485BPOS 1 pafiling.htm Unassociated Document
 
 
 

As filed with the Securities and Exchange Commission on April 25, 2008
 
Registration Nos. 333-111639
 
811-02990


SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

FORM N-4
b

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Post-Effective Amendment No. 5
[X]

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No.  31
[X]

KMA Variable Account
(Exact name of Registrant)

Sun Life Assurance Company of Canada (U.S.)
(Name of Depositor)

One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481
(Address of Depositor's Principal Executive Offices) (Zip Code)

Depositor's Telephone Number, including Area Code:  781-262-6402

Sandra M. DaDalt, Assistant Vice President & Senior Counsel
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481
(Name and Address of Agent for Service)

Copies of Communications to:
Thomas C. Lauerman, Esq.
Jorden Burt LLP
1025 Thomas Jefferson Street, N.W.
Washington, DC 20007


It is proposed that this filing will become effective (check appropriate box)

£ immediately upon filing pursuant to paragraph (b) of Rule 485
R on May 1, 2008 pursuant to paragraph (b) of Rule 485
£ 60 days after filing pursuant to paragraph (a)(1) of Rule 485
£ on (date) pursuant to paragraph (a)(1) of Rule 485.

If appropriate, check the following box:
£ this post-effective amendment designates a new effective date for a previously filed post-effective amendment

Title of Securities Being Registered: Units of Interest in the Separate Account under the Contracts

No filing fee is due because an indefinite amount of securities is deemed to have been registered in reliance on Section 24(f) of the Investment Company Act of 1940.


 
 
 

CONTENTS OF REGISTRATION STATEMENT



The Facing Sheet

The Contents Page

PART A

Prospectus


PART B

Statement of Additional Information

PART C

Items 24 - 32

The Signatures

Exhibits



 
 
 




PART A


 
 
 

PROSPECTUS FOR
PREFERRED ADVISOR VARIABLE ANNUITY
INDIVIDUAL FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
KMA VARIABLE ACCOUNT
AND
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)

This prospectus describes the Preferred Advisor variable annuity contract offered by Sun Life Assurance Company of Canada (U.S.).  The contract is designed to help you in your long-term retirement planning.  As of May 1, 1998, the Contracts were no longer offered for sale.

Under the Contract, you may elect to have value accumulate on a variable or fixed basis.  You may also elect to receive periodic annuity payments on either a variable or a fixed basis.  This prospectus generally describes only the variable features of the Contract.  For a summary of the Fixed Account and its features, see Appendix A.  The Contracts are designed to help you in your retirement planning.  You may purchase them on a tax qualified or non-tax qualified basis.  Because they are offered on a flexible payment basis, you are permitted to make multiple payments.

We will allocate your purchase payments to the investment options and the Fixed Account in the proportions you choose.  The Contract currently offers eight investment options, each of which is a Sub-account of KMA Variable Account.  Currently, you may choose among the Sub-accounts investing in the following Eligible Funds:

Large-Cap Equity Funds
Asset Allocation Fund
  Columbia Large Cap Growth Fund, Variable Series
  Columbia Asset Allocation Fund, Variable Series
  Columbia Large Cap Value Fund, Variable Series
Money Market Fund
Small-Cap Equity Funds
  Columbia Money Market Fund, Variable Series
  Columbia Small Company Growth Fund, Variable Series
Intermediate-Term Bond Funds
International/Global Equity Fund
  Columbia Federal Securities Fund, Variable Series
  Columbia International Fund, Variable Series
Multi-Sector Bond Fund
 
  Columbia Strategic Income Fund, Variable Series

Columbia Management Advisors, Inc., advises the Columbia Funds (with Nordea Investment Management North America, Inc. serving as the sub-advisor for Columbia Asset Allocation Fund, Variable Series).

If you purchased a variable annuity contract before May 1, 1992, you may continue to make purchase payments under that contract subject to the terms and conditions of those contracts and Appendix B.

The purchase of a Contract involves certain risks.  Investment performance of the Sub-accounts may vary based on the performance of the related Eligible Funds. We do not guarantee any minimum Contract Value for amounts allocated to the Sub-accounts.

The Variable Account may offer other contracts with different features, fees and charges, and other Sub-accounts which may invest in different or additional mutual funds.  Separate prospectuses and statements of additional information will describe other contracts.  The agent selling the Contracts has information concerning the eligibility for and the availability of the other contracts.

This prospectus contains important information about the Contracts you should know before investing.  You should read it before investing and keep it for future reference.  We have filed a Statement of Additional Information ("SAI") with the Securities and Exchange Commission.  The current SAI has the same date as this prospectus and is incorporated by reference in this prospectus.  You may obtain a free copy by writing us at P.O. Box 9133, Wellesley Hills, MA 02481, by calling (800) 367-3653, or by returning the postcard on the back cover of this prospectus.  A table of contents for the SAI appears on page 33 of this prospectus.

The date of this prospectus is May 1, 2008 .

The Securities and Exchange Commission has not approved or disapproved these securities or determined if this prospectus is truthful or complete.  Any representation to the contrary is a criminal offense.



 
 
 

TABLE OF CONTENTS

 
 
 
 
SUMMARY OF CONTRACT FEATURES[INSERT PAGE NUMBER]
 
 
Purchase Payments[INSERT PAGE NUMBER]
 
Contingent Deferred Sales Charge[INSERT PAGE NUMBER]
 
Mortality and Expense Risk Charge[INSERT PAGE NUMBER]
 
Contract Maintenance Charge[INSERT PAGE NUMBER]
 
 
Federal Income Taxes[INSERT PAGE NUMBER]
 
 
 
 
 
 
CONDENSED FINANCIAL INFORMATION[INSERT PAGE NUMBER]
 
 
SUN LIFE (U.S.) AND THE VARIABLE ACCOUNT[INSERT PAGE NUMBER]
 
 
PURCHASE PAYMENTS AND APPLICATIONS[INSERT PAGE NUMBER]
 
 
INVESTMENTS OF THE VARIABLE ACCOUNT[INSERT PAGE NUMBER]
 
Allocations of Purchase Payments[INSERT PAGE NUMBER]
 
Eligible Funds[INSERT PAGE NUMBER]
 
Dollar Cost Averaging[INSERT PAGE NUMBER]
 
Transfer of Variable Account Value[INSERT PAGE NUMBER]
 
Frequent Transfers[INSERT PAGE NUMBER]
 
Substitution of Eligible Funds and Other Variable Account Changes[INSERT PAGE NUMBER]
 
 
 
Deductions for Contract Maintenance Charge[INSERT PAGE NUMBER]
 
Deductions for Mortality and Expense Risk Charge[INSERT PAGE NUMBER]
 
Deductions for Daily Sales Charge[INSERT PAGE NUMBER]
 
Deductions for Contingent Deferred Sales Charge[INSERT PAGE NUMBER]
 
Deductions for Transfers of Variable Account Value[INSERT PAGE NUMBER]
 
Deductions for Premium Taxes[INSERT PAGE NUMBER]
 
Deductions for Income Taxes[INSERT PAGE NUMBER]
 
Total Variable Account Expenses[INSERT PAGE NUMBER]
 
 
 
Variable Account Value[INSERT PAGE NUMBER]
 
Valuation Periods[INSERT PAGE NUMBER]
 
Net Investment Factor[INSERT PAGE NUMBER]
 
Modification of the Contract[INSERT PAGE NUMBER]
 
Right to Revoke[INSERT PAGE NUMBER]
 
 
DEATH PROVISIONS FOR NON-QUALIFIED CONTRACTS[INSERT PAGE NUMBER]
 
 
DEATH PROVISIONS FOR QUALIFIED CONTRACTS[INSERT PAGE NUMBER]
 
 
CONTRACT OWNERSHIP[INSERT PAGE NUMBER]
 
 
 
 
 
 
ANNUITY PROVISIONS[INSERT PAGE NUMBER]
 
Annuity Benefits[INSERT PAGE NUMBER]
 
Income Date and Settlement Option[INSERT PAGE NUMBER]
 
Change in Income Date and Settlement Option[INSERT PAGE NUMBER]
 
Settlement Options[INSERT PAGE NUMBER]
 
Variable Annuity Payment Values[INSERT PAGE NUMBER]
 
Proof of Age, Sex, and Survival of Annuitant[INSERT PAGE NUMBER]
 
 
SUSPENSION OF PAYMENTS[INSERT PAGE NUMBER]
 
 
 
 
Taxation of Annuities in General[INSERT PAGE NUMBER]
 
Qualified Plans[INSERT PAGE NUMBER]
 
Tax-Sheltered Annuities[INSERT PAGE NUMBER]
 
Individual Retirement Annuities[INSERT PAGE NUMBER]
 
Corporate Pension and Profit-Sharing Plans[INSERT PAGE NUMBER]
 
Deferred Compensation Plans With Respect to Service for State and Local Governments[INSERT PAGE NUMBER]
 
Required Minimum Distribution Requirements for Tax-Sheltered Annuities and Traditional Individual
 
     Retirement Annuities[INSERT PAGE NUMBER]
 
Texas Optional Retirement Program[INSERT PAGE NUMBER]
 
 
VARIABLE ACCOUNT VOTING RIGHTS[INSERT PAGE NUMBER]
 
 
REPORTS TO OWNERS[INSERT PAGE NUMBER]
 
 
DISTRIBUTION OF THE CONTRACT[INSERT PAGE NUMBER]
 
 
LEGAL PROCEEDINGS[INSERT PAGE NUMBER]
 
 
INQUIRIES BY CONTRACT OWNERS[INSERT PAGE NUMBER]
 
 
TABLE OF CONTENTS - STATEMENT OF ADDITIONAL INFORMATION[INSERT PAGE NUMBER]
 
 
APPENDIX A - The Fixed Account (Also Known as the Guaranteed Rate Account)[INSERT PAGE NUMBER]
 
 
APPENDIX B - Prior Contracts of the Variable Account[INSERT PAGE NUMBER]
 
 
APPENDIX C - Telephone Instructions[INSERT PAGE NUMBER]
 
 
APPENDIX D - Dollar Cost Averaging[INSERT PAGE NUMBER]


 
 
 

DEFINITIONS

Accumulation Unit: A unit of measurement used to calculate Variable Account Value.

Annuitant: The natural person on whose life annuity benefits are based and who will receive annuity payments starting on the Income Date.

Company ("We", "Us", "Our", "Sun Life (U.S.)"): Sun Life Assurance Company of Canada (U.S.).

Contract Anniversary: Each anniversary of the Issue Date.

Contract Owner ("You"): The person(s) having the privileges of ownership under the Contract.

Contract Value: The sum of the Variable Account Value and the Fixed Account Value under your Contract at any given time.

Contract Year: Each twelve-month period beginning on the Issue Date and each Contract Anniversary thereafter.

Designated Beneficiary: The person designated to receive any death benefits under the Contract

Eligible Funds: The underlying mutual funds in which the Variable Account invests.

Fixed Account: Part of our general account into which purchase payments or Contract Values may be allocated or transferred.

Fixed Account Value: The value of all Fixed Account amounts accumulated under the Contract prior to the Income Date.

In Force: The status of the Contract before the Income Date so long as:

(1)
it is not totally surrendered, and
   
(2)
there has not been a death of the Annuitant or any Contract Owner that will cause the Contract to end within at most five years of the date of death.

Income Date: The date on which annuity payments are to begin.

Issue Date: The date when the Contract becomes effective.

Non-Qualified Contract: Any Contract that is not issued under a Qualified Plan.

Office: Our service office, which is P.O. Box 9133, Wellesley Hills, Massachusetts 02481.

Qualified Contract: Contracts issued under Qualified Plans.

Qualified Plan: A retirement plan which receives special tax treatment under Sections 401, 403(b), 408(b) or 408A of the Internal Revenue Code of 1986, as amended ("Code") or a deferred compensation plan for a state and local government or other tax exempt organization under Section 457 of the Code.

Surrender Value: The Contract Value less the deductions made upon a total surrender of the Contract.

Variable Account: KMA Variable Account which is our separate investment account, into which purchase payments under the Contracts may be allocated. The Variable Account is divided into Sub-accounts, each of which invests in shares of an Eligible Fund.

Variable Account Value: The value of all Variable Account amounts accumulated under the Contract prior to the Income Date.

Written Request: A request written on a form satisfactory to us, signed by you and a disinterested witness, and filed at our Office.

SUMMARY OF CONTRACT FEATURES

This summary does not contain all of the information that may be important to you.  You should read the entire prospectus and Statement of Additional Information before deciding to invest.  Further, individual state requirements, that differ from the information in this prospectus, are described in supplements to this prospectus or in endorsements to the Contracts.

The Contract

The Contract is a flexible premium deferred variable annuity contract.  It is designed for retirement planning purposes.  It allows you to allocate purchase payments to and receive annuity payments from the Variable Account and/or the Fixed Account.

The Variable Account is a separate investment account we maintain.  If you allocate payments to the Variable Account, your accumulation values and annuity payments will fluctuate according to the investment performance of the Eligible Funds chosen.

The Fixed Account is part of our "general account", which consists of all our assets except the Variable Account and the assets of other separate investment accounts we maintain.  If you allocate payments to the Fixed Account, your accumulation value will increase at guaranteed interest rates and annuity payments will be of a fixed amount.  (See Appendix A for more information on the Fixed Account.)

If you allocate payments to both the Variable and the Fixed Accounts, then the accumulation value and annuity payments will be variable in part and fixed in part.

Purchase Payments

You may make multiple purchase payments. The minimum initial payment is $5,000. The minimum amount for each subsequent payment is $1,000 or a lesser amount as we may permit from time to time which is currently $250.  (See "Purchase Payments and Applications".)

Fees and Charges

     Contingent Deferred Sales Charge

There are no sales charges at the time of your purchase payment.  We may deduct a charge in the event of a total or partial surrender. That charge is based on a table of charges.  The charge will not exceed 7% of that portion of the amount you surrender that represents purchase payments you made during the seven years immediately preceding your request for surrender. (See "Deductions for Contingent Deferred Sales Charge".)

     Mortality and Expense Risk Charge

We deduct a mortality and expense risk charge at an annual rate of 1.25% of your average daily net asset values in the Variable Account.  (See "Deductions for Mortality and Expense Risk Charge".)

     Sales Charge

We deduct a daily sales charge at an annual rate of .15% of your average daily net asset values in the Variable Account.  (See "Deductions for Sales Charge".)


 
 
 

     Contract Maintenance Charge

We deduct an annual $36 contract maintenance charge from Variable Account Value for administrative expenses. (See "Deductions for Contract Maintenance Charge".)

     Transfer Charge

Currently, there is no transfer charge. However, the Contract permits us to charge you up to $25 for each transfer in excess of 12 in each year your Contract is In Force.

     Premium Taxes

We charge premium taxes against your Contract Value. Currently such premium taxes range from 0% to 3.5%.  (See "Deductions for Premium Taxes".)

     Federal Income Taxes

You will not pay federal income taxes on the increases in value of your Contract until you make a withdrawal, such as a lump sum payment or annuity payment or make a gift or assignment. Some withdrawals may also be subject to a 10% federal penalty tax.  (See "Tax Status".)

Free Look

Generally, you may revoke the Contract by returning it to us within ten days after you receive it. For most states, we will refund the lesser of the initial purchase payment or Contract Value as of the date we receive the returned Contract. You will bear the investment risk during the revocation period.  You may ask us for the rules that apply to your state.  (See "Right to Revoke".)

FEE TABLE

The following tables describe the fees and expenses that you will pay when buying, owning, and surrendering the Contract.

The table below describes the fees and expenses that you will pay at the time that you buy the Contract, surrender the Contract, or transfer cash value between investment options. State premium taxes may also be deducted.

Contract Owner Transaction Expenses

Sales Load Imposed on Purchases
  
(as a percentage of purchase payments):
0%
   
Maximum Contingent Deferred Sales Charge
  
(as a percentage of purchase payments):
7%*
   
Maximum Charge Per Transfer (currently $0):
$25**
   
Premium Taxes
  
(as a percentage of Contract Value or total purchase payments):
0% - 3.5%***

*Completed years from Date of Purchase Payment
Sales Charge
   
Up to 1
7%
2
6%
3
5%
4
4%
5
3%
6
2%
7
1%
8 or later
0%

Surrender charges are deducted only if you totally or partially surrender the Contract. We will reduce any otherwise applicable surrender charge if it would cause the total surrender charge you have paid plus the daily sales charges attributable to your Contract to exceed the “maximum cumulative sales charge” as described in “Deductions for Contingent Deferred Sales Charge”.

**Applicable to each transfer after the first twelve transfers in each Contract Year. We are currently waiving this fee. We reserve the right to impose a transfer fee after we notify you. See "Deductions for Transfers of Variable Account Value."

***The premium tax rate and base vary by your state of residence and the type of Contract you own. Currently, we deduct premium taxes from Contract Value upon full surrender (including a surrender for the death benefit) or annuitization. See “Deductions for Premium Taxes.”

The tables below describe the fees and expenses that you will pay periodically during the time that you own the Contract, not including Eligible Fund fees and expenses.

Annual Contract Maintenance Charge
$36  

Variable Account Annual Expenses (as a percentage of average net assets)

Mortality and Expense Risk Charge:
1.25%  
Daily Sales Charge:
.15%*
Total Variable Account Annual Expenses:
1.40%  

* This charge compensates us for certain sales distribution expenses related to the Contract.

The next table shows the minimum and maximum total operating expenses charged by the Eligible Funds that you may pay periodically during the time that you own the Contract. More detail concerning each Eligible Fund's fees and expenses is contained in the prospectus for each Eligible Fund.

Total Annual Eligible Fund Operating Expenses
  
Minimum
  
Maximum
         
(Expenses that are deducted from Eligible Fund assets including
management fees, and other expenses)
  
 
0.60%
  
 
1.23%1

1The expenses shown do not reflect any fee waiver or expense reimbursement.

The advisers and/or other service providers of certain Eligible Funds have agreed to reduce their fees and/or reimburse the Eligible Funds' expenses in order to keep the Eligible Funds' expenses below specified limits. All of the Eligible Funds have voluntary fee reduction and/or expense reimbursement arrangements that may be terminated at any time. The minimum and maximum Total Annual Operating Expenses for all Eligible Funds, after all fee reductions and expense reimbursements are taken into consideration are 0.45% and 0.95%, respectively. Each fee reduction and/or expense reimbursement arrangement is described in the relevant Eligible Fund's prospectus.

THE ABOVE EXPENSES FOR THE ELIGIBLE FUNDS WERE PROVIDED BY THE ELIGIBLE FUNDS. WE HAVE NOT INDEPENDENTLY VERIFIED THE ACCURACY OF THE INFORMATION.

EXAMPLES

The Examples are intended to help you compare the cost of investing in the Contract with the cost of investing in other variable annuity contracts. These costs include Contract Owner transaction expenses, Contract fees, Variable Account annual expenses, and Eligible Fund fees and expenses, and are based on a sample Contract with the maximum possible fees.

The Examples assume that you invest $10,000 in the Contract for the time periods indicated. The Examples also assume that your investment has a 5% return each year and assume the maximum fees and expenses of any of the Eligible Funds. In addition, the Examples assume no transfers were made and no premium taxes were deducted. If these arrangements were considered, the expenses shown would be higher. The Examples also do not take into consideration any fee waiver or expense reimbursement arrangements of the Eligible Funds. If these arrangements were taken into consideration, the expenses shown would be lower.

Although your actual costs may be higher or lower, based on these assumptions, your costs would be:


 
 
 

(1) If you surrender your Contract at the end of the applicable time period:

1 year
3 years
5 years
10 years
$971
$1,355
$1,862
$3,743

(2) If you annuitize your Contract OR if you do not surrender your Contract at the end of the applicable time period:

1 year
3 years
5 years
10 years
$271
$872
$1,562
$3,743

The Examples do not show the effect of premium taxes.  Premium taxes (which range from 0% to 3.5%) are deducted from Contract Value upon full surrender, death or annuitization. The Examples also do not include any of the taxes or penalties you may be required to pay if you surrender your Contract.

The Fee Table and Examples should not be considered a representation of past or future expenses and charges of the Sub-accounts.  Your actual expenses may be greater or less than those shown.  Similarly, the 5% annual rate of return assumed in the Examples are not an estimate or a guarantee of future investment performance. For more information about the expenses of the Eligible Funds, including a description of any applicable fee waiver or expense reimbursement arrangement, see the prospectuses for the Eligible Funds.

CONDENSED FINANCIAL INFORMATION

 
Accumulation Unit Values*
 
Accumulation
Accumulation
Number of
  
 
Unit Value
Unit Value
Accumulation
  
 
Beginning
End
Units End
  
Sub-account
of Year**
of Year
of Year
Year
         
Columbia Money Market Fund
$16.293
$16.873
727,772
2007
 
15.776
16.293
843,387
2006
 
15.559
15.776
1,021,793
2005
 
15.640
15.559
1,095,847
2004
 
15.750
15.640
1,223,256
2003
 
15.774
15.750
1,690,305
2002
 
15.437
15.774
1,955,935
2001
 
14.762
15.437
2,015,415
2000
 
14.284
14.762
2,653,148
1999
 
13.780
14.284
2,099,133
1998
         
Columbia Federal Securities Fund
25.227
26.416
341,594
2007
 
24.663
25.227
394,900
2006
 
24.378
24.663
484,523
2005
 
23.736
24.378
591,927
2004
 
23.449
23.736
705,555
2003
 
21.665
23.449
910,218
2002
 
20.526
21.665
966,699
2001
 
18.762
20.526
1,204,515
2000
 
18.826
18.762
1,664,530
1999
 
17.874
18.826
2,099,027
1998
         
Columbia Strategic Income Fund
24.735
21.688
323,266
2007
 
19.637
24.735
399,005
2006
 
19.596
19.637
489,739
2005
 
18.038
19.596
608,964
2004
 
15.448
18.038
724,519
2003
 
14.433
15.448
953,122
2002
 
14.102
14.433
1,161,047
2001
 
14.291
14.102
1,575,551
2000
 
14.237
14.291
2,404,355
1999
 
13.616
14.237
3,020,397
1998
         
Columbia Asset Allocation Fund
34.278
36.903
1,140,662
2007
 
31.091
34.278
1,338,051
2006
 
29.594
31.091
1,560,361
2005
 
27.284
29.594
1,855,246
2004
 
22.966
27.284
2,223,330
2003
 
26.381
22.966
2,805,912
2002
 
29.460
26.381
3,392,455
2001
 
30.197
29.460
4,546,040
2000
 
27.188
30.197
6,115,748
1999
 
24.497
27.188
7,821,031
1998
         
Columbia Large Cap Growth Fund
36.076
41.186
538,978
2007
 
33.184
36.076
627,785
2006
 
32.124
33.184
780,867
2005
 
33.223
32.124
962,638
2004
 
26.898
33.223
1,190,941
2003
 
39.052
26.898
1,472,056
2002
 
52.532
39.052
1,839,034
2001
 
60.541
52.532
2,465,959
2000
 
44.829
60.541
2,890,859
1999
 
35.538
44.829
3,344,812
1998
         
Columbia Large Cap Value Fund
33.971
34.416
775,722
2007
 
29.152
33.971
959,190
2006
 
27.785
29.152
1,187,349
2005
 
24.767
27.785
1,489,294
2004
 
20.965
24.767
1,818,780
2003
 
27.237
20.965
1,104,793
2002
 
27.788
27.237
1,361,532
2001
 
27.196
27.788
1,736,093
2000
 
24.622
27.196
2,264,494
1999
 
20.780
24.622
2,759,395
1998
         
Columbia Small Company Growth Fund
40.149
44.920
444,879
2007
 
36.218
40.149
536,628
2006
 
35.755
36.218
628,975
2005
 
32.523
35.755
780,903
2004
 
22.882
32.523
940,568
2003
 
30.646
22.882
1,195,825
2002
 
34.541
30.646
1,422,850
2001
 
37.025
34.541
1,863,729
2000
 
25.351
37.025
2,326,515
1999
 
31.085
25.351
3,260,203
1998
         
Columbia International Fund
15.792
16.786
695,899
2007
 
12.793
15.792
825,439
2006
 
11.463
12.793
995,123
2005
 
10.221
11.463
1,218,595
2004
 
7.646
10.221
1,465,973
2003
 
8.948
7.646
519,096
2002
 
11.996
8.948
573,217
2001
 
14.919
11.996
799,370
2000
 
10.761
14.919
942,135
1999
 
9.660
10.761
1,145,641
1998

*Accumulation Unit values are rounded to the nearest tenth of a cent and numbers of accumulation units are rounded to the nearest whole number. See Appendix B  for historical values for the contracts described in that appendix.

**Except for Columbia International Fund, Columbia Strategic Income Fund and Columbia Large Cap Value Fund, each unit value started at $10.00 as of May 1, 1989, which is the date the Eligible Fund Sub-account first became available for Accumulation Units based on a 1.40% asset-based charge. The unit values for the Columbia International Fund, Columbia Strategic Income Fund and Columbia Large Cap Value Fund Sub-accounts were valued at $10.00 on May 2, 1994; July 5, 1994, and July 5, 1994, respectively.

The full financial statements for the Variable Account and Sun Life Assurance Company of Canada (U.S.) are in the Statement of Additional Information.

 
 
 

SUN LIFE (U.S.) AND THE VARIABLE ACCOUNT

We are a stock life insurance company incorporated under the laws of Delaware on January 12, 1970. We do business in 49 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands, and we have an insurance company subsidiary that does business in New York. The Executive Office mailing address is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481.

We are ultimately controlled by Sun Life Financial Inc. ("Sun Life Financial"). Sun Life Financial, a corporation organized in Canada, is a reporting company under the Securities Exchange Act of 1934 with common shares listed on the Toronto, New York, and Philippine stock exchanges.

We are a member of the Insurance Marketplace Standards Association ("IMSA"), and as such may use the IMSA logo and membership in IMSA in advertisements. Being a member means that we have chosen to participate in IMSA’s Life Insurance Ethical Market Conduct Program.

The Variable Account was established by Keyport Life Insurance Company ("Keyport"), a predecessor of Sun Life (U.S.), on January 9, 1980, pursuant to the provisions of Rhode Island law, as a segregated investment account. One December 31, 2003, Keyport was merged with and into Sun Life (U.S.). The Variable Account survived the merger intact. The Variable Account meets the definition of "separate account" under the federal securities laws. The Variable Account is registered with the Securities and Exchange Commission as a unit investment trust under the Investment Company Act of 1940. Such registration does not mean the Securities and Exchange Commission supervises us or the management of the Variable Account.

Obligations under the Contracts are our obligations. Although the assets of the Variable Account are our property, these assets are held separately from our other assets and are not chargeable with liabilities arising out of any other business we may conduct. Income, capital gains and/or capital losses, whether or not realized, from assets allocated to the Variable Account are credited to or charged against the Variable Account without regard to the income, capital gains, and/or capital losses arising out of any other business we may conduct.

PURCHASE PAYMENTS AND APPLICATIONS

The initial purchase payment is due on the Issue Date. The minimum initial purchase payment is $5,000. You may make additional purchase payments. We reserve the right to limit each subsequent purchase payment to at least $1,000. We may reject any purchase payment or any application.

If your application for a Contract is complete and amounts are to be allocated to the Variable Account, we will apply your initial purchase payment to the Variable Account within two business days of receipt. If the application is incomplete, we will notify you and try to complete it within five business days. If it is not complete at the end of this period, we will inform you of the reason for the delay.  The purchase payment will be returned immediately unless you specifically consent to our keeping the purchase payment until the application is complete. Once the application is complete, the purchase payment will be applied within two business days of its completion. Additional purchase payments are allocated to a Contract based on the applicable Sub-account accumulation unit value(s) next determined after we receive it.

We will send you a written notification showing the allocation of all purchase payments and the re-allocation of values after any transfer you have requested. You must notify us immediately of any error. You may contact our Client Service Department at (800) 367-3653. If you fail to notify us within 60 days, we will not assume responsibility for correcting the error.

We will permit others to act on your behalf in certain instances, including:

l
We will accept an application for a Contract signed by an attorney-in-fact if we receive a copy of the power of attorney with the application.
   
l
We will issue a Contract to replace an existing life insurance or annuity policy that we or an affiliated company issued even though we did not previously receive a signed application from you.

Certain dealers or other authorized persons such as employers and Qualified Plan fiduciaries may inform us of your responses to application questions by telephone or by order ticket and cause the initial purchase payment to be paid to us.  If the information is complete, we will issue the Contract with a copy of an application containing that information.  We will send you the Contract and a letter so you may review the information and notify us of any errors.  We may request you to confirm that the information is correct by signing a copy of the application or a Contract delivery receipt.  We will send you a written notice confirming all purchases.  Our liability under any Contract relates only to amounts so confirmed.

INVESTMENTS OF THE VARIABLE ACCOUNT

Allocations of Purchase Payments

We will invest your purchase payments in the Sub-accounts you have chosen. Your selection must specify the percentage of the purchase payment that is allocated to each Sub-account. The percentage for each Sub-account, if not zero, must be at least 10% and a whole number. You may change the allocation percentages without fee, penalty or other charge. You must notify us in writing of your allocation changes unless you, your attorney-in-fact, or another authorized person have given us written authorization to accept telephone allocation instructions.  By allowing us to accept telephone changes, you agree to accept and be bound by our current conditions and procedures. The current conditions and procedures are in Appendix C.  We will notify you of any changes in advance.

The Variable Account is segmented into Sub-accounts.  Each Sub-account contains the shares of one of the Eligible Funds and such shares are purchased at net asset value.  We may add or withdraw Eligible Funds and Sub-accounts as permitted by applicable law.

Eligible Funds

The Contract offers Sub-accounts that invest in a number of Eligible Fund investment options. More comprehensive information about the Eligible Funds, including a discussion of their management, investment objectives, expenses, and potential risks, is found in the current prospectuses for the Eligible Funds (the "Fund Prospectuses"). The Fund Prospectuses should be read in conjunction with this prospectus before you invest. A copy of each Fund Prospectus, as well as a Statement of Additional Information for each Eligible Fund, may be obtained without charge from the Company by calling (800) 752-7215 or by writing to Sun Life Assurance Company of Canada (U.S.), P.O. Box 9133, Wellesley Hills, Massachusetts 02481.

The Eligible Funds may also be available to registered separate accounts offering variable annuity and variable life products of other affiliated and unaffiliated insurance companies, as well as to the Variable Account and other separate accounts of the Company. Although we do not anticipate any disadvantages to this, there is a possibility that a material conflict may arise between the interests of the Variable Account and one or more of the other separate accounts participating in the Eligible Funds. A conflict may occur due to a change in law affecting the operations of variable life and variable annuity separate accounts, differences in your voting instructions and those of other companies, or some other reason. In the event of conflict, we will take any steps necessary to protect you, including withdrawal of the Variable Account from participation in the underlying Eligible Funds which are involved in the conflict or substitution of shares of other Eligible Funds.

Certain of the investment advisers, transfer agents, or underwriters to the Eligible Funds may reimburse us for administrative costs in connection with administering the Eligible Funds as options under the Contracts. These amounts are not charged to you or the Eligible Funds, but are paid from assets of the advisers, transfer agents, or underwriters.

Certain publicly available mutual funds may have similar investment goals and principal investment policies and risks as one or more of the Eligible Funds, and may be managed by a Eligible Fund's portfolio manager(s). While an Eligible Fund may have many similarities to these other funds, its investment performance will differ from their investment performance. This is due to a number of differences between an Eligible Fund and these similar products, including differences in sales charges, expense ratios and cash flows.


 
 
 

Dollar Cost Averaging

Under the program, we make automatic transfers of Accumulation Units on a periodic basis out of the Columbia Money Market Fund Sub-account or the One-Year Guarantee Period Fixed Account option into one or more of the other available Sub-accounts you select.  The program allows you to invest in the Sub-accounts over time rather than all at once.  The program is available for purchase payments and amounts transferred into the Columbia Money Market Fund Sub-account or the One-Year Guarantee Period Fixed Account option.  We reserve the right to limit the number of Sub-accounts you may choose. Currently, there are no limits. If you wish to participate in the program, you must notify us in writing. The One-Year Guarantee Period Fixed Account option of the program is not available under Contracts issued to New Jersey and Washington residents.

A transfer under the program is not subject to a transfer fee and will not be counted as a transfer for purposes of the limitations in "Transfer of Variable Account Value" below. The automatic transfer program does not guarantee a profit nor does it protect against loss in declining markets. We impose no charge for participating in the dollar cost averaging program. The program is described in detail in Appendix D.

Transfer of Variable Account Value

You may transfer Variable Account Value from one Sub-account to another Sub-account and/or to the Fixed Account.

You must notify us in writing of your transfer requests unless you have given us written authorization to accept telephone transfer requests from you or your attorney-in-fact. By authorizing us to accept telephone transfer instructions, you agree to accept our current conditions and procedures. The current conditions and procedures are in Appendix C.  You will be given prior notification of any changes. A person acting on your behalf as an attorney-in-fact may make written transfer requests.

If we receive your transfer requests before 4:00 P.M. Eastern Time, we will initiate them at the close of business that day. We will initiate any requests received after that time at the close of the next business day.  We will execute your request to transfer value by both redeeming and acquiring Accumulation Units on the day we initiate the transfer.

If you transfer 100% of any Sub-account's value, and the allocation formula for purchase payments on your application includes that Sub-account, the allocation formula for future purchase payments will automatically change unless you tell us otherwise.

