SUN LIFE ASSURANCE COMPANY OF CANADA

Transcription

1 SUN LIFE ASSURANCE COMPANY OF CANADA Toronto, Ontario, Canada A+ Ultimate Parent: Sun Life Financial Inc SUN LIFE ASSURANCE COMPANY OF CANADA 150 King Street West Toronto, ON, Canada M5H 1J9 Web: Tel.: Fax: AMB#: Ultimate Parent#: AIIN#: AA Data shown in the financial exhibits of this report is in Canadian dollars. BEST S FINANCIAL STRENGTH RATING Based on our opinion of the consolidated Financial Strength of the life/health members of Sun Life Assurance Company of Canada, which operate under a group structure, this group member is assigned a Best s Financial Strength Rating of A+ (Superior). The company is assigned the Financial Size Category of Class XV which is the Financial Size Category of the parent. RATING RATIONALE Rating Rationale: The group rating of the Sun Life Assurance Company of Canada organization has been extended to the company as it is the primary operating company for Sun Life Financial Inc. in Canada. The rating of Sun Life Assurance Company of Canada (SLA) and its core operating subsidiaries is based on the consolidated financial strength and operating performance of the Sun Life Financial Group. The rating reflects the group s market-leading positions in its core Canadian markets, strong risk-adjusted capitalization, integrated enterprise risk management process and globally diversified operations. Partially offsetting these strengths are the recent trend of reduced earnings levels due in part to the current macroeconomic environment, especially in its U.S. operations where in-force interest-sensitive business lines remain pressured and may continue to experience volatile financial trends in the near term as this business slowly runs off the books. In addition, the company maintains a sizeable exposure to real estate-linked assets through its investments in commercial mortgage loans, direct real estate and residential and commercial mortgage-backed securities, which could pose continuing risk to its balance sheet and risk-adjusted capitalization. Sun Life maintains a leading market position in several of its worldwide business units through its wealth management and protection subsidiaries. In Canada, Sun Life holds a top three market position in Canada s individual life and health, annuity, group pension and group life and health markets. The company s retail market position in Canada is enhanced by its large career sales force, which has contributed to the company s sales growth and excellent persistency in recent years. Sun Life benefits from a diversified revenue stream from multiple regions, profitable operations in Canada and favorable risk-adjusted capitalization; the regulatory capital ratio in Canada is considered very strong. The company also maintains an expanding wealth management segment and life insurance operation in Asia. Additionally, the company benefits from a very integrated risk management framework to assist in managing, categorizing and monitoring risk exposures, ultimately reporting to the board s Risk Review Committee. The prolonged volatility in the global economy has impacted both the company s insurance operations through higher reserve and capital charges, and this was further highlighted in the third-quarter results for SLF, where a loss of $621 million was reported. The company s U.S. insurance operations have experienced a significant reduction in revenue and earnings due to the impact of the low interest rate environment and the large volume of interest-sensitive annuity products it markets. In addition, the strong Canadian dollar opposite the U.S. dollar has had a dampening impact on consolidated earnings. While risk-adjusted capital levels at the group remain very strong, the U.S. operations have required capital contributions in recent years, reducing financial flexibility for the group. On December 12, 2011, SLF s new CEO announced that following the completion of a strategic review, the company will stop offering domestic variable annuity (VA) and individual life products in the U.S. market. The decision to discontinue sales in these two 2011 A.M. Best Company, Oldwick, NJ Printed January 30, Page 1 of 7

2 lines of business is based on unfavorable product economics, which, due to ongoing shifts in capital markets and regulatory requirements, no longer enhance shareholder value. As a result, A.M. Best believes its target U.S. risk-based capital levels will remain adequate going forward since the strain from new business production will be eliminated. Historically, the group had always provided support when needed, and A. M. Best would expect this to continue if needed. During the peak of the global economic crisis, its U.S. segment reported losses, while earnings for its Canadian and Asian operations have remained pressured. A.M. Best believes that earnings will remain under pressure for the group, resulting in lower fixed coverage relative to historical levels, largely due to continued economic volatility, particularly the low interest rate environment. The company retains exposure to real estate-linked assets through its investments in commercial mortgage loans, direct real estate and residential and commercial mortgage-backed securities and may be subject to significant losses should deterioration occur in the commercial real estate market. A large portion of the real estate portfolio is underwritten in Canada, where it typically performs better than similar investments in the U.S. Given the downgrade of the issuer credit rating, A.M. Best believes that the company is well positioned at its current rating level and relative to its peers for the near to medium term. Further negative rating action could occur should equity market volatility and low interest rates continue to impact earnings and capital levels or should investment impairments exceed A.M. Best s expectations. Best s Financial Strength Rating: A+ g Outlook: Stable FIVE YEAR RATING HISTORY Date Best s FSR Date Best s FSR 11/28/11 A+ g 02/27/09 A+ g 10/26/11 A+ u 06/19/08 A++g 10/27/10 A+ 06/12/07 A++g KEY FINANCIAL INDICATORS ($000) Surplus Premiums Funds AOCI Written Invest Income Income Assets ,115,483 9,756,092 8,898,773 4,027,844 1,418, ,842,854 9,882,939-1,521, ,645 3,005,488 1,391, ,253,625 10,399,170-1,365,473 12,954,206 2,013,232 