset return performance of the plan assets,
the historical returns of the market indices on which the plan
assets performance is based, and managements best estimate of the
weighted-average long-term expected rate of returns for the target
allocation of plan assets.

xi) Emerging Issues Task Force (EITF) 03-01  The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments:In November 2003, the FASBs EITF reached a consensus
requiring disclosures, for debt and marketable equity securities
classified as available-for-sale or held-to-maturity under FASB statements
115 and 124 that are impaired at the balance sheet date, but for which an
other-than-temporary impairment has not been recognized.

The following table shows the Companys investments gross unrealized
losses and fair value, aggregated by investment category and length of
time that individual securities have been in a continuous unrealized loss
position, at December 31, 2003.

Less than 12 months
    
    12 months or more
    
    TotalDescription of securities
    
    Fair Value
    
    Unrealized Losses
    
    Fair Value
    
    Unrealized Losses
    
    Fair Value
    
    Unrealized LossesDebt securities
    
    $
    6,050
    
    
    $
    (140
    )
    
    $
    1,139
    
    
    $
    (114
    )
    
    $
    7,189
    
    
    $
    (254
    )Common stock
    
    
    138
    
    
    
    (8
    )
    
    
    38
    
    
    
    (6
    )
    
    
    176
    
    
    
    (14
    )Total temporarily
impaired securities
    
    $
    6,188
    
    
    $
    (148
    )
    
    $
    1,177
    
    
    $
    (120
    )
    
    $
    7,365
    
    
    $
    (268
    )


47
Sun Life Financial Inc.



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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|23. |  | Summary of Material Differences Between Accounting Principles
Generally Accepted in Canada and in the United States (Contd)
|--- |  | ----------------------------------------------------------------------------------------------------------------------------

Available for sale debt securities have generally been identified as
temporarily impaired if their amortized cost as at December 31, 2003 was
greater than their fair value, resulting in an unrealized loss.
Unrealized gains and losses in respect of investments designated as
trading have been included in net income and have been excluded from the
above table.

Unrealized losses are largely due to interest rate fluctuations and/or
depressed fair values in sectors which have experienced unusually strong
negative market reactions. In connection with the Companys asset
liability management practices, and based on a review of these investment
holdings, it is believed that the contractual terms of these debt
securities will be met.

A total of 685 debt security positions (63 common stock positions) were in
a unrealized loss position at December 31, 2003 of which 528 (46 common
stock positions) were in a continuous loss position for less than 12
months and 157 positions for more than 12 months (17 common stock
positions).

xii) U.S. generally accepted accounting standard not yet adopted by the
Company:

Variable Interest Entities:On January 17, 2003, the FASB issued
Financial Interpretation No. 46, Consolidation of Variable Interest
Entities (FIN 46). FIN 46 clarifies the application of Accounting
Research Bulletin No. 51, Consolidated Financial Statements, for those
entities defined as VIEs and more commonly referred to as special purpose
entities, 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. FIN 46 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 FIN 46. On
December 24, 2003, the FASB issued a revision to Interpretation No. 46
(FIN 46R) to clarify some of the provisions of FIN 46, and to exempt
certain entities from its requirements. FIN 46R will be effective for the
Companys annual statements commencing January 1, 2004.

The following is a summary of the estimated impact of FIN 46R for the
major categories of VIEs that the Company is involved with. The Company
continues to assess the impact of FIN 46R on its VIEs as further guidance
is provided by the FASB.

Sun Life ExchangEable Capital
Securities:As described in Note 15, the Trust has issued SLEECS of $1,150 to third
party investors. The Company has issued a debenture of $1,200 to the
Trust and holds an investment of $2 in Special Trust Securities in the
Trust. The Company currently consolidates the Trust, however, under FIN
46R, the Company would not consolidate the Trust as it would be a VIE and
the Company would not likely be its Primary Beneficiary. As a result, the
Company would deconsolidate $1,150 of non-controlling interest in
subsidiaries and record the $1,200 debenture payable in other liabilities
and increase equity by $7 and other assets by $57 on the consolidated
balance sheets.