Currently, we do not charge a transfer fee. We will notify you prior to charging any transfer fee or a change in the limitation on the number of transfers. The fee will not exceed $25. Contracts delivered in Pennsylvania, South Carolina and Texas contain a stated maximum of $15 per transfer.

Frequent Transfers

The Contracts are not designed for frequent transfer activity. If you wish to employ such strategies, do not purchase a Contract. Transfer limitations and other restrictions described below, are subject to our ability to monitor transfer activity. Some Contract Owners and their third party intermediaries engaging in frequent transfer activity may employ a variety of strategies to avoid detection. Despite our efforts to prevent frequent transfer activity, there is no assurance that we will be able to identify such Contract Owners or intermediaries or curtail their transfer activity.

A failure to detect and curtail short-term trading could result in adverse consequences to the Contract Owners.  Short-term trading can increase costs for all Contract Owners as a result of excessive portfolio transaction fees.  In addition, short-term trading can adversely affect a Fund's performance.  If large amounts of money are suddenly transferred out of a Fund, the Fund's investment adviser cannot effectively invest in accordance with the Fund's investment objectives and policies.

     Limitations on Transfers

We discourage frequent transfers of Contract Value among the Sub-accounts. Accordingly, we have established the following policies and procedures to limit transfers as follows:

l
we impose a transfer limit of one transfer every 30 days, or such other period as we may permit with notification of the change to all Contract Owners prior to its effectiveness, and
   
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we limit each transfer to a maximum of $2,000,000, or such greater amount as we may permit with notification of the change to all Contract Owners prior to its effectiveness. We treat all transfer requests for a Contract made on the same day as a single transfer. We may treat as a single transfer all transfers you request on the same day for every Contract you own. The total combined transfer amount is subject to the maximum limitation. If the total amount of the requested transfers exceeds the maximum, we will not execute any of the transfers.

If we have executed a transfer with respect to your Contract as part of a multiple transfer request, we will not execute another transfer request for your Contract for 30 days. Transactions pursuant to optional investment-related programs, such as dollar cost averaging and portfolio rebalancing, are not considered in the application of these limits.

By applying these limitations, we intend to protect the interests of all Contract Owners invested in the Sub-accounts. We have determined that the actions of individuals engaging in significant transfer activity may adversely affect the performance of the Eligible Fund for the Sub-account involved. The movement of values from one Sub-account to another may prevent the appropriate Eligible Fund from taking advantage of investment opportunities because the Eligible Fund must maintain a liquid position in order to handle redemptions. Such movement may also cause a substantial increase in fund transaction costs which all Contract Owners must indirectly bear.

Transfer limitations may prevent you from making a transfer on the date you select. This may result in your Contract Value being lower than it would have been if you had been able to make the transfer.

     Waiver of Transfer Limitations

In certain limited situations, we may accommodate transfers more frequent than one every 30 days. Therefore, we reserve the right to waive transfer limitations, where permitted by law and not adverse to the interests of the relevant Eligible Fund and other shareholders, in the following instances:

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when a new broker of record is designated for the contract;
   
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when the contract owner changes;
   
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when control of the contract passes to the designated beneficiary upon death of the owner or annuitant;
   
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when necessary in our view to avoid hardship to a contract owner; or
   
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when eligible funds are dissolved or merged or substituted.

We reserve the right to change these limitations and exceptions at any time.  Any change will be applied uniformly. We will notify you of any change prior to its effectiveness.

If significant trading activity trading results as a consequence of waiving the transfer limitations, it could expose Contract Owners to certain risks.  The significant trading activity could increase costs for all Contract Owners as a result of excessive portfolio transaction fees.  In addition, the significant trading activity could adversely affect a Fund’s performance.  If large amounts of money are suddenly transferred out of a Fund, the Fund’s investment adviser cannot effectively invest in accordance with the Fund’s investment objectives and policies.   Unless the limitations on transfers policy and the permitted waivers of that policy are applied uniformly, some Contract Owners may experience a different application of the policy and therefore may experience some of these risks.  Too much discretion on our part in allowing the waivers of transfer policy could result in an unequal treatment of Contract Owners by permitting some Contract Owners to engage in frequent transfers while prohibiting others from doing the same.


 
 
 

     Eligible Funds' Shareholder Trading Policies

In addition to the restrictions that we impose (as described above under "Limitations on Transfers"), most of the Eligible Funds have adopted restrictions or other policies about transfers or other purchases and sales of the Eligible Fund's shares. These policies (the "Eligible Funds' Shareholder Trading Policies") are intended to protect the Eligible Fund from short-term trading or other trading practices that are potentially harmful to the Eligible Fund. The Eligible Funds' Shareholder Trading Policies may be more restrictive in some respects than the restrictions that we otherwise would impose, and the Eligible Funds may modify their Shareholder Trading Policies from time to time.

We are legally obligated to provide (at the Eligible Funds' request) information about each amount you cause to be deposited into an Eligible Fund (including by way of Purchase Payments and transfers under your Certificate) or removed from the Eligible Fund (including by way of withdrawals and transfers under your Certificate). If an Eligible Fund identifies you as having violated the Eligible Fund's Shareholder Trading Policies, we are obligated, if the Eligible Fund requests, to restrict or prohibit any further deposits or exchanges by you (or a third party acting on your behalf) in respect of that Eligible Fund. Any such restriction or prohibition may remain in place indefinitely.

Accordingly, if you do not comply with any Eligible Fund's Shareholder Trading Policies, you (or a third party acting on your behalf) may be prohibited from directing any additional amounts into that Eligible Fund or directing any transfers or other exchanges involving that Eligible Fund. You should review and comply with each Eligible Fund's Shareholder Trading Policies, which are disclosed in the Eligible Funds' current prospectuses.

Eligible Funds may differ significantly as to such matters as: (a) the amount, format, and frequency of information that the Eligible Funds request from us about transactions that our customers make; and (b) the extent and nature of any limits or restrictions that the Eligible Funds request us to impose upon such transactions. As a result of these differences, the costs borne by us and (directly or indirectly) by our customers may be significantly increased. Any such additional costs may outweigh any additional protection that would be provided to our customers, particularly in view of the protections already afforded by the trading restrictions that we impose as described under "Limitations on Transfers." Also, if an Eligible Fund imposes more strict trading restrictions than are reasonably necessary under the circumstances, you could be deprived of potentially valuable flexibility to make transactions with respect to that Eligible Fund.  For these and other reasons, we may disagree with the timing or substance of a Eligible Fund's requests for information from us or with any transaction limits or restrictions that the Eligible Fund requests us to impose upon our customers.  If any such disagreement with respect to an Eligible Fund cannot be satisfactorily resolved, the Eligible Fund might be restricted or, subject to obtaining any required regulatory approval, replaced as a variable investment option.

Substitution of Eligible Funds and Other Variable Account Changes

If shares of any of the Eligible Funds are no longer available for investment by the Variable Account or further investment in the shares of an Eligible Fund is no longer appropriate under the Contract, we may add or substitute shares of another Eligible Fund or of another mutual fund for Eligible Fund shares already purchased or to be purchased in the future. Any substitution of securities will comply with the requirements of the Investment Company Act of 1940.

We also reserve the right to make the following changes in the operation of the Variable Account and Eligible Funds:

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to operate the Variable Account in any form permitted by law;
   
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to take any action necessary to comply with applicable law or obtain and continue any exemption from applicable law;
   
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to transfer any assets in any Sub-account to another or to one or more separate investment accounts, or to our general account;
   
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to add, combine or remove Sub-accounts in the Variable Account; and
   
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to change how we assess charges, so long as we do not increase them above the current total charged to the Variable Account and the Eligible Funds in connection with your Contract.

DEDUCTIONS

Deductions for Contract Maintenance Charge

We charge an annual contract maintenance charge of $36 per Contract Year. This charge reimburses us for our expenses incurred in maintaining your Contract. We may not change the contract maintenance charge of any Contract delivered in Pennsylvania, South Carolina, or Texas to be greater than $100 per year. There is no such limit under Contracts delivered in other jurisdictions.

Before the Income Date, we will deduct the contract maintenance charge from the Variable Account Value on each Contract Anniversary and on the date of any total surrender not falling on the Contract Anniversary.

On the Income Date, we will subtract from Variable Account Value a pro-rata portion of the contract maintenance charge due on the next Contract Anniversary. This pro-rata charge covers the period from the prior Contract Anniversary to the Income Date.

Before and after the Income Date, we deduct the contract maintenance charge proportionally from each Sub-account based upon the value each Sub-account bears to the Variable Account Value.

After the Income Date, once annuity payments begin, or after surrender benefits are applied under a settlement option, the contract maintenance charge is guaranteed not to increase.  We will subtract this charge in equal parts from each annuity payment. For example, if annuity payments are monthly, then we will deduct one-twelfth of the annual charge from each payment.

Deductions for Mortality and Expense Risk Charge

Variable annuity payments fluctuate depending on the investment performance of the Sub-accounts.  The payments will not be affected by the mortality experience (death rate) of persons receiving such payments or of the general population. We guarantee that certain total surrenders after your death or the death of the Annuitant will not mean that payments are reduced by a contingent deferred sales charge or will not result in payments that are lower than the amount of purchase payments less any prior partial surrenders. We also assume an expense risk since the contract maintenance charge after the Income Date remains the same and does not change to reflect variations in expenses.

We deduct a mortality and expense risk charge from each Sub-account as part of the calculation of Accumulation Unit Values for each Valuation period. The mortality and expense risk charge is equal, on an annual basis, to 1.25% of the average daily net asset value of each Sub-account. We deduct the charge both before and after the Income Date.

We may deduct less than the full charge from Sub-account values attributable to Contracts issued to our employees and other persons specified in "Distribution of the Contract".

Deductions for Daily Sales Charge

We deduct a daily sales charge from each Sub-account as part of the calculation of Accumulation Unit values for each Valuation Period. This charge is equal, on an annual basis, to 0.15% of the average daily net asset value of each Sub-account. This charge compensates us for certain sales distribution expenses relating to the Contract. We do not deduct the daily sales charge during the annuity period.

We will not deduct this charge from your Sub-account values once we have reached the maximum cumulative daily sales charge limit. We do not deduct this charge from the values of Contracts issued to our employees and other persons specified in "Distribution of the Contract". We may decide not to deduct the charge from Sub-account values attributable to a Contract issued in an internal exchange or transfer of an annuity contract from our general account.

Deductions for Contingent Deferred Sales Charge

We do not deduct a sales charge from the Contract when you purchase it.  We may deduct such a charge if you surrender your Contract.

To determine whether we will deduct a contingent deferred sales charge if you partially or totally surrender your Contract, we maintain a separate set of records. These records identify the date and amount of each purchase payment you have made and the Contract Value over time.

You may make partial surrenders during the Accumulation Period without incurring a contingent deferred sales charge.  You may surrender an amount up to the Contract’s earnings. Earnings equal the Contract Value at the time of surrender, less purchase payments not previously surrendered.

After the first Contract Year, we guarantee that a minimum amount of Contract Value will be free of contingent deferred sales charges each year. This amount is equal to 10% of the Contract Value at the beginning of each Contract Year. This 10% amount will be reduced by the amount of each surrender in a year that represents the Contract's increase in value. The amount of any surrender in excess of this increase in value but not in excess of the remaining 10% amount will be free of contingent deferred sales charges. This portion will be deducted from the purchase payments from the oldest payment to the most recent until the amount is fully deducted. Any amount so deducted will not be subject to a charge.

The following additional amounts will be deducted from the purchase payments in this order: the amount of any surrender in the first Contract Year in excess of the Contract's increase in value at the time of surrender; and the amount of any surrender in any later Contract Year in excess of the Contract's increase in value at the time of surrender (or in excess of the 10% limit if it applies). The contingent deferred sales charge for each purchase payment from which a deduction is made will be equal to (a) x (b), where:

(a)
is the amount so deducted; and
   
(b)
is the applicable percentage for the number of years that have elapsed from the date of the purchase payment to the date of surrender. We measure years from the date of each payment. The applicable percentages for each year are:
   
Year
Percentage
1
7%
2
6%
3
5%
4
4%
5
3%
6
2%
7
1%
8 and thereafter
0%

We calculate the contingent deferred sales charges for each purchase payment. The lesser of this amount and the maximum cumulative sales charge will be deducted from Contract Value in the same manner as the surrender amount. The maximum cumulative sales charge is equal to (a) - (b), where:

(a)
is 8.5% of the total purchase payments made to the Contract, and
   
(b)
is the sum of (i) all prior contingent deferred sales charge deductions from the Contract Value and (ii) all prior daily sales charges attributable to the Contract Value allocated to the Sub-accounts. After each surrender, our records will be adjusted to reflect any deductions made from the applicable purchase payments.

The contingent deferred sales charge is used to cover expenses we incur selling the Contract, including compensation paid to selling dealers and the cost of sales literature. Selling dealers may receive up to 6.00% of purchase payments. (See "Distribution of the Contracts.") We pay any expenses not covered by the charge from our general account, which may include monies deducted from the Variable Account for the mortality and expense risk charge.

The contingent deferred sales charge is not applicable to Contracts issued to our employees and other persons specified in "Distribution of the Contract".

We may reduce or change any contingent deferred sales charge percentage to 0% under a Contract issued in an internal exchange or transfer of an annuity contract from our general account.

We may establish a systematic withdrawal program to allow you to request systematic partial surrenders in the first Contract Year up to 10% of the initial purchase payment. Under this program, we may waive the contingent deferred sales charge on the amount of any partial surrender that is in excess of the Contract's increase in value at the time the surrender occurs. Any such excess surrender amount will not be deducted from the initial purchase payment. This means that the waiver of the contingent deferred sales charge is not a permanent waiver and we can collect the charge in the event that you later make a non-systematic partial or total surrender.

Deductions for Transfers of Variable Account Value

Currently, we do not charge a transfer fee. However, the Contract allows us to charge up to $25 for each transfer in excess of 12 per year. Contracts delivered in Pennsylvania, South Carolina and Texas contain a stated maximum of $15 per transfer. We will notify you prior to the imposition of any fee.

Deductions for Premium Taxes

We deduct the amount of any premium taxes levied by any state or governmental entity when paid unless we elect to defer such deduction. We can not anticipate precisely the amount of premium tax payable on any transaction involving the Contract. Premium taxes depend, among other things, on the type of Contract (Qualified or Non-Qualified), on your state of residence, the state of residence of the Annuitant, our status within such states, and the insurance tax laws of such states. Currently, premium taxes range from 0% to 3.5% of either total purchase payments or Contract Value.

Deductions for Income Taxes

We deduct income taxes from any amount payable under the Contract that a governmental authority requires us to withhold. See "Income Tax Withholding" and "Tax-Sheltered Annuities".

Total Variable Account Expenses

The total Variable Account expenses you will incur are the contract maintenance charge, the mortality and expense risk charge, and the daily sales charge.

The value of the assets in the Variable Account will reflect the value of Eligible Fund shares and the deductions from and expenses paid out of the assets of the Eligible Funds. These deductions and expenses are described in the Eligible Fund prospectus.

THE CONTRACTS

Variable Account Value

The Variable Account Value for your Contract is based on the sum of your proportionate interest in value of each Sub-account where you have allocated values. We determine the value of each Sub-account at any time by multiplying the number of Accumulation Units attributable to that Sub-account by its Accumulation Unit value.

Each purchase payment you make results in the credit of additional Accumulation Units to your Contract and the appropriate Sub-account.  Purchase payments are credited to your Contract using the Accumulation Unit Value that is calculated after we receive your purchase payment.  The number of additional units for any Sub-account will equal the amount allocated to that Sub-account divided by the Accumulation Unit value for that Sub-account at the time of investment. We process transactions other than purchase payments using the Accumulation Unit value that is calculated at the end of the Valuation Period during which the transaction occurs.

Valuation Periods

We determine the value of the Variable Account each valuation period using the net asset value of the Eligible Fund shares. A valuation period is the period beginning at 4:00 P.M. (ET) which is the close of trading on the New York Stock Exchange and ending at the close of trading for the next business day.  The New York Stock Exchange is currently closed on weekends, New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.

Net Investment Factor

Your Variable Account Value will fluctuate with the investment results of the underlying Eligible Funds you have selected. In order to determine how these fluctuations affect value, we use an Accumulation Unit value. Each Sub-account has its own Accumulation Units and value per unit. We determine the unit value applicable during any valuation period at the end of that period.

When we first purchased Eligible Fund shares on behalf of the Variable Account, we valued each Accumulation Unit at $10.00.  The Unit value for each Sub-account in any valuation period thereafter is determined by multiplying the value for the prior period by a net investment factor. This factor may be greater or less than 1.0; therefore, the Accumulation Unit may increase or decrease from valuation period to valuation period. We calculate a net investment factor for each Sub-account according to the following formula (a / b) - c, where:

(a)
is equal to:
     
 
(i)
the net asset value per share of the Eligible Fund at the end of the valuation period; plus
     
 
(ii)
the per share amount of any dividend or other distribution the Eligible Fund made if the "ex-dividend" date for such distribution occurs during that same valuation period.
     
(b)
is the net asset value per share of the Eligible Fund at the end of the prior valuation period.
     
(c)
is equal to:
     
 
(i)
the valuation period equivalent of the annual rate for the mortality and expense risk charge; plus
     
 
(ii)
the valuation period equivalent of the annual rate for the daily sales charge; plus
     
 
(iii)
a charge factor, if any, for any tax provision established by us as a result of the operations of that Sub-account.

If we have deducted the maximum cumulative sales charge limit, we will not deduct the daily sales charge in (c) (ii) above.  For Contracts issued to our employees and other persons specified in "Distribution of the Contract", the mortality and expense risk charge in (c) (i) above is .35% and the daily sales charge in (c)(ii) above is eliminated.  We may eliminate the daily sales charge in (c)(ii) above for certain Contracts we issue in an internal exchange or transfer.

Modification of the Contract

Only our President or Secretary may agree to alter the Contract or waive any of its terms. A change may be made to the Contract if there have been changes in applicable law or interpretations of law.  Any changes will be made in writing and with your consent, except as may be required by applicable law.

Right to Revoke

You may return the Contract within ten days after you receive it by delivering or mailing it to us. The postmark on a properly addressed and postage-prepaid envelope determines if a Contract is returned within the period. We will treat the returned Contract as if we never issued it and we will refund: (a) the initial purchase payment for Contracts delivered in Connecticut, Georgia, Idaho, North Carolina, South Carolina, Utah, Washington and West Virginia; (b) the Contract Value for Contracts delivered in Arizona, California (if you are age 60 or older; see below), Kansas, Minnesota, North Dakota and Pennsylvania; and (c) the lesser of the initial purchase payment or the Contract Value for Contracts delivered elsewhere, including in California if you are under age 60.

If we deliver your Contract to you in California and you are age 60 or older, you may return the Contract to us or the agent from whom you purchased it. If you return the Contract within 30 days after you receive it, we will refund the Contract Value.

DEATH PROVISIONS FOR NON-QUALIFIED CONTRACTS

Death of Primary Owner, Joint Owner or Certain Non-Owner Annuitant. If the Contract is In Force, you or any joint Owner dies or the Annuitant dies under a Contract when a non-natural person such as a trust owns the Contract, we will treat the Designated Beneficiary as the Contract Owner after such a death.

Under this paragraph you are the covered person. However, if there is a non-natural Owner such as a trust, the covered person is the Annuitant. If the covered person dies, we will increase the Contract Value if it is less than the guaranteed minimum death value amount ("GMDV").  Except for certain previously issued Contracts, the GMDV is the greater of:

(a)
the sum of all purchase payments made through the date of death, less all partial surrenders made through the date of death; and
   
(b)
the Anniversary Value.  We will compute an "Anniversary Value" for each Contract Anniversary (if any) before the 81st birthday of the covered person and we will use the greatest of such "Anniversary Values".  Initially, the "Anniversary Value" for each applicable Contract Anniversary is equal to the Contract Value on that Anniversary.  It is then increased by any purchase payments made from that Anniversary until the date of death, and decreased by the following amount at the time of each partial surrender made from that Anniversary until the date of death: the partial surrender amount divided by the Contract Value right before the surrender, multiplied by the "Anniversary Value" right before the surrender.

The GMDV will be different for any Contract issued between July 1, 1993 and before the later of July 5, 1994 and the date we changed the death provisions in the state of issue of a Contract.  Contracts on application form number FLEX-APP(REV)3, FLEX-APP-OH(REV)3 or FLEX-APP-PA(REV)3 are affected. You or your agent may call 800-437-4466 to see when the change was made in your state.

The GMDV for such a Contract is the greatest of (a) above, (b) above, and the Contract Value on the seventh Contract Anniversary, plus any purchase payments made from that Anniversary until the date of death, and less any partial surrenders made from that Anniversary until the date of death. The GMDV for any other Contract issued before May 1, 1996 is the greater of (a) above and the Contract Value.

When we receive due proof of the covered person’s death, we will compare, as of the date of death, the Contract Value and the GMDV. If the Contract Value is less than the GMDV, we will increase the current Contract Value by the amount of the difference. Note that while the amount of the difference is determined as of the date of death, that amount is not added to the Contract Value until we receive due proof of death. We allocate the amount credited, if any, to the Variable Account and/or the Fixed Account based on the purchase payment allocation in effect when we receive due proof of death.  The Designated Beneficiary may, by the later of the 90th day after the covered person’s death and the 60th day after we receive proof of the death, surrender the Contract for the Contract Value without incurring any applicable contingent deferred sales charge. For a surrender after the applicable 90 or 60 day period and for a surrender at any time after the death of a non-covered person, we will pay the Surrender Value. If the Contract is not surrendered, it will continue for the time period specified below.

If the decedent’s surviving spouse is the sole Designated Beneficiary, he or she will become the new sole primary Owner as of the decedent’s date of the death. If the Annuitant is the decedent, the new Annuitant will be any living contingent annuitant, otherwise the new Annuitant will be the surviving spouse. The Contract can continue until another death occurs. Except for this paragraph, all of "Death Provisions" will apply to that subsequent death.

In all other cases, the Contract may continue up to five years from the date of death. During this period, the Designated Beneficiary may exercise all ownership rights, including the right to make transfers or partial surrenders or the right to totally surrender the Contract for its Surrender Value. If the Contract is still in effect at the end of the five-year period, we will automatically end it by paying the Contract Value to the Designated Beneficiary. If the Designated Beneficiary is not alive, we will pay any person(s) named by the Designated Beneficiary in writing; otherwise we will pay the Designated Beneficiary’s estate.

Payment of Benefits.  Instead of receiving a lump sum, you or any Designated Beneficiary may direct us in writing to pay any benefit of $2,000 or more under an annuity payment option that meets the following:

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the first payment to the Designated Beneficiary must be made no later than one year after the date of death;
   
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payments must be made over the life of the Designated Beneficiary or over a period not extending beyond that person’s life expectancy; and
   
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any payment option that provides for payments to continue after the death of the Designated Beneficiary will not allow the successor payee to extend the period of time over which the remaining payments are to be made.

Death of Certain Non-Contract Owner Annuitant.  These provisions apply if, while the Contract is In Force, the Annuitant dies, you are not the Annuitant, and you are a natural person. The Contract will continue after the Annuitant's death. The new Annuitant will be any living contingent annuitant. If there is no living contingent annuitant, then you will be the new Annuitant.

DEATH PROVISIONS FOR QUALIFIED CONTRACTS

Death of Annuitant.  If the Annuitant dies while the Contract is In Force, the Designated Beneficiary will control the Contract. We will increase the Contract Value, as provided below, if it is less than the guaranteed minimum death value amount ("GMDV"). The GMDV is the amount defined on page 20. When we receive due proof of the Annuitant's death, we will compare, as of the date of death, the Contract Value to the GMDV. If the Contract Value is less than the GMDV, we will increase the current Contract Value by the amount of the difference. Note that while the amount of the difference is determined as of the date of death, that amount is not added to the Contract Value until we receive due proof of death.

We will allocate the amount credited, if any, to the Variable Account and/or the Fixed Account based on the purchase payment allocation selection that is in effect when we receive due proof of death.  The Designated Beneficiary may, by the later of the 90th day after the Annuitant’s death and the 60th day after we are notified of the death, surrender the Contract for the Contract Value without incurring any applicable contingent deferred sales charge. If the surrender is made after the applicable 90 or 60 day period, we will pay the Surrender Value.

If the Designated Beneficiary does not surrender the Contract, it may continue for the time period permitted by the Internal Revenue Code provisions applicable to the particular Qualified Plan. During this period, the Designated Beneficiary may exercise all ownership rights, including the right to make transfers or partial surrenders or the right to totally surrender the Contract for its Surrender Value. If the Contract is still in effect at the end of the period, we will automatically end it by paying the Contract Value to the Designated Beneficiary. If the Designated Beneficiary is not alive then, we will pay any person(s) named by the Designated Beneficiary in writing; otherwise, we will pay the Designated Beneficiary's estate.

Payment of Benefits.  You or any Designated Beneficiary may direct us in writing to pay any benefit of $2,000 or more under an annuity payment option that meets the following:

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the first payment to the Designated Beneficiary must be made no later than one year after the date of death;
   
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payments must be made over the life of the Designated Beneficiary or over a period not extending beyond that person’s life expectancy; and
   
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any payment option that provides for payments to continue after the death of the Designated Beneficiary will not allow the successor payee to extend the period of time over which the remaining payments are to be made.


 
 
 

CONTRACT OWNERSHIP

The Contract Owner shall be the person designated in the application and may exercise all the rights of the Contract.  Joint Contract Owners are permitted.  Contingent Contract Owners are not permitted.

You may direct us in writing to change the Contract Owner, primary beneficiary, contingent beneficiary or contingent annuitant. If the selection of a beneficiary or annuitant was designated "irrevocable", that selection may be changed only with that person's written consent.

Because a change of Contract Owner by means of a gift may be a taxable event, you should consult a qualified tax professional as to the tax consequences resulting from such a transfer.

Any Qualified Contract may have limitations on transfer of ownership. You should consult a qualified tax professional as to the tax consequences resulting from such a transfer.

ASSIGNMENT

You may assign the Contract at any time. You must file a copy of any assignment with us. Your rights and those of any revocably-named person will be subject to the assignment. A Qualified Contract may have limitations on your ability to assign the Contract.

Because an assignment may be a taxable event, you should consult the plan administrator and a qualified tax professional as to the tax consequences resulting from any such assignment.

SURRENDERS

You may partially surrender the Contract by notifying us in writing. We reserve the right to limit the minimum amount to be surrendered to at least $300.  We may permit a lesser amount with a systematic withdrawal program. If the Contract Value after a partial surrender would be below $2,500, we will treat the request as a surrender of only the amount over $2,500. The amount surrendered will include any applicable contingent deferred sales charge and may be greater than the amount of the surrender check requested. Unless you specify otherwise, we will deduct the total amount surrendered from all Sub-accounts of the Variable Account in the proportion that the value in each Sub-account bears to the total Variable Account Value. If there is no or insufficient value in the Variable Account, then the amount surrendered, or the insufficient portion, will be deducted from the Fixed Account.

You may totally surrender the Contract by notifying us in writing.  Surrendering the Contract will end it. Upon surrender, you will receive the Surrender Value.

We will pay the amount of any surrender within seven days of receipt of your request. Alternatively, you may apply any surrender benefit of at least $2,000 to an annuity payment option for yourself. If the Contract Owner is not a natural person, we must consent to the selection of an annuity payment option.

You may not make partial surrenders or total surrender under Settlement Options based on life contingencies after annuity payments have begun. You may make partial surrenders from or total surrender under Settlement Option 1, described in "Settlement Options" below, which is not based on life contingencies if you have selected a variable payout. Any partial surrender will reduce your future annuity payments.

Because of the potential tax consequences of a full or partial surrender, you should consult a qualified tax professional regarding a surrender.

Participants under Qualified Plans as well as Contract Owners, Annuitants, and Designated Beneficiaries are cautioned that you may not be able to partially or totally surrender the Contract under a Qualified Plan. You should seek competent advice concerning the terms and conditions of the particular Qualified Plan and use of the Contract with that Plan.


 
 
 

ANNUITY PROVISIONS

Annuity Benefits

If the Annuitant is alive on the Income Date and the Contract is In Force, we will begin payments to the Annuitant under the payment option or options you have chosen. We determine the amount of the payments on the Income Date by applying to the Option you choose:

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your Contract Value;
   
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subtracting any premium taxes not previously deducted; and
   
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subtracting any applicable contract maintenance charge on the Income Date in accordance with the Option selected.

Income Date and Settlement Option

You may select an Income Date and Settlement Option at the time of application. If you do not select a Settlement Option, we automatically choose Option 2. If you do not select an Income Date for the Annuitant, the Income Date will automatically be the first day of the calendar month following the later of:

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the Annuitant's 75th birthday, or
   
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the 10th Contract Anniversary.

You may continue to make purchase payments until you reach your Income Date.

Change in Income Date and Settlement Option

You may choose or change an Income Date or Settlement Option by writing to us at least 30 days before the Income Date. However, any Income Date must be:

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for variable annuity payment options, not earlier than the second calendar month after the Issue Date;
   
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for fixed annuity payment options, not earlier than the first calendar month after the end of the first Contract Year;
   
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not later than the calendar month after the Annuitant's 90th birthday; and
   
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the first day of a calendar month.

Settlement Options

The Settlement Options are:

Option 1:
Income for a Fixed Number of Years;
   
Option 2:
Life Income with 10 Years of Payments Guaranteed; and
   
Option 3:
Joint and Last Survivor Income.

You may arrange other options if we agree. Each option is available in two forms - as a variable annuity for use with the Variable Account and as a fixed annuity for use with the Fixed Account. Variable annuity payments will fluctuate.  Fixed annuity payments will not fluctuate.

Unless you choose otherwise, we will apply Variable Account Value to a variable annuity option and Fixed Account Value to a fixed annuity option. The same amount applied to a variable option and a fixed option will produce a different initial payment and different subsequent payments.

The payee is the person who will receive the sum payable under a payment option. Any payment option that provides for payments to continue after the death of the payee will not allow the successor payee to extend the period of time over which the remaining payments are to be made.

If the amount available under any variable or fixed option is less than $5,000, we reserve the right to pay such amount in one sum to the payee in lieu of the payment otherwise provided for.

We will make annuity payments monthly unless you have requested in writing quarterly, semi-annual or annual payments. However, if any payment would be less than $100, we may reduce the frequency of payments to a period that will result in each payment being at least $100.

Option 1: Income for a Fixed Number of Years.  We will pay periodic payments for a chosen number of years, not less than 5 nor over 50. You may choose a period of years over 30 only if it does not exceed the difference between age 100 and the Annuitant's age on the date of the first payment.  At any time while we are making variable annuity payments, the payee may elect to receive the following amount:

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the present value of the remaining payments, commuted at the interest rate used to create the annuity factor for this option. This interest rate is 6% per year (3% per year for Florida Contracts and 5% per year for Oregon Contracts), unless you chose 3% per year in writing; less
   
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any contingent deferred sales charge due by treating the value defined above as a total surrender.

Instead of receiving a lump sum, the payee may elect another payment option and we will not deduct the amount applied to the option by the contingent deferred sales charge above.

If, at the death of the payee, Option 1 payments have been made for less than the chosen number of years:

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we will continue payments during the remainder of the period to the successor payee; or
   
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the successor payee may elect to receive in a lump sum the present value of the remaining payments, commuted at the interest rate used to create the annuity factor for this option. For the variable annuity, this interest rate is 6% per year (3% per year for Florida Contracts and 5% per year for Oregon Contracts), unless the payee chose 3% per year in writing.

The mortality and expense risk charge is deducted during the Option 1 payment period but we have no mortality risk during this period.

You may choose a "level monthly" payment option for variable payments under Option 1. Under this option, we convert your annual payment into 12 equal monthly payments. Thus the monthly payment amount changes annually instead of monthly.  We will determine each annual payment as described in "Variable Annuity Payment Values", place each annual payment in our general account, and distribute it in 12 equal monthly payments.  The sum of the 12 monthly payments will exceed the annual payment amount because of an interest rate factor we use which will vary from year to year. If the payments are commuted, (1) we will use the commutation method described above for calculating the present value of remaining payments and (2) use the interest rate that determined the current 12 payments to commute any unpaid monthly payments.

See "Annuity Payments" for the manner in which Option 1 may be taxed.

Option 2: Life Income with 10 Years of Payments Guaranteed. We will pay periodic payments during the lifetime of the payee. If, at the death of the payee, payments have been made for fewer than 10 years:

 
 
 


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we will continue payments during the remainder of the period to the successor payee; or
   
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such successor payee may elect to receive in a lump sum the present value of the remaining payments, commuted at the interest rate used to create the annuity factor for this option. For the variable annuity, this interest rate is 6% per year (3% per year for Florida Contracts and 5% per year for Oregon Contracts), unless the payee chose 3% per year in writing.

The amount of the annuity payments will depend on the age of the payee on the Income Date and it may also depend on the payee’s sex.

Option 3: Joint and Last Survivor Income. We will pay periodic payments for as long as either the payee or a designated second natural person is alive. The amount of the annuity payments will depend on the age of both persons on the Income Date and it may also depend on each person’s sex. It is possible under this option to receive only one annuity payment if both payees die after the receipt of the first payment or to receive only two annuity payments if both payees die after receipt of the second payment and so on.

Variable Annuity Payment Values

We determine the amount of the first variable annuity payment by multiplying the Contract Value you are applying to variable annuity payments by the annuity purchase rate for the Settlement Option you have selected. The annuity purchase rates are based on an assumed annual investment return ("AIR") of 6% per year (3% per year for Florida Contracts and 5% for Oregon Contracts), unless you choose 3% in writing. (See below and "Variable Annuity Payment Values" in the Statement of Additional Information for more information on AIRs and how your initial variable payment is calculated.)