1,508, ,419,938 10,512,067-1,467,429 9,494,829 4,711, , ,789,831 11,118,689-1,606,706 9,870,669 5,108,617 1,580,350 (*) Beginning 2007, /Surplus includes Accumulated Other Comprehensive Income/(Loss) (AOCI). Balances in the tables shown throughout the report are on a non-consolidated basis for Sun Life The Key Financial Indicators are based upon calculation derived from the non-consolidated financial segments of the Life-1 Annual Return. BUSINESS REVIEW Sun Life Assurance Company of Canada (SLF Canada) is the Canadian insurance company and lead insurance company for Sun Life Financial, Inc. The key life insurance subsidiaries of Sun Life Financial, Inc. (SLF), are Sun Life Assurance Company of Canada (SLF Canada); Sun Life Assurance Company of Canada (U.S.) (SLF U.S.), which primarily conducts U.S. variable annuity and life business; and Sun Life Insurance and Annuity Company of New York (Sun Life NY), which serves as the Sun Life Financial Group s New York marketing arm. SLF Canada maintains a market leading position in Canada with a customer base representing about one in five Canadians. SLF Canada s business segments, consisting of Individual Insurance & Investments, Group Benefits and Group Wealth, offer a full range of protection and wealth accumulation products and services to individuals and corporate clients. SLF Canada also has investments in the Canadian asset management sector. SLF Canada s protection business comprises both individual insurance, including universal life, term life and non-participating and participating whole life insurance products, critical illness, long-term care, personal health insurance and group life and accident and sickness insurance, including life insurance, short- and long-term disability insurance and dental and extended care plans. While each of its business units remain focused on their respective markets, SLF Canada recognizes the opportunity to serve its clients through the combination of some aspects of these businesses. This has led to the formation of SLF Canada s Total Benefits offering for group clients and customer solutions, which addresses the needs of individual and group clients as they do business with the company. In addition, effective December 31, 2010, Sun Life sold its reinsurance business to Berkshire Hathaway Life Co. of Nebraska. This transaction reflected SLF s strategy to deploy capital to the parts of its business that can best achieve strong, sustainable growth. The wealth management business includes group pension and annuity products offered through its group retirement services business unit, mutual funds, asset management services and individual annuities. SLF continues to increase its participation in the retail wealth management business through the launch of a proprietary mutual fund company (Sun Life Global Investments Canada) in October SLF plans to achieve scale in mutual funds by offering a new proprietary family of funds that will be marketed primarily to Canadian retail investors. In addition, this new vehicle is expected to be an extension of the wealth management capabilities currently recognized in its U.S. mutual fund company MFS Investment Management (MFS). SLF s current Group Wealth includes a controlling economic interest in McLean Budden Limited, which conducts investment management services for individuals, mutual funds, pension plans, and corporations. On September 29, 2011, SLF announced that it has agreed to purchase the minority shares (which represent 32.4% of ownership) in McLean Budden and transfer the business to MFS. The transaction closed in November 2011 and added approximately $30 billion to MFS s assets under management. As of August 31, the combined assets under management of MFS and McLean Budden were C$261 billion (US$255 billion). SLF U.S. focuses on the delivery of innovative protection and wealth accumulation products to individuals and businesses through its three business units: Annuities, Individual Life and Employee Benefits Group. The Annuities business unit offers variable annuities, 401(k) products, and investment management services. The Individual Life business unit offers protection products for affluent consumers and business owners. Products include corporate-owned life insurance (COLI). The majority of the company s U.S. individual life insurance products are distributed through general agents and third-party intermediaries, which provide strong access to its target market. The Employee Benefits Group business unit offers group life insurance, short-term and long-term disability insurance, dental insurance and medical stop-loss insurance for employers. SLF s U.S. group insurance business has historically been focused on small and medium-sized companies. The group products are marketed and distributed through an extensive network of field sales representatives in approximately thirty-four regional sales offices across the U.S. In response to the changing economic and regulatory landscape, SLF U.S. has increased its focus on product designs that provide lower capital strain, greater flexibility around pricing and benefits, and improved opportunities for sustainable growth over the long term. As a result, SLF U.S. is now focused on profitable growth markets and providing sustainable solutions for pre-retirees, retirees, businesses and employees. In order to align with these new philosophies, SLF U.S. exited the no-lapse guarantee (NGL) universal life business in 2010 and, in 2011, decided to discontinue sales of commoditized products such as traditional universal life and variable universal life and focus on products that provide value to customers and shareholders. SLF U.S. will also continue to expand its presence in the employee benefits and voluntary insurance markets. On December 12, 2011, SLF s new CEO announced that following the completion of a strategic review, the company will stop offering domestic variable annuity (VA) and individual life products in the U.S. market. The decision to discontinue sales in these two lines of business is based on unfavorable product economics which, due to ongoing shifts in capital markets and regulatory requirements, no longer enhance shareholder value. SLF will continue service to its existing in-force policyholders. Going forward, Sun Life is looking to reallocate resources toward its highest growth and less capital-intensive segments A.M. Best Company, Oldwick, NJ Printed January 30, Page 2 of 7