Other Variable Interest
Entities:
The Company is involved with certain trust structures that invest in
corporate bonds and total return swaps. On evaluation of these trusts
structures, the Company was identified as the Primary Beneficiary and
would therefore be required to consolidate these trusts once FIN 46R
becomes effective. As a result, the Company would consolidate additional
general fund assets of $71, general fund liabilities of $81, and record an
after-tax loss of $10. The Company is also involved with other entities
and/or structures such as investment vehicles, securitized financial
assets and private equity investments that could be regarded as VIEs, and
therefore subject to an assessment for consolidation under the provisions
of FIN 46R. The Company continues to assess these structures in light of
the new guidance but does not expect there to be material impact on the
consolidated financial statements.

Statement of Position 03-1  Accounting and Reporting by Insurance
Enterprises for certain Nontraditional Long-duration Contracts and for
Separate Accounts:In July 2003, the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants issued
SOP 03-1, Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts (SOP
03-1). The SOP provides guidance on accounting and reporting by insurance
enterprises for certain non-traditional long-duration contracts and for
separate accounts. Specific guidance is provided on separate account
presentation, interest in separate accounts, gains and losses on the
transfer between general and separate accounts, liability valuation,
returns based on contractually referenced pools of assets or index,
accounting for contracts that contain death or other insurance benefit
features, accounting for reinsurance and other similar contracts,
accounting for annuitization benefits, and sales inducements to contract
holders.

The SOP will be effective for the Companys annual statements commencing
January 1, 2004. The impact of adopting SOP 03-1 on the
consolidated financial statements is not yet estimable.

FASB Derivative Implementation Group SFAS No. 133 Implementation Issue No.
36  Embedded Derivatives: Bifurcation of a Debt Instrument that
Incorporates Both Interest Rate Risk and Credit Rate Risk Exposures that
are Unrelated or Only Partially Related to the Creditworthiness of the
Issuer of that Instrument (DIG B36):In April 2003, the FASBs
Derivative Implementation Group (DIG) released DIG B36, which addresses
whether SFAS 133 requires bifurcation of a debt instrument into a debt
host contract and an embedded derivative if the debt instrument
incorporates both interest rate risk and credit risk exposures that are
unrelated or only partially related to the creditworthiness of the issuer
of that instrument. Under DIG B36, embedded derivatives contained in
certain reinsurance agreements, such as modified coinsurance and
coinsurance with funds withheld reinsurance agreements, as well as other
types of receivables and payables where interest is determined with
reference to a pool of fixed maturity assets, or a total return debt
index, are required to be bifurcated from the host contract. DIG B36 will
be effective for the Companys annual financial statements commencing
January 1, 2004.

The Company has identified that certain of its reinsurance agreements
contain embedded derivatives that will require bifurcation. The impact of
bifurcating the embedded derivatives on the consolidated financial
statements is not yet estimable.

48
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS



|24. |  | Comparative Figures
|--- |  | -------------------

Certain comparative figures have been restated to conform with the
presentation adopted in 2003.

49
Sun Life Financial Inc.



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APPOINTED ACTUARYS
REPORT/AUDITORS REPORT

Appointed Actuarys Report

THE SHAREHOLDERS AND DIRECTORS
OF SUN LIFE FINANCIAL INC.

I have valued the policy liabilities of Sun Life Financial Inc. for its
consolidated balance sheets at December 31, 2003 and 2002 and their change
in the consolidated statements of operations for the years then ended in
accordance with accepted actuarial practice, including selection of
appropriate assumptions and methods.

In my opinion, the amount of policy liabilities makes appropriate
provision for all policyholder obligations and the consolidated financial
statements fairly present the results of the valuation.

-s- Robert W. Wilson

Robert W. Wilson
Fellow, Canadian Institute of Actuaries

Toronto, Canada
February 12, 2004

Auditors Report

THE SHAREHOLDERS
OF SUN LIFE FINANCIAL INC.

We have audited the consolidated balance sheets of Sun Life Financial Inc.
and the separate consolidated statements of segregated funds net assets as
at December 31, 2003 and 2002, and the consolidated statements of
operations, equity, cash flows and changes in segregated funds net assets
for each of the years in the three-year period ended December 31, 2003.
These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an
audit to obtain reasonable assurance whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation.

In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company and its
segregated funds as at December 31, 2003 and 2002 and the results of the
Companys operations, its cash flows and the changes in its segregated
funds net assets for each of the years in the three-year period ended
December 31, 2003 in accordance with Canadian generally accepted
accounting principles.

(DELOITTE & TOUCHE LLP)

Deloitte & Touche LLP
Chartered Accountants

Toronto, Canada
February 12, 2004

50
www.sunlife.com Annual Report 2003



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