Subsequent variable annuity payments will fluctuate in amount and reflect whether the actual investment return of the selected Sub-account(s) (after deducting the mortality and expense risk charge) is better or worse than the assumed investment return. The total dollar amount of each variable annuity payment will be equal to:

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the sum of all Sub-account payments; less
   
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the pro-rata amount of the annual contract maintenance charge.

Currently there is no limit on the number of times or the frequency with which a payee may instruct us to change the Sub-account(s) used to determine the amount of the variable annuity payments. Any change requested must be at least six months after a prior selection.

If you apply the same amount to a particular payment option, a 5% or 6% AIR will result in a larger initial payment than will a 3% AIR. You should note, however, that, assuming the same investment performance, your subsequent payments using a 5% or 6% AIR will increase by a smaller percentage (when they increase) and decrease by a larger percentage (when they decrease) than will subsequent payments using a 3% AIR. Indeed, it is possible that after a sufficient period of time, payments determined using a 5% or 6% AIR may be lower than payments commencing at the same time using the same Sub-accounts but a 3% AIR. Note that if you select Option 1 (Income for a Fixed Number of Years) and payments continue for the entire period, the 5% or 6% AIR payment amount will start out being larger than the 3% AIR amount but eventually the 5% or 6% payment amount will become less than the 3% AIR payment amount. Whether you would be better off choosing a higher or lower AIR depends on the annuity payment option you choose, the investment performance of the Sub-accounts you choose, and the period for which payments are received.

Proof of Age, Sex, and Survival of Annuitant

We may require proof of age, sex or survival of any payee upon whose age, sex or survival payments depend. If the age or sex has been misstated, we will compute the amount payable based on the correct age and sex. If income payments have begun, we will pay in full any underpayments with the next annuity payment. Any overpayments, unless repaid in one sum, will be deducted from future annuity payments until we are repaid in full.

SUSPENSION OF PAYMENTS

We reserve the right to postpone surrender payments from the Fixed Account for up to six months. We may suspend or postpone any type of payment from the Variable Account for any period when:

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the New York Stock Exchange is closed other than customary weekend or holiday closings;
   
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trading on the Exchange is restricted;
   
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an emergency exists as a result of which it is not reasonably practicable to dispose of securities held in the Variable Account or determine their value; or
   
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the Securities and Exchange Commission permits delay for the protection of security holders.

The applicable rules and regulations of the Securities and Exchange Commission shall govern as to whether the two latter conditions described above exist.

TAX STATUS

Introduction

This section provides general information on the federal income tax consequences of ownership of a Contract based upon our understanding of current federal tax laws and is not intended as tax advice. Actual federal tax consequences will vary depending on, among other things, whether the Contract is issued under a Qualified Plan and the type of retirement plan under which your Contract is issued. Also, legislation altering the current tax treatment of annuity contracts could be enacted in the future and could apply retroactively to Contracts that were purchased before the date of enactment. We make no attempt to consider any applicable federal estate, federal gift, state, or other tax laws. We also make no guarantee regarding the federal, state, or local tax status of any Contract or any transaction involving any Contract. You should consult a qualified tax professional for advice before purchasing a Contract or executing any other transaction (such as a rollover, distribution, withdrawal or payment) involving a Contract.

You may purchase a Contract that is not issued under a Qualified Plan ("Non-Qualified Contract") or a Contract that is used under a Plan that is Qualified under the provisions of the Internal Revenue Code of 1986, as amended (the "Code") (a "Qualified Contract").  The ultimate effect of federal income taxes on the Contract Value, on annuity payments, and on the economic benefit to the Contract Owner, Annuitant or Designated Beneficiary depends on the type of retirement plan for which you purchase the Contract and upon the tax and employment status of the individual concerned.

Taxation of Annuities in General

For federal income tax purposes, purchase payments made under Non-Qualified Contracts are not deductible.  Under certain circumstances, purchase payments made under Qualified Contracts may be excludible or deductible from taxable income.  Any such amounts will also be excluded from the cost basis for purposes of determining the taxable portion of any distributions from a Qualified Contract.

You should note that a qualified retirement plan generally provides tax deferral regardless of whether the plan invests in an annuity contract.  For that reason, no decision to purchase a Qualified Contract should be based on the assumption that the purchase of a Qualified Contract is necessary to obtain tax deferral under a qualified plan.

Section 72 of the Code governs taxation of annuities in general. There are no income taxes on increases in the value of a Contract until a distribution occurs, in the form of a full surrender, a partial surrender, an assignment or gift of the Contract, or annuity payments. A trust or other entity owning a Non-Qualified Contract other than as an agent for an individual is taxed differently; increases in the value of a Contract are taxed yearly whether or not a distribution occurs.

Surrenders, Partial Surrenders, Death Benefit Payments, Assignments and Gifts. If you fully surrender your Contract, the portion of the surrender payment that exceeds your cost basis in the Contract is subject to tax as ordinary income. For Non-Qualified Contracts, the cost basis is generally the amount of the purchase payments made for the Contract. For Qualified Contracts, the cost basis is generally zero and the entire surrender payment is generally taxed as ordinary income. A Designated Beneficiary receiving a lump sum death benefit payment after your death or the death of the Annuitant is similarly taxed on the portion of the amount that exceeds your cost basis in the Contract. If the Designated Beneficiary elects to receive annuity payments that begin within one year of the decedent's death, different tax rules apply. See "Annuity Payments" below. For Non-Qualified Contracts, the tax treatment applicable to Designated Beneficiaries may be contrasted with the tax treatment applicable to persons inheriting and then selling mutual fund shares who receive a "stepped-up" basis equal to the date-of-death value of their shares and therefore will pay no tax on the sale of their share unless the sale price exceeds the date-of-death value.

Partial surrenders received under Non-Qualified Contracts prior to annuitization are first included in gross income to the extent cash value (determined without regard to surrender charges) exceeds purchase payments. Then, to the extent the cash value does not exceed purchase payments, such surrenders are treated as a non-taxable return of principal to you. There is no definition of “cash value” in the Code and, for tax reporting purposes, we are currently treating it as the Contract Value.  However, there can be no assurance that the IRS will agree that this is the correct cash value.  The IRS could, for example, determine that the cash value is the Contract Value plus an additional amount representing the value of a death benefit in your Contract.  If this were to occur, any withdrawal could have a higher proportion of the withdrawal derived from taxable investment earnings.

For partial surrenders under a Qualified Contract, a portion of each payment is treated as a non-taxable return of principal and the remaining amount is treated as taxable income. Since the cost basis of Qualified Contracts is generally zero, partial surrender amounts will generally be fully taxed as ordinary income.

If you assign or pledge a Non-Qualified Contract, you will be subject to taxation under the rules applicable to surrenders. If you give away your Contract to anyone other than your spouse, you are treated for income tax purposes as if you had fully surrendered the Contract. If the transfer is to a charity, you may be allowed a deduction for some or all of the value of the Contract.

A special computational rule applies if we issue to you, during any calendar year, two or more Contracts or one or more Contracts and one or more of our other annuity contracts. Under this rule, all of the contracts will be treated as one contract. We believe this means that the amount of any distribution under any one Contract will be includable in gross income to the extent that at the time of distribution the sum of the values for all the Contracts exceeds the cost bases for all the contracts.

Annuity Payments. We determine the non-taxable portion of each variable annuity payment by dividing the cost basis of your values allocated to Variable Account Value by the total number of expected payments.  We determine the non-taxable portion of each fixed annuity payment with an  "exclusion ratio" formula which establishes the ratio that the cost basis of your values allocated to Fixed Account Value bears to the total expected value of annuity payments for the term of the annuity. The remaining portion of each payment is taxable. Such taxable portion is taxed at ordinary income rates. For Qualified Contracts, the cost basis is generally zero.

With annuity payments based on life contingencies, the payments will become fully taxable once the payee lives longer than the life expectancy used to calculate the non-taxable portion of the prior payments, if any. Because variable annuity payments can increase over time and because certain payment options provide for a lump sum right of commutation, it is possible that the IRS could determine that variable annuity payments should not be taxed as described above but instead should be taxed as if they were received under an agreement to pay interest.  This determination would result in a higher amount (up to 100%) of certain payments being taxable.

With respect to the "level monthly" payment option available under Settlement Option 1, pursuant to which each annual payment is placed in our general account and paid out with interest in twelve equal monthly payments, it is possible the IRS could determine that receipt of the first monthly payout of each annual payment is constructive receipt of the entire annual payment. Thus, the total taxable amount for each annual payment would be accelerated to the time of the first monthly payout and reported in the tax year in which the first monthly payout is received. This acceleration would affect you if your first monthly payment for each year is received in a month other than January since those of your 12 monthly payments that are actually received in the next tax year would be treated as being constructively received (and taxable) in the current tax year.

Following any change by the payee to variable annuity payments under Settlement Option 1, other than a change of the payment day of the month or a change from a regular periodic income payment option to a "level monthly" payment option (or vice versa) where the remaining payment length stays the same, the non-taxable portion of each payment will be recalculated in accordance with IRS standards.

The Code does not specifically address partial surrenders after annuity payments have begun. Based on a private letter ruling issued by the IRS in 2000, it is our intention to report as taxable income the portion of any partial surrender from variable annuity Settlement Option 1 that does not exceed immediately before the partial surrender the present value of remaining payments less the Contract's remaining cost basis. Under this approach, a partial surrender of $10,000 when the present value is $150,000 and the remaining cost basis is $145,000 would result in taxable income of $5,000 being reported. Since private letter rulings do not bind the IRS, the IRS could take the position that the Code requires the full amount of the partial surrender ($10,000 in the example) to be treated as taxable income. Under either approach to determining the taxable income associated with a partial surrender, some taxpayers, such as those under age 59 1/2, could be subject to additional tax penalties. Because of the potential for adverse tax results as described above, you should carefully consider, prior to making a partial surrender, your need for funds from the Contract and the tax implications. You should also consult a qualified tax professional prior to making a partial surrender.

Penalty Tax. Payments received by you, Annuitants, and Designated Beneficiaries under Contracts may be subject to both ordinary income taxes and a penalty tax equal to 10% of the amount received that is includable in income. The penalty tax is not imposed on amounts received for Non-Qualified Contracts:

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after the taxpayer attains age 59-1/2;
   
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in a series of substantially equal periodic payments made for life or life expectancy;
   
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after the death of the Contract Owner (or, where the Contract Owner is not a natural person, after the death of the primary Annuitant, as defined in the Code);
   
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if the taxpayer becomes totally and permanently disabled; or
   
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under a Non-Qualified immediate annuity contract that provides for a series of substantially equal periodic payments (not less frequently than annually), provided that only one purchase payment is made to the Contract, that the Contract is not issued as a result of a Section 1035 exchange, and that the first annuity payment begins in the first Contract Year.

Similar exceptions to the 10% penalty tax apply to distributions from Qualified Contracts.

Income Tax Withholding. We are required to withhold federal income taxes on taxable amounts paid under Contracts unless the recipient elects not to have withholding apply. We will notify recipients of their right to elect not to have withholding apply. See "Tax-Sheltered Annuities" (TSAs) for an alternative type of withholding that may apply to distributions from TSAs that are eligible for rollover to another TSA, an individual retirement annuity or account (IRA), a qualified trust or an eligible deferred compensation plan of a state or local government.

Section 1035 Exchanges. You may purchase a Non-Qualified Contract with proceeds from the surrender of an existing annuity contract. Such a transaction may qualify as a tax-free exchange pursuant to Section 1035 of the Code. It is our understanding that in such an event:

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the new Contract will be subject to the distribution-at-death rules described in "Death Provisions for Non-Qualified Contracts"
   
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purchase payments made between August 14, 1982 and January 18, 1985 and the income allocable to them will, following an exchange, no longer be covered by a "grandfathered" exception to the penalty tax for a distribution of income that is allocable to an investment made over ten years prior to the distribution; and
   

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purchase payments made before August 14, 1982 and the income allocable to them will, following an exchange, continue to receive the following "grandfathered" tax treatment under prior law:
   
 
(i)
the penalty tax does not apply to any distribution;
     
 
(ii)
partial surrenders are treated first as a non-taxable return of principal and then a taxable return of income; and
     
 
(iii)
assignments are not treated as surrenders subject to taxation.

Diversification Standards. The U.S. Secretary of the Treasury has issued regulations that set standards for diversification of the investments underlying variable annuity contracts (other than pension plan contracts). The Eligible Funds intend to meet the diversification requirements for the Contract, as those requirements may change from time to time. If the diversification requirements are not satisfied, the Contract will not be treated as an annuity contract. As a consequence, income earned on a Contract would be taxable to you as ordinary income in the year in which diversification requirements were not satisfied, including previously non-taxable income earned in prior years.

The IRS has stated that satisfaction of the diversification requirements described above by itself does not prevent a contract owner from being treated as the owner of separate account assets under an "owner control" test.  If a contract owner is treated as the owner of separate account assets for tax purposes, the contract owner would be subject to taxation on the income and gains from the separate account assets. In published revenue rulings through 1982 and then again in 2003, the IRS has stated that a variable contract owner will be considered the owner of separate account assets if the owner possesses incidents of ownership such as the ability to exercise control over the investment of the assets.  In Revenue Ruling 2003-91, the IRS considered certain variable annuity and variable life insurance contracts and concluded that the owners of the variable contracts would not be considered the owners of the contracts' underlying assets for federal income tax purposes.

Revenue Ruling 2003-91 states that the determination of whether the owner of a variable contract possesses sufficient incidents of ownership over the assets underlying the variable contract so as to be deemed the owner of those assets for federal income tax purposes will depend on all the facts and circumstances. We do not believe that the differences between the Contract and the contracts described in Revenue Ruling 2003-91 should prevent the holding in Revenue Ruling 2003-91 from applying.  Nevertheless, you should consult with a qualified tax professional on the potential impact of the investor control rules of the IRS as they relate to the investment decisions and activities you may undertake with respect to the Contract.  In addition, the IRS and/or the Treasury Department may issue new rulings, interpretations or regulations on this subject in the future.  Accordingly, we have reserved certain rights to alter the Contracts and investment alternatives to attempt to prevent you from being considered the owner, for tax purposes, of the underlying assets. However, you bear the risk that you may be treated as the owner of Separate Account assets and taxed accordingly.

Qualified Plans

The Contract is designed for use with several types of Qualified Plans. Under the Code, Qualified Plans generally enjoy tax-deferred accumulation of amounts invested in the plan. Therefore, in considering whether or not to purchase a Contract in a Qualified Plan, you should only consider the Contract's other features, including the availability of lifetime annuity payments and death benefit protection.

The tax rules applicable to participants in such Qualified Plans vary according to the type of plan and the terms and conditions of the plan itself. Therefore, we do not attempt to provide more than general information about the use of the Contract with the various types of Qualified Plans. Participants under such Qualified Plans as well as Contract Owners, Annuitants, and Designated Beneficiaries are cautioned that the rights of any person to any benefits under such Qualified Plans may be subject to the terms and conditions of the plans themselves regardless of the terms and conditions of the Contract issued in connection therewith. Following are brief descriptions of the various types of Qualified Plans and of the use of the Contract in connection with them, and, for Tax-Sheltered Annuities and traditional Individual Retirement Annuities, required minimum distribution requirements. Purchasers of the Contract should seek competent advice concerning the terms and conditions of the particular Qualified Plan and use of the Contract with that Plan.

Tax-Sheltered Annuities

Section 403(b) of the Code permits public school employees and employees of certain types of charitable, educational and scientific organizations specified in Section 501(c)(3) of the Code to purchase annuity contracts and, subject to certain contribution limitations, exclude the amount of purchase payments from gross income for tax purposes. However, such purchase payments may be subject to Social Security (FICA) taxes. This type of annuity contract is commonly referred to as a "Tax-Sheltered Annuity" (TSA).

Section 403(b)(11) of the Code contains distribution restrictions. Specifically, distributions attributable to contributions made pursuant to a salary reduction agreement may be paid, through surrender of the Contract or otherwise, only:

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when the employee attains age 59-1/2, has a severance from employment, dies or becomes totally and permanently disabled (within the meaning of Section 72(m)(7) of the Code) or
   
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in the case of hardship. A hardship distribution must be of contributions only and not of any income attributable to such contributions. The Internal Revenue Service has issued specific rules defining financial hardship, but those rules do not become effective until January 1, 2009.  Until then, we expect that to qualify for a hardship distribution, the Participant must have an immediate and heavy bona fide financial need and lack other resources reasonably available to satisfy the need.

Even though a distribution may be permitted under these rules, it may be subject, in addition to income tax, to the 10% penalty tax as a premature distribution.

Section 403(b)(11) does not apply to distributions attributable to assets held as of December 31, 1988. Thus, the law's restrictions would apply only to distributions attributable to contributions made after 1988, to earnings on those contributions, and to earnings on amounts held as of December 31, 1988. The Internal Revenue Service has indicated that the distribution restrictions of Section 403(b)(11) are not applicable when TSA funds are being transferred tax-free directly to another TSA issuer, provided the transferred funds continue to be subject to the Section 403(b)(11) distribution restrictions.

If you have requested a distribution from a Contract, we will notify you if all or part of such distribution is eligible for rollover to another Eligible Retirement Plan. Any amount eligible for rollover treatment will be subject to mandatory federal income tax withholding at a 20% rate unless you direct us in writing to transfer the amount as a direct rollover to another Eligible Retirement Plan. The term "Eligible Retirement Plan" means an individual retirement account under Section 408(a), an individual retirement annuity under Section 408(b), a pension or profit sharing plan under Section 401(a), an annuity plan under Section 403(a), a tax-sheltered annuity under Section 403(b), or an eligible deferred compensation plan of a state or local government under Section 457(b).

Under the terms of a particular Section 403(b) plan, the participant may be entitled to transfer all or a portion of the Contract Value to one or more alternative funding options. Participants should consult the documents governing their plan and the person who administers the plan for information as to such investment alternatives.

The Internal Revenue Service has issued comprehensive regulations that are generally effective January 1, 2009, to 403(b) plans and annuities, but that may apply to a Section 403(b) annuity issued before that date.  You should consult with a qualified tax professional about those regulations.

Individual Retirement Annuities

Section 408(b) and 408(A) of the Code permit eligible individuals to contribute to an individual retirement program known as a traditional "Individual Retirement Annuity" and "Roth IRA" respectively.  These traditional individual retirement annuities and Roth IRAs are subject to limitations on the amount which may be contributed, the persons who may be eligible, and on the time when distributions may commence. In addition, distributions from certain types of Qualified Plans may be placed on a tax-deferred basis into a Section 408(b) Individual Retirement Annuity. If you convert a traditional individual retirement annuity into a Roth IRA, the fair market value of the Contract is included in taxable income.  Under IRS Regulations and Revenue Procedure 2006-13, fair market value may exceed Contract Value.  Thus, you should consult with a qualified tax professional prior to any conversion.

Corporate Pension and Profit-Sharing Plans

Sections 401(a) and 403(a) of the Code permit corporate employers to establish various types of retirement plans for employees. Such retirement plans may permit the purchase of the Contract to provide benefits under the plans.

Deferred Compensation Plans With Respect to Service for State and Local Governments

Section 457 of the Code, while not actually providing for a Qualified Plan as that term is normally used, provides for certain deferred compensation plans that enjoy special income tax treatment with respect to service for tax-exempt organizations, state governments, local governments, and agencies and instrumentalities of such governments. The Contract can be used with such plans. Under such plans, a participant may specify the form of investment in which his or her participation will be made. However, with respect to plans established by tax-exempt organizations, all such investments are owned by and subject to the claims of general creditors of the sponsoring employer.

Required Minimum Distribution Requirements for Tax-Sheltered Annuities and Traditional Individual Retirement Annuities

If your Contract is a traditional Individual Retirement Annuity or a 403(b) TSA annuity, it is subject to certain required minimum distribution (RMD) requirements imposed by the Internal Revenue Code and IRS regulations. Under the RMD rules, distributions must begin no later than April 1 of the calendar year following the year in which you attain age 70 1/2 or, for non-IRAs, the date of retirement instead of age 70 1/2 if it is later. The RMD amount for a distribution calendar year is generally calculated by dividing the Contract's value as of 12/31 of the prior calendar year by the applicable distribution factor set forth in a Uniform Lifetime Table in the IRS regulations. For Contracts issued in connection with traditional Individual Retirement Accounts, you should contact the Account’s trustee or custodian about RMD requirements since we only provide the trustee or custodian with the Contract’s value (including any actuarial present value of additional benefits discussed below) so that it can be used in the Account’s RMD calculations.

Effective with the 2006 distribution calendar year, the actuarial present value as of 12/31 of any additional benefits that are provided under your Contract (such as death and living benefits) will be added to the Contract Value as of 12/31 in order to calculate the RMD amount. There are two exceptions to the requirement that the actuarial present value of an additional benefit must be added to the Contract Value for RMD calculation purposes. First, if the only additional benefit provided under a Contract is a return of premium death benefit (i.e., a benefit under which the final payment does not exceed the amount of purchase payments made less prior distributions), then the additional benefit is disregarded and the RMD calculation uses only the 12/31 Contract Value. Second, if (1) the Contract provides only for additional benefits that are each reduced on a proportional basis in the event of distributions, with or without a return of premium death benefit that is not reduced in amount proportionately in the event of distributions and (2) the actuarial present value of all the Contract’s additional benefits is no more than 20% of the 12/31 Contract Value, then the additional benefits are disregarded and the RMD calculation uses only the 12/31 account balance. When we notify you of the RMD amount for a distribution calendar year, we will inform you if the calculation included the actuarial present value of additional benefits. Because of the above requirements, a death benefit and/or living benefit in your Contract could cause your RMD amount to be higher than it would be without such a benefit.

Texas Optional Retirement Program

If we are an approved carrier under the Texas Optional Retirement Program ("ORP"), any Contract issued to an ORP participant will contain an ORP endorsement that will amend the Contract in two ways. First, if for any reason a second year of ORP participation is not begun, the total amount of the State of Texas' first-year contribution will be returned to the appropriate institution of higher education upon its request. Second, no benefits will be payable, through surrender of the Contract or otherwise, unless the participant dies, retires, or terminates employment in all Texas institutions of higher education. The value of the Contract may, however, be transferred to other contracts or carriers during the period of ORP participation.

VARIABLE ACCOUNT VOTING RIGHTS

In accordance with our view of present applicable law, we will vote the shares of the Eligible Funds held in the Variable Account at regular and special meetings of the shareholders of the Eligible Funds in accordance with instructions received from persons having the voting interest in the Variable Account. We will vote shares for which we have not received instructions in the same proportion as we vote shares for which we have received instructions.

However, if the Investment Company Act of 1940 or any regulation thereunder should be amended or if the present interpretation should change, and as a result we determine that we are permitted to vote the shares of the Eligible Funds in our own right, we may elect to do so.

You have the voting interest under a Contract prior to the Income Date. The number of shares held in each Sub-account that are attributable to you is determined by dividing your Variable Account Value in each Sub-account by the net asset value of the applicable share of the Eligible Fund. The payee has the voting interest after the Income Date under an annuity payment option. The number of shares held in the Variable Account which are attributable to each payee is determined by dividing the reserve for the annuity payments by the net asset value of one share. During the annuity payment period, the votes attributable to a payee decrease as the reserves underlying the payments decrease.

We will determine the number of shares in which a person has a voting interest as of the date established by the respective Eligible Fund for determining shareholders eligible to vote at the meeting of the Eligible Fund.  We will solicit voting instructions in writing prior to such meeting in accordance with the procedures established by the Eligible Fund.

Each person having the voting interest in the Variable Account will receive periodic reports relating to the Eligible Fund(s) in which he or she has an interest, proxy material and a form with which to give such voting instructions.

REPORTS TO OWNERS

We will send you, by regular U.S. mail, confirmation of all purchase payments (including any interest credited), withdrawals, (including any withdrawal charges and federal taxes on withdrawals), minimum distributions, death benefit payments, and transfers (excluding dollar-cost averaging transfers).  Such confirmations will be sent within two business days after the transaction occurs.

In addition, within 5 business days after each calendar quarter, we will send you a statement showing your current Contract Value, death benefit value, and investment allocation by asset class.  Each quarterly statement will detail transactions that occurred during the last quarter including purchase payments, annuity payments, transfers (including dollar-cost averaging transfers), partial withdrawals, systematic withdrawals, minimum distributions, portfolio rebalancing, asset reallocations, interest credited on fixed accounts, and annual contract fees assessed.

We will also send you annual and semi-annual reports of the funds in which you are invested, including a list of investments held by each portfolio as of the current date of the report.

It is your obligation to review each such statement carefully and to report to us, at the address or telephone number provided on the statement, any errors or discrepancies in the information presented therein within 60 days of the date of such statement. Unless we receive notice of any such error or discrepancy from you within such period, we may not be responsible for correcting the error or discrepancy.

DISTRIBUTION OF THE CONTRACT

Contracts are sold by licensed insurance agents (“the Selling Agents”) in those states where the Contracts may be lawfully sold. Such Selling Agents will be registered representatives of affiliated and unaffiliated broker-dealer firms (“the Selling Broker-Dealers”) registered under the Securities Exchange Act of 1934 who are members of the Financial Industry Regulatory Authority ("FINRA") and who have entered into selling agreements with Sun Life (U.S.) and the principal underwriter, Clarendon Insurance Agency, Inc. (“Clarendon”), One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481. Clarendon, our wholly-owned subsidiary, is registered with the SEC under the Securities Exchange Act of 1934 as a broker-dealer and is a member of FINRA .

Sun Life (U.S.) (or its affiliate ) pays the Selling Broker-Dealers compensation for the promotion and sale of the Contract. The Selling Agents who solicit sales of the Contract typically receive a portion of the compensation paid by us to the Selling Broker-Dealers in the form of commissions or other compensation, depending on the agreement between the Selling Broker-Dealer and their Selling Agent. This compensation is not paid directly by the Contract Owner or the separate account. We intend to recoup this compensation through fees and charges imposed under the Contract, and from profits on payments we receive for providing administrative, marketing, and other support and services to the Funds.

The amount and timing of commissions we may pay to Selling Broker-Dealers may vary depending on the selling agreement but it not expected to be more than 6.00% of purchase payments, and 1.00% annually, based on the Contract Value of those payments. We may pay or allow other promotional incentives or payments in the form of cash or other compensation to the extent permitted by FINRA rules and other applicable laws and regulations, and this compensation may be significant in amount .

The Company also pays compensation to wholesaling broker-dealers or other firms or intermediaries, including payments to affiliates of the Company, in return for wholesaling services such as providing marketing and sales support, product training and administrative services to the Selling Agents of the Selling Broker-Dealers.   This compensation may be significant and may be based on a percentage of purchase payments and/or a percentage of Contract Value and/or may be a fixed dollar amount.  The prospect of receiving, or the receipt of additional compensation as described above may provide Selling Broker-Dealers with an incentive to favor sales of the Contracts over other variable annuity contracts (or other investments) with respect to which the Selling Broker-Dealer does not receive additional compensation, or lower levels of additional compensation. You should take such payment arrangements into account when considering and evaluating any recommendation relating to the Contracts.

In addition to selling our variable contracts (including the Contract), some Selling Broker-Dealers or their affiliates may have other business relationships with the Company. Those other business relationships may include, for example, reinsurance agreements pursuant to which an affiliate of the Selling Broker-Dealer provides reinsurance to the Company relative to some or all of the Policies or other variable policies issued by the Company or its affiliates. The potential profits for a Selling Broker-Dealer or its affiliates (including its registered representatives) associated with such reinsurance arrangements could be significant in amount and could indirectly provide incentives to the Selling Broker-Dealer and its Selling Agents to recommend products for which they provide reinsurance over similar products which do not result in potential reinsurance profits to the Selling Broker-Dealer or its affiliate. The operation of an individual contract is not impacted by whether the policy is subject to a reinsurance arrangement between the Company and an affiliate of the Selling Broker-Dealer.

As discussed in the preceding paragraphs, the Company makes numerous forms of payments and engages in a variety of other activities that, directly or indirectly, provide incentives to, and otherwise facilitate and encourage the offer and sale of the Contracts by Selling Broker-Dealers and their registered representatives. Such payments and other activities may be significantly greater or less in connection with the Contracts than in connection with other products offered and sold by the Company or by others. Accordingly, our payments and other activities described above may create a potential conflict of interest, as they may influence your Selling Broker-Dealer or registered representative to present a Contract to you instead of (or more favorably than) another product or products that might be preferable to you.

You should ask your Selling Agent for further information about what commissions or other compensation he or she, or the Selling-Broker-Dealer for which he or she works, may receive in connection with your purchase of a Contract.

Different Contracts are sold to persons who are officers, directors, or employees of ours, trustees or officers of Columbia Trust, employees of the investment adviser or sub-investment adviser of either Trust, or employees of a company that is under contract with either Trust to provide management or administrative services or to any Qualified Plan established for such persons. Such Contracts are different from the Contracts sold to others in that they are not subject to a contract maintenance charge, asset-based sales charge or the contingent deferred sales charge and they have a mortality and expense risk charge of 0.35% per year.

Commissions may be waived or reduced in connection with certain transactions described in this prospectus. During 2005, 2006, and 2007 , approximately $257,426, $246,477, and $209,899 , respectively, in commissions were paid to but not retained by Clarendon in connection with the distribution of the Contracts.

LEGAL PROCEEDINGS

There are no legal proceedings to which the Variable Account or the principal underwriter are a party. We are engaged in various kinds of routine litigation which, in our judgment, is not of material importance in relation to our total capital and surplus.

INQUIRIES BY CONTRACT OWNERS

You may write us with questions about your Contract to Sun Life Assurance Company of Canada (U.S.), P.O Box 9133, Wellesley Hills, MA 02481, or call (800) 367-3653.

TABLE OF CONTENTS - STATEMENT OF ADDITIONAL INFORMATION

   
Sun Life Assurance Company of Canada (U.S.)
  
Variable Annuity Benefits
  
  Variable Annuity Payment Values
  
  Re-Allocating Sub-account Payments
  
Principal Underwriter
  
Safekeeping of Assets
  
Independent Registered Public Accounting Firm
  
Investment Performance
  
Financial Statements
  


 
 
 

APPENDIX A -
The Fixed Account (Also Known as the Guaranteed Rate Account)

Introduction

This Appendix describes the Fixed Account option available under the Contract. The Fixed Account is not available under either the Contract (form number FLEX(4)V) that is issued to New Jersey residents or the Contract (form number FLEX(4)/WA) that is issued to Washington residents.

Any purchase payments you allocate to the Fixed Account option become part of our general account. Because of applicable exemptive and exclusionary provisions in the securities laws, our general account, including the Fixed Account, are not subject to regulation under the Securities Act of 1933 or Investment Company Act of 1940.  The Securities and Exchange Commission has not reviewed the disclosure in the prospectus relating to the general account and the Fixed Account option.

Investments in the Fixed Account and Capital Protection Plus

We will allocate purchase payments to the Fixed Account according to your selection in the application. Your selection must specify the percentage of the purchase payment you want to allocate to each Guarantee Period of the Fixed Account. The percentage, if not zero, must be at least 10%. You may change the allocation percentages without any charges. You must make allocation changes in writing unless you have authorized us in writing to accept telephone allocation instructions. By authorizing us to accept telephone changes, you agree to the conditions and procedures we establish from time to time. The current conditions and procedures are in Appendix C. We will notify you in advance of any changes.

Each Guarantee Period currently offered is available for initial and subsequent purchase payments and for transfers of Contract Value.

We currently offer Guarantee Periods of up to 7 years.  We also currently offer a Guarantee Period of 1 year, which is only for use with the Dollar Cost Averaging Program. We may change at any time the number and/or length of Guarantee Periods we offer. You or your salesperson should call 1-800-426-3750 for information on the Guarantee Periods that are currently offered. If we no longer offer a particular Guarantee Period, the existing Fixed Account Value in that Guarantee Period will remain until the end of that period.  At that time you must select a different Guarantee Period.

We offer a capital protection plus program. Under this program, we allocate part of the purchase payment to the Guarantee Period you select.  Based on the length of the period and the period’s interest rate, we determine how much of your purchase payment must be allocated to the Guarantee Period so that, at the end of the Guarantee Period, the allocated amount plus interest will be equal to your total purchase payment. We will allocate the rest of your purchase payment to the Sub-account(s) of the Variable Account based on your allocation instructions.

For example, assume you select the 7-year Guarantee Period and we receive your purchase payment of $10,000 when the interest rate for the Guarantee Period is 6.75% per year. We will allocate $6,331 to that Guarantee Period, because $6,331 will increase, at the interest rate of 6.75%, to $10,000 after 7 years. The remaining $3,669 of the payment will be allocated to the Sub-account(s) you select.

If you surrender or transfer any part of the Fixed Account Value before the end of the Guarantee Period, the value at the end of that Period will not equal the original purchase payment amount.

Fixed Account Value

The Fixed Account Value at any time is equal to:

l
all purchase payments allocated to the Fixed Account plus the interest credited on those payments; plus
   
l
any Variable Account Value transferred to the Fixed Account plus the interest credited on the transferred value; less
   
l
any prior partial surrenders from the Fixed Account, including any charges; less
   
lo
any Fixed Account Value transferred to the Variable Account.