3 MFS Investment Management, headquartered in Boston, MA, is a global investment management company which offers products and services that address the varying needs of investors over time. Individual investors have access to MFS s advisory services through a broad selection of financial products including mutual funds, variable annuities, separate accounts, college and retirement savings plans, and offshore investment products. These products are distributed through financial intermediaries that provide sales support, product administration and client services. MFS provides asset management services to institutional clients for corporate retirement plans, separate accounts, public or government funds and insurance company assets. Institutional clients are serviced through a direct sales force and a network of independent consultants. MFS s strategy has expanded in recent years to include institutional product sales. Over the last few years, MFS has initiated several institutionally focused investment products, designed to better meet the market diversification of investment performance linked to an index and investment performance based on the management of investment vehicles. MFS is expected to continue adding intellectual capital to support the increased product offerings and wholesalers to expand distribution capabilities geographically. At December 31, 2010, the company s ownership interest in MFS was 94.49% with the remainder owned by MFS s employees. As of December 2010, MFS maintained slightly above CAD 222 billion in assets under management with approximately three million accounts, with roughly 1,660 employees and over 200 equity and fixed income investment professionals. SLF Asia operates in five markets, through subsidiaries in the Philippines, Hong Kong and Indonesia and through joint ventures (JV) with local partners in India, China and Indonesia, serving about 70% of the Asian population. It provides individual life insurance products and services in all operations, and savings, retirement and pension products and services in India, the Philippines and Hong Kong. Group insurance is also offered in India, the Philippines, Hong Kong and China. These protection and wealth management products are distributed to middle- and upper-income individuals, employer/employee groups and affinity clients. SLF Asia s parent is Sun Life Assurance. With regional headquarters located in Hong Kong, the group consists of three operating entities in the Philippines, three operating entities in Hong Kong, three operations in Indonesia, three operating entities in India with two JVs at 26% and 50% ownership and lastly a 24.9% JV in China. SLF Asia s focus is to increase scale in the markets it serves, developing into a significant growth segment in terms of revenue and earnings. As such, SLF Asia has increased its speed to market capabilities for new products and developing distribution channels, such as bancassurance and telemarketing while it leverages the company s existing asset management capability. The local initiatives are expected to bolster the leveraging of SLF s global resources to bring industry-leading products and services to Asia. Philippines - SLF s Philippine operations distribute a diverse range of protection and savings products largely through their proprietary career agent sales force. The Business Group offers traditional and unit-linked individual life insurance products, as well as mutual funds to individuals, while group life and health insurance products are marketed to employer groups. The Philippines are Sun Life s most mature Asian operation and its market position is enhanced with broadened product offerings and customer service capabilities. In 2001, SLF entered into a new bancassurance agreement with Rizal Commercial Banking Corporation (RCBC) operated through a joint venture company through partnership with Yuchengco Group. A share purchase agreement representing an acquisition of 49% of Grepalife Financial, Inc., a Philippine life insurance company, was signed in February 2011 and the transaction subsequently closed in the fourth quarter of Hong Kong Sun Life s Hong Kong operations offer a complete range of products to address protection and savings needs. Individual life insurance, group life and health insurance, mandatory provident funds (the government legislated pension plan) and pension administration are supplied to individuals and businesses through a multi-channel distribution system that includes a career agency force, bancassurance and brokers. India Birla Sun Life Insurance Company Limited (BSLIC), SLF s insurance joint venture in India, provides a full array of individual life insurance, group life insurance and group savings products. The company markets these products through a multi-channel distribution network, including a career agent sales force, bancassurance arrangements, brokers and worksite marketing, to reach different segments of the market. Birla Sun Life Asset Management Company Limited, the company s asset management joint venture in India, offers a full array of mutual fund products to individuals and institutional investors. Independent financial advisors and banks deliver Birla Sun Life mutual funds to the retail sector, while direct distribution serves corporate accounts. In 2010, a new regulation, which banned the sale of unit-linked insurance products (ULIP), significantly changed the insurance industry in India. As a result, the entire BSLIC product portfolio was changed in 2010 along with the commission structure for ULIP products. Subsequently, sales of traditional insurance product offerings have increased in recent periods. China Sun Life Everbright Life Insurance Company Limited (SLEB), SLF s joint venture in China, operates a multi-distribution model that combines a direct career agency and several bancassurance alliances to sell individual life and health insurance and savings products. In July 2009, the company announced the restructuring of its insurance JV in China. During the third quarter of 2010, SLF repositioned the company in China when it completed its restructuring initiatives, reducing its ownership from 50% to about a 24.9% interest. SLF will continue to provide its international governance, risk management and actuarial expertise and standards to SLEB and will also be well represented on SLEB s board of directors The repositioning of SLEB as a domestic insurer in the market will provide additional avenues of growth in China s financial services market and enable the company to fully leverage China Everbright Bank s broad distribution capabilities. Group life and health insurance, along with pension products, are provided to employer groups through brokers, agents and China Everbright Group Limited, the company s joint venture partner. SLEB currently operates in 11 provinces in 36 cities across China and plans to expand to 15 provinces by the end of Sun Life Indonesia SLF Asia s Indonesian operations provide both traditional and investment-linked individual life insurance to individuals through a career agent sales force and bancassurance partners. Life insurance products are also marketed to affinity groups via telemarketing. During 2009, a new bancassurance joint venture with CIMB Group was established. CIMB Niaga Bank is one of the largest banks in Indonesia, with over 600 branches and three million customers. The segment has reported favorable sales through its in-branch and telemarketing channels since its inception. In December 2010, a Shariah unit was launched and through first quarter 2011, Shariah sales represented 12% of total sales for Sun Life Financial Indonesia. The Corporate segment includes the results of SLF U.K. and Corporate support operations that include the company s reinsurance businesses as well as investment income, expenses, capital and other items not allocated to Sun Life Financial s other business segments. PREMIUM AND RESERVE ANALYSIS Direct Premiums (000) Individual life 4,172,560 3,861,090 3,537,504 3,663,715 3,970,474 Group life 1,465,309 1,474,811 1,405,739 1,360,320 1,286,122 Individual annuities 842, , , , ,297 Group annuities 646, , , , ,485 Individual A&S 210, , , , ,905 Group A&S 4,037,077 3,872,300 3,568,135 3,240,252 3,038,115 Total 11,374,088 11,075,457 9,926,217 9,671,718 9,647,398 Reins Assumed Prems (000) Individual life 480, , , , ,496 Group life 263, , , , ,969 Individual annuities 152, ,517 4,375, Group annuities 77,019 Individual A&S 2,177 22,800 17,643 19,631 32,762 Group A&S 237, , , ,602 14,568 Total 1,213,582 1,364,775 5,613,461 1,066, ,026 Reins Ceded Prems (000) Individual life 1,386,218 1,530,254 1,573,413 1,674, ,603 Group life 403, , , , ,278 Individual annuities 418, , ,368 5,097,436 Group annuities 254, , ,970 3,364,583 Individual A&S 46,220 45,026 38,768 35,251 32,496 Group A&S 208, , , , ,321 Total 2,717,059 2,945,461 2,585,504 10,625,767 1,396, A.M. Best Company, Oldwick, NJ Printed January 30, Page 3 of 7

4 Premiums (000) Individual life 3,266,977 2,936,277 2,550,381 2,598,380 3,510,367 Group life 1,326,006 1,369,368 1,313,576 1,230,664 1,091,813 Individual annuities 576, ,155 4,742,951-4,378, ,528 Group annuities 468, , ,207-2,813, ,485 Individual A&S 166, , , , ,171 Group A&S 4,066,087 4,006,411 3,783,381 3,353,613 2,943,362 Other Total 9,870,669 9,494,829 12,954, ,645 8,898,773 EARNINGS SLF reported a loss of CAD 621 million in the third quarter of 2011 (CAD 572 million on an operating basis). The results for the third quarter included losses related to substantial declines in both equity markets and interest rate levels, which particularly impacted the individual life and variable annuity businesses in SLF U.S. Since the second half of 2009, recovery in the financial markets has resulted in generally improved operating performance through third quarter However, revenue and earnings have been pressured through the volatility associated with the current economic environment, including the low interest rate environment in the U.S. which A.M. Best believes will likely continue into The low interest rate environment was further exuberated by economic uncertainty in the European Union and U.S. monetary policy actions aimed at lowering interest rates on long-term treasuries. In addition, the third quarter saw the continuing problems in Europe as well as the U.S. debt crisis and increased volatility in North American equity markets, which saw markets drop by 12% - 14%. As a result, A.M. Best expects SLF s consolidated and segmented earnings to remain pressured, with the greatest impact expected to occur in its annuity and universal life products. SLF s historically stable earnings reflect the company s overall well-balanced diversified business model, which is focused on wealth management and protection businesses. The geographic and business diversity has generally buffered the organization s overall profitability from potential volatility in one of its several business segments. The earnings contribution from the company s protection and wealth businesses has historically been nearly evenly divided. Geographically, more than ninety percent of its earnings are generated in North America with the Asia and the U.K. making up most of the balance. Credit experience overall has remained favorable through the third quarter of 2011, compared to the same period in 2010 and full year While the volume of rating downgrades experienced in recent years remain elevated compared to historical levels, the financial impact of the downgrades was significantly reduced from comparative periods due to a number of underlying factors which include a reduction in the severity of downgrades. SLF Canada recorded operating net income of CAD 11 million in third quarter Third quarter results were impacted by substantial declines in equity markets and the net unfavorable impact of updates to actuarial assumptions and assumptions in Individual Insurance and Investments. Operating income through third quarter 2011 was CAD 483 million and reflected declining equity markets and the net unfavorable impact of updates to actuarial estimates and assumptions. Through the third quarter of 2011, SLF Canada recorded improved sales, up about 9% from the third quarter of 2010 for its individual life and health insurance products, largely due to the success of its new par product, SunPar. Sales of its individual investment offerings declined 13% due to reduced segregated fund sales. However, this was partially offset by increased mutual fund sales, which increased 35%. The Group Benefit sales decreased 25% from the third quarter of 2010 due primarily to reduced sales in the medium-sized case market. Group Retirement Sales (part of the Group Wealth segment) were down 6% from the third quarter of 2010, the result of lower defined contribution sales, although this was partially offset by increased payout annuity sales. In its pension rollover business, sales remained favorable. SLF U.S. reported an operating loss of US 568 million in the third quarter of Third quarter results reflected the adverse impact of substantial declines in interest rates and equity markets on the Annuity and Individual Insurance lines of business, in addition to unfavorable morbidity experience in the Employee Benefits line. The third quarter results also included the net unfavorable impact of updates to actuarial estimates and assumptions related to policyholder behavior and mortality in the Individual Insurance Line. In the third quarter of 2011, variable annuity sales were US $847 million, which was a 19% decrease when compared to the same period in Sales in the Employee Benefits line decreased across all product lines and were down 37% with SLF staying committed to its pricing discipline in a very competitive sales environment. Individual Insurance sales improved in the third quarter due primarily to increased sales of corporate-owned life insurance. SLF Asia recorded earnings of CAD 100 million through the third quarter of 2011 compared to CAD 64 million of earnings during the same period in The growth recorded during 2011 was reflective of business growth, the favorable impact of investment gains stemming from the Philippines as well as reduced strain from lower sales volumes and improved product mix in India. Individual life sales were down 20% during the third quarter of 2011, compared to the same period in 2010, due primarily to reduced sale volumes in India as a result of the industry-wide regulatory changes to unit-linked products which took effect during the third quarter. Sales in Indonesia, the Philippines and China continued to improve through the third quarter of 2011, benefiting from enhanced distribution capabilities and product expansion. MFS reported net income of CAD 63 million during the third quarter of 2011 compared to net income of CAD 31 million in the third quarter of This was due in part to the impact of fair value adjustments on share-based payment awards, which were positive relative to a year ago. Operating income was CAD 59 million during the third quarter of 2011 and was helped by the strengthening of the Canadian dollar relative to average exchange rates in the third quarter of 2011, which decreased operating net income for MFS by CAD 4 million. In terms of U.S. dollars, net income during the third quarter of 2011 was $60 million compared to operating net income of $53 million in the third quarter of The improvement in net income from the same period a year prior was due mainly to higher net average assets. MFS s pre-tax operating profit margin ratio increased to 32% in the third quarter of 2011 from 31% at the third quarter of Comm & Exp to NPW PROFITABILITY TESTS NOG to Tot NOG to Assets Tot Rev Operating Return on Equity Ben Paid to NPW Yield Total Return CAPITALIZATION The capitalization of Sun Life is considered strong on a consolidated basis relative to its current insurance and investment risks. Sun Life Assurance Company of Canada s (SLA) MCCSR has historically been above 200% (228% at year-end 2010, 210% through third quarter 2011). In addition, SLA maintains a strong level of risk-adjusted capitalization as measured by Best s Adequacy Ratio (BCAR). The group s regulatory capital consists primarily of common equity along with a moderate mix of preferred equity, SLEECS, which qualify as Tier 1 capital for regulatory capital purposes, and subordinated debt. SLA s year-end 2010 Tier 1 MCCSR ratio was 183%, which is well in excess of the 105% Tier 1 target set by OSFI. In addition, the SLF U.S. companies have historically maintained acceptable capitalization levels from both a BCAR and an RBC perspective. SLA reported an excess capital position well above the lower end of the target range of 180% through year-end 2010 and third quarter The excess capital position was driven in part, from the sale of its reinsurance operation in December There is an intercompany loan arrangement between SLF and SLA of $500 million. Under SLF, the capital structure is comprised of 60% from Canada, 30% from the U.S., 7% from Asia, 2% from MFS and the other 1% from miscellaneous sources A.M. Best Company, Oldwick, NJ Printed January 30, Page 4 of 7

5 In recent years, SLF has recorded a relatively flat shareholders equity position, as a result of the global economic pressures and Canadian dollar valuation sensitivities. Also, cumulative net income has comfortably exceeded shareholder dividends and common share repurchases over the last several years. However, Sun Life has a proven ability to raise additional funds through the capital markets as needed. The group s current debt, hybrid securities, and preferred shares to total capital are within expectations for the current rating level garnering some equity credit. Through third quarter 2011, the group s debt to capital ratio is on par with A.M. Best s expectations. Due to the loss recorded through third quarter, interest coverage does not meet A.M. Best s expectations although this ratio is expected to improve as earnings return to more normal levels. Sun Life maintains an excellent liquidity position which provides for favorable debt servicing capabilities. Through Sun Life Trust and Sun Life Trust II, open-end trusts established in Ontario, SLA has issued three tranches of long-dated subordinated unsecured debt that qualify as capital for Canadian regulatory purposes (SLEECS Series A, B and ). The SLEECS Series A and B can be converted into SLA s preferred shares that are exchangeable in certain limited circumstances at a future date into SLF common shares at a price equal to 95% of the trading price at the time of the exchange. All three series of SLEECS represent low-cost and tax-efficient capital that A.M. Best believes provides the company with increased capital flexibility. Sun Life Trust, a subsidiary of Sun Life Financial Inc., announced that on December 31, 2011, it completed the redemption of all of its outstanding $950 million principal amount of Sun Life ExchangEable Securities-Series A. LEVERAGE TESTS C&S to Liabilities NPW to Change in Surplus Reins Change Relief Leverage in NPW Current BCAR: 176 end C&S CAPITAL TRENDS ($000) Subordinateholder Share- Debt Divs Policyholder Divs AOCI ,756,092 1,249, , , ,882,939 1,249, , ,904-1,521, ,399,170 1,799,436 1,098, ,935-1,365, ,512,067 1,799,580 1,139, ,303-1,467, ,118,689 1,499,732 1,248, ,952-1,606,706 (*) Beginning 2007, /Surplus includes Accumulated Other Comprehensive Income/(Loss) (AOCI). INVESTMENTS AND LIQUIDITY SLF and its key life operating subsidiaries maintain a portfolio of high quality assets. The investment portfolio is broadly diversified and managed with respect to the company s underlying policy obligations. The company invests the majority of its general fund assets in medium- to long-term fixed income investments while the assets supporting equity capital are invested in a broader range of asset classes including bonds, mortgages, equity securities, and real estate investments, reflecting management s focus on the enhancement of risk-adjusted investment returns. The company s asset portfolio is geographically diversified with forty-two percent invested in the U.S., forty-eight percent in Canada, and the balance outside of North America, based on the jurisdiction of the incorporation of issuers. Market value for invested assets through year-end 2010 is approximately CAD 109 billion (CAD 117 billion though third quarter 2011). The vast majority of SLF s general funds are invested in fixed income instruments, such as bonds and mortgages with a medium- to long-term duration. Its portfolio is comprised of about 85% of the general funds in cash and fixed income investments. Real estate holdings comprise about four percent of the portfolio and stocks account for about four percent of the portfolio. The remaining six percent of the portfolio is comprised of policy loans, derivative assets and other invested assets. Through the third quarter 2011, bonds represented about 55% of invested assets. The quality of the bond portfolio remains high, with below investment grade issues representing a modest three percent of the total. Impaired assets to total invested assets is small. SLF s bond portfolio is very diverse, represented by a large number of credits and good diversification across multiple segments. Its bond portfolio is actively managed through a regular program of purchases and sales directed at optimizing yield quality and liquidity, while ensuring that asset/liability matching requirements are met. The company maintains a larger proportion of private placements than historical levels currently about 12 % of total bonds. SLF maintains modest exposures to collateralized mortgage obligations and mortgage-backed securities in its United States branch operations and indirectly through its U.S.-domiciled subsidiaries. Although these investments are of high quality, they are volatile in price and duration during changing interest rate environments coupled with volatility in the global economy. The company utilizes derivative instruments to provide hedging protection on interest rates, currency exposures and equity volatility inherent in the VA product offering. SLF s mortgage loan portfolio represents about 12 % of total invested assets through third quarter 2011, with the Canadian mortgage portfolio accounting for more than half of the total mortgage portfolio. The company s mortgage portfolio is almost entirely in first mortgages. Mortgages are concentrated in office, retail, industrial, and apartment properties. Commercial mortgages account for about three-fourths of the total mortgage portfolio with the remainder invested in residential mortgages. The portfolio has a weighted average loan-to-value of around 60% and the estimated weighted average debt service coverage is 1.6 times. The Canada Mortgage and Housing Corporation insures around 23% of the Canadian commercial mortgage portfolio. Impaired mortgages and loans, net of allowances for losses, amounted to CAD 493 million as of September 30, 2011, CAD 23 million higher than the December 31, 2010 level. Approximately 90% of the impaired mortgage loans are in the U.S. A.M. Best will continue to monitor the results of the U.S. mortgage loan portfolio carefully. The company also originates and manages mortgage-backed investments for institutional clients. The fee-based business allows SLF to leverage its commercial mortgage underwriting expertise and enhance its asset management strength. SLF s real estate portfolio represents about four percent of invested assets as the group actively manages its real estate portfolio focusing on acquisitions and dispositions, leasing and rehabilitation, and the management of foreclosed properties. SLF also benefits from maintaining a portfolio with benign exposure to the U.S. subprime investment issues. SLF s equity portfolio represents about four percent of invested assets and remains well diversified by industry classification and issuer. To attain desired spreads and maintain appropriate matching, the company adheres to stringent asset/liability management guidelines for interest-sensitive products. A somewhat less conservative strategy is maintained for non-interest-sensitive products. The company engages in securities lending for purposes of fee generation. At year-end 2010, securities with an estimated carrying and fair value of CAD 555 million were loaned for which collateral held was CAD 585 million. SLF has approximately CAD 1 billion of liquidity available for its capital management needs. SLF also has $1 billion CAD of unutilized credit facilities with no MAC clauses and also receives net income from its asset management companies. SLA maintains an intercompany credit facility (loan agreement) with SLF for CAD 500 million. In addition, OSFI rules offer flexibility where capital flows are generally unrestricted between SLA and SLF. Dividends can also be paid from SLA and SLF, as long as the operating company continues to maintain adequate levels of capital and liquidity per regulatory guidelines. SLF has a hedging program, involving the use of derivative instruments, to mitigate a portion of the equity market-related volatility in the cost of providing these guarantees. As of September 30, 2010, over 90% of the total variable annuity and segregated fund contracts (measured by associated fund values) were included. This program reduces net income sensitivity to equity market declines by approximately 60% to 70% A.M. Best Company, Oldwick, NJ Printed January 30, Page 5 of 7

6 Operating Cash Flow ($000) LIQUIDITY TESTS Non-Inv Grade Current Bonds to Liquidity Delnq & Foreclsd Mtg to Mtg & Cred Ten Lns & RE to Cap Affil Invest to Quick Liquidity ,297, ,484, ,306, ,542, ,389, HISTORY Date Incorporated: 00/00/1871 Date Commenced: 05/00/1871 Domicile: Canada Originally incorporated as The Sun Insurance Company of Montreal in 1865, the name was changed in 1871 to Sun Mutual Life Insurance Company of Montreal, and in 1882 the present title Sun Life Assurance Company of Canada was adopted. In 1962, the company was organized as a mutual life insurance company. On March 22, 2000, the company completed its demutualization. Sun Life Financial Inc. (SLF) is the publicly traded holding company for its principal Canadian life insurance subsidiary, Sun Life Assurance Company of Canada (Sun Life) and is traded on the major stock exchanges in Toronto, New York and the Philippines. SLF has made several business transactions to enhance its overall evolving business model. In 2002, SLF acquired an economic interest in CI in exchange for its subsidiary, Spectrum Investment Management Limited (Spectrum) and Clarica Diversico Ltd. (Diversico), the mutual fund subsidiary of Clarica Life. SLF acquired Clarica Life Insurance Company (Clarica Life) and its wholly owned subsidiary, Clarica Life Insurance Company-U.S. in 2002, as an all stock transaction valued at approximately $6.9 billion CAD. Clarica Life Insurance Company-U.S. was subsequently sold in early 2003 and Clarica Life Insurance Company was merged into Sun Life at the end of At the time of the transaction, based on assets under management, Clarica Life was Canada s fourth largest life insurer with favorable market positions in a number of major Canadian business segments. The consolidation created one of Canada s largest life insurance companies, with very strong market positions in all major protection and wealth accumulation business segments in Canada. In 2007, Sun Life introduced an integrated brand strategy to reduce brand duplication and complexity in the Canadian market. This strategy included retiring the Clarica brand and aligning its career sales force with the Sun Life brand. On May 31, 2007, the Company completed its acquisition of Genworth Financial Inc. s U.S. Employee Benefits Group (Genworth EBG Business) for $725 million Sun Life Financial s U.S. group business combined with the Genworth EBG Business and became Sun Life Financial Employee Benefits Group offering customers group life, disability, dental and stop loss insurance, and voluntary worksite products. This acquisition added scale and scope to Sun Life Financial s U.S. Employee Benefits Group business and solidified its top ten leadership position in the important U.S. employee benefits industry. In addition, the increased access to markets, broadened product and service offerings and strengthened distribution platform position Sun Life Financial for long-term growth. On June 22, 2007, the Company purchased approximately two million of additional trust units of CI Financial Income Fund for $66 million in order to maintain its existing combined interest in CI Financial Income Fund and Canadian International LP (collectively, CI Financial). SLF s interest in CI Financial had decreased slightly as a result of CI Financial s purchase of Rockwater Corporation in the second quarter of On November 7, 2007, the Company sold the U.S. subsidiaries that comprised the Independent Financial Marketing Group business to LPL Holdings, Inc. The sale had no material effect on the 2007 financial results. On February 29, 2008, the Company sold Sun Life Retirement Services (U.S.), Inc., a 401(k) plan administration business in the United States, to The Hartford Financial Services LLC (Hartford). The sale had no material effect on the 2008 financial results. The sale price was $47 million. Hartford acquired over 400 employees, $17 billion in AUM across roughly 6,000 plans and 465,000 plan participants On December 12, 2008, SLF sold its 37% interest in CI Financial Income Fund to Bank of Nova Scotia for $2.2 billion CAD. The proceeds included $1.55 billion CAD in cash and the balance in common and preferred shares of Bank of Nova Scotia. On July 15, 2009, Sun Life Financial and CIMB Group received regulatory approval to form a joint venture to distribute Sun Life Financial s life, accident and health insurance products through the 600-plus retail branches of PT Bank CIMB Niaga in Indonesia. On July 29, 2009, the company announced the restructuring of its insurance JV in China. During the third quarter of 2010, SLF repositioned the company in China when it completed its restructuring initiatives, reducing its ownership from 50% to about a 24.9% interest. SLF will continue to provide its international governance, risk management and actuarial expertise and standards to Sun Life Everbright. The repositioning of Sun Life Everbright as a domestic insurer in the market will provide additional avenues of growth in China s financial services market and enable the company to fully leverage China Everbright Bank s broad distribution capabilities. On October 1, 2009, the Company completed the acquisition of the United Kingdom operations of Lincoln National Corporation for $387 million. The purchase price was subject to adjustment related to market and business performance prior to October 1, There were no material adjustments to the purchase price allocation of 2010.The acquisition increased Sun Life U.K. s assets under management over 60% to $20 billion and doubled the number of policies in force to 1.1 million. On December 31, 2010, the Company completed the sale of its reinsurance business to Berkshire Hathaway Life Company of Nebraska. On September 29, 2011, SLF announced that it has agreed to purchase the minority shares (which represent 32.4% of ownership) in McLean Budden and transfer the business to MFS. The transaction closed in November 2011 and added approximately $30 billion to MFS s assets under management. As of August 31, the combined assets under management of MFS and McLean Budden were C$261 billion (US$255 billion). MANAGEMENT Officers: Chairman of the Board, James H. Sutcliffe; President and Chief Executive Officer, Dean A. Connor; Presidents, Kevin P. Dougherty (SLF Canada, Sun Life Global Investments), Westley V. Thompson (SLF U.S.); Executive Vice President and Chief Financial Officer, Colm J. Freyne; Executive Vice President and Chief Investment Officer, Stephen C. Peacher; Executive Vice President and Chief Information Officer, Mark S. Saunders; Executive Vice President and Chief Risk Officer, Michael P. Stramaglia; Executive Vice President and General Counsel, Thomas A. Bogart (Business Development); Executive Vice President, Claude A. Accum (Actuarial & Risk Management). Directors: William D. Anderson, Richard H. Booth, Jon A. Boscia, John H. Clappison, Dean A. Connor (President and Chief Executive Officer), David A. Ganong, Martin J. G. Glynn, Krystyna T. Hoeg, David W. Kerr, Idalene F. Kesner, Mitchell M. Merin, Ronald W. Osborne, Hugh D. Segal, James H. Sutcliffe (Chairman). REINSURANCE The maximum net retention on one life is CAD 15,000,000 in Canada. The maximum net retention is $15,000,000 for lives issued on a single life or joint-first-to-die basis and $20,000,000 for lives issued under joint last-to-die policies in the United States and Bermuda. Lower retention limits apply in other countries. REGULATORY The 2011 annual independent audit of the company was conducted by Deloitte & Touche, LLP. The annual statement of actuarial opinion is provided by Leslie B. Thomson, Vice President and Appointed Actuary. Territory: The company is licensed in all provinces and territories. It is also licensed in the United States in the District of Columbia, Puerto Rico, U.S. Virgin Islands, AL, AK, AZ, AR, CA, CO, CT, DE, FL, GA, HI, ID, IL, IN, IA, KS, KY, LA, ME, MD, MA, MI, MN, MS, MO, MT, NE, NV, NH, NJ, NM, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, TX, UT, VT, VA, WA, WV, WI and WY. The company is also licensed in Bermuda, Great Britain and 2011 A.M. Best Company, Oldwick, NJ Printed January 30, Page 6 of 7

7 Northern Ireland, Hong Kong, and Republic of Philippines. Servicing policies only: Cuba, Dominican Republic, Federation of Malaysia, Guyana, Haiti, Jamaica, Malta, herlands Antilles, Singapore, Sri Lanka, Trinidad and Tobago and Zimbabwe. Sun Life is also an accredited reinsurer in the state of New York. Reserve basis: (Current ordinary business): Canadian Asset Liability Methodology (CALM). FINANCIAL INFORMATION BALANCE SHEET ($000) - December 31, 2010 Assets Liabilities Bonds 34,787,073 actuarial liabilities 53,278,597 Preferred shares 1,782,066 Accounts payable 1,306,744 Common shares 10,099,239 Other policy liabilities 3,837,100 Mortgage loans 9,657,615 Other debt 2,487,262 Real estate 4,194,002 Other liabilities 1,950,681 Contract loans 2,230,858 def gains/losses 177,398 Cash -10,345 Deferred income tax 133,628 Short-term investments 2,579,023 Subordinated debt 1,499,732 Accounts receivable 5,103,663 Total Liabilities 64,671,142 Accrued invest income 505,287 Policyholders equity 114,085 Other assets 4,861,350 Shareholders equity 11,004,604 Assets 75,789,831 Total 75,789,831 SUMMARY OF OPERATIONS ($000) Premiums: Benefits paid 7,462,502 Individual life 3,266,977 Change in reserves 3,419,203 Individual annuities 576,380 Plcyhldr divs & refunds 864,353 Group life 1,326,006 Trans from/to oth funds -57,195 Group annuities 468,913 Commissions 434,883 Acc & sickness group 4,066,087 Interest expenses 291,001 Acc & sickness individual 166,248 Gen exp & taxes 1,533,663 Misc premiums 58 Other expenses 42,713 Total premiums 9,870,669 investment income 5,108,617 Misc income 812,300 Total 15,791,586 Total 13,991,123 Gain from operations before IT & extraordinary items... 1,800,463 Provision for inc taxes ,113 income (loss)... 1,580,350 Why is this Best s Rating Report important to you? A Rating Report from the A.M. Best Company represents an independent opinion from the leading provider of insurer ratings of a company's financial strength and ability to meet its obligations to policyholders. The A.M. Best Company is the oldest, most experienced rating agency in the world and has been reporting on the financial condition of insurance companies since The Best's Financial Strength Rating opinion addresses the relative ability of an insurer to meet its ongoing insurance obligations. The rating is not assigned to specific insurance policies or contracts and does not address any other risk, including, but not limited to, an insurer's claims-payment policies or procedures; the ability of an insurer to dispute or deny claims payment on grounds of misrepresentation or fraud; or any specific liability contractually borne by the policy or contract holder. A Best's Financial Strength Rating is not a recommendation to purchase, hold or terminate any insurance policy, contract or any other financial obligation issued by an insurer, nor does it address the suitability of any particular policy or contract for a specific purpose or purchaser. The company information appearing in this pamphlet is an extract from the complete company report prepared by the A.M. Best Company. A Best's Financial Strength Rating is assigned after a comprehensive quantitative and qualitative evaluation of a company's balance sheet strength, operating performance and business profile. Best's Financial Strength Ratings are assigned according to the following scale: Secure Best's Financial Strength Ratings A++ and A Superior A and A Excellent B++ and B Good Vulnerable Best's Financial Strength Ratings B and B Fair C++ and C Marginal C and C Weak D Poor E Under Regulatory Supervision F In Liquidation S Rating Suspended For the latest Best's Financial Strength Ratings and AMB Credit Reports visit the A.M. Best web site at You may also obtain AMB Credit Reports by calling our Customer Service department at , ext To expedite your request, please provide the company's identification number (AMB #) A.M. Best Company, Oldwick, NJ Printed January 30, Page 7 of 7