Interest Credits

We credit interest daily.  The interest we credit is based on an annual compound interest rate.  It is credited to purchase payments allocated to the Fixed Account at rates declared by us for Guarantee Periods of one or more years from the month and day of allocation. Each Guarantee Period will have a basic interest rate and a maturity interest rate. During the Guarantee Period, we will credit interest at the Basic Rate. At the end of the Guarantee Period, we will credit an additional interest amount so that the original allocation amount remaining at that time will have earned interest at the maturity rate for the entire Guarantee Period. For certain post-death surrenders occurring before the end of the Guarantee Period (see the last paragraph of this section), we will credit an additional interest amount so that the original allocation amount remaining at the time of surrender will have earned interest at the maturity rate through the time of surrender.

Under this method of crediting interest (unless the post-death surrender exception applies):

l
the maturity rate will be credited only on amounts held for the entire Guarantee Period; and
   
l
if you or a Designated Beneficiary surrenders or transfers any part of an allocated amount before the end of a Guarantee Period, only the Basic Rate will be credited on that part.

Any basic and maturity interest rates we set will be at least 3.5% per year.

Our method of crediting interest means that Fixed Account Value might be subject to different rates for each Guarantee Period you have selected in the Fixed Account. For purposes of this section, we treat Variable Account Value transferred to the Fixed Account and Fixed Account Value renewed for or transferred to another Guarantee Period as a purchase payment allocation.

With certain deaths, "Death Provisions for Non-Qualified Contracts" and "Death Provisions for Qualified Contracts" provide that the Designated Beneficiary may surrender the Contract within 90 days of the date of death for the Contract Value. In the event such a surrender occurs before the end of the Guarantee Period, we will immediately credit an additional interest amount so that the original allocation amount remaining at that time will have earned interest at the maturity rate throughout the Guarantee Period. For a surrender after 90 days, no additional interest amount will be credited.

Transfers when Guarantee Periods End

The total accumulated amount at the end of a Guarantee Period will be transferred to the new Guarantee Period(s) and/or Sub-account(s) of the Variable Account that you have selected in writing. If you have not made a selection, we will automatically transfer the total accumulated amount at the end of the Guarantee Period to the Columbia Money Market Fund Sub-account. If the Guarantee Period selected exceeds the time remaining to the Income Date but does not exceed the time remaining to the latest Income Date allowable under the Contract, the Income Date will automatically change to the latest allowable date, which allows the selected Guarantee Period to go into effect. You may not select a Guarantee Period that would end after the Income Date.

Transfers of Fixed Account Value

You may transfer Fixed Account Value from one of your Guarantee Periods to another or to one or more Sub-accounts of the Variable Account. If the Fixed Account Value represents multiple Guarantee Periods, your transfer request must specify from which values you want the transfer made.

The Contract allows us to limit the number of transfers you may make in a specified time period. Currently, we generally limit Variable Account and Fixed Account transfers to 1 transfer every thirty days  with a $2,000,000 per transfer dollar limit. See "Limits on Transfers". These limitations will not apply to any transfer made at the end of a Guarantee Period.  We will notify you prior to any change in the current limitations.

You must request transfers in writing unless you have authorized us in writing to accept telephone transfer instructions from you or from a person acting on your behalf as an attorney-in-fact under a power of attorney. By authorizing us to accept telephone transfer instructions, you agree to the conditions and procedures we establish from time to time. The current conditions and procedures are in Appendix C. If you have authorized telephone transfers, you will be notified in advance, of any changes. A person acting on your behalf as an attorney-in-fact under a power of attorney may request transfers in writing.

If we receive your transfer requests before 4:00 P.M. Eastern time, which is the close of trading on the New York Stock Exchange, we will execute them at the close of business that day. Any written requests we receive later, we will execute at the close of the next business day.

We will deduct the amount of the transfer from the specified values in the manner stated in the next section below.

If you transfer 100% of a Guarantee Period's value and your current allocation for purchase payments includes that Guarantee Period, we will automatically change the allocation formula for future purchase payments unless you instruct otherwise. For example, if the allocation formula is 50% to the one-year Guarantee Period and 50% to Sub-account A and you transfer all Fixed Account Value to Sub-account A, we will change the allocation formula to 100% to Sub-account A.

Reductions of Guarantee Period Values After a Transfer or Surrender

You must specify in your transfer request from which Guarantee Period's values the transfer is to be made. A partial surrender request may, at your option, specify the Guarantee Period. The specified amount will be deducted from both the allocated purchase amount and its associated interest in the proportion that each bear to their total sum. For example, if $600 is to be deducted from a $800 payment that was allocated for a three-year Guarantee Period and the interest earned up to the date of transfer is $200 (for a total value of $1,000), $480 will be deducted from the payment allocation [($800/$1,000) x $600] and $120 will be deducted from the interest [($200/$1,000) x $600]. The $400 remaining after the transfer or surrender would thus represent $320 of payment allocation and $80 of interest. This $320, if it remains until the end of the Guarantee Period, would receive the Maturity Interest Rate credit described in "Interest Credits".

If a partial surrender request does not specify any Guarantee Period, the ordering rule in "Surrenders" may result in a certain amount of Fixed Account Value being automatically deducted. Any amount determined under that rule will be deducted from each Guarantee Period's values in the proportion that each bears to the total Fixed Account Value. For example, if $500 is to be deducted from two Guarantee Periods' values of $4,000 and $1,000, $400 will be deducted from the first Guarantee Period's values [($4,000/$5,000) x $500] and $100 will be deducted from the second [($1,000/$5,000) x $500]. Each of these amounts (the $400 and the $100 in the example) will then be deducted from the allocated purchase amount and its associated interest in the manner stated in the preceding paragraph.

The above rules determine only for the purpose of interest crediting the amount of the allocated purchase payment and its associated interest that still remains after any transfer or surrender. These rules are different from the rules used to determine contingent deferred sales charges. As a result, if you take a withdrawal from the Fixed Account, the amount of the withdrawn amount treated as a withdrawal of “purchase payments” in calculating the surrender charge may be more or less than the portion of the withdrawn amount deemed withdrawal of a “payment allocation”. For more information as to how the surrender charge is calculated, see “Deductions for Contingent Deferred Sales Charge”.

Fixed Annuity Payment Values

We determine the dollar amount of each fixed annuity payment by deducting any applicable premium taxes not previously deducted and then dividing the remaining Fixed Account Value by $1,000 and multiplying the result by the greater of:

l
the applicable factor shown in the appropriate table in the Contract; or
   
l
the factor we currently offer at the time annuity payments begin. This current factor may be based on the sex of the payee unless to do so would be prohibited by law.


 
 
 

APPENDIX B -
Prior Contracts of the Variable Account

Persons who purchased the variable annuity contracts identified below before May 1, 1992 may continue to make purchase payments under those contracts subject to the terms and conditions of those contracts and this Appendix. All contracts are subject to the transfer limitations and procedures described in "Transfer of Variable Account Value". Persons who purchased non-qualified contracts between April 9, 1981 and September 25, 1981 are not permitted to make any additional purchase payments under those contracts. Such non-qualified contracts are not included in number 4 below.

1. KEYFLEX Contracts (Form #FLEX(4)). The current Eligible Funds are those listed on Page 1. . Columbia International Fund, Columbia Strategic Income Fund and Columbia Large Cap Value Fund were added effective 5/2/94, 7/5/94, and 7/5/94, respectively. Accumulation unit values are shown on Page 8.

2. KEYFLEX Contracts (Form #FLEX-I). The current Eligible Funds are those listed on Page 1. Columbia International Fund, Columbia Strategic Income Fund and Columbia Large Cap Value Fund were added effective 5/2/94, 7/5/94, and 7/5/94, respectively. Columbia Money Market Fund, Columbia Federal Securities Fund, Columbia Asset Allocation Fund, Columbia Large Cap Growth Fund and Columbia Small Company Growth Fund were substituted on 1/1/89 for, respectively, the former eligible mutual funds: Cash Income Trust; Mortgage Securities Income Trust; Managed Assets Trust; Managed Growth Stock Trust; and Aggressive Stock Trust. Accumulation unit values are shown on Page 37-38 .

3. FLEX 2 Contracts (Form #FLEX-II). The current Eligible Funds are those listed on Page 1. Columbia International Fund, Columbia Strategic Income Fund and Columbia Large Cap Value Fund were added effective 5/2/94, 7/5/94, and 7/5/94, respectively. Columbia Money Market Fund, Columbia Federal Securities Fund, Columbia Asset Allocation Fund, Columbia Large Cap Growth Fund and Columbia Small Company Growth Fund were substituted on 1/1/89 for, respectively, the former eligible mutual funds: Cash Income Trust; Mortgage Securities Income Trust; Managed Assets Trust; Managed Growth Stock Trust; and Aggressive Stock Trust. Accumulation unit values are shown on Page 39-40 .

4. All K-100 and KeySource Contracts (Form #VA-1-81) Other than those Identified in Numbers 5 and 6 below. The current Eligible Funds are those listed on Page 1. Columbia International Fund, Columbia Strategic Income Fund and Columbia Large Cap Value Fund were added effective 5/2/94, 7/5/94, and 7/5/94, respectively. Columbia Money Market Fund, Columbia Money Market Fund, Columbia Asset Allocation Fund, and Columbia Small Company Growth Fund were substituted on 1/1/89 for, respectively, the former eligible mutual funds: Cash Income Trust; Money Market/Options Investments, Inc.; Managed Assets Trust; and Aggressive Stock Trust. Accumulation unit values are shown on Pages 41-42 .

5. K-100 Qualified Contracts (Form #VA-1-81) Issued Before May 1, 1986 Pursuant to Section 457 of the Internal Revenue Code. The current Eligible Mutual Funds are: Evergreen Money Market Fund - A, Evergreen Core Plus Bond Fund - A (formerly Evergreen Diversified Bond Fund - A), Evergreen High Income Fund - A, and Evergreen Emerging Growth Fund A. On January 23, 1998, the fund names for High Income Bond Fund (B-4), Keystone Liquid Trust, and Small Company Growth (S-4) were changed to Evergreen High Income Fund - A, Evergreen Money Market - A, and Evergreen Mid Cap Growth Fund - A, respectively. In addition, the fund names for Diversified Bond Fund (B-2) and Qualified Bond Fund (B-1) were changed to Evergreen Core Plus Bond Fund - A. Accumulation unit values are shown on Page 43. As of July 1997, Evergreen Money Market Fund - A (formerly named Keystone Liquid Trust) was no longer available for investment.

6. All Other K-100 Qualified Contracts (Form #VA-1-81) Issued Before September 25, 1981. The current Eligible Funds are those listed on Page 1. Columbia International Fund, Columbia Strategic Income Fund and Columbia Large Cap Value Fund  were added effective 5/2/94, 7/5/94, and 7/5/94, respectively. Columbia Money Market Fund, Columbia Money Market Fund, Columbia Large Cap Growth Fund, and Columbia Small Company Growth Fund were substituted on 1/1/89 for, respectively, the former eligible mutual funds: Keystone Liquid Trust; Money Market/Options Investments, Inc.; and Growth and Income Fund, Mid-Cap Growth Fund, and Small Company Growth Fund (formerly named Keystone Custodian Fund, Series S-1, S-3, and S-4, respectively). Accumulation unit values are shown on Page 41-42 .


 
 
 

ACCUMULATION UNIT VALUES FOR CONTRACTS DESCRIBED IN NUMBER TWO

 
Accumulation
Accumulation
Number of
  
 
Unit Value
Unit Value
Accumulation
  
 
Beginning
End
Units End
  
Sub-Account
of Year*
of Year
of Year
Year
         
Columbia Money Market Fund
$20.790
$21.562
74,144
2007
 
20.100
20.790
75,047
2006
 
19.794
20.100
81,329
2005
 
19.867
19.794
63,313
2004
 
19.978
19.867
76,256
2003
 
19.978
19.978
108,699
2002
 
19.521
19.978
120,766
2001
 
18.640
19.521
141,415
2000
 
18.009
18.640
132,079
1999
 
17.348
18.009
100,397
1998
         
Columbia Large Cap Value Fund
33.515
34.005
24,127
2007
 
28.718
33.515
26,579
2006
 
27.331
28.718
29,373
2005
 
24.325
27.331
30,373
2004
 
20.560
24.325
38,790
2003
 
26.671
20.560
11,272
2002
 
27.170
26.671
12,214
2001
 
26.551
27.170
15,895
2000
 
24.003
26.551
16,300
1999
 
20.227
24.003
43,556
1998
         
Columbia Federal Securities Fund
28.441
29.827
17,890
2007
 
27.764
28.441
41,278
2006
 
27.403
27.764
43,581
2005
 
26.640
27.403
47,097
2004
 
26.279
26.640
51,117
2003
 
24.243
26.279
69,011
2002
 
22.934
24.243
81,914
2001
 
20.932
22.934
79,196
2000
 
20.972
20.932
97,510
1999
 
19.882
20.972
116,120
1998
         
Columbia Asset Allocation Fund
56.887
61.336
123,375
2007
 
51.522
56.887
134,886
2006
 
48.967
51.522
144,731
2005
 
45.077
48.967
158,477
2004
 
37.886
45.077
184,125
2003
 
43.455
37.886
210,849
2002
 
48.453
43.455
252,918
2001
 
49.592
48.453
290,003
2000
 
44.584
49.592
328,200
1999
 
40.111
44.584
406,222
1998
         


 
 
 

ACCUMULATION UNIT VALUES FOR CONTRACTS DESCRIBED IN NUMBER TWO (continued)

 
Accumulation
Accumulation
Number of
  
 
Unit Value
Unit Value
Accumulation
  
 
Beginning
End
Units End
  
Sub-Account
of Year*
of Year
of Year
Year
         
Columbia Strategic Income Fund
$20.987
$21.984
65,970
2007
 
19.846
20.987
73,533
2006
 
19.775
19.846
80,707
2005
 
18.176
19.775
92,580
2004
 
15.542
18.176
95,058
2003
 
14.500
15.542
104,368
2002
 
14.146
14.500
146,288
2001
 
14.314
14.146
178,389
2000
 
14.239
14.314
203,097
1999
 
13.597
14.239
278,009
1998
         
Columbia International Fund
16.094
17.132
4,209
2007
 
13.018
16.094
6,378
2006
 
11.647
13.018
6,861
2005
 
10.370
11.647
6,474
2004
 
7.746
10.370
9,328
2003
 
9.051
7.746
3,424
2002
 
12.116
9.051
3,495
2001
 
15.046
12.116
58,685
2000
 
10.836
15.046
76,755
1999
 
9.712
10.836
67,742
1998
         
Columbia Large Cap Growth Fund
39.248
44.875
46,458
2007
 
36.048
39.248
58,673
2006
 
34.844
36.048
64,952
2005
 
35.982
34.844
81,431
2004
 
29.088
35.982
89,980
2003
 
42.169
29.088
100,182
2002
 
56.640
42.169
117,551
2001
 
65.177
56.640
136,270
2000
 
48.190
65.177
153,771
1999
 
38.146
48.190
185,449
1998
         
Columbia Small Company Growth Fund
54.091
60.610
25,009
2007
 
48.723
54.091
26,787
2006
 
48.028
48.723
30,746
2005
 
43.622
48.028
44,147
2004
 
30.644
43.622
51,361
2003
 
40.980
30.644
58,450
2002
 
46.120
40.980
89,701
2001
 
49.363
46.120
107,818
2000
 
33.749
49.363
127,345
1999
 
41.320
33.749
182,408
1998
         

Accumulation unit values are rounded to the nearest tenth of a cent and numbers of accumulation units are rounded to the nearest whole number. The full financial statements for the Variable Account and Sun Life Assurance Company of Canada (U.S.) are in the Statement of Additional Information.

 
 
 

ACCUMULATION UNIT VALUES FOR CONTRACTS DESCRIBED IN NUMBER THREE

 
Accumulation
Accumulation
Number of
  
 
Unit Value
Unit Value
Accumulation
  
 
Beginning
End
Units End
  
Sub-Account
of Year*
of Year
of Year
Year
         
Columbia Money Market Fund
$20.185
$20.914
614
2007
 
19.534
20.185
639
2006
 
19.256
19.534
645
2005
 
19.474
19.256
651
2004
 
19.474
19.347
740
2003
 
19.493
19.474
747
2002
 
19.066
19.493
753
2001
 
18.223
19.066
784
2000
 
17.624
18.223
1,226
1999
 
16.994
17.624
2,008
1998
         
Columbia Large Cap Value Fund
31.077
31.500
733
2007
 
26.655
31.077
1,378
2006
 
25.392
26.655
1,408
2005
 
22.622
25.392
1,440
2004
 
19.139
22.622
1,409
2003
 
24.853
19.139
0
2002
 
25.343
24.853
0
2001
 
24.790
25.343
0
2000
 
22.433
24.790
17
1999
 
18.923
22.433
0
1998
         
Columbia Federal Securities Fund
28.023
29.359
1,223
2007
 
27.382
28.023
12,150
2006
 
27.053
27.382
12,219
2005
 
26.326
27.053
12,293
2004
 
25.995
26.326
12,364
2003
 
24.005
25.995
12,087
2002
 
22.731
24.005
12,169
2001
 
20.767
22.731
12,512
2000
 
20.827
20.767
14,462
1999
 
19.764
20.827
14,578
1998
         
Columbia Asset Allocation Fund
54.113
58.287
6,113
2007
 
49.058
54.113
12,439
2006
 
46.671
49.058
12,450
2005
 
43.005
46.671
13,601
2004
 
36.181
43.005
13,819
2003
 
41.540
36.181
14,027
2002
 
46.364
41.540
16,604
2001
 
47.500
46.364
18,470
2000
 
42.745
47.500
21,795
1999
 
38.494
42.745
27,878
1998
         
         


 
 
 

ACCUMULATION UNIT VALUES FOR CONTRACTS DESCRIBED IN NUMBER THREE (continued)

 
Accumulation
Accumulation
Number of
  
 
Unit Value
Unit Value
Accumulation
  
 
Beginning
End
Units End
  
Sub-Account
of Year*
of Year
of Year
Year
         
Columbia Strategic Income Fund
$20.049
$20.980
5,532
2007
 
18.977
20.049
10,528
2006
 
18.929
18.977
13,120
2005
 
17.415
18.929
13,462
2004
 
14.906
17.415
13,540
2003
 
13.920
14.906
11,738
2002
 
13.594
13.920
12,185
2001
 
13.769
13.594
12,879
2000
 
13.710
13.769
17,990
1999
 
13.105
13.710
20,161
1998
         
Columbia International Fund
15.986
17.001
0
2007
 
12.944
15.986
0
2006
 
11.592
12.944
0
2005
 
10.331
11.592
0
2004
 
7.724
10.331
0
2003
 
9.274
7.724
0
2002
 
12.106
9.274
0
2001
 
15.049
12.106
0
2000
 
10.849
15.049
24
1999
 
9.733
10.849
58
1998
         
Columbia Large Cap Growth Fund
35.575
40.635
940
2007
 
32.706
35.575
941
2006
 
31.645
32.706
943
2005
 
32.711
31.645
3,016
2004
 
26.470
32.711
4,677
2003
 
38.411
26.470
4,682
2002
 
51.643
38.411
4,684
2001
 
59.486
51.643
4,644
2000
 
44.025
59.486
4,833
1999
 
34.883
44.025
4,594
1998
         
Columbia Small Company Growth Fund
54.618
61.139
2,882
2007
 
49.245
54.618
3,200
2006
 
48.591
49.245
3,859
2005
 
44.176
48.591
4,131
2004
 
31.065
44.176
4,156
2003
 
41.583
31.065
6,894
2002
 
46.845
41.583
6,857
2001
 
50.188
46.845
7,202
2000
 
34.347
50.188
11,880
1999
 
42.093
34.347
19,836
1998
         

Accumulation unit values are rounded to the nearest tenth of a cent and numbers of accumulation units are rounded to the nearest whole number. The full financial statements for the Variable Account and Sun Life Assurance Company of Canada (U.S.) are in the Statement of Additional Information.


 
 
 

ACCUMULATION UNIT VALUES FOR CONTRACTS
DESCRIBED IN NUMBERS FOUR AND SIX

 
Accumulation
Accumulation
Number of
  
 
Unit Value
Unit Value
Accumulation
  
 
Beginning
End
Units End
  
Sub-Account
of Year*
of Year
of Year
Year
         
Columbia Money Market Fund
$29.916
$31.104
235,840
2007
 
28.853
29.916
254,539
2006
 
28.344
28.853
267,364
2005
 
28.380
28.344
302,685
2004
 
28.469
28.380
356,241
2003
 
28.399
28.469
436,738
2002
 
27.681
28.399
458,677
2001
 
26.368
27.681
511,252
2000
 
25.413
26.368
554,809
1999
 
24.421
25.413
639,325
1998
         
Columbia Large Cap Value Fund
34.030
34.613
20,366
2007
 
29.089
34.030
22,842
2006
 
27.616
29.089
25,174
2005
 
24.519
27.616
24,506
2004
 
26.673
24.519
38,750
2003
 
26.753
26.673
25,606
2002
 
27.188
26.753
37,756
2001
 
26.502
27.188
42,302
2000
 
23.900
26.502
37,962
1999
 
20.091
23.900
50,149
1998
         
Columbia Federal Securities Fund
27.396
29.359
14,097
2007
 
26.678
27.396
21,006
2006
 
26.267
26.678
24,553
2005
 
25.474
26.267
34,234
2004
 
25.066
25.474
35,168
2003
 
23.068
25.066
51,361
2002
 
21.769
23.068
44,502
2001
 
19.821
21.769
37,178
2000
 
19.809
19.821
38,807
1999
 
18.734
19.809
43,444
1998
         
Columbia Asset Allocation Fund
58.340
58.287
69,969
2007
 
52.710
58.340
78,974
2006
 
49.974
52.710
79,994
2005
 
45.891
49.974
91,857
2004
 
38.476
45.891
99,501
2003
 
44.024
38.476
111,953
2002
 
48.967
44.024
130,917
2001
 
49.996
48.967
143,567
2000
 
44.837
49.996
160,309
1999
 
40.240
44.837
198,156
1998
         


 
 
 

ACCUMULATION UNIT VALUES FOR CONTRACTS
DESCRIBED IN NUMBERS FOUR AND SIX (continued)

 
Accumulation
Accumulation
Number of
  
 
Unit Value
Unit Value
Accumulation
  
 
Beginning
End
Units End
  
Sub-Account
of Year*
of Year
of Year
Year
         
Columbia Strategic Income Fund
$20.951
$22.001
127,844
2007
 
19.764
20.951
134,285
2006
 
19.646
19.764
129,603
2005
 
18.013
19.646
169,525
2004
 
15.365
18.013
177,622
2003
 
14.299
15.365
180,515
2002
 
13.916
14.299
236,317
2001
 
14.047
13.916
273,383
2000
 
13.939
14.047
365,049
1999
 
13.279
13.939
410,209
1998
         
Columbia International Fund
16.693
17.001
39,064
2007
 
13.470
16.693
39,965
2006
 
12.023
13.470
30,779
2005
 
10.677
12.023
28,901
2004
 
7.956
10.677
28,197
2003
 
9.274
7.956
11,097
2002
 
12.384
9.274
15,613
2001
 
15.341
12.384
19,543
2000
 
11.022
15.341
16,797
1999
 
9.855
11.022
18,039
1998
         
Columbia Large Cap Growth Fund
92.808
106.374
19,875
2007
 
85.033
92.808
21,543
2006
 
81.993
85.033
21,781
2005
 
84.463
81.993
23,625
2004
 
68.115
84.463
31,891
2003
 
98.503
68.115
57,762
2002
 
131.978
98.503
61,068
2001
 
151.502
131.978
72,118
2000
 
111.743
151.502
76,592
1999
 
88.236
111.743
83,655
1998
         
Columbia Small Company Growth Fund
112.658
126.546
65,911
2007
 
101.230
112.658
72,503
2006
 
99.543
101.230
74,275
2005
 
90.188
99.543
91,445
2004
 
63.203
90.188
100,694
2003
 
84.314
63.203
110,217
2002
 
94.656
84.314
128,890
2001
 
101.064
94.656
135,411
2000
 
68.927
101.064
152,924
1999
 
84.183
68.927
193,700
1998
         

Accumulation unit values are rounded to the nearest tenth of a cent and numbers of accumulation units are rounded to the nearest whole number. The full financial statements for the Variable Account and Sun Life Assurance Company of Canada (U.S.) are in the Statement of Additional Information.

 
 
 

ACCUMULATION UNIT VALUES FOR QUALIFIED CONTRACTS DESCRIBED
IN NUMBER FIVE ( 1998-2007 )

 
Accumulation
Accumulation
Number of
  
 
Unit Value
Unit Value
Accumulation
  
 
Beginning
End
Units End
  
Sub-Account
of Year
of Year
of Year
Year
         
Evergreen Money Market Fund - A
$25.326
$26.213
2,456
2007
 
24.527
25.326
3,135
2006
 
24.194
24.527
3,144
2005
 
24.297
24.194
1,362
2004
 
22.768
24.297
1,368
2003
 
24.453
22.768
2,159
2002
 
24.447
24.453
1,868
2001
 
24.441
24.447
2,080
2000
 
24.345
24.441
2,088
1999
 
24.432
24.345
2,840
1998
         
Evergreen Core Plus Bond Fund – A
57.242
59.517
176
2007
 
55.332
57.242
323
2006
 
54.676
55.332
324
2005
 
52.884
54.676
324
2004
 
48.928
52.884
325
2003
 
46.930
48.928
522
2002
 
44.382
46.930
326
2001
 
41.387
44.382
326
2000
 
40.990
41.387
326
1999
 
39.560
40.990
2,237
1998
         
Evergreen High Income Fund - A
54.095
55.005
58
2007
 
50.092
54.095
362
2006
 
50.151
50.092
470
2005
 
46.612
50.151
465
2004
 
39.035
46.612
451
2003
 
37.515
39.035
434
2002
 
35.756
37.515
421
2001
 
38.734
35.756
404
2000
 
36.441
38.734
388
1999
 
35.860
36.441
380
1998
         
Evergreen Emerging Growth Fund – A
66.182
75.011
1,829
2007
 
59.077
66.182
1,073
2006
 
58.658
59.077
1,195
2005
 
53.817
58.658
1,191
2004
 
37.649
53.817
1,181
2003
 
49.708
37.649
1,479
2002
 
60.578
49.708
1,392
2001
 
68.897
60.578
1,720
2000
 
39.622
68.897
2,346
1999
 
47.822
39.622
5,448
1998
         

Accumulation unit values are rounded to the nearest tenth of a cent and numbers of accumulation units are rounded to the nearest whole number. The full financial statements for the Variable Account and Sun Life (U.S.) are in the Statement of Additional Information.

 
 
 

APPENDIX C -
Telephone Instructions

Telephone Transfers of Contract Values

1. If there are joint Contract Owners, both must authorize us to accept telephone instructions but either Owner can give us telephone instructions.

2. All callers must identify themselves. We reserve the right to refuse to act upon any telephone instructions in cases where the caller has not sufficiently identified himself/herself to our satisfaction.

3. Neither we nor any person acting on our behalf shall be subject to any claim, loss, liability, cost or expense if we or such person acted in good faith upon a telephone instruction, including one that is unauthorized or fraudulent.  However, we will employ reasonable procedures to confirm that a telephone instruction is genuine and, if we do not, we may be liable for losses due to an unauthorized or fraudulent instruction. You thus bear the risk that an unauthorized or fraudulent instruction we execute may cause your Contract Value to be lower than it would be had we not executed the instruction.

4. We record all conversations with disclosure at the time of the call.

5. The application for the Contract may allow you to create a power of attorney by authorizing another person to give telephone instructions. Unless prohibited by state law, we will treat such power as durable in nature and it shall not be affected by your subsequent incapacity, disability or incompetency. Either we or the authorized person may cease to honor the power by sending written notice to you at your last known address. Neither we nor any person acting on our behalf shall be subject to liability for any act executed in good faith reliance upon a power of attorney.

6. Telephone authorization shall continue in force until:

l
we receive your written revocation,
   
l
we discontinue the privilege, or
   
l
we receive written evidence that you have entered into a market timing or asset allocation agreement with an investment adviser or with a broker/dealer.

7. If we receive telephone transfer instructions at 800-367-3653 before the 4:00 P.M. Eastern Time close of trading on the New York Stock Exchange, they will be initiated that day based on the unit value prices calculated at the close of that day.

8. You must make all transfers in accordance with the terms of the Contract and current prospectus. If your transfer instructions are not in good order, we will not execute the transfer and will notify the caller within 48 hours.

9. If you transfer 100% of any Sub-account's value and the allocation formula for purchase payments includes that Sub-account, then we will change the allocation formula for future purchase payments accordingly unless we receive telephone instructions to the contrary. For example, if the allocation formula is 50% to Sub-account A and 50% to Sub-account B and you transfer all of Sub-account A’s value to Sub-account B, we will change the allocation formula to 100% to Sub-account B unless you instruct us otherwise.

Telephone Changes to Purchase Payment Allocation Percentages

Numbers 1-6 above are applicable.

 
 
 

APPENDIX D -
Dollar Cost Averaging

We offer a dollar cost averaging program that you may participate in. The program periodically transfers Accumulation Units from the Columbia Money Market Fund Sub-account or the One-Year Guarantee Period of the Fixed Account to other Sub-accounts you select. The program allows you to invest in non-"money market" Sub-accounts over time rather than having to invest in those Sub-accounts all at once.

The program is available for initial and subsequent purchase payments and for Contract Value transferred into the Columbia Money Market Fund Sub-account or One-Year Guarantee Period. Under the program, we make automatic transfers on a periodic basis out of the Columbia Money Market Fund Sub-account or the One-Year Guarantee Period into one or more of the other available Sub-accounts. We may limit the number of Sub-accounts you may choose but there are currently no limits. The automatic transfer program does not guarantee a profit nor does it protect against loss in declining markets.  The One-Year Guarantee Period option of the program is not available under Contracts issued to New Jersey and Washington residents.

You must specify in writing the Columbia Money Market Fund Sub-account or One-Year Guarantee Period from which the transfers are to be made, the monthly amount to be transferred and the Sub-account(s) to which the transfers are to be made. The minimum amount to be transferred is $150.  The first transfer will occur at the close of the Valuation Period that includes the 30th day after the receipt of your request. Each succeeding transfer will occur one month later. If the 30th day after the receipt date is April 8, the second transfer will occur at the close of the Valuation Period that includes May 8. When the remaining value is less than the monthly transfer amount, that remaining value will be transferred and the program will end. Before this final transfer, you may extend the program by allocating additional purchase payments to the Columbia Money Market Fund Sub-account or One-Year Guarantee Period or by transferring Contract Value to the Columbia Money Market Fund Sub-account or One-Year Guarantee Period. You may, in writing or by telephone, change the monthly amount to be transferred, change the Sub-account(s) to which the transfers are to be made, or end the program. The program will automatically end if the Income Date occurs. We reserve the right to end the program at any time by sending you a notice one month in advance.

We must receive your written or telephone instructions by 5:00 P.M. Eastern Time of the business day preceding the next scheduled transfer in order for them to be in effect for that transfer. Telephone instructions are subject to the conditions and procedures we establish from time to time. The current conditions and procedures appear below and you will be notified, in advance, of any changes.

1. If there are joint Contract Owners, either Owner can give us telephone transfer instructions.

2. All callers will be required to identify themselves. We reserve the right to refuse to act upon any telephone instructions in cases where the caller has not sufficiently identified himself/herself to our satisfaction.

3. Neither we nor any person acting on our behalf shall be subject to any claim, loss, liability, cost or expense if it or such person acted in good faith upon a telephone instruction, including one that is unauthorized or fraudulent; however, we will employ reasonable procedures to confirm that a telephone instruction is genuine and, if we do not, we may be liable for losses due to an unauthorized or fraudulent instruction. You bear the risk that an unauthorized or fraudulent instruction that is executed may cause the Contract Value to be lower than it would be had no instruction been executed.

4. All conversations will be recorded with disclosure at the time of the call.

5. Telephone authorization shall continue in force until:

l
we receive your written revocation,
l
we discontinue the privilege, or
l
we receive written evidence that you have entered into a market timing or asset allocation agreement with an investment adviser or with a broker/dealer.

6. We must receive your telephone instructions at 800-367-3653 before 5:00 P.M. Eastern Time of the business day preceding the next scheduled transfer in order for them to be in effect for that transfer.

7. Once we accept instructions, they may not be canceled. New telephone instructions may be given on the following business day.

8. All instructions must be made in accordance with the terms of the Contract and current prospectus. If the instructions are not in good order, we will not execute them and will notify the caller within 48 hours.


 
 
 




PART B



 
 
 

STATEMENT OF ADDITIONAL INFORMATION

INDIVIDUAL FLEXIBLE PURCHASE PAYMENT
DEFERRED VARIABLE ANNUITY CONTRACT
ISSUED BY
KMA VARIABLE ACCOUNT
AND
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) (“Sun Life (U.S.)”)


This Statement of Additional Information is not a prospectus but it relates to, and should be read in conjunction with, the variable annuity prospectus dated May 1, 2008 . The prospectus is available, at no charge, by writing Sun Life (U.S.) at P.O. Box 9133, Wellesley Hills, MA 02481 or by calling (800) 367-3653.


TABLE OF CONTENTS

   
   
Sun Life Assurance Company of Canada (U.S.)
  
Variable Annuity Benefits
  
  Variable Annuity Payment Values
  
  Re-Allocating Sub-account Payments
  
Principal Underwriter
  
Safekeeping of Assets
  
Independent Registered Public Accounting Firm
  
Investment Performance
  
Financial Statements
  




The date of this statement of additional information is May 1, 2008



KMA.SAI
5/2008




 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)

Sun Life Financial Inc. ("Sun Life Financial"), a reporting company under the Securities Exchange Act of 1034 with common shares listed on the Toronto, New York and Philippine stock exchanges, is the ultimate corporate parent of Sun Life (U.S.). Sun Life Financial ultimately controls Sun Life (U.S.) through the following intervening companies: Sun Life of Canada (U.S.) Holdings, Inc., Sun Life Financial (U.S.) Investments LLC, Sun Life Financial (U.S.) Holdings, Inc., Sun Life Assurance Company of Canada - U.S. Operations Holdings, Inc., and Sun Life Global Investments Inc .

VARIABLE ANNUITY BENEFITS

Variable Annuity Payment Values

For each variable payment option, we calculate separately each Sub-account's contribution to your periodic payments. Your total periodic payment equals: (a) the sum of the payment amounts determined for all for all of the Sub-accounts you have selected; less (b) the pro-rata amount of the annual Contract Maintenance Charge.

The first payment for each Sub-account will be determined by deducting any applicable Contract Maintenance Charge and any applicable state premium taxes and then dividing the remaining value of your interest in that Sub-account by $1,000 and multiplying the result by the greater of: (a) the applicable factor from the Contract’s annuity table for the particular payment option and the assumed investment rate ("AIR") you have selected; or (b) the factor currently offered by Sun Life (U.S.) at the time annuity payments begin. This current factor may be based on the sex of the payee unless to do so would be prohibited by law. The effect of your choice of AIR on the initial and subsequent annuity payments is explained in "Variable Annuity Payment Values" in the prospectus and in the last paragraph of this section.

The number of Annuity Units for each Sub-account will be determined by dividing such first payment by the Sub-account Annuity Unit value for the Valuation Period that includes the date of the first payment. The number of Annuity Units remains fixed for the annuity payment period. Each Sub-account payment after the first one will be determined by multiplying (a) by (b), where: (a) is the number of Sub-account Annuity Units; and (b) is the Sub-account Annuity Unit value for the Valuation Period that includes the date of the particular payment.

Variable annuity payments will fluctuate in accordance with the investment results of the underlying Eligible Funds. In order to determine how these fluctuations affect annuity payments, Sun Life (U.S.) uses an Annuity Unit value. Each Sub-account has its own Annuity Units and value per Unit. The Unit value applicable during any Valuation Period is determined at the end of such period.

When the Eligible Fund shares of SteinRoe Variable Investment Trust and Liberty Variable Investment Trust were first purchased on behalf of the Variable Account, each Annuity Unit for each Sub-account was valued at $10. The Unit value for each Sub-account in any Valuation Period thereafter is determined by multiplying the value for the prior period by a net investment factor (See “Net Investment Factor” in the prospectus). This factor may be greater or less than 1.0; therefore, the Annuity Unit may increase or decrease from Valuation Period to Valuation Period. For each AIR, Sun Life (U.S.) calculates a net investment factor for each Sub-account by dividing (a) by (b), where:

(a)
is equal to the net investment factor defined in the "Net Investment Factor" section of the prospectus without any deduction for the sales charge defined in (c)(ii) on that page; and
   
(b)
is the assumed investment factor for the current Valuation Period. The assumed investment factor adjusts for the interest assumed in determining the first variable annuity payment. Such factor for any Valuation Period shall be the accumulated value, at the end of such period, of $1.00 deposited at the beginning of such period at the AIR. The AIR for Annuity Units based on the Contract’s annuity tables is 6% per year (3% per year for Florida contracts and 5% per year for Oregon contracts.)  An AIR of 3% per year is also currently available upon Written Request.

With a particular AIR, payments after the first one will increase or decrease from month to month based on whether the actual annualized investment return of the selected Sub-account(s) (after deducting the Mortality and Expense Risk Charge) is better or worse than the assumed AIR percentage. If a given amount of Sub-account value is applied to a particular payment option, the initial payment will be smaller if a 3% AIR is selected instead of a 6% AIR but, all other things being equal, the subsequent 3% AIR payments have the potential for increasing in amount by a larger percentage and for decreasing in amount by a smaller percentage.  For example, consider what would happen if the actual annualized investment return (see the first sentence of this paragraph) is 9%, 6%, 3%, or 0% between the time of the first and second payments.  With an actual 9% return, the 3% AIR and 6% AIR payments would both increase in amount but the 3% AIR payment would increase by a larger percentage.  With an actual 6% return, the 3% AIR payment would increase in amount while the 6% AIR payment would stay the same. With an actual return of 3%, the 3% AIR payment would stay the same while the 6% AIR payment would decrease in amount.  Finally, with an actual return of 0%, the 3% AIR and 6% AIR payments would both decrease in amount but the 3% AIR payment would decrease by a smaller percentage.  Note that the changes in payment amounts described above are on a percentage basis and thus do not illustrate when, if ever, the 3% AIR payment amount might become larger than the 6% AIR payment amount.  Note though that if Option 1 (Income for a Fixed Number of Years) is selected and payments continue for the entire period, the 3% AIR payment amount will start out being smaller than the 6% AIR payment amount but eventually the 3% AIR payment amount will become larger than the 6% AIR payment amount.

Re-Allocating Sub-account Payments

The number of Annuity Units for each Sub-account under any variable annuity option will remain fixed during the entire annuity payment period unless the payee makes a written request for a change. Any change requested must be at least six months after a prior selection. The payee’s request must specify the percentage of the annuity payment that is to be based on the investment performance of each Sub-account. The percentage for each Sub-account, if not zero, must be at least 10% and must be a whole number. At the end of the Valuation Period during which Sun Life (U.S.) receives the request, Sun Life (U.S.) will: (a) value the Annuity Units for each Sub-account to create a total annuity value; (b) apply the new percentages the payee has selected to this total value; and (c) recompute the number of Annuity Units for each Sub-account. This new number of units will remain fixed for the remainder of the payment period unless the payee requests another change.

PRINCIPAL UNDERWRITER

The Contract, which is offered continuously, is distributed by Clarendon Insurance Agency, Inc. (“Clarendon”), a subsidiary of Sun Life (U.S.).

SAFEKEEPING OF ASSETS

Sun Life (U.S.) acts as custodian for, and is responsible for the safekeeping of, the assets of the Variable Account. Sun Life (U.S.) has responsibility for providing all administration of the Certificates and the Variable Account. This administration includes, but is not limited to, preparation of the Contracts and Certificates, maintenance of Certificates Owners' records, and all accounting, valuation, regulatory and reporting requirements.

INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The consolidated financial statements of Sun Life Assurance Company of Canada (U.S.) included in this Statement of Additional Information have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein (which report, dated March 27, 2008, accompanying such financial statements expresses an unqualified opinion and includes an explanatory paragraph, referring to the adoption of the provisions of the Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No.109”), and has been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.  Their office is located at 200 Berkeley Street, Boston, Massachusetts.

The financial statements of KMA Variable Account that are included in this Statement of Additional Information have been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report appearing herein (which report, dated April 18, 2008, accompanying the financial statements expresses an unqualified opinion) and has been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing .


INVESTMENT PERFORMANCE

The Variable Account may from time to time quote performance information concerning its various Sub-accounts.  A Sub-account’s performance may also be compared to the performance of sub-accounts used with variable annuities offered by other insurance companies. This comparative information may be expressed as a ranking prepared by Financial Planning Resources, Inc. of Miami, FL (The VARDS Report) or by Morningstar, Inc. of Chicago, IL (Morningstar’s Variable Annuity Performance Report), which are independent services that compare the performance of variable annuity sub-accounts.  The rankings are done on the basis of changes in accumulation unit values over time and do not take into account any charges (such as sales charges or administrative charges) that are deducted directly from contract values.

Ibbotson Associates of Chicago, IL provides historical returns from 1926 on capital markets in the United States.  The Variable Account may quote the performance of its Sub-accounts in conjunction with the long-term performance of capital markets in order to illustrate general long-term risk versus reward investment scenarios.  Capital markets tracked by Ibbotson Associates include common stocks, small company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury Bills, and the U.S. inflation rate. Historical total returns are determined by Ibbotson Associates for: Common Stocks, represented by the Standard and Poor’s Composite Stock Price Index (an unmanaged weighted index of 90 stocks prior to March 1957 and 500 stocks thereafter of industrial, transportation, utility and financial companies widely regarded by investors as representative of the stock market); Small Company Stocks, represented by the fifth capitalization quintile (i.e., the ninth and tenth deciles) of stocks on the New York Stock Exchange for 1926-1981 and by the performance of the Dimensional Fund Advisors Small Company 9/10 (for ninth and tenth deciles) Fund thereafter; Long Term Corporate Bonds, represented beginning in 1969 by the Salomon Brothers Long-Term High-Grade Corporate Bond Index, which is an unmanaged index of nearly all Aaa and Aa rated bonds, represented for 1946-1968 by backdating the Salomon Brothers Index using Salomon Brothers’ monthly yield data with a methodology similar to that used by Salomon Brothers in computing its Index, and represented for 1925-1945 through the use of the Standard and Poor’s monthly High-Grade Corporate Composite yield data, assuming a 4% coupon and a 20-year maturity. Long-Term Government Bonds, measured each year using a portfolio containing one U.S. government bond with a term of approximately twenty years and a reasonably current coupon; U.S. Treasury Bills, measured by rolling over each month a one-bill portfolio containing, at the beginning of each month, the shortest-term bill having not less than one month to maturity; Inflation, measured by the Consumer Price Index for all Urban Consumers, not seasonably adjusted, since January, 1978 and by the Consumer Price Index before then. The stock capital markets may be contrasted with the corporate bond and U.S. government securities capital markets.  Unlike an investment in stock, an investment in a bond that is held to maturity provides a fixed rate of return. Bonds have a senior priority to common stocks in the event the issuer is liquidated and interest on bonds is generally paid by the issuer before it makes any distributions to common stock owners.  Bonds rated in the two highest rating categories are considered high quality and present minimal risk of default.  An additional advantage of investing in U.S. government bonds and Treasury bills is that they are backed by the full faith and credit of the U.S. government and thus have virtually no risk of default.  Although government securities fluctuate in price, they are highly liquid.

FINANCIAL STATEMENTS

The financial statements of the Variable Account and Sun Life Assurance Company of Canada (U.S.) are included herein. The consolidated financial statements of Sun Life Assurance Company of Canada (U.S.) are provided as relevant to its ability to meet its financial obligations under the Contracts and should not be considered as bearing on the investment performance of the assets held in the Variable Account.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
For the years ended December 31,

   
 
2007
    
 
2006
    
 
2005
                 
Revenues:
                
Premiums and annuity considerations
$
110,616
  
$
59,192 
  
$
51,982 
Net investment income
  
1,098,592
    
1,206,081 
    
1,112,529 
Net derivative (loss) income
  
(193,124)
    
9,089 
    
16,474 
Net realized investment (losses) gains
  
(61,048)
    
(44,511)
    
16,925 
Fee and other income
  
479,904
    
398,622 
    
362,275 
Subordinated notes early redemption premium
  
25,578
    
- 
    
- 
                 
Total revenues
  
1,460,518
    
1,628,473 
    
1,560,185 
                 
Benefits and expenses:
                
Interest credited
  
629,823
    
633,405 
    
637,502 
Interest expense
  
101,532
    
130,802 
    
123,279 
Policyowner benefits
  
229,485
    
156,970 
    
187,013 
Amortization of deferred acquisition costs and value of
business acquired
  
 
189,121
    
 
399,182 
    
 
243,821 
Other operating expenses
  
283,815
    
231,434 
    
196,543 
Partnership capital securities early redemption payment
  
25,578
    
- 
    
- 
                 
Total benefits and expenses
  
1,459,354
    
1,551,793 
    
1,388,158 
                 
Income before income tax (benefit) expense, and minority
interest
  
 
1,164
    
 
76,680 
    
 
172,027 
                 
Income tax (benefit) expense:
                
Federal
  
(24,289)
    
(1,717)
    
40,091 
State
  
431
    
105 
    
(2)
Income tax (benefit) expense
  
(23,858)
    
(1,612)
    
40,089 
                 
Income before minority interest
  
25,022
    
78,292 
    
131,938 
                 
Minority interest share of loss
  
-
    
-
    
(1,214)
                 
Net income
$
25,022
  
$
78,292 
  
$
133,152 




The accompanying notes are an integral part of the consolidated financial statements


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)

ASSETS
December 31, 2007
  
December 31, 2006
Investments
          
Available-for-sale fixed maturities at fair value (amortized cost of
$11,848,397 and $13,623,450 in 2007 and 2006, respectively); fair value
option elected for $16,584  in 2007
 
 
$
 
 
11,503,230
  
 
 
$
13,637,973 
Trading fixed maturities at fair value (amortized cost of $3,938,088 and
$3,838,732 in 2007 and 2006, respectively)
  
 
3,867,011
    
3,856,053 
Subordinated note from affiliate held-to-maturity (fair value of $630,751
in 2006)
  
- 
    
600,000 
Mortgage loans
  
2,318,341
    
2,273,176 
Derivative instruments – receivable
  
609,261
    
653,854 
Limited partnerships
  
164,464
    
193,728 
Real estate
  
201,777
    
186,891 
Policy loans
  
712,633
    
709,626 
Other invested assets
  
568,676
    
950,226 
Cash and cash equivalents
  
1,169,701
    
578,080 
Total investments and cash
  
21,115,094
    
23,639,607 
           
Accrued investment income
  
290,363
    
291,218 
Deferred policy acquisition costs
  
1,603,397
    
1,234,206 
Value of business and customer renewals acquired
  
51,806
    
47,744 
Net deferred tax asset
  
15,945
    
3,597 
Goodwill
  
708,829
    
701,451 
Receivable for investments sold
  
3,482
    
33,241 
Reinsurance receivable
  
2,709,249
    
1,817,999 
Other assets
  
311,999
    
153,230 
Separate account assets
  
24,996,603
    
21,060,255 
           
Total assets
$
51,806,767
  
$
48,982,548 
           
LIABILITIES
          
           
Contractholder deposit funds and other policy liabilities
$
18,262,569
  
$
19,428,625 
Future contract and policy benefits
  
823,588
    
750,112 
Payable for investments purchased
  
199,210
    
218,465 
Accrued expenses and taxes
  
123,065
    
144,695 
Debt payable to affiliates
  
1,945,000
    
1,325,000 
Partnership capital securities
  
-
    
607,826 
Reinsurance payable to affiliate
  
1,691,884
    
1,605,626 
Derivative instruments – payable
  
446,640
    
160,504 
Other liabilities
  
888,061
    
1,178,086 
Separate account liabilities
  
24,996,603
    
21,060,255 
           
Total liabilities
  
49,376,620
    
46,479,194 
           
Commitments and contingencies – Note 20
          
           
STOCKHOLDER’S EQUITY
          
           
Common stock, $1,000 par value – 10,000 shares authorized; 6,437 shares issued and outstanding in 2007 and 2006
  
6,437 
    
6,437 
Additional paid-in capital
  
2,146,436
    
2,143,408 
Accumulated other comprehensive (loss) income
  
(92,403)
    
14,030 
Retained earnings
  
369,677
    
339,479 
           
Total stockholder’s equity
  
2,430,147
    
2,503,354 
           
Total liabilities and stockholder’s equity
$
51,806,767
  
$
48,982,548 


The accompanying notes are an integral part of the consolidated financial statements.

 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
For the years ended December 31,


   
 
2007
    
 
2006
    
 
2005
                 
Net income
$
25,022
  
$
78,292 
  
$
133,152 
                 
Other comprehensive loss:
                
Change in unrealized holding (losses) gains on available-
for-sale securities, net of tax and policyholder amounts
(1)
  
(119,775)
    
(46,229)
    
(79,814)
Change in pension and other postretirement plan
adjustments, net of tax (2)
  
11,197
    
1,842 
    
(1,842)
Reclassification adjustments of realized investment losses
(gains) into net income (3)
  
2,145
    
40,673 
    
 
(79,722)
Other comprehensive loss
  
(106,433)
    
(3,714)
    
(161,378)
                 
Comprehensive (loss) income
$
(81,411)
  
$
74,578 
  
$
(28,226)


(1)  
Net of tax benefit of $64.7 million, $25.5 million and $43.0 million for the years ended December 31, 2007, 2006 and 2005, respectively.
(2)  
Net of tax (expense) benefit of $(6.0) million, $(0.2) million and $1.0 million for the years ended December 31, 2007, 2006 and 2005, respectively.
(3)  
Net of tax (expense) benefit of $(1.2) million, $(21.9) million and $42.9 million for the years ended December 31, 2007, 2006 and 2005, respectively.






















The accompanying notes are an integral part of the consolidated financial statements



 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(in thousands)
For the years ended December 31,

 
 
 
Common Stock
  
 
Additional Paid-In
Capital
  
Accumulated Other Comprehensive Income (Loss)
  
 
 
Retained Earnings
  
 
Total
Stockholder’s
Equity
                             
Balance at December 31, 2004
$
6,437
  
$
2,131,888
  
$
180,638 
  
$
628,035 
  
$
2,946,998 
                             
Net income
  
-
    
-
    
-
    
133,152 
    
133,152 
Dividends
  
-
    
-
    
-
    
(200,000)
    
(200,000)
Tax benefit from stock options
  
-
    
6,992
    
-
    
-
    
6,992 
Other comprehensive loss
  
-
    
-
    
(161,378)
    
-
    
(161,378)
                             
Balance at December 31, 2005
  
6,437
    
2,138,880
    
19,260 
    
561,187 
    
2,725,764 
                             
Adjustment to initially apply FASB
Statement No. 158, net of tax
              
 
(1,516)
          
 
(1,516)
Net income
  
-
    
-
    
-
    
78,292 
    
78,292 
Dividends
  
-
    
-
    
-
    
(300,000)
    
(300,000)
Tax benefit from stock options
  
-
    
4,528
    
-
    
-
    
4,528 
Other comprehensive loss
  
-
    
-
    
(3,714)
    
-
    
(3,714)
                             
Balance at December 31, 2006
  
6,437
    
2,143,408
    
14,030 
    
339,479 
    
2,503,354 
                             
Cumulative effect of accounting
changes, net of tax
                    
 
5,176 
    
 
5,176 
Net income
  
-
    
-
    
-
    
25,022 
    
25,022 
Tax benefit from stock options
  
-
    
3,028
                
3,028 
Other comprehensive loss
  
-
    
-
    
(106,433)
    
-
    
(106,433)
                             
Balance at December 31, 2007
$
6,437
  
$
2,146,436
  
$
(92,403)
  
$
369,677 
  
$
2,430,147 


















The accompanying notes are an integral part of the consolidated financial statements



 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended December 31,

   
 
2007
    
 
2006
    
 
2005
                 
Cash Flows From Operating Activities:
                
Net income from operations
$
25,022 
  
$
78,292 
  
$
133,152 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
                
Minority interest share of loss
  
- 
    
-
    
(1,214)
Net amortization of premiums on investments
  
40,668 
    
58,752 
    
71,357 
Amortization of deferred acquisition costs and value of
business and customer renewals acquired
  
 
189,121 
    
 
399,182 
    
 
243,821 
Depreciation and amortization
  
7,460 
    
4,608 
    
3,985 
Net losses (gains) on derivatives
  
131,503 
    
(11,853)
    
(77,025)
Net realized losses (gains) on available-for-sale
investments
  
 
61,048 
    
 
44,511 
    
 
(16,925)
Changes in fair value of trading investments
  
88,398 
    
(15,235)
    
80,324 
Net realized gains on trading investments
  
(4,655)
    
(373)
    
(11,162)
Net change in unrealized and undistributed gains in
private equity limited partnerships
  
 
(23,027)
    
 
(29,120)
    
 
(48,244)
Interest credited to contractholder deposits
  
629,823 
    
633,405 
    
637,502 
Deferred federal income taxes
  
43,366
    
4,180 
    
22,047 
Changes in assets and liabilities:
                
Additions to deferred acquisition costs, value of
business and customer renewals acquired
  
 
(379,941)
    
 
(262,895)
    
 
(261,917)
Accrued investment income
  
855 
    
(29,711)
    
17,916 
Net reinsurance receivable/payable
  
33,161
    
77,063 
    
85,876 
Future contract and policy benefits
  
66,550 
    
(6,619)
    
25,123 
Other, net
  
(134,356)
    
14,268 
    
53,536 
Purchases of trading fixed maturities, net of sales
  
(100,836)
    
(1,866,153)
    
(651,921)
Net cash provided by (used in) operating activities
  
674,160 
    
(907,698)
    
306,231 
                 
Cash Flows From Investing Activities:
                
Sales, maturities and repayments of:
                
Available-for-sale fixed maturities
  
4,252,780 
    
5,872,190 
    
5,685,008 
Mortgage loans
  
355,146 
    
248,264 
    
117,438 
Real estate
  
- 
    
- 
    
947 
Net cash from disposition of subsidiary
  
- 
    
- 
    
17,040 
Other invested assets
  
667,683 
    
184,646 
    
483,700 
Redemption of subordinated note from affiliates
  
600,000 
    
- 
    
- 
Purchases of:
                
Available-for-sale fixed maturities
  
(2,557,841)
    
(4,002,244)
    
(5,269,211)
Mortgage loans
  
(399,566)
    
(780,592)
    
(390,376)
Real estate
  
(19,439)
    
(20,619)
    
(6,648)
Other invested assets
  
(57,864)
    
(489,493)
    
(171,539)
Net change in other investments
  
(361,781)
    
399,514 
    
(239,910)
Net change in policy loans
  
(3,007)
    
(7,857)
    
(5,464)
Net change in short-term investments
  
- 
    
- 
    
(4,576)
Early redemption premium
  
25,578 
    
- 
    
- 
                 
Net cash provided by investing activities
$
2,501,689 
  
$
1,403,809 
  
$
216,409 

The accompanying notes are an integral part of the consolidated financial statements

 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the years ended December 31,

   
 
2007
    
 
2006
    
 
2005
                 
Cash Flows From Financing Activities:
                
Additions to contractholder deposit funds
$
1,924,784 
  
$
3,520,138 
  
$
2,720,141 
Withdrawals from contractholder deposit funds
  
(4,533,405)
    
(3,690,351)
    
(3,404,468)
Repayments of debt
  
(980,000)
    
- 
    
- 
Debt proceeds
  
1,000,000 
    
200,000 
    
100,000 
Dividends paid to stockholder
  
- 
    
(300,000)
    
(150,600)
Early redemption payment
  
(25,578)
    
- 
    
- 
Other, net
  
29,971 
    
4,528 
    
6,992 
Net cash used in financing activities
  
(2,584,228)
    
(265,685)
    
(727,935)
                 
Net change in cash and cash equivalents
  
591,621 
    
230,426 
    
(205,295)
                 
Cash and cash equivalents, beginning of year
  
578,080 
    
347,654 
    
552,949 
                 
Cash and cash equivalents, end of year
$
1,169,701 
  
$
578,080 
  
$
347,654 
                 
Supplemental Cash Flow Information
                
Interest paid
$
73,116 
  
$
130,686 
  
$
122,474 
Income taxes paid
$
43,287 
  
$
82,250 
  
$
16,857 


Supplemental Schedule of non-cash investing and financing activities

Effective November 8, 2007, the Company’s subsidiary, Sun Life Financial (U.S.) Reinsurance Company (“Sun Life Vermont”), entered into a reinsurance agreement with Sun Life Assurance Company of Canada (“SLOC”), the Company’s affiliate, under which Sun Life Vermont assumed the risks of certain individual universal life insurance contracts issued and to be issued by SLOC.  This agreement is described more fully in Note 1 and Note 8.  As part of the transaction, the Sun Life Vermont assumed $553.7 million of contractholder deposits, future contract and policy benefits of $ 20.4 million, a funds withheld asset of $551.8 million, and a deferred loss of $22.3 million, all of which are considered non-cash items for purposes of the Company’s consolidated statement of cash flows.

The Company declared and paid to its direct parent, Sun Life of Canada (U.S.) Holdings, Inc., cash dividends of $300.0 million in 2006.  In 2005, the Company declared and paid a $200.0 million dividend to its direct parent, consisting of $150.6 million in cash and $49.4 million in notes. The Company did not pay any dividends to its direct parent in 2007.

On April 19, 2005, the Company sold its interest in a consolidated variable interest entity (“VIE”). As a result of the sale, bonds decreased by $42.5 million, short-term investments decreased by $28.5 million, investment income due and accrued decreased by $0.3 million, other invested assets decreased by $3.2 million, other liabilities decreased by $26.1 million, deferred tax liability decreased by $3.9 million, and notes payable decreased by $33.5 million.


The accompanying notes are an integral part of the consolidated financial statements



 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

Sun Life Assurance Company of Canada (U.S.) (the “Company”) and its subsidiaries are engaged in the sale of individual and group variable life insurance, individual universal life insurance, individual and group fixed and variable annuities, funding agreements, group life, group disability, group dental and group stop loss insurance.  These products are distributed through individual insurance agents, financial planners, insurance brokers and broker-dealers to both the tax-qualified and non-tax-qualified markets.  The Company is authorized to transact business in 49 states, the District of Columbia, Puerto Rico and the U.S. Virgin Islands.  In addition, the Company’s wholly-owned subsidiary, Sun Life Insurance and Annuity Company of New York (“SLNY”), is authorized to transact business in the State of New York.

The Company is a stock life insurance company incorporated under the laws of Delaware.  The Company is a direct wholly-owned subsidiary of Sun Life of Canada (U.S.) Holdings, Inc. (the "Parent").  The Company is an indirect wholly-owned subsidiary of Sun Life Assurance Company of Canada - U.S. Operations Holdings, Inc. ("SLC - U.S. Ops Holdings") and is an indirect wholly-owned subsidiary of Sun Life Financial Inc. ("SLF"), a reporting company under the Securities Exchange Act of 1934.  SLF and its subsidiaries are collectively referred to herein as "Sun Life Financial."

BASIS OF PRESENTATION

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for stock life insurance companies.

The consolidated financial statements include the accounts of the Company and its subsidiaries.  As of December 31, 2007, the Company directly or indirectly owned all of the outstanding shares or members interest of SLNY, which issues individual fixed and variable annuity contracts, group life, group disability, group dental and stop loss insurance, and individual life insurance in New York; Independence Life and Annuity Company (“INDY”), a Rhode Island life insurance company that sold variable and whole life insurance products; Sun Life Vermont, a Vermont special purpose financial captive insurance company; Clarendon Insurance Agency, Inc., a registered broker-dealer; Sun Life of Canada (U.S.) SPE 97-I, Inc., organized for the purpose of engaging in activities incidental to securitizing mortgage loans; SLF Private Placement Investment Company I, LLC; Sun Parkaire Landing LLC; 7101 France Avenue Manager, LLC; Sun MetroNorth, LLC; and SLNY Private Placement Investment Company I, LLC.

On October 31, 2007, the Company subscribed for $250,000 worth of shares of, and contributed $150 million of paid-in capital to, a newly formed wholly-owned subsidiary, Sun Life Vermont.  Effective November 8, 2007, Sun Life Vermont entered into a reinsurance agreement with Sun Life Assurance Company of Canada (“SLOC”), an affiliate of the Company, under which the Sun Life Vermont has assumed the risks of certain individual universal life insurance (“UL”) policies issued, and to be issued, by SLOC.  This agreement is described more fully in Note 8.  A long-term financing arrangement has been established with a financial institution (the "Lender") that will enable Sun Life Vermont to fund a portion of its obligations under the reinsurance agreement with SLOC.  Under this arrangement, Sun Life Vermont issued a $1 billion variable principal, floating rate surplus note (the “Surplus Note”) to a special-purpose entity, Structured Asset Repackage Company, 2007-SUNAXXX LLC (“SUNAXXX”) affiliated with the Lender.  Pursuant to an agreement between the Lender and SLC – U.S. Ops Holdings, SLC – U.S. Ops Holdings bears the ultimate obligation to repay the Lender and, as such, has consolidated SUNAXXX in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (Revised December 2003)" (“FIN 46(R)”).


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

BASIS OF PRESENTATION (continued)

Effective September 27, 2007, the Company dissolved Sun life of Canada (U.S.) Holdings General Partner, LLC (the “General Partner”).  The General Partner was the sole general partner in Sun Life of Canada (U.S.) Limited Partnership (the “Partnership”) and, as a result, the Partnership had been consolidated with the results of the Company.  The Partnership was organized to purchase subordinated debentures issued by the Parent and to issue partnership capital securities to an affiliated business trust, Sun Life of Canada (U.S.) Capital Trust I (the “Capital Trust”).  Effective May 6, 2007, the Parent redeemed $600 million of 8.526% subordinated debentures issued to the Partnership and paid the Partnership an early redemption premium of $25.6 million.  Also effective May 6, 2007, the Partnership redeemed $600 million of the 8.526% partnership capital securities issued to the Capital Trust and paid a premium of $25.6 million to the Capital Trust.  The redemption had no impact on the Company’s net income.  The Partnership was cancelled effective September 27, 2007.

Effective May 31, 2007, Sun Life Financial completed its acquisition of Genworth Financial, Inc.'s (“Genworth’s”) Employee Benefits Group business ("EBG").  Also effective May 31, 2007, SLNY entered into a series of agreements with Sun Life and Health Insurance Company (U.S.) (“SLHIC”), one of the acquired companies (formerly named Genworth Life and Health Insurance Company), through which the New York issued business of SLHIC was transferred to SLNY.  These agreements include a 100% coinsurance agreement for all existing and future new business issued in New York, a renewal rights agreement under which SLNY has exclusive rights to renew in-force business assumed under the reinsurance agreement and an administrative service agreement under which SLNY has agreed to assume direct responsibility for all sales and administration of existing and new business issued in New York (collectively, “the SLHIC to SLNY asset transfer”).  These agreements, in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” were treated as a transfer of net assets between entities under common control. SLNY paid $40 million of total consideration to SLHIC.  SLHIC transferred assets at carrying value of approximately $72 million, including $38.9 million of goodwill and other intangibles, as well as policyholder and other liabilities of approximately $32 million to SLNY.  The Group Protection Segment of the Company reflects a significant increase in business as a result of these agreements. These agreements have allowed the Company to expand its product offerings to include group dental insurance.

On September 6, 2006, the Company entered into an agreement with Credit and Repackaged Securities Limited Series 2006-10 Trust (the "CARS Trust"), whereby the Company is the sole beneficiary of the CARS Trust.  As of December 31, 2007, total assets and liabilities of the CARS Trust were $57.7 million and $7.9 million, respectively. As the sole beneficiary of the CARS Trust, the Company is required to consolidate this trust under the requirements of FIN 46(R).  Accordingly, the assets and liabilities of the CARS Trust are included in the Company’s consolidated financial statements.  As of December 31, 2007, the Company recorded in its consolidated balance sheets $53.8 million of trading fixed maturities, $2.9 million of deferred tax, $1.0 million of accrued investment income and $7.9 million of liabilities relating to a total return swap.  As of December 31, 2006, the Company recorded in its consolidated balance sheets $55.3 million of trading fixed maturities, $1.2 million of accrued investment income and $1.7 million of liabilities.

On April 19, 2005, the Company sold its interest in a consolidated variable interest entity (“VIE”) and recognized a gain of $6.1 million.  The Company received net cash proceeds of $17.0 million and reduced consolidated assets and liabilities by $74.5 million and $63.6 million, respectively. The Company’s net income for the year ended December 31, 2005 included a net loss of $0.8 million related to this VIE.

The Company had a greater than or equal to 20%, but less than 50%, interest in fourteen VIEs at December 31, 2007.  The Company is a creditor in seven trusts, three limited liability companies, two limited partnership and two special-purpose entities that were used to finance commercial mortgages, and franchise receivables and equipment used in utility generation.  The Company’s maximum exposure to loss related to all of these VIEs is the investments’ carrying value, which was $88.4 million and $30.1 million at December 31, 2007 and 2006, respectively.  The investments in these VIEs mature between March 2007 and September 2029.  As the Company will not absorb a majority of the VIEs’ expected losses or receive a majority of the expected returns, the Company is not required to consolidate these VIEs, in accordance with FIN 46.  See Note 4 for additional information with respect to leveraged leases which is not included above.

All intercompany transactions have been eliminated in consolidation.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  The most significant estimates are those used in determining the fair value of financial instruments, goodwill, DAC, VOBA, the liabilities for future contract and policyholder benefits and other-than-temporary impairments of investments.  Actual results could differ from those estimates.

FINANCIAL INSTRUMENTS

In the normal course of business, the Company enters into transactions involving various types of financial instruments, including cash equivalents, fixed maturity investments, mortgage loans, equity securities, derivative financial instruments, debt, loan commitments and financial guarantees.  These instruments involve credit risk and also may be subject to risk of loss due to interest rate fluctuation.  The Company evaluates and monitors each financial instrument individually and, when appropriate, obtains collateral or other security to minimize losses.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents primarily include cash, commercial paper, money market investments and short-term bank participations.  All such investments have maturities of three months or less when purchased and are considered cash equivalents for purposes of reporting cash flows.

INVESTMENTS

The Company accounts for its investments in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities."  At the time of purchase, fixed maturity securities are classified based on the Company's intent as either held-to-maturity, trading or available-for-sale.  In order for a security to be classified as held-to-maturity, the Company must have positive intent and ability to hold the security to maturity.  Securities held-to-maturity are stated at cost, adjusted for amortization of premiums and accretion of discounts.  Securities that are bought and held principally for the purpose of selling them in the near term are classified as trading.  Trading securities are carried at aggregate fair value with changes in market value reported as a component of net investment income.  Securities that do not meet the held-to-maturity or trading criterion are classified as available-for-sale.  Included with available-for-sale fixed maturities are mortgage backed securities in the To Be Announced ("TBA") form.  The Company records TBA purchases on the trade date and the corresponding payable is recorded as an outstanding liability in payable for investments purchased until the settlement date of the transaction.  Available-for-sale securities are carried at fair value with the unrealized gains or losses reported in other comprehensive income.

The Company determines the fair value of its publicly traded fixed maturities using four primary pricing methods: third-party pricing services, independent dealer quotes, pricing matrices, and pricing models.  Prices are first sought from third party pricing services; the remaining unpriced securities are priced using one of the remaining three methods.  Third-party pricing services derive the security prices through recently reported trades for identical or similar securities with adjustments for trading volumes and market observable information through the reporting date.  In the event that there are no recent market trades, pricing services and brokers may use pricing matrices and models to develop a security price based on future expected cash flows discounted at an estimated market rate using collateral performance and vintages.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVESTMENTS (continued)

Structured securities, such as collateralized mortgage obligations (“CMO”), commercial mortgage-backed securities (“CMBS”), and asset-backed securities (“ABS”), are priced using a matrix, fair value model or independent broker quotations.  CMBS securities, which are a subset of the Company's CMO holdings, are priced using the last sale price of the day or a broker quote, if no sales were transacted that day.  Other CMOs and ABS are priced using matrices, models or independent broker quotations.  Typical inputs used by these three pricing methods include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids and/or estimated cash flows and prepayment speeds.  In addition, estimates of expected future prepayments are factors in determining the price of ABS, mortgage-backed securities (“MBS”), CMBS, and CMOs.  These estimates are based on the underlying collateral and structure of the security, as well as prepayment speeds previously experienced in the market at interest rate levels projected for the underlying collateral.  Actual prepayment experience may vary from these estimates.

For privately placed fixed maturities, fair values are estimated using matrices, which take into account credit spreads for publicly traded securities of similar credit risk, maturity, prepayment and liquidity characteristics.  A portion of privately placed fixed maturities are also priced using market prices or dealer quotes.  The fair values of mortgages are estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

The Company’s ability to liquidate positions in privately placed fixed securities and mortgages could be impacted to a significant degree by the lack of an actively traded market.  Although the Company believes that its estimates reasonably reflect the fair value of those instruments, its key assumptions about risk-free interest rates, risk premiums, performance of underlying collateral (if any) and other factors may not reflect those of an active market.

The Company performs a monthly analysis on the prices received from third parties to assess if the prices represent a reasonable estimate of the fair value.  The process is both quantitative and qualitative and includes back testing of recent trades, review of key assumptions such as spreads, duration, credit rating, and on-going review of third-party pricing services methodologies.  In the event that a more appropriate fair value is justified, the price received from a third-party pricing services is adjusted accordingly.  The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between knowledgeable, unrelated willing parties using inputs, including estimates and assumptions, a market participant would utilize.

The Company's accounting policy for impairment requires recognition of an other-than-temporary impairment write-down on a security if it is determined that the Company anticipates that it will be unable to recover all amounts due under the contractual obligations of the security.  Additionally, in the event that securities that are expected to be sold before the fair value of the security recovers to amortized cost, an other-than-temporary impairment charge is also taken.

Some structured securities, typically those rated single A or below, are subject to Emerging Issues Task Force Issue No.  99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests That Continued to Be Held by a Transferor in Securitized Financial Assets” (“EITF 99-20”).  EITF 99-20 requires the Company to periodically update its best estimate of cash flows over the life of the security.  In the event that the present value of the estimated cash flows is less than amortized cost, an other-than-temporary impairment charge is recorded.  Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third parties, along with assumptions and judgments about the future performance of the underlying collateral.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVESTMENTS (continued)

Impairments are classified as either credit-related or interest-related.  The Company categorizes impairments as credit-related if it anticipates the issuers will be unable to pay all principal and interest amounts due, according to the contractual terms of the security or if the decline in fair value of the security is driven by issuer-specific credit events.  The Company characterizes impairments as interest-related if the depression in fair value of the security was due to changes in interest or general credit spread widening and for which the Company has determined it no longer has the intent or ability to hold a security until recovery to amortized cost.  Once an other than temporary impairment charge has been recorded, the Company continues to review the other-than-temporarily impaired securities for additional impairment.  The net realized loss is recorded in the income statement as the difference between the fair value and the amortized cost of the security.

The Company incurred realized losses totaling $68.1 million, $6.3 million and 29.7, for the years ended December 31, 2007, 2006 and 2005, respectively, for other-than-temporary impairments.  Of the $68.1 million in realized losses for other-than-temporary impairments for the year ended December 31, 2007, $16.1 million was due to a change in the Company’s intent to hold the securities to recovery of fair value, up to amortized cost.  The remaining $52 million of realized losses were credit-related.

The Company discontinues the accrual of income on its holdings for issuers that are in default.  Investment income would not have materially increased for the year ended December 31, 2007 and 2006 if these holdings were performing.




 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

INVESTMENTS (CONTINUED)

Mortgage loans are stated at unpaid principal balances, net of provisions for estimated losses.  Mortgage loans acquired at a premium or discount are carried at amortized values net of provisions for estimated losses.  Mortgage loans, which include primarily commercial first mortgages, are diversified by property type and geographic area throughout the United States.  Mortgage loans are collateralized by the related properties and generally are no more than 75% of the property’s value at the time that the original loan is made.

A loan is recognized as impaired when it is probable that the principal or interest is not collectible in accordance with the contractual terms of the loan.  Measurement of impairment is based on the lower of the present value of expected future cash flows discounted at the loan's effective interest rate, or on the loan's observable market price.  A specific valuation allowance is established if the fair value of the impaired loan is less than the recorded amount.  Loans are also charged against the allowance when determined to be uncollectible.  The allowance is based on a continuing review of the loan portfolio, past loss experience, and current economic conditions, which may affect the borrower's ability to pay.  While management believes that it uses the best information available to establish the allowance, future adjustments to the allowance may become necessary if economic conditions differ from the assumptions used in making the evaluation.

Real estate investments are held for the production of income or are held for sale.  Real estate investments held for the production of income are carried at the lower of cost adjusted for accumulated depreciation or fair value.  Depreciation of buildings and improvements is calculated using the straight line method over the estimated useful life of the property, generally 40 to 50 years.  Real estate investments held for sale are primarily acquired through foreclosure of mortgage loans.  The cost of real estate that has been acquired through foreclosure is the estimated fair value less estimated costs to dispose at the time of foreclosure.  Real estate investments are diversified by property type and geographic area throughout the United States.

Policy loans are carried at the amount of outstanding principal balance.  Policy loans are collateralized by the related insurance policy and do not exceed the net cash surrender value of such policy.

Investments in private equity limited partnerships are accounted for by the equity method of accounting.

The Company uses derivative financial instruments including swaps, options, and futures as a means of hedging exposure to interest rate, currency and equity price risk.  Derivatives are carried at fair value and changes in fair value are recorded as a component of derivative income.

Realized gains and losses on the sales of investments are recognized in operations at the date of sale and are determined using the average cost method.  When an impairment of a specific available-for-sale investment is determined to be other-than-temporary, a realized investment loss is recorded.  Changes in the provision for estimated losses on mortgage loans and real estate are included in net realized investment gains and losses.

Interest income is recorded on the accrual basis. Investments are placed in a non-accrual status when management believes that the borrower's financial condition, after giving consideration to economic and business conditions and collection efforts, is such that collection of principal and interest is doubtful.  When an investment is placed in non-accrual status, all interest accrued is reversed against current period interest income.  Interest accruals are resumed on such investments only when the investments have performed on a sustained basis for a reasonable period of time and when, in the judgment of management, the investments are estimated to be fully collectible as to both principal and interest.



 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

DEFERRED POLICY ACQUISITION COSTS

Acquisition costs consist of commissions, underwriting and other costs, which vary with and are primarily related to the production of new business.  Acquisition costs related to investment-type contracts, primarily deferred annuity and guaranteed investment contracts (“GICs”), and universal and variable life products are deferred and amortized with interest in proportion to the present value of estimated gross profits to be realized over the estimated lives of the contracts.  Estimated gross profits are composed of net investment income, net realized investment gains and losses, life and variable annuity fees, surrender charges, interest credited, policyholder benefits and direct variable administrative expenses.  DAC amortization is reviewed regularly and adjusted, as appropriate, retrospectively when the Company records actual profits and revises its estimate of future gross profits to be realized from this group of products, including realized gains and losses from investments.

Although recovery of DAC is not assured, the Company believes it is more likely than not that all of these costs will be recovered from future profits.  The amount of DAC considered recoverable, however, could be reduced in the near term if the future estimates of gross profits are reduced.

DAC is also adjusted for amounts relating to unrealized investment gains and losses.  This adjustment, net of tax, is included with unrealized investment gains or losses that are recorded in accumulated other comprehensive (loss) income. DAC was increased by $189.8 million and $6.9 million at December 31, 2007 and 2006, respectively, to reflect unrealized losses.

VALUE OF BUSINESS AND CUSTOMER RENEWALS ACQUIRED

Value of business acquired (“VOBA”) represents the actuarially-determined present value of projected future gross profits from policies in force at the date of their acquisition.  This amount is amortized in proportion to the projected emergence of profits or premium income over the estimated life of the purchased block of business.

VOBA is also adjusted for amounts relating to unrealized investment gains and losses.  This adjustment, net of tax, is included with unrealized investment gains or losses that are recorded in accumulated other comprehensive (loss) income.  The Company’s VOBA was not adjusted for amounts relating to unrealized investment gains and losses for the year ended December 31, 2007.  VOBA was increased by $0.5 million at December 31, 2006 to account for unrealized investment losses.

The value of customer renewals acquired represents the actuarially determined present value of projected future profits arising from the existing in-force business at the date of acquisition to the next policy renewal date.  This amount is amortized in proportion to the projected premium income over the period from the first renewal date to the end of the projected life of the policies and, as such, is not adjusted for amounts relating to unrealized investment gains and losses.




 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

GOODWILL

Goodwill represents the difference between the purchase price paid and the fair value of the net assets acquired in connection with the Company’s acquisitions of Keyport on November 1, 2001 and the allocation of goodwill to SLNY, based on a reinsurance agreement with SLHIC, effective May 31, 2007.  Goodwill obtained in connection with the purchase of Keyport is allocated to the Wealth Management Segment.  Goodwill obtained through the reinsurance agreement with SLHIC is allocated to the Group Segment in the Company’s subsidiary, SLNY.  In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” goodwill is tested for impairment on an annual basis.  The Company completed the required impairment tests of goodwill and indefinite-lived intangible assets during the second quarter of 2007 and concluded that these assets were not impaired.

OTHER ASSETS

Property, equipment, leasehold improvements and capitalized software costs that are included in other assets are stated at cost, less accumulated depreciation and amortization.  Depreciation and amortization are calculated using the straight-line or accelerated method over the estimated useful lives of the related assets, which generally range from 3 to 10 years.

Amortization of leasehold improvements is calculated using the straight-line method over the lesser of the term of the leases or the estimated useful life of the improvements.  Intangible assets are also included in other assets.

Intangible assets, which are recorded in other assets, consist of state insurance licenses that are not subject to amortization, product rights that have a weighted-average useful life of 7 years, and the value of distribution, which was transferred to SLNY from SLHIC.  The value of distribution represents the present value of projected future profits arising from sales of new business by brokers with whom SLHIC had an existing distribution relationship contract.  This amount is amortized on a straight-line basis over 25 years, representing the period over which the Company expects to earn premiums from new sales stemming from the added distribution capacity.

POLICY LIABILITIES AND ACCRUALS

Future contract and policy benefit liabilities include amounts reserved for future policy benefits payable upon contingent events as well as liabilities for unpaid claims due as of the statement date.  Such liabilities are established in amounts adequate to meet the estimated future obligations of policies in force.

Policy reserves for annuity contracts include liabilities held for group pension and payout annuity payments and liabilities held for product guarantees on variable annuity products, such as guaranteed minimum death benefits.  Reserves for pension and payout annuity contracts are calculated using the best-estimate interest and decrement assumptions that were set at the time that loss recognition testing resulted in additional reserves.  The Company periodically reviews its policies for loss recognition based upon management’s best estimates.  From time to time the Company may recognize a loss on certain lines of business.  For the year ended December 31, 2007 additional reserves of $31.4 million were recorded as a reduction to income and additional reserves of $7.5 million were recorded as a component of other comprehensive loss.  Reserves for guaranteed minimum death benefits and guaranteed minimum income benefits are calculated according to the methodology of AICPA Statement of Position 03-1, "Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts" ("SOP 03-1"), whereby the expected benefits provided by the guarantees are spread over the duration of the contract in proportion to the benefit assessments.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

POLICY LIABILITIES AND ACCRUALS (continued)

Policy reserves for universal life contracts are held for benefit coverages that are not fully provided for in the policy account value.  These include rider coverages, conversions from group policies, and benefits provided under market conduct settlements.

Policy reserves for group life and health contracts are calculated using standard actuarial methods recognized by the American Academy of Actuaries. For the tabular reserves, discount rates are based on the Company’s earned investment yield and the morbidity and mortality tables used are standard industry tables modified to reflect the Company’s actual experience when appropriate.  In particular, for the Company’s group known claim reserves, the mortality and morbidity tables for the early durations of claims are based exclusively on the Company’s experience, incorporating factors such as age at disability, sex and elimination period.  These reserves are computed at amounts that, with interest compounded annually at assumed rates, are expected to meet the Company’s future obligations.

Liabilities for unpaid claims consist of the estimated amount payable for claims reported but not yet settled and an estimate of claims incurred but not reported.  The amount reported is based upon historical experience, adjusted for trends and current circumstances.  Management believes that the recorded liability is sufficient to provide for the associated claims adjustment expenses.  Revisions of these estimates are included in operations in the year such refinements are made.

Contractholder deposit funds consist of policy values that accrue to the holders of universal life-type contracts and investment-related products such as deferred annuities, single premium whole life policies ("SPWL"), GICs and funding agreements.  The liabilities consist of deposits received plus interest credited, less accumulated policyholder charges, assessments, partial withdrawals and surrenders.  The liabilities are not reduced by surrender charges.

REVENUE AND EXPENSES

Premiums for traditional individual life products are considered earned revenue when due. Premiums related to group life, group stop loss, group dental and group disability insurance are recognized as earned revenue pro-rata over the contract period. The unexpired portion of these premiums is recorded as unearned premiums. Revenue from universal life-type products and investment-related products includes charges for the cost of insurance (mortality), initiation and administration of the policy and surrender charges. Revenue is recognized when the charges are assessed except that any portion of an assessment that relates to services to be provided in future years is deferred and recognized over the period during which the services are provided.

Benefits and expenses related to traditional life, annuity and disability contracts, including group policies, are recognized when incurred in a manner designed to match them with related premium revenue and to spread income recognition over the expected life of the policy.  For universal life-type and investment-type contracts, expenses include interest credited to policyholders’ accounts and death benefits in excess of account values, which are recognized as incurred.

Fees from investment advisory services are recognized as revenues when the services are provided.

INCOME TAXES

For the years ended December 31, 2007, 2006 and 2005, the Company participated in a consolidated federal income tax return with SLC – U.S. Ops Holdings and other affiliates.  For the years ended December 31, 2006 and 2005, the Company’s subsidiaries INDY and SLNY filed stand-alone federal income tax returns.  INDY, SLNY and Sun Life Vermont, a new subsidiary, will be included as part of the consolidated federal income tax return for the year ended December 31, 2007.

Deferred income taxes are recognized when assets and liabilities have different values for financial statement and tax reporting purposes, and for other temporary taxable and deductible differences as defined by SFAS No. 109, “Accounting for Income Taxes.”  These differences primarily result from policy reserves, policy acquisition expenses and unrealized gains or losses on investments.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

SEPARATE ACCOUNTS

The Company has established separate accounts applicable to various classes of contracts providing variable benefits.  Contracts for which funds are invested in separate accounts include variable life insurance and individual and group qualified and non-qualified variable annuity contracts.  Investment income and changes in mutual fund asset values are allocated to policyholders and therefore do not affect the operating results of the Company.  Assets held in the separate accounts are carried at fair value and the investment risk of such securities is retained by the contractholder.  The Company earns separate account fees for providing administrative services and bearing the mortality risks related to these contracts.  The activity of the separate accounts is not reflected in the consolidated financial statements except for:  (1) the fees the Company receives, which are assessed periodically and recognized as revenue when assessed; and (2) the activity related to the guaranteed minimum death benefit ("GMDB"), guaranteed minimum income benefit ("GMIB"), guaranteed minimum accumulation benefit ("GMAB") and guaranteed minimum withdrawal benefit ("GMWB") which is reflected in the Company’s consolidated financial statements and accompanying notes.

ACCOUNTING PRONOUNCEMENTS

New and Adopted Accounting Pronouncements

In June 2006, the FASB issued Interpretation No. 48, "Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109" ("FIN 48"), which became effective for fiscal years beginning after December 15, 2006.  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  The Company adopted FIN 48 on January 1, 2007, and recognized a decrease of $5.2 million in the liability for unrecognized tax benefits (“UTBs”) and related net interest, and an offsetting increase in its January 1, 2007 balance of retained earnings.

In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets," an amendment to SFAS No. 140.  SFAS No. 156 requires all separately recognized servicing assets and liabilities to be initially measured at fair value and permits entities to choose to either subsequently measure servicing rights at fair value and report changes in fair value in earnings, or amortize servicing rights in proportion to, and over the estimated net servicing income or loss, and assess the rights for impairment or the need for an increased obligation.  The option to subsequently measure servicing rights at fair value allows entities which utilize derivative instruments to hedge their servicing rights to account for such hedging relationships at fair value and avoid the complications of hedge accounting under SFAS No. 133.  SFAS No. 156 was effective for fiscal years beginning after September 15, 2006.  The adoption of this statement did not have a material impact on the Company’s financial position or results of operations.

In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140.”  This statement amended SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and resolved issues addressed in SFAS No. 133 Implementation Issue No. D1, "Application of Statement 133 to Beneficial Interests in Securitized Financial Assets."  The Company began applying SFAS No. 155 to all financial instruments acquired, issued or subject to a remeasurement event beginning January 1, 2007.  The Company elected the fair value option for $16.6 million of available-for-sale securities during the year ended December 31, 2007.  The election did not have a material impact on the Company’s results of operations.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

ACCOUNTING PRONOUNCEMENTS (CONTINUED)

New and Adopted Accounting Pronouncements (continued)

In September 2005, the American Institute of Certified Public Accountants (the "AICPA") issued Statement of Position 05-1, "Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts" ("SOP 05-1").  SOP 05-1 provides guidance on accounting by insurance enterprises for DAC on internal replacements of insurance and investment contracts.  The adoption of SOP 05-1 on January 1, 2007 did not have a material impact on the Company’s consolidated financial condition and results of operations.

Accounting Standards Not Yet Adopted

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which permits entities to choose to measure many financial instruments and certain other items at fair value (“FV option”).  The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reporting earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  SFAS No. 159 is effective for fiscal years beginning after November 15, 2007 and all interim periods within those fiscal years.

As of January 1, 2008, the Company has adopted the FV option for all available-for-sale fixed maturity securities attributable to certain life, health and annuity products.  At December 31, 2007 such available-for-sale securities had a market value of $10.7 billion and an amortized cost of $11.1 billion.  The adoption of the FV option does not relieve the Company from its obligation to monitor those available-for-sale securities that are in an unrealized loss position at December 31, 2007, which the Company will do through its current portfolio monitoring process.

The FV option adoption will result in a cumulative-effect adjustment to the opening balance of retained earnings, accumulated other comprehensive income, DAC, VOBA, deferred tax asset and certain other liabilities.  The Company is currently assessing the impact of the effects of this adoption.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements, but does not change existing guidance as to whether or not an instrument is carried at fair value.

SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be exchanged to sell an asset or transfer a liability in an orderly transaction between market participants.  The statement establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (i.e., Level 1, 2 and 3).  Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.  Level 2 inputs are observable inputs, other than quoted prices included in Level 1, for the asset or liability or prices for similar assets and liabilities.  Level 3 inputs are unobservable inputs reflecting the reporting entity’s estimates of the assumptions that market participants would use in pricing the asset or liability.  SFAS No. 157 requires that a fair value measurement technique include an adjustment for risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model, if market participants would also include such an adjustment.  Quantitative and qualitative disclosures will focus on the inputs used to measure fair value for both recurring and non-recurring fair value measurements and the effects of the measurements in the financial statements.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

ACCOUNTING PRONOUNCEMENTS (CONTINUED)

Accounting Standards Not Yet Adopted (continued)

The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007, and are to be applied prospectively, except for changes in fair value measurements that result from the initial application of SFAS No. 157, which are to be recorded as an adjustment to opening retained earnings in the year of adoption.  Effective January 1, 2008, the Company adopted SFAS No. 157 and applied the provisions of the statement prospectively to assets and liabilities measured and disclosed at fair value. In addition to new disclosure requirements, the adoption of SFAS No. 157 changes the valuation of embedded derivatives associated with annuity contracts. The change in valuation of embedded derivatives associated with annuity contracts results from the incorporation of risk margins and the Company’s own credit standing in their valuation and changes to assumptions regarding policyholder lapses.  The Company is currently assessing the impact of SFAS No. 157 on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141(R)”). This statement replaces SFAS No. 141 and establishes the principles and requirements for how the acquirer in a business combination: (a) measures and recognizes the identifiable assets acquired, liabilities assumed, and any noncontrolling interests in the acquired entity, (b) measures and recognizes positive goodwill acquired or a gain from bargain purchase (negative goodwill), and (c) determines the disclosure information that is useful to users of financial statements in evaluating the nature and financial effects of the business combination. Some of the significant changes to the existing accounting guidance on business combinations made by SFAS No. 141(R) include the following:

 
•
  
Most of the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquired entity shall be measured at their acquisition-date fair values rather than SFAS No. 141’s requirement to allocate the cost of an acquisition to individual assets acquired and liabilities assumed based on their estimated fair values;
       
 
•
  
Acquisition-related costs incurred by the acquirer shall be expensed in the periods in which the costs are incurred rather than included in the cost of the acquired entity;
       
 
•
  
Goodwill shall be measured as the excess of the consideration transferred, including the fair value of any contingent consideration, plus the fair value of any noncontrolling interest in the acquired entity, over the fair values of the acquired identifiable net assets, rather than measured as the excess of the cost of the acquired entity over the estimated fair values of the acquired identifiable net assets;
       
 
•
  
Contractual pre-acquisition contingencies are to be recognized at their acquisition date fair values and noncontractual pre-acquisition contingencies are to be recognized at their acquisition date fair values only if it is more likely than not that the contingency gives rise to an asset or liability, whereas SFAS No. 141 generally permits the deferred recognition of pre-acquisition contingencies until the recognition criteria of SFAS No. 5, “Accounting for Contingencies” are met; and
       
 
•
  
Contingent consideration shall be recognized at the acquisition date rather than when the contingency is resolved and consideration is issued or becomes issuable.




 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

ACCOUNTING PRONOUNCEMENTS (CONTINUED)

Accounting Standards Not Yet Adopted

SFAS No. 141(R) is effective for and shall be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008, with earlier adoption prohibited. Assets and liabilities that arose from business combinations with acquisition dates prior to the SFAS No. 141(R) effective date shall not be adjusted upon adoption of SFAS No. 141(R) with certain exceptions for acquired deferred tax assets and acquired income tax positions. The Company expects to adopt SFAS No. 141(R) on January 1, 2009, and has not yet determined the effect of SFAS No. 141(R) on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements.”  This statement amends Accounting Research Bulletin No. 51, “Consolidated Financial Statements” (“ARB 51”). Noncontrolling interest refers to the minority interest portion of the equity of a subsidiary that is not attributable directly or indirectly to a parent. SFAS No. 160 establishes accounting and reporting standards that require for-profit entities that prepare consolidated financial statements to: (a) present noncontrolling interests as a component of equity, separate from the parent’s equity, (b) separately present the amount of consolidated net income attributable to noncontrolling interests in the income statement, (c) consistently account for changes in a parent’s ownership interests in a subsidiary in which the parent entity has a controlling financial interest as equity transactions, (d) require an entity to measure at fair value its remaining interest in a subsidiary that is deconsolidated, (e) require an entity to provide sufficient disclosures that identify and clearly distinguish between interests of the parent and interests of noncontrolling owners. SFAS No. 160 applies to all for-profit entities that prepare consolidated financial statements, and affects those for-profit entities that have outstanding noncontrolling interests in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 with earlier adoption prohibited. The Company expects to adopt SFAS No. 160 on January 1, 2009 and has not yet determined the effect of SFAS No. 160 on its consolidated financial statements.

In June 2007, the AICPA issued Statement of Position 07-1, “Clarification of the Scope of the Audit and Accounting Guide Investment Companies and Accounting by Parent Companies and Equity Method Investors for Investments in Investment Companies” (“SOP 07-1”).  SOP 07-1 provides guidance for determining whether an entity is within the scope of the AICPA Audit and Accounting Guide Investment Companies (“the Guide”).  This statement also addresses whether the specialized industry accounting principles of the Guide should be retained by a parent company in consolidation or by an investor that has the ability to exercise significant influence over the investment company and applies the equity method of accounting to its investment in the entity.  In addition, SOP 07-1 includes certain disclosure requirements for parent companies and equity method investors in investment companies that retain investment company accounting in the parent company’s consolidated financial statements or the financial statements of an equity method investor.  SOP 07-1 is effective for fiscal years beginning on or after December 15, 2007, with earlier application encouraged; however, in November 2007, the FASB decided to (1) delay indefinitely the effective date and (2) prohibit adoption by an entity that has not early adopted SOP 07-1.  The Company did not early adopt SOP 07-1.  SOP 07-1 as currently issued is not expected to have an impact on the Company’s consolidated financial condition or results of operations.



 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

2. MERGERS, ACQUISITIONS AND DISPOSITIONS

Effective September 27, 2007, the Company dissolved the General Partner.  The General Partner was the sole general partner in the Partnership and, as a result, the Partnership had been consolidated with the results of the Company.  The Partnership was organized to purchase subordinated debentures issued by the Parent and to issue partnership capital securities to an affiliated business trust, the Capital Trust.  Effective May 6, 2007, the Parent redeemed $600 million of 8.526% subordinated debentures issued to the Partnership and paid the Partnership an early redemption premium of $25.6 million.  Also effective May 6, 2007, the Partnership redeemed $600 million of the 8.526% partnership capital securities issued to the Capital Trust and paid a premium of $25.6 million to the Capital Trust.  The redemption had no impact on the Company’s net income.  The Partnership was cancelled effective September 27, 2007.

On September 6, 2006 the Company entered into an agreement with the CARS Trust, whereby the Company is the sole beneficiary of the trust.  As of December 31, 2007 and 2006, total assets of the CARS Trust were $57.7 million and $56.6 million, respectively.  As the sole beneficiary of the CARS Trust, the Company is required to consolidate this trust under the requirements of FIN 46.  Accordingly, the assets and liabilities of the CARS Trust are included in the Company’s consolidated financial statements.  As of December 31, 2007, the Company recorded in its consolidated balance sheets $53.8 million of trading fixed maturities, $2.9 million of deferred tax, $1.0 million of accrued investment income and $7.9 million of liabilities relating to a total return swap.  As of December 31, 2006, the Company recorded in its consolidated balance sheets $55.3 million of trading fixed maturities, $1.2 million of accrued investment income and $1.7 million of liabilities.

On April 19, 2005, the Company sold its interest in a consolidated VIE and recognized a gain of $6.1 million.  The Company received net cash proceeds of $17.0 million and reduced consolidated assets and liabilities by $74.5 million and $63.6 million, respectively. The Company’s net income for the year ended December 31, 2005 includes a net loss of $0.8 million related to this VIE.




 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES

Below is a summary of affiliated transactions for those affiliates that are not consolidated with the Company.

The Company and its subsidiaries have administrative services agreements with SLOC which provides that SLOC will furnish, as requested, certain services and facilities on a cost-reimbursement basis. Expenses under these agreements amounted to approximately $14.2 million, $9.4 million and $11.3 million for the years ended December 31, 2007, 2006 and 2005, respectively.

In accordance with an administrative service agreement between the Company and SLOC, the Company provides personnel and certain services to SLOC, as requested.  Reimbursements under this agreement, which are recorded as a reduction of other operating expenses, were approximately $301.0 million, $212.4 million and $170.4 million for the years ended December 31, 2007, 2006 and 2005, respectively.

The Company has an administrative service agreement with Sun Life Information Services Canada, Inc. ("SLISC"), under which SLISC provides administrative and support services to the Company in connection with the Company’s insurance and annuity business.  Expenses under this agreement amounted to approximately $16.9 million, $10.7 million and $5.8 million for the years ended December 31, 2007, 2006 and 2005, respectively.

The Company has a service agreement with Sun Life Information Services Ireland Limited ("SLISIL"), under which SLISIL provides various insurance related and information systems services to the Company.  Expenses under this agreement amounted to approximately $26.0 million, $19.6 million and $13.9 million for the years ended December 31, 2007, 2006 and 2005, respectively.

The Company has an administrative services agreement with SLC - U.S. Ops Holdings, under which the Company provides administrative and investor services with respect to certain open-end management investment companies for which an affiliate, Massachusetts Financial Services Company (“MFS”), serves as the investment adviser, and which are offered to certain of the Company’s separate accounts established in connection with the variable annuity contracts issued by the Company.  Amounts received under this agreement amounted to approximately $22.3 million, $22.6 million and $23.4 million for the years ended December 31, 2007, 2006 and 2005, respectively.

The Company has an administrative service agreement with SLHIC, whereby the Company provides personnel and certain services to SLHIC, as requested.  Reimbursements under this agreement, which are recorded as a reduction of other operating expenses, were $0.1 million for the year ended December 31, 2007.

The Company has an administrative service agreement with California Benefits Dental Plan (“CalBen”) whereby the Company provides personnel and certain services to CalBen, as requested.  Reimbursements under this agreement, which are recorded as a reduction of other operating expenses, were $1.1 million for the year ended December 31, 2007.



 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
For the years ended December 31, 2007, 2006 and 2005

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

The Company has an administrative service agreement with Professional Insurance Company (“PIC”), whereby the Company provides personnel and certain services to PIC, as requested.  Reimbursements under this agreement, which are recorded as a reduction of other operating expenses, were $0.8 million for the year ended December 31, 2007.

The Company leases office space to SLOC under lease agreements with terms expiring in December 31, 2009 and options to extend the terms for each of twelve successive five-year terms at fair market rental value, not to exceed 125% of the fixed rent for the term, which is then ending.  Rent received by the Company under the leases amounted to approximately $10.6 million for each of the years ended December 31, 2007, 2006 and 2005, respectively.  Rental income is reported as a component of net investment income.

As more fully described in Note 8, the Company is party to several reinsurance transactions with SLOC and other affiliates.

Effective May 31, 2007, Sun Life Financial completed its acquisition of EBG.  Also effective May 31, 2007, SLNY entered into a series of agreements with SLHIC, one of the acquired companies, through which the New York-issued business of SLHIC was transferred to SLNY.  These agreements include a 100% coinsurance agreement for all existing and future new business issued in New York, a renewal rights agreement under which SLNY has exclusive rights to renew in-force business assumed under the reinsurance agreement and an administrative service agreement under which SLNY has agreed to assume direct responsibility for all sales and administration of existing and new business issued in New York.  These agreements, in accordance with SFAS No. 141 were treated as a transfer of net assets between entities under common control. SLNY paid $40 million of total consideration to SLHIC.  SLHIC transferred assets at carrying value of approximately $72 million, including $38.9 million of goodwill and other intangibles, as well as policyholder and other liabilities of approximately $32 million to SLNY.  The Group Protection Segment of the Company reflects a significant increase in business as a result of these agreements. These agreements have allowed the Company to expand its product offerings to include group dental insurance.

As part of the SLHIC to SLNY asset transfer, SLNY received certain intangible assets totaling $31.3 million.  These include the value of distribution, the value of business, and the value of customer renewals acquired.  The value of distribution acquired of $7.5 million is subject to amortization on a straight line basis over its projected economic life of 25 years.  The value of business acquired of $7.6 million is subject to amortization based up on expected premium income over the period from acquisition to the first customer renewal, generally not more than two years.  The value of customer renewals acquired of $16.2 million is subject to amortization based upon expected premium income over the projected life of the inforce business acquired, which is 20 years.  For the year ended December 31, 2007, the Company recorded $0.1 million, $5.9 million, and $1.9 million for amortization of the value of distribution, the value of business, and the value of customer renewals acquired, respectively.

In 2007, the Company recorded a tax benefit of $3.0 million through paid-in-capital for SLF stock options issued to employees of the Company.  In 2006, the Company recorded a tax benefit of $4.5 million through paid-in-capital for SLF stock options issued to employees of the Company.  In 2005, the Company recorded a tax benefit of $7.0 million through paid-in-capital for stock options issued to employees of the Company during 2001 through 2005.  The $7.0 million tax benefit is comprised of a $2.5 million tax benefit on expenses accrued at its indirect parent, SLF, and a $4.5 million adjustment to record the excess tax benefit over the recorded book expense for stock options exercised.

In 2006, the Company declared and paid $300.0 million in a cash dividend to the Parent.  In 2005, the Company declared and paid a $200.0 million dividend to the Parent, consisting of $150.6 million in cash and $49.4 million in notes.  The Company did not declare or pay a dividend to the Parent in 2007.




 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

In 2004, the employees of the Company became participants in a restricted share unit (“RSU”) plan with its indirect parent, SLF.  Under the RSU plan, participants are granted units that are equivalent to one common share of SLF stock and have a fair market value of a common share of SLF stock on the date of grant.  RSUs earn dividend equivalents in the form of additional RSUs at the same rate as the dividends on common shares of SLF stock.  The redemption value, upon vesting, is the fair market value of an equal number of common shares of SLF stock.  The Company incurred expenses of $4.4 million, $7.3 million and $7.0 million relating to RSUs for the years ended December 31, 2007, 2006 and 2005, respectively.

In 2002, the Company issued two promissory notes with a combined total of $460 million to Sun Life (Hungary) Group Financing Limited Company ("Sun Life (Hungary) LLC").  The proceeds of the notes were used to purchase fixed rate government and corporate bonds.  On May 24, 2007, the Company redeemed one of the notes with a principal balance of $380 million and paid $388.7 million to Sun Life (Hungary) LLC, including $8.7 million in accrued interest.  At December 31, 2007 and 2006, the Company had $80.0 million and $460.0 million, respectively, in promissory notes issued to Sun Life (Hungary) LLC.  The Company pays interest semi-annually to Sun Life (Hungary) LLC.  Related to these promissory notes, the Company incurred interest expense of $13.3 million, $26.5 million and $26.5 million for the years ended December 31, 2007, 2006 and 2005, respectively.

At December 31, 2007 and 2006, the Company had $565.0 million of surplus notes issued to Sun Life Financial (U.S.) Finance, Inc.  The Company expensed $42.6 million for interest on these surplus notes for each of the years ended December 31, 2007, 2006 and 2005.

Effective September 27, 2007, the Company dissolved the General Partner.  The General Partner was the sole general partner in the Partnership and, as a result, the Partnership had been consolidated with the results of the Company.  The Partnership was organized to purchase subordinated debentures issued by the Parent and to issue partnership capital securities to an affiliated business trust, the Capital Trust.  The Partnership was cancelled effective September 27, 2007.

Effective May 6, 2007, the Parent redeemed $600 million of 8.526% subordinated debentures issued to the Partnership and paid the Partnership an early redemption premium of $25.6 million.  Also effective May 6, 2007, the Partnership redeemed $600 million of the 8.526% partnership capital securities issued to the Capital Trust and paid a premium of $25.6 million to the Capital Trust.  The redemption had no impact on the Company’s net income.  Related to these partnership capital securities, the Company incurred interest expense of $17.8 million, $51.2 million and $51.2 million for the years ended December 31, 2007, 2006 and 2005, respectively.  The Company also earned, through the Partnership, $17.8 million, $51.2 million and $51.2 million for the years ended December 31, 2007, 2006 and 2005, respectively.

The Company purchased a total of $140.0 million in promissory notes from Massachusetts Financial Services Company in 2004 and 2003.  Interest earned for the year ended December 31, 2005 was $4.2 million.  As of December 31, 2005, the Company sold and transferred these notes to other affiliates.  On December 31, 2005, the Company sold notes with a par value of $90.0 million to Sun Life (Hungary) LLC and recognized a loss of $3.3 million.  On September 23, 2005, the Company transferred notes with a par value of $50.0 million to the Parent as a dividend.  The Company recognized a loss of $0.6 million on the transfer of the notes to the Parent.

During the years ended December 31, 2007, 2006 and 2005, the Company paid $31.3 million, $24.3 million and $23.2 million, respectively, in commission fees to Sun Life Financial Distributors, Inc. (“SLFD”).  The Company also has an agreement with SLFD and the Parent whereby the Parent provides expense reimbursements to the Company for administrative services provided by the Company to SLFD.  Related to this agreement, the Company received reimbursement of $0.6 million and $3.2 million for the years ended December 31, 2007 and 2006, respectively.  This agreement was terminated on March 2, 2007.  In addition, the Company received fee income for administrative services provided to SLFD of $7.1 million for the year ended December 31, 2005.

Effective November 7, 2007, Independent Financial Marketing Group, Inc. (“IFMG”) was sold by the Parent and is no longer an affiliate of the Company.  IFMG will continue to distribute the Company’s products.  For that period of time in 2007 during which it was still affiliated, the Company paid $22.6 million in commission fees to IFMG.  During the years ended December 31, 2006 and 2005, the Company paid $20.1 million and $25.1 million, respectively, in commission fees to IFMG.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

The Company has an administrative services agreement with Sun Capital Advisers (“SCA”), a registered investment adviser, under which the Company provides administrative services with respect to certain open-end management investment companies for which SCA serves as the investment adviser, and which are offered to certain of the Company’s separate accounts established in connection with the variable contracts issued by the Company.  Amounts received under this agreement amounted to approximately $1.9 million, $1.5 million and $2.4 million for the years ended December 31, 2007, 2006 and 2005, respectively.

The Company paid $15.9 million, $14.9 million and $16.4 million for the years ended December 31, 2007, 2006 and 2005, respectively, in investment management services fees to SCA.

Effective December 31, 2007, SLNY entered into a reinsurance agreement with SLOC under which SLOC will fund AXXX reserves, attributable to certain UL policies sold by SLNY.  Under this agreement SLNY ceded, and SLOC assumed, on a funds withheld 90% coinsurance basis certain inforce policies at December 31, 2007.  Future new business also will be reinsured under this agreement.  Under the agreement, SLNY ceded $63.1 million of policyholder balances, received a ceding commission of $54.2 million, recorded a funds withheld payable to SLOC of $71.6 million, and recorded a deferred gain of $45.7 million.

On October 31, 2007, the Company subscribed to $250,000 worth of shares of, and contributed $150 million of paid-in capital to, a newly formed wholly-owned subsidiary, Sun Life Vermont.  Sun Life Vermont is a Vermont-domiciled captive special purpose financial insurance company which, effective November 8, 2007, has entered into a reinsurance agreement with SLOC, the Company’s affiliate, under which the Sun Life Vermont assumed, and will assume, the risks of certain UL policies issued, and to be issued, by SLOC.  This agreement is described more fully in Note 8.  A long-term financing arrangement has been established with the Lender that will enable Sun Life Vermont to fund a portion of its obligations under the reinsurance agreement with SLOC.  Under this arrangement, on November 8, 2007, Sun Life Vermont issued a Surplus Note to a special-purpose entity, SUNAXXX, affiliated with the Lender.  Pursuant to an agreement between the Lender and SLC – U.S. Ops Holdings, SLC – U.S. Ops Holdings bears the ultimate obligation to repay the Lender and, as such, will consolidate SUNAXXX in accordance with FIN 46.  Sun Life Vermont has agreed to reimburse SLC – U.S. Ops Holdings for certain costs incurred in connection with the issuance of the Surplus Note.  For the year ended December 31, 2007, the amount of interest expense incurred by Sun Life Vermont was $8.6 million.

On September 12, 2006, the Company entered into a Terms Agreement (the "2006-B Terms Agreement") with its affiliates Sun Life Financial Global Funding III, L.P. (the "Issuer III"), Sun Life Financial Global Funding III, U.L.C. (the "ULC III") and Sun Life Financial Global Funding III, L.L.C. (the "LLC III"), and with Citigroup Global Markets, Inc., Deutsche Bank Securities Inc., Morgan Stanley & Co. Incorporated, Banc of America Securities LLC, Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, RBC Capital Markets Corporation and Wachovia Capital Markets (each, an "Initial Purchaser" and collectively, the "2006-B Initial Purchasers"), in connection with the offer and sale by the Issuer III of $750 million of Series 2006-1 Floating Rate Notes due 2013 ("2006-B Notes").  On September 21, 2006, the Company entered into another Terms Agreement (together with the original 2006-B Terms Agreement, the "2006-B Terms Agreements") with the same parties as the original 2006-B Terms Agreement in connection with the offer and sale by the Issuer III of a second tranche of $150 million of 2006-B Notes.  The payment obligations of the Issuer III for the full $900 million of 2006-B Notes are unconditionally guaranteed by the LLC III pursuant to a guarantee (the "2006-B Secured Guarantee") dated as of September 19, 2006, and the obligations of the LLC III under the 2006-B Secured Guarantee are secured by two floating rate funding agreements issued by the Company to the LLC III, one for $750 million issued on September 19, 2006 and another for $150 million issued on September 29, 2006.  Total interest credited for the funding agreements was $51.6 million and $14.9 million for the years ended December 31, 2007 and 2006, respectively.

The 2006-B Terms Agreements incorporate by reference the provisions of a Purchase Agreement dated as of September 5, 2006 by and among the Issuer III, the ULC III, the LLC III, the Company and all of the 2006-B Initial Purchasers.  Pursuant to these incorporated provisions, the Company has agreed, among other things, to indemnify each 2006 Initial Purchaser against certain securities law liabilities related to the offering of the 2006-B Notes.  In addition, the Company issued a $100 million floating rate demand note payable to the LLC III on September 19, 2006.  The Company expensed $5.8 million and $1.7 million for interest on this demand note for the years ended December 31, 2007 and 2006, respectively.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

The Company has entered into an interest rate swap agreement with the LLC III with an aggregate notional amount of $900 million that effectively converts the floating rate payment obligations under the funding agreements to fixed rate obligations.  The net interest payable under this swap agreement was $0.2 million at December 31, 2007.

On May 17, 2006, the Company entered into a Terms Agreement (the "2006-A Terms Agreement") with its affiliates Sun Life Financial Global Funding II, L.P. (the "Issuer II"), Sun Life Financial Global Funding II, U.L.C. (the "ULC II") and Sun Life Financial Global Funding II, L.L.C. (the "LLC II"), and with Citigroup Global Markets, Inc. ("Citigroup"), Morgan Stanley & Co. Incorporated ("Morgan Stanley"), Banc of America Securities LLC, Credit Suisse Securities (USA) LLC, Deutsche Bank Securities Inc., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and RBC Capital Markets Corporation (collectively, with Citigroup and Morgan Stanley, the "2006-A Initial Purchasers"), in connection with the offer and sale by the Issuer II of $900 million of Series 2006-1 Floating Rate Notes due 2011 (the "2006-A Notes").  The payment obligations of the Issuer II are unconditionally guaranteed by the LLC II pursuant to a guarantee (the "2006-A Secured Guarantee"), and the obligations of the LLC II under the 2006-A Secured Guarantee are secured by a $900 million floating rate funding agreement issued by the Company to the LLC II.  The 2006-A Terms Agreement incorporates by reference the provisions of a Purchase Agreement dated as of May 15, 2006 by and among the Issuer II, the ULC II, the LLC II, the Company and the 2006-A Initial Purchasers.  Pursuant to these incorporated provisions, the Company has agreed, among other things, to indemnify each 2006 Initial Purchaser against certain securities law liabilities related to the offering of the 2006-A Notes.  Total interest credited for the funding agreement was $50.8 million and $30.7 million for the years ended December 31, 2007 and 2006, respectively.

On May 24, 2006, the Company also issued a $100 million floating rate demand note payable to the LLC II.  The Company expensed $5.7 million and $3.4 million for interest on this demand note for the years ended December 31, 2007 and 2006, respectively.

The Company has entered into an interest rate swap agreement with the LLC II with an aggregate notional amount of $900 million that effectively converts the floating rate payment obligations under the funding agreement to fixed rate obligations.

On June 3, 2005, the Company entered into a Terms Agreement (the "2005 Terms Agreement") with its affiliates, Sun Life Financial Global Funding, L.P. (the "Issuer"), Sun Life Financial Global Funding, U.L.C. (the "ULC") and Sun Life Financial Global Funding, L.L.C. (the "LLC"), and with Citigroup, Morgan Stanley, Banc of America Securities LLC, Credit Suisse First Boston LLC, J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and RBC Capital Markets Corporation (collectively, the "2005 Initial Purchasers"), in connection with the offer and sale by the Issuer of $600 million of Series 2005-1 Floating Rate Notes due 2010 (the "First Tranche Notes").

On June 29, 2005, the Company entered into a Second Terms Agreement (the "Second 2005 Terms Agreement") with the Issuer, the ULC and the LLC, and with Citigroup and Morgan Stanley, in connection with the offer and sale by the Issuer of $300 million of Series 2005-1 Floating Rate Notes due 2010 (the "Second Tranche Notes").

The payment obligations of the Issuer under the First Tranche Notes and the Second Tranche Notes are unconditionally guaranteed by the LLC pursuant to a guarantee (the "2005 Secured Guarantee") dated as of June 10, 2005, and the obligations of the LLC under the 2005 Secured Guarantee are secured by two floating rate funding agreements issued by the Company to the LLC, one for $600 million issued on June 10, 2005 and one for $300 million issued on July 5, 2005.  The Company issued a total of $900 million funding agreements to the LLC in connection with the First Tranche Notes and Second Tranche Notes.  The Terms Agreement and the Second Terms Agreement incorporate by reference the provisions of a Purchase Agreement dated as of November 11, 2004 by and among the Issuer, the ULC, the LLC, the Company, and the 2005 Initial Purchasers. Pursuant to these incorporated provisions, the Company has agreed, among other things, to indemnify each 2005 Initial Purchaser against certain securities law liabilities related to the offering of the First Tranche Notes and the Second Tranche Notes.




 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Total interest credited for the funding agreements associated with the First Tranche Notes and Second Tranche Notes was $51.6 million, $49.5 million and $20.7 million for the years ended December 31, 2007, 2006 and 2005, respectively.

On June 10, 2005, the Company issued a $100 million floating rate demand note payable to the LLC.  The Company expensed $5.8 million, $5.5 million and $2.3 million for interest on the demand note for the years ended December 31, 2007, 2006 and 2005, respectively.

The Company has entered into two interest rate swap agreements with the LLC with an aggregate notional amount of $900 million that effectively convert the floating rate payment obligations under the funding agreements to fixed rate obligations.

The following table lists the details of notes due to affiliates at December 31, 2007 (in 000’s):

Payees
Type
Rate
Maturity
Principal
Interest  Expense
           
Sun Life Financial (U.S.) Finance, Inc.
Surplus
8.625%
11/06/2027
$     250,000
$        21,563
Sun Life Financial (U.S.) Finance, Inc.
Surplus
6.150%
12/15/2027
150,000
9,225
Sun Life Financial (U.S.) Finance, Inc.
Surplus
7.250%
12/15/2015
150,000
10,875
Sun Life Financial (U.S.) Finance, Inc.
Surplus
6.125%
12/15/2015
7,500
459
Sun Life Financial (U.S.) Finance, Inc.
Surplus
6.150%
12/15/2027
7,500
461
Structured Asset Repackage Company, 2007-SUNAXXX LLC
Surplus
LIBOR + 0.89%
11/8/2037
1,000,000
8,642
Sun Life (Hungary) Group Financing Limited
Company
Promissory
5.710%
06/30/2012
80,000
4,568
Sun Life Financial Global Funding I, L.L.C.
Demand
LIBOR + 0.35%
07/6/2010
100,000
5,754
Sun Life Financial Global Funding II, L.L.C.
Demand
LIBOR + 0.26%
07/6/2011
100,000
5,663
Sun Life Financial Global Funding III, L.L.C.
Demand
LIBOR + 0.35%
10/6/2013
100,000
5,754
       
$  1,945,000
$        72,964

The Company has significant transactions with affiliates.  Management believes inter-company revenues and expenses are calculated on a reasonable basis; however, these amounts may not necessarily be indicative of the costs that would be incurred if the Company operated on a stand-alone basis and these transactions were with unrelated parties.



 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS – Fixed Maturities

The amortized cost and fair value of fixed maturities at December 31, 2007, was as follows:

   
Gross
Gross
  
 
Amortized
Unrealized
Unrealized
Fair
Available-for-sale fixed maturities:
Cost
Gains
Losses
Value
Asset Backed Securities
$             827,129
 $      11,436
$         (71,706)
$          766,859
Collateralized Mortgage Obligations
2,594,637
22,204
(185,362)
2,431,479
Mortgage Backed Securities
447,720
2,723
(2,244)
448,199
Foreign Government & Agency Securities
         74,287
      2,766
                     - 
          77,053
States & Political Subdivisions
          493
          6
                     - 
              499
U.S. Treasury & Agency Securities
           284,811
     11,462
                   (40)
        296,233
Total non-corporate
4,229,077
  50,597
   (259,352)
 4,020,322
         
Corporate securities:
        
Basic Industry
      195,959
      3,146
          (3,424)
     195,681
Capital Goods
      424,393
       8,143
               (7,698)
            424,838
Communications
             811,426
        18,403
             (13,190)
             816,639
Consumer Cyclical
               845,981
       6,415
             (45,142)
           807,254
Consumer Noncyclical
                312,647
         6,708
               (2,438)
            316,917
Energy
             314,822
       5,705
               (3,292)
            317,235
Finance
             2,944,203
       19,895
           (152,604)
         2,811,494
Industrial Other
               272,493
          6,225
               (7,219)
         271,499
Technology
                  77,817
             786
                 (821)
         77,782
Transportation
                 241,983
       8,598
               (5,061)
          245,520
Utilities
              1,177,596
      32,001
             (11,548)
      1,198,049
Total Corporate
   7,619,320
  116,025
   (252,437)
  7,482,908
         
Total available-for-sale fixed maturities
$        11,848,397
$    166,622
$       (511,789)
$     11,503,230
         
 
Amortized
Gross
Gross
Fair
Trading fixed maturities:
Cost
Gains
Losses
Value
Asset Backed Securities
$             105,719
$           287
$           (8,255)
$            97,751
Collateralized Mortgage Obligations
276,753
2,584
(3,519)
275,818
Mortgage Backed Securities
3,304
2
(38)
3,268
Foreign Government & Agency Securities
          39,589
        1,182
                 - 
         40,771
U.S. Treasury & Agency Securities
       94,813
         713
                 - 
        95,526
Total non-corporate
     520,178
      4,768
   (11,812)
       513,134
         
Corporate securities:
        
Basic Industry
           7,417
    270
         (40)
      7,647
Capital Goods
          71,894
    590
                 (338)
        72,146
Communications
       683,714
  10,849
               (4,105)
      690,458
Consumer Cyclical
    248,206
    1,932
             (13,458)
     236,680
Consumer Noncyclical
       131,746
    2,199
                 (464)
    133,481
Energy
      23,609
   1,745
                   (17)
     25,337
Finance
     1,886,983
   15,992
             (83,662)
   1,819,313
Industrial Other
        67,322
        880
                 (705)
        67,497
Technology
      1,989
         -
                   (21)
         1,968
Transportation
           40,965
    1,887
                 (501)
    42,351
Utilities
     254,065
    4,434
          (1,500)
             256,999
Total Corporate
   3,417,910
 40,778
    (104,811)
  3,353,877
         
Total trading fixed maturities
$          3,938,088
 $      45,546
 $       (116,623)
 $       3,867,011


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

The amortized cost and fair value of fixed maturities at December 31, 2006, was as follows:

   
Gross
Gross
  
 
Amortized
Unrealized
Unrealized
Fair
Available-for-sale fixed maturities:
Cost
Gains
Losses
Value
Asset Backed Securities
$              915,669
$       12,660
$            (9,020)
$          919,309
Collateralized Mortgage Obligations
2,950,906
24,838
(42,598)
2,933,146
Mortgage Backed Securities
549,137
892
(7,362)
542,667
Foreign Government & Agency Securities
      79,319
   3,512
         (283)
              82,548
States & Political Subdivisions
       495
      32
            - 
                    527
U.S. Treasury & Agency Securities
     307,580
    2,637
    (4,027)
             306,190
Total non-corporate
      4,803,106
     44,571
        (63,290)
     4,784,387
         
Corporate securities:
        
Basic Industry
  204,355
 4,217
     (3,182)
            205,390
Capital Goods
   520,338
 11,507
    (3,973)
             527,872
Communications
  1,163,026
  20,149
   (24,077)
         1,159,098
Consumer Cyclical
 1,051,633
   10,127
   (28,599)
         1,033,161
Consumer Noncyclical
    364,459
       7,847
      (2,302)
             370,004
Energy
    350,930
       6,226
    (3,547)
             353,609
Finance
   3,201,774
   43,217
   (33,235)
      3,211,756
Industrial Other
      228,442
 7,446
       (629)
            235,259
Technology
     22,779
      357
      (852)
              22,284
Transportation
    307,542
   10,418
      (5,458)
             312,502
Utilities
   1,405,066
    35,310
  (17,725)
         1,422,651
Total Corporate
   8,820,344
 156,821
  (123,579)
          8,853,586
         
Total available-for-sale fixed maturities
$         13,623,450
$     201,392
$        (186,869)
$      13,637,973
         
Held-to-maturity fixed maturities:
        
Sun Life of Canada (U.S.) Holdings, Inc., 8.526%
        
subordinated debt, due 2027, called in 2007
$              600,000
$       30,751
$                    - 
$           630,751
         
 
Amortized
Gross
Gross
Fair
Trading fixed maturities:
Cost
Gains
Losses
Value
Asset Backed Securities
$              109,684
$         1,460
$               (316)
$           110,828
Collateralized Mortgage Obligations
239,970
2,390
(3,074)
239,286
Mortgage Backed Securities
3,917
1
(89)
3,829
Foreign Government & Agency Securities
40,274
710
(152)
40,832
U.S. Treasury & Agency Securities
          796
        10
           - 
806
Total non-corporate
394,641
4,571
(3,631)
395,581
         
Corporate securities:
        
Basic Industry
    8,237
   596
             - 
       8,833
Capital Goods
        71,060
       540
- 
              71,600
Communications
      735,753
    5,378
    (5,077)
            736,054
Consumer Cyclical
 279,856
   2,628
      (3,550)
     278,934
Consumer Noncyclical
      159,221
      633
       (901)
             158,953
Energy
       20,620
    2,388
- 
          23,008
Finance
    1,742,731
  14,625
     (7,385)
         1,749,971
Industrial Other
         55,950
      405
       (839)
              55,516
Transportation
      48,887
   1,873
        (672)
          50,088
Utilities
     321,776
   7,476
    (1,737)
            327,515
Total Corporate
    3,444,091
  36,542
  (20,161)
      3,460,472
         
Total trading fixed maturities
$            3,838,732
$       41,113
$          (23,792)
$        3,856,053

 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

The amortized cost and estimated fair value by maturity periods for fixed maturity investments are shown below.  Actual maturities may differ from contractual maturities on asset-backed and mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

       
December 31, 2007
       
Amortized Cost
Fair Value
Maturities of available-for-sale fixed securities:
    
 
Due in one year or less
$                688,385
$                   688,444
 
Due after one year through five years
2,051,688
2,047,417
 
Due after five years through ten years
3,201,896
3,121,793
 
Due after ten years
    
2,036,942
1,999,039
          Subtotal – Maturities available-for-sale
  
7,978,911
7,856,693
ABS, CMO and MBS securities
  
3,869,486
3,646,537
          Total Available-for-sale
  
$          11,848,397
$              11,503,230
       
Maturities of trading fixed securities:
    
 
Due in one year or less
$                61,145
$                     59,773
 
Due after one year through five years
2,311,208
2,264,299
 
Due after five years through ten years
991,112
977,102
 
Due after ten years
188,847
189,000
 
Subtotal – Maturities  of trading
3,552,312
3,490,174
ABS, CMO and MBS securities
385,776
376,837
 
Total Trading
$           3,938,088
$               3,867,011

Gross gains of $52.8 million, $39.2 million and $61.0 million and gross losses of $52.3 million, $92.3 million and $38.9 million were realized on the sale of fixed maturities for the years ended December 31, 2007, 2006 and 2005, respectively.

Fixed maturities with an amortized cost of approximately $12.0 million and $12.0 million at December 31, 2007 and 2006, respectively, were on deposit with federal and state governmental authorities as required by law.

As of December 31, 2007 and 2006, 96.0% and 96.5%, respectively, of the Company's fixed maturities were investment grade.  Investment grade securities are those that are rated "BBB" or better by nationally recognized rating organizations.  During 2007, 2006 and 2005, the Company incurred realized losses totaling $68.1 million, $6.3 million and $29.7 million, respectively, for other-than-temporary impairment of value of some of its fixed maturities.

The Company has made funding commitments of private placement bonds into the future.  The outstanding funding commitments for these private placement bonds amounted to $4.1 million at December 31, 2006.  There was not any outstanding commitment for these private placement bonds at December 31, 2007.

The Company had outstanding commitments with respect to funding of limited partnerships of approximately $34.9 million and $53.3 million at December 31, 2007 and 2006, respectively.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

OVERVIEW OF THE COMPANY’S INVESTMENT HOLDINGS AND PORTFOLIO MONITORING PROCESSES

At December 31, 2007, the Company held $21.1 billion in invested assets and cash.  Of this balance, $15.4 billion was invested in fixed-maturity securities designated as either available-for-sale ($11.5 billion) or trading ($3.9 billion).  Of the $11.5 billion of available-for-sale fixed maturities, securities with a fair value of $7.0 billion were in an unrealized loss position totaling $511.8 million.  At December 31, 2007, 77% of securities in an unrealized loss position, based on fair value, were securities with fair value to amortized cost percentages of greater than or equal to 90%.  The total unrealized loss position for such securities was $193.8 million.

In the available-for-sale fixed maturity portfolio, securities with a fair value of $511.1 million, representing 2.4% of the total invested asset balance, were comprised of below-investment-grade or not-rated securities.  Of the total of the securities that were below-investment-grade or not-rated at December 31, 2007, securities with a fair value of $286.5 million, representing 1.4% of the total invested asset balance, were in an unrealized loss position that totaled $42.3 million.  At December 31, 2007, 53.8% of these securities in an unrealized loss position, based on fair value, were securities with fair value to amortized cost percentages of greater than or equal to 90%.

The Company’s portfolio monitoring process is designed to identify securities that may be other-than-temporarily impaired.  The Company has a Credit Committee comprised of professionals from the investment and accounting functions that meets at least quarterly to review individual issues or issuers that may be of concern.  The process involves a quarterly screening of all impaired securities, with particular attention paid to identify those securities whose fair value to amortized cost percentages have been less than 80% for an extended period of time.  Additionally, the Company screens all sales transactions which generated realized losses in excess of $1.5 million and 10% of amortized cost in order to identify identical securities or issuers which the Company continues to hold.  Discrete credit events, such as a ratings downgrade, are also used to identify securities that may be other-than-temporarily impaired.  The securities identified are then evaluated based on issuer-specific facts and circumstances, such as the issuer’s ability to meet current and future interest and principal payments, an evaluation of the issuer’s financial condition and its near term recovery prospects, difficulties being experienced by an issuer’s parent or affiliate, and management’s assessment of the outlook for the issuer’s sector.  Based on this evaluation, issues or issuers are considered for inclusion on one of the Company’s following credit lists:

“Monitor List”- Management has concluded that the fair value will increase enough to recover the Company’s amortized cost but that changes in issuer-specific facts and circumstances require monitoring on a quarterly basis.  As of December 31, 2007, securities with an amortized cost of $37.3 million and a fair value of $27.2 million were included on the Company’s Monitor List.

“Watch List”- Management has concluded that the fair value will increase enough to recover the Company’s amortized cost but that changes in issuer-specific facts and circumstances require continued monitoring during the quarter.  As of December 31, 2007, securities with an amortized cost of $65.5 million and a fair value of $56.4 million were included on the Company’s Watch List.  A security is moved from the Monitor List to the Watch List when changes in issuer-specific facts and circumstances increase the possibility that a security may become impaired within the next 24 months.

“Impaired List”- Management has concluded that the fair value will not increase enough to recover the Company’s amortized cost and an other-than-temporary-impairment charge is recorded to income or the security is sold and a realized loss is recorded as a charge to income.  Impairments are classified as either credit-related or interest-related.  The Company categorizes impairments as credit-related if there are current concerns regarding the issuers’ ability to pay all principal and interest amounts due, according to the contractual terms of the security or if the decline in fair value of the security is driven by issuer-specific credit events.  The Company characterizes impairments as interest-related if the depression in fair value of the security was due to changes in interest or general credit spread widening and for which the Company has determined it no longer has the intent or ability to hold a security until recovery to amortized cost.  For the year ended December 31, 2007, other-than-temporary impairments of $68.1 million were recorded as a charge to income.  Of this balance, $52 million was credit-related and $16.1 million was interest-related.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

OVERVIEW OF THE COMPANY’S INVESTMENT HOLDINGS AND PORTFOLIO MONITORING PROCESSES (continued)

At each balance sheet date, management also evaluates securities in an unrealized loss position and determines if the Company has the intent and ability to hold the securities until recovery.  If events or circumstances change, such as unexpected changes in the creditworthiness of the issuer, unanticipated changes in interest rates and/or credit spreads, changes in tax laws or accounting rules, changes in statutory capital requirements, or greater than expected liquidity needs, management will reconsider whether the Company has the intent and ability to hold a security until recovery.  If subsequent to the balance sheet date and due to an unexpected change in circumstances, the Company determines that it no longer intends to hold a security until recovery, a loss is recognized in net income in the period in which the intent to hold to recovery no longer exists.

There are inherent risks and uncertainties in management’s evaluation of securities for other-than-temporary impairment.  These risks and uncertainties include factors both external and internal to the Company, such as general economic conditions, an issuer’s financial condition or near-term recovery prospects, market interest rates, unforeseen events which affect one or more issuers or industry sectors, and portfolio management parameters, including asset mix, interest rate risk, portfolio diversification, duration matching, and greater than expected liquidity needs.  All of these factors could impact management’s evaluation of securities for other-than-temporary impairment.

The Company discontinues accruing income on all of its holdings for issuers that are in default.  Accrued income was not materially impacted by the termination of accrual accounting on these holdings for the year ended December 31, 2007.  The termination of accrual accounting on these holdings reduced previously accrued income by $0.6 million and $1.7 million for the years ended December 31, 2006 and 2005, respectively.  As of December 31, 2007 and 2006, the Company did not have any holding for issuers that were in default.  As of December 31, 2005, the fair market value of holdings for issuers in default was $24.4 million.



 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

OVERVIEW OF THE COMPANY’S INVESTMENT HOLDINGS AND PORTFOLIO MONITORING PROCESSES (continued)

Unrealized Losses

The following table shows the fair value and gross unrealized losses of the Company’s available-for-sale fixed maturity investments, which were deemed to be temporarily impaired, aggregated by investment category, industry sector and length of time that the individual securities had been in an unrealized loss position at December 31, 2007.

 
 
Less Than Twelve Months
 
Twelve Months Or More
 
Total
             
 
 
Corporate Securities
 
Fair
Value
Gross
Unrealized
Losses
 
Fair Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Basic Industry
$       86,180
$     (1,459)
$         23,229
$       (1,965)
$     109,409
$      (3,424)
Capital Goods
    179,854
    (5,651)
     36,728
   (2,047)
 216,582
      (7,698)
Communications
   213,084
   (5,172)
    165,027
     (8,018)
  378,111
     (13,190)
Consumer Cyclical
    349,363
 (26,136)
    185,094
   (19,006)
   534,457
  (45,142)
Consumer Noncyclical
    90,795
   (1,114)
    22,910
         (1,324)
   113,705
    (2,438)
Energy
   100,815
  (1,682)
    44,034
         (1,610)
    144,849
     (3,292)
Finance
  1,539,054
(106,524)
  515,945
  (46,080)
 2,054,999
  (152,604)
Industrial Other
     50,543
   (7,059)
    12,981
        (160)
    63,524
     (7,219)
Technology
     41,379
    (100)
    13,278
          (721)
   54,657
        (821)
Transportation
   102,549
   (2,883)
    41,601
         (2,178)
   144,150
    (5,061)
Utilities
   225,892
   (4,894)
    235,342
         (6,654)
   461,234
    (11,548)
             
Total Corporate
  2,979,508
(162,674)
   1,296,169
 (89,763)
 4,275,677
  (252,437)
             
Non-Corporate
            
Asset Backed Securities
232,353
(29,887)
267,080
(41,819)
499,433
(71,706)
Collateralized Mortgage Obligations
1,027,142
(95,499)
934,327
(89,863)
1,961,469
(185,362)
Mortgage Backed Securities
25,960
(64)
190,905
(2,180)
216,865
(2,244)
U.S. Treasury & Agency Securities
6,517
(40)
-
- 
 6,517
(40)
             
Total Non-Corporate
1,291,972
   (125,490)
   1,392,312
   (133,862)
2,684,284
  (259,352)
             
Grand Total
$  4,271,480
$ (288,164)
$    2,688,481
$   (223,625)
$  6,959,961
$   (511,789)



 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

OVERVIEW OF THE COMPANY’S INVESTMENT HOLDINGS AND PORTFOLIO MONITORING PROCESSES (continued)

Unrealized Losses (continued)

The following table provides the fair value and gross unrealized losses of the Company’s available-for-sale fixed maturities investments, which were deemed to be temporarily impaired, aggregated by investment category, industry sector and length of time that individual securities have been in an unrealized loss position, at December 31, 2006:

 
 
Less Than Twelve Months
 
Twelve Months Or More
 
Total
             
 
 
Corporate Securities
 
Fair
Value
Gross
Unrealized
Losses
 
Fair Value
Gross
Unrealized
Losses
 
Fair
Value
Gross
Unrealized
Losses
Basic Industry
$       7,750
$    (109)
$  43,426
$    (3,073)
$     51,176
$     (3,182)
Capital Goods
   50,624
 (399)
108,017
  (3,574)
 158,641
 (3,973)
Communications
 228,260
(4,389)
292,442
 (19,688)
 520,702
  (24,077)
Consumer Cyclical
 175,557
 (3,380)
514,067
  (25,219)
 689,624
 (28,599)
Consumer Noncyclical
138,379
  (942)
 33,801
  (1,360)
 172,180
  (2,302)
Energy
 75,777
(1,357)
 43,064
  (2,190)
 118,841
  (3,547)
Finance
 482,642
  (5,525)
 874,370
  (27,710)
1,357,012
  (33,235)
Industrial Other
14,092
   (15)
  11,214
    (614)
  25,306
   (629)
Technology
           -
       -
13,938
   (852)
  13,938
  (852)
Transportation
30,905
  (207)
111,423
 (5,251)
 142,328
 (5,458)
Utilities
 252,419
  (3,303)
429,194
 (14,422)
  681,613
 (17,725)
             
Total Corporate
1,456,405
(19,626)
2,474,956
(103,953)
 3,931,361
(123,579)
             
Non-Corporate
            
Asset Backed Securities
139,558
 (608)
388,329
(8,412)
527,887
   (9,020)
Collateralized Mortgage Obligations
620,790
(4,296)
1,286,663
(38,303)
1,907,453
(42,599)
Mortgage Backed Securities
152,527
(661)
303,444
(6,700)
455,971
(7,361)
Foreign Government & Agency Securities
   -
          -
      13,865
  (283)
  13,865
    (283)
U.S. Treasury & Agency Securities
   147,386
 (2,026)
   86,591
 (2,001)
 233,977
 (4,027)
             
Total Non-Corporate
1,060,261
 (7,591)
 2,078,892
(55,699)
3,139,153
 (63,290)
             
Grand Total
$2,516,666
$(27,217)
$ 4,553,848
$(159,652)
$7,070,514
$ (186,869)


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

OVERVIEW OF THE COMPANY’S INVESTMENT HOLDINGS AND PORTFOLIO MONITORING PROCESSES (continued)

Unrealized Losses (continued)

The following table provides the number of securities with gross unrealized losses, which were deemed to be temporarily impaired, at December 31, 2007 (not in thousands):

 
Number of Securities Less Than Twelve Months
 
Number of Securities Twelve Months Or More
 
 
Total Number of Securities
Corporate Securities
      
Basic Industry
 23
7
30
Capital Goods
41
15
56
Communications
63
55
118
Consumer Cyclical
93
54
147
Consumer Noncyclical
28
9
37
Energy
24
21
45
Finance
426
178
604
Industrial Other
14
3
17
Technology
7
2
9
Transportation
44
21
65
Utilities
69
66
135
       
Total Corporate
832
431
1,263
       
Non-Corporate
      
Asset Backed Securities
79
115
194
Collateralized Mortgage Obligations
383
351
734
Mortgage Backed Securities
14
202
216
U.S. Treasury & Agency Securities
2
-
2
       
Total Non-Corporate
478
668
1,146
       
Grand Total
1,310
1,099
2,409




 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

OVERVIEW OF THE COMPANY’S INVESTMENT HOLDINGS AND PORTFOLIO MONITORING PROCESSES (continued)

Unrealized Losses (continued)

The following table provides the number of securities with gross unrealized losses, which were deemed to be temporarily impaired, at December 31, 2006 (not in thousands):

 
Number of Securities Less Than Twelve Months
 
Number of Securities Twelve Months Or More
 
 
Total Number of Securities
Corporate Securities
      
Basic Industry
           2
       12
       14
Capital Goods
           9
       15
       24
Communications
         22
       64
       86
Consumer Cyclical
         28
       57
       85
Consumer Noncyclical
         14
       10
       24
Energy
         13
       15
       28
Finance
         80
      137
      217
Industrial Other
           3
         2
         5
Technology
          -
         3
         3
Transportation
           8
       47
       55
Utilities
         39
       55
       94
       
Total Corporate
       218
      417
      635
       
Non-Corporate
      
Asset Backed Securities
29
125
154
Collateralized Mortgage Obligations
139
328
467
Mortgage Backed Securities
200
288
488
Foreign Government & Agency Securities
 -
 3
         3
U.S. Treasury & Agency Securities
 10
       25
       35
       
Total Non-Corporate
       378
      769
   1,147
       
Grand Total
       596
   1,186
   1,782

The Company’s available-for-sale fixed maturity gross unrealized loss position as of December 31, 2007 was $324.9 million greater than at December 31, 2006.  The increase in unrealized losses was primarily due to general credit spread widening, partially offset by a decrease in interest rates.  Credit spreads widened primarily due to the deterioration of the sub-prime mortgage market and other liquidity disruptions, impacting the overall credit market.

Deterioration in the U.S. housing market, combined with tightened lending conditions and the market’s flight to quality securities, as well as the increased likelihood of a U.S. recession, also caused credit spreads to widen considerably.  The sectors and industries most significantly impacted include mortgage originators, home builders, financial lenders, residential and commercial mortgage backed investments, and other structured products, including consumer loan backed investments.

The sectors in the Company’s portfolio that recognized the largest unrealized losses were financial services, asset-backed and mortgage-backed securities.  As of December 31, 2007, there were 604 securities accounting for unrealized losses of $152.6 million in the Finance sector.   Of these unrealized losses, 83.4% were related to investment grade issues (rated AAA through BBB-).  As of December 31, 2007, there were 1,144 collateralized mortgage obligations, asset-backed and mortgage-backed securities accounting for unrealized losses of $259.4 million. Of the losses, 99.7% were related to investment grade issues (rated AAA through BBB-).  All securities held at December 31, 2007 were subject to the Company’s portfolio monitoring process.

 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

OVERVIEW OF THE COMPANY’S INVESTMENT HOLDINGS AND PORTFOLIO MONITORING PROCESSES (continued)

Unrealized Losses (continued)

The Company has exposure to sub-prime and Alt-a residential mortgage-backed securities.  Sub-prime mortgage lending is the origination of residential mortgage loans to customers with weak credit profiles.  Alt-A mortgage lending is the origination of residential mortgage loans to customers who have credit ratings above sub-prime, but do not conform to government sponsored standards.  The combination of these two categories of securities is considered below prime.  The Company is not an originator of residential mortgages.  The slowing U.S. housing market and relaxed underwriting standards of some originators of below-prime loans has recently led to higher delinquency and loss rates especially within the 2006 and 2007 vintage years.  Ninety-seven percent of the Company’s below-prime mortgage-backed securities, based upon fair value, were related to mortgages either issued before 2006 or having an AAA rating.  At December 31, 2007, the Company had exposure to residential sub-prime and Alt-a mortgages of $332.8 million and $176.2 million, respectively, representing approximately 2.4% of the Company's total invested assets.

Because securities issued by the same issuer with different CUSIP numbers typically have different investment characteristics, such as secured or unsecured, shorter or longer maturities, or different interest rates, management’s analyses of unrealized and realized losses are performed at the CUSIP number level.  The Company also considers the credit condition of issuers at the entity level and considers various issues affecting an issuer collectively as facts and circumstances warrant.




 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

OVERVIEW OF THE COMPANY’S INVESTMENT HOLDINGS AND PORTFOLIO MONITORING PROCESSES (continued)

Realized Losses

The sales of securities in the year ended December 31, 2007, which were in an unrealized loss position at the time of sale were primarily due to actual liquidity needs that were different from anticipated liquidity needs.  Management responded by selling certain securities that were in an unrealized gain position and by reconsidering the Company’s intent to hold certain securities that were in an unrealized loss position until recovery and selling them at a loss.  The objective of these sales was to keep the portfolio optimally balanced and diversified with respect to asset mix, interest rate risk, yield, duration, and credit quality.

During the year ended December 31, 2007, the Company recorded realized losses totaling $52.3 million on sales of securities with an aggregate fair value of $1.8 billion.  The average percentage of selling price to amortized cost was 97%.  The largest single trading loss during the year ended December 31, 2007, was $1.5 million.  $33.8 million of the realized losses were generated by individual losses of $0.5 million or less.

MORTGAGE LOANS AND REAL ESTATE

The Company invests in commercial first mortgage loans and real estate throughout the United States.  Investments are diversified by property type and geographic area.  Mortgage loans are collateralized by the related properties and generally are no more than 75% of the property’s value at the time that the original loan is made.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

MORTGAGE LOANS AND REAL ESTATE (continued)

The carrying value of mortgage loans and real estate investments, net of applicable reserves and accumulated depreciation, was as follows:

     
December 31,
     
2007
2006
       
Total mortgage loans
  
$     2,318,341
$     2,273,176
         
Real estate:
        
 
Held for production of income
201,777
186,891
Total real estate
  
$        201,777
$        186,891
       
Total mortgage loans and real estate
  
$     2,520,118
$     2,460,067

Accumulated depreciation on real estate was $31.8 million and $27.2 million at December 31, 2007 and 2006, respectively.

The Company monitors the condition of the mortgage loans in its portfolio.  In those cases where mortgages have been restructured, values are impaired or values are impaired but mortgages are performing, appropriate allowances for losses have been made.  The Company has impaired and impaired-but-performing mortgage loans totaling $3.3 million and $3.9 million at December 31, 2007 and 2006, respectively.

Activity for the investment valuation allowances was as follows:

 
Balance at
    
Balance at
 
January 1,
Additions
Subtractions
December 31,
2007
        
Mortgage loans
$           3,928
 $                   -
$        (640)
$           3,288 
         
2006
        
Mortgage loans
$           6,272
 $               400
$       (2,744)
$           3,928 

Mortgage loans and real estate investments comprise the following property types and geographic regions at December 31:

 
2007
2006
Property Type:
    
Office building
$       820,803
$      864,486
Residential
          369
115,822
Retail
    1,067,483
998,291
Industrial/warehouse
   306,769
310,346
Apartment
    109,919
-
Other
   218,063
175,050
Valuation allowances
  (3,288)
(3,928)
Total
$    2,520,118
$    2,460,067


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

MORTGAGE LOANS AND REAL ESTATE (continued

 
2007
  
2006
Geographic region:
      
       
Alabama
$           9,387
  
$           7,824
Alaska
6,000
  
3,041
Arizona
449
  
56,964
Arkansas
59,024
  
474
California
132,829
  
179,502
Colorado
39,276
  
32,294
Connecticut
13,133
  
15,016
Delaware
7,188
  
20,445
Florida
269,254
  
264,316
Georgia
68,371
  
86,510
Idaho
3,885
  
2,635
Illinois
47,521
  
47,777
Indiana
32,584
  
23,471
Iowa
325
  
364
Kansas
7,853
  
6,089
Kentucky
29,396
  
32,000
Louisiana
38,470
  
38,314
Maine
13,425
  
12,508
Maryland
72,659
  
58,318
Massachusetts
139,203
  
141,485
Michigan
20,649
  
15,522
Minnesota
41,909
  
40,259
Mississippi
3,959
  
770
Missouri
64,624
  
88,348
Montana
30,843
  
483
Nebraska
13,457
  
12,615
Nevada
5,987
  
7,304
New Hampshire
762
  
961
New Jersey
37,952
  
44,003
New Mexico
13,787
  
10,097
New York
345,887
  
313,204
North Carolina
39,453
  
44,866
North Dakota
1,920
  
2,150
Ohio
148,743
  
145,692
Oklahoma
8,811
  
4,900
Oregon
33,852
  
23,910
Pennsylvania
132,665
  
136,091
South Carolina
33,334
  
31,688
South Dakota
949
  
977
Tennessee
39,405
  
41,161
Texas
348,817
  
295,284
Utah
27,088
  
30,710
Virginia
14,070
  
16,825
Washington
76,767
  
77,525
West Virginia
4,730
  
4,874
Wisconsin
17,785
  
18,663
All other
24,969
  
25,766
Valuation allowances
(3,288)
  
(3,928)
Total
  
$     2,520,118
  
$     2,460,067


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

MORTGAGE LOANS AND REAL ESTATE (continued

At December 31, 2007, scheduled mortgage loan maturities were as follows:

2008
$             32,168
2009
33,457
2010
38,630
2011
123,728
2012
84,449
Thereafter
2,005,909
Total
$         2,318,341

Actual maturities could differ from contractual maturities because borrowers may have the right to prepay obligations with or without prepayment penalties and loans may be refinanced.

The Company has made funding commitments of mortgage loans on real estate and other loans into the future. The outstanding funding commitments for these mortgages amount to $17.8 million and $99.0 million at December 31, 2007 and 2006, respectively.




 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

SECURITIES LENDING

The Company is engaged in certain securities lending transactions, which require the borrower to provide collateral on a daily basis, in amounts in excess of 102% of the fair value of the applicable securities loaned.  The Company retains effective control over all loaned securities and, therefore, continues to report such loaned securities as fixed maturities in its consolidated balance sheet.

Cash collateral received on securities lending transactions is reflected in other invested assets with an offsetting liability recognized in other liabilities for the obligation to return the collateral.  The fair value of collateral held and included in other invested assets was $533.5 million and $895.3 million at December 31, 2007 and 2006, respectively.  Fees earned on securities lending transactions were $2.2 million, $2.3 million and $1.9 million for the years ended December 31, 2007, 2006 and 2005, respectively.

LEVERAGED LEASES

The Company is an owner participant in a trust that is a lessor in a leveraged lease agreement entered into on October 21, 1994, under which equipment having an estimated economic life of 25-40 years was originally leased through a VIE for a term of 9.78 years.  During 2001, the lease term was extended until 2010.  The Company's equity investment in this VIE represented 8.33% of the partnership that provided 22.9% of the purchase price of the equipment.  The balance of the purchase price was furnished by third-party long-term debt financing, collateralized by the equipment, and is non-recourse to the Company.  At the end of the lease term, the master lessee may exercise a fixed price purchase option to purchase the equipment.  The leveraged lease is included as a part of other invested assets.

The Company's net investment in the leveraged lease is composed of the following elements:

 
Year ended December 31,
 
2007
  
2006
Lease contract receivable
$         12,836
  
$       18,631
Less: non-recourse debt
-
  
-
Net Receivable
12,836
  
18,631
Estimated value of leased assets
20,795
  
20,795
Less: unearned and deferred income
(4,304)
  
(6,506)
Investment in leveraged leases
29,327
  
32,920
Less: fees
(87)
  
(113)
Net investment in leveraged leases
$         29,240
  
$       32,807


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

DERIVATIVES

The Company uses derivative financial instruments for risk management purposes to hedge against specific interest rate risk, to alter investment rate exposures arising from mismatches between assets and liabilities, and to minimize the Company's exposure to fluctuations in interest rates, foreign currency exchange rates and general market conditions. The Company does not hold or issue any derivative instruments for trading purposes.

As a component of its investment strategy and to reduce its exposure to interest rate risk, the Company utilizes interest rate swap agreements.  Interest rate swap agreements are agreements to exchange with a counter-party interest rate payments of differing character (e.g., fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal) as an economic hedge against interest rate changes. No cash is exchanged at the outset of the contract and no principal payments are made by either party.  A single net payment is usually made by one counter-party at each interest payment date. The net payment is recorded as a component of derivative income (loss). Because the underlying principal is not exchanged, the Company's maximum exposure to counter-party credit risk is the difference in payments exchanged.  The fair value of swap agreements is included with derivative instruments - receivable (positive position) or derivative instruments - payable (negative position) in the accompanying balance sheet.

The Company utilizes payer swaptions to hedge exposure to interest rate risk.  Swaptions give the buyer the option to enter into an interest rate swap per the terms of the original swaption agreement.  A premium is paid on settlement date and no further cash transactions occur until the positions expire.  At expiration, the swaption either cash settles for value, settles into an interest rate swap, or expires worthless per the terms of the original swaption agreement. Swaptions are carried at fair value which is included in derivative instruments - receivable (positive position) in the accompanying balance sheet and the change in value is offset to derivative income.

The Company utilizes over-the-counter (“OTC”) put options and exchange traded futures on the Standard & Poor’s 500 Composite Stock Price Index (“S&P 500 Index”) ("S&P", "S&P 500", and "Standard & Poor's" are trademarks of The McGraw Hill Companies, Inc. and have been licensed for use by the Company) and other indexes to hedge against stock market exposure inherent in the GMDB and living benefit features of the Company's variable annuities.  The Company also purchases OTC call options on the S&P 500 Index to economically hedge its obligation under certain fixed annuity contracts.  Options are carried at fair value and are included with derivative instruments - receivable in the Company’s balance sheet.

Standard & Poor’s indexed futures contracts are entered into for purposes of hedging fixed index products.  The interest credited on these 1-, 5-, 7- and 10-year term products is based on the changes in the S&P 500 Index.  On the trade date, an initial cash margin is exchanged.  Daily cash is exchanged to settle the daily variation margin and the offset is recorded in derivative income.

The Company issues annuity contracts that contain a derivative instrument that is embedded in the contract.  Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract) and is carried at fair value.






 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

DERIVATIVES (continued)

From 2000 through 2002, the Company marketed GICs to unrelated third parties.  Each transaction is highly-individualized but typically involves the issuance of foreign currency denominated contracts backed by cross currency swaps or equity-linked cross currency swaps.  The combination of the currency swaps with interest rate swaps allows the Company to lock in U.S. dollar fixed rate payments for the life of the contract.

Included in derivative gains (losses) are gains (losses) on the translation of foreign currency denominated GIC liabilities of $45.5 million, $(90.2) million and $197.1 million for the years ended December 31, 2007, 2006 and 2005, respectively.

Beginning in 2005, the Company marketed GICs to unrelated third parties and entered into funding agreements and interest rate swaps as part of this guaranteed investment program.  The interest rate swaps allow the Company to lock in U.S. dollar fixed rate payments for the life of the contracts.

The Company does not employ hedge accounting.  The Company believes that its derivatives provide economic hedges and the cost of formally documenting hedge effectiveness in accordance with the provisions of SFAS No.133, “Accounting for Derivative Instruments,” is not justified.  As a result, all changes in the fair value of derivatives are recorded in the current period operations as a component of derivative income.

Net derivative (loss) income for the years ended December 31 consisted of the following:

   
2007
    
2006
    
2005
Net expense on swap agreements
$
6,943
  
$
(7,749)
  
$
(64,915)
Change in fair value of swap agreements
(interest rate, currency, and equity)
  
 
(255,727)
    
 
8,392
    
 
101,320
Change in fair value of options, futures and
embedded derivatives
  
 
55,660
    
 
8,446
    
 
(19,931)
Total derivative (losses) income
$
(193,124)
  
$
9,089
  
$
16,474

The Company is required to pledge and receive collateral for open derivative contracts.  The amount of collateral required is determined by agreed upon thresholds with the counter-parties.  The Company currently pledges cash and U.S. Treasury bonds to satisfy this collateral requirement.  At December 31, 2007 and 2006, $132.9 million and $43.0 million, respectively, of fixed maturities were pledged as collateral and are included with fixed maturities.

The Company’s underlying notional or principal amounts associated with open derivatives positions were as follows for the years ended December 31:

 
2007
 
Notional
  
Fair Value
 
Principal
  
Asset
 
Amounts
  
(Liability)
           
Interest rate swaps
$
11,423,788
  
$
(310,616)
Currency swaps
  
452,533
    
174,311
Credit Default Swaps
  
55,000
    
(6,915)
Equity swaps
  
71,656
    
19,361
Currency forwards
  
45
    
 -
Futures
  
2,099,368
    
608
Swaptions
  
500,000
    
14
S&P 500 index call options
  
2,619,948
    
250,311
S&P 500 index put options
  
646,640
    
35,547
           
Total
$
17,868,978
  
$
162,621

 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
For the years ended December 31, 2007, 2006 and 2005

4. INVESTMENTS (CONTINUED)

DERIVATIVES (continued)

 
2006
 
Notional
  
Fair Value
 
Principal
  
Asset
 
Amounts
  
(Liability)
           
Interest rate swaps
$
10,759,984
  
$
(84,860)
Currency swaps
  
488,377
    
169,618
Equity swaps
  
172,329
    
52,664
Currency forwards
  
3,570
    
2,493
Futures
  
1,008,792
    
(2,313)
Swaptions
  
1,500,000
    
1,428
S&P 500 index call options
  
4,166,184
    
337,441
S&P 500 index put options
  
1,103,502
    
16,879
           
Total
$
19,202,738
  
$
493,350

5. NET REALIZED INVESTMENT LOSSES AND GAINS

Net realized investment (losses) gains consisted of the following for the years ended December 31:

   
2007
2006
2005
         
Fixed maturities
  
$          (4,107) 
$          (53,120) 
$           21,873
Equity securities
395
519
(6) 
Mortgage and other loans
780
1,543
614
Real estate
    
-
318
Other invested assets
(32) 
(19) 
12,741
Other than temporary impairments
(68,092) 
(6,329) 
(29,707) 
Sales of previously impaired assets
10,008
12,895
11,092
       
 
Total
$          (61,048) 
$          (44,511) 
$           16,925

6. NET INVESTMENT INCOME

Net investment income consisted of the following for the years ended December 31:

   
2007
2006
2005
       
Fixed maturities
$          863,779
$           991,738
$           921,803
Mortgages and other loans
153,228
135,515
103,253
Real estate
  
9,347
10,460
11,047
Policy loans
  
43,708
44,516
37,595
Other
44,426
38,858
55,245
 
Gross investment income
1,114,488
1,221,087
1,128,943
Less: Investment expenses
15,896
15,006
16,414
 
Net investment income
$       1,098,592
$        1,206,081
$        1,112,529

 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
For the years ended December 31, 2007, 2006 and 2005

7.  FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 107, "Disclosure about Fair Value of Financial Instruments," excludes certain insurance liabilities and other non-financial instruments from its disclosure requirements.  The fair value amounts presented herein do not include the expected interest margin (interest earnings over interest credited) to be earned in the future on investment-type products or other intangible items.  Accordingly, the aggregate fair value amounts presented herein do not necessarily represent the underlying value to the Company.  Likewise, care should be exercised in deriving conclusions about the Company's business or financial condition based on the fair value information presented herein.

The following table presents the carrying amounts and estimated fair values of the Company's financial instruments at December 31:

     
2007
  
2006
     
Carrying
Estimated
  
Carrying
Estimated
     
Amount
Fair Value
  
Amount
Fair Value
Financial assets:
          
 
Cash and cash equivalents
$              1,169,701
$             1,169,701
  
$                578,080
$                578,080
 
Fixed maturities
15,370,241
15,370,241
  
18,094,026
18,124,777
 
Equity securities
-
-
  
15,895
15,895
 
Mortgages
2,318,341
2,324,351
  
2,273,176
2,267,327
 
Derivative instruments -receivables
609,261
605,058
  
653,854
653,854
 
Policy loans
712,633
712,633
  
709,626
709,626
 
Separate accounts
24,996,603
24,996,603
  
21,060,255
21,060,255
             
Financial liabilities:
          
 
Contractholder deposit funds and other policy liabilities
15,716,209
14,060,467
  
19,428,625
18,051,332
 
Derivative instruments - payables
446,640
442,437
  
160,504
160,504
 
Long-term debt to affiliates
1,945,000
2,045,867
  
1,325,000
1,370,223
 
Partnership capital securities
-
-
  
607,826
630,751
 
Separate accounts
24,996,603
24,996,603
  
21,060,255
21,060,255

The following methods and assumptions were used by the Company in determining the estimated fair value of its financial instruments:

Interest receivable on the above financial instruments is stated at carrying value which approximates fair value.

Cash and cash equivalents: The fair values of cash and cash equivalents are estimated to be cost plus accrued interest.

Fixed maturities, short term investments, and equity securities: The Company determines the fair value of its publicly traded fixed maturities using four primary pricing methods: third-party pricing services, independent dealer quotes, pricing matrices, and pricing models.  Prices are first sought from third-party pricing services; the remaining unpriced securities are priced using one of the remaining three methods.  Third-party pricing services derive the security prices through recently reported trades for identical or similar securities with adjustments for trading volumes and market observable information through the reporting date.  In the event that there are no recent market trades, pricing services and brokers may use pricing matrices and models to develop a security price based on future expected cash flows discounted at an estimated market rate using collateral performance and vintages.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
For the years ended December 31, 2007, 2006 and 2005

7. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Investments (continued):  Structured securities, such as CMOs, CMBS, and ABS, are priced using a matrix, fair value model or independent broker quotations.  CMBS securities, which are a subset of the Company's CMO holdings, are priced using the last sale price of the day or a broker quote, if no sales were transacted that day.  Other CMOs and ABS are priced using matrices, models and independent broker quotations.  Typical inputs used by these three pricing methods include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids and/or estimated cash flows and prepayment speeds.  In addition, estimates of expected future prepayments are factors in determining the price of ABS, MBS, CMBS, and CMOs.  These estimates are based on the underlying collateral and structure of the security, as well as prepayment speeds previously experienced in the market at interest rate levels projected for the underlying collateral.  Actual prepayment experience may vary from these estimates.

For privately placed fixed maturities, fair values are estimated using matrices, which take into account credit spreads for publicly traded securities of similar credit risk, maturity, prepayment and liquidity characteristics.  A portion of privately placed fixed maturities are also priced using market prices or dealer quotes.  The fair values of mortgages are estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

The fair value of equity securities are based on quoted market prices.  Equity securities are included as a component of other invested assets.

Mortgages: The fair values of mortgage and other loans are estimated by discounting future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.

Derivative instruments, receivables and payables: The fair values of swaps are based on current settlement values.  The current settlement values are based on dealer quotes and market prices.  Fair values for options and futures are based on dealer quotes and market prices.

Policy loans: Policy loans are stated at unpaid principal balances, which approximate fair value.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

7. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Separate accounts, assets and liabilities: The estimated fair value of assets held in separate accounts is based on quoted market prices.  The fair value of liabilities related to separate accounts is the amount payable on demand, which excludes surrender charges.

Contractholder deposit funds and other policy liabilities: The fair values of the Company's general account insurance reserves and contractholder deposits under investment-type contracts (insurance, annuity and pension contracts that do not involve mortality or morbidity risks) are estimated using discounted cash flow analyses or surrender values based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for all contracts being valued. Those contracts that are deemed to have short-term guarantees have a carrying amount equal to the estimated market value.  The fair values of other deposits with future maturity dates are estimated using discounted cash flows.  The fair values of S&P 500 Index and other equity linked embedded derivatives are produced using standard derivative valuation techniques.  GMABs or GMWBs are considered to be derivatives under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and are included in contractholder deposit funds.  The fair value of the embedded derivatives is calculated stochastically using risk neutral scenarios over a fifty-year projection.  Policyholder assumptions are based on experience studies and industry standards.

Long term debt: The fair value of notes payable and other borrowings are estimated using discounted cash flow analyses based upon the Company's current incremental borrowing rates for similar types of borrowings.

8. REINSURANCE

Reinsurance ceded contracts do not relieve the Company from its obligations to policyholders.  The Company remains liable to its policyholders for the portion reinsured to the extent that any reinsurer does not meet the obligations assumed under the reinsurance agreement.  To minimize its exposure to significant losses from reinsurer insolvencies, the Company regularly evaluates the financial condition of its reinsurers and monitors concentrations of credit risk.  Management believes that any liability from this contingency is unlikely.  A brief discussion of the Company’s reinsurance agreements by business segment follows.  (Also, see Note 16 for additional information on the Company's business segments.)

Wealth Management Segment

The Wealth Management Segment manages a closed block of single premium whole life (“SPWL”) insurance policies, a retirement-oriented tax-advantaged life insurance product.  The Company discontinued sales of SPWL’s in response to certain tax law changes in the 1980s.  The Company had SPWL policyholder balances of approximately $1.6 billion and $1.6 billion as of December 31, 2007 and 2006, respectively.  On December 31, 2003, this entire block of business was reinsured on a funds withheld basis with SLOC, an affiliate.

By reinsuring the SPWL policies, the Company reduced net investment income by $78.2 million, $97.0 million and $82.7 million for the years ended December 31, 2007, 2006 and 2005, respectively.  The reduction of net investment income resulting from interest paid on funds withheld includes the impact from net investment income, net derivative (loss) income and net realized investment gains.  The Company also reduced interest credited by $73.0 million, $76.0 million and $57.5 million for the years ended December 31, 2007, 2006 and 2005, respectively.  In addition, the Company increased net investment income, relating to an experience rating refund under the reinsurance agreement with SLOC, by $8.9 million, $13.0 and $13.1 million for the years ended December 31, 2007, 2006 and 2005, respectively.  The liability for the SPWL policies is included in contractholder deposit funds and other policy liabilities.

Individual Protection Segment

The Company has agreements with SLOC and several unrelated companies, which provide for reinsurance of portions of the net-amount-at-risk under certain individual variable universal life, individual private placement variable universal life, bank owned life insurance (“BOLI”), and corporate owned life insurance (“COLI”) policies. These amounts are reinsured on either a monthly renewable or a yearly renewable term basis.  Fee income was reduced by $21.6 million, $37.8 million and $33.3 million for the years ended December 31, 2007, 2006 and 2005, respectively, to account for these agreements.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

8. REINSURANCE (CONTINUED)

Pursuant to a reinsurance agreement with SLOC that was effective November 8, 2007, Sun Life Vermont will fund AXXX reserves, attributable to certain UL policies sold by SLOC through its United States branch (the "Branch").  Sun Life Vermont is reinsuring, on a coinsurance basis, a 100% quota share of SLOC's risk on the UL policies covered under the reinsurance agreement.  New UL business will also be reinsured under this agreement.  Sun Life Vermont's obligations will be secured in part through a reinsurance trust and in part on a funds-withheld basis.  On November 8, 2007 pursuant to reinsurance agreement, the Company recorded total assets of $576.9 million, including a funds withheld reinsurance receivable of $551.8 million, deferred costs of $22.4 million, and other assets of $2.8 million.  Total liabilities assumed on November 8, 2007 of $576.9 million consisted of $553.7 million in contractholder deposit account value, $20.4 million in future contract and policy benefits, and other liabilities of $2.8 million.  As of December 31, 2007, Sun Life Vermont held assumed liabilities of $577.5 million of contractholder deposits and future contract and policy benefits of $23.7 million under the reinsurance agreement and a reinsurance payable to an affiliate of $33.1 million.  At December 31, 2007, Sun Life Vermont held assets consisting of a reinsurance receivable for funds withheld of $626.6 million, a reinsurance receivable for deferred costs of $22.3 million.  In addition, the reinsurance agreement has increased revenues by approximately $29.7 million, and increased expenses by $14.4 million for the year ended December 31, 2007.

Funds withheld assets comprised of trading bonds, mortgages and derivatives, amounting to $626.6 million are being held in a separate trust account for the protection of policyholders and claimants of the Branch.  The assets of the trust are managed by SLOC with all of the investment returns, net of expenses, inuring to the Company.  The funds withheld asset is reported in reinsurance receivable.  The coinsurance treaty with funds withheld gives rise to an embedded derivative requiring that it be separated from the host reinsurance contract.  The fair value of the embedded derivative at December 31, 2007 was a $3.1 million liability.  The $3.1 million loss is included in net derivative income.

Effective December 31, 2007, SLNY entered into a reinsurance agreement with SLOC under which SLOC will fund AXXX reserves, attributable to certain UL policies sold by SLNY.  Under this agreement SLNY ceded, and SLOC assumed, on a funds withheld 90% coinsurance basis certain inforce policies at December 31, 2007.  Future new business will also be reinsured under this agreement.  Under the agreement, SLNY ceded $63.1 million of policyholder balances, received a ceding commission of $54.2 million, recorded a funds withheld payable to SLOC of $71.6 million, and recorded a deferred gain of $45.7 million.

Group Protection Segment

The Company, through its subsidiary, SLNY, has an agreement with an unrelated company whereby the unrelated company reinsures the mortality risks of the Company’s group life contracts.  Under this agreement, certain group life mortality benefits are reinsured on a yearly renewable term basis. The agreement provides that the unrelated company will reinsure amounts above $0.7 million per claim for group life contracts ceded by the Company.

The Company, through its subsidiary, SLNY, has an agreement with an unrelated company whereby the unrelated company reinsures the morbidity risks of SLNY’s group stop loss contracts.  Under this agreement, certain stop loss benefits are reinsured on a yearly renewable term basis. The agreement provides that the unrelated company will reinsure specific claims for amounts above $1.0 million per claim for stop loss contracts ceded by SLNY.  The retention limit was raised to $1.5 million for policies sold or renewed on or after January 1, 2006.

The Company, through its subsidiary, SLNY, has an agreement with an unrelated company whereby the unrelated company reinsures the morbidity risks of SLNY’s group long-term disability contracts.  Under this agreement, certain long-term disability benefits are reinsured on a yearly renewable term basis.  The agreement provides that the unrelated company will reinsure amounts in excess of $4,000 per claim per month for long-term disability contracts ceded by SLNY.  The retention limit was raised to $9,000 per claim per month for claims incurred or after January 1, 2006.

The Company, through its subsidiary, SLNY, has an agreement with an unrelated company whereby the unrelated company reinsures 100% of the risks on a quota share basis for certain specific group life and disability policies.

The Company, through its subsidiary, SLNY, has an agreement, effective May 31, 2007, to assume the net risks of SLHIC’s New York issued contracts.

 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

8. REINSURANCE (CONTINUED)

The effects of reinsurance were as follows:

   
For the Years Ended December 31,
       
2007
2006
2005
Premiums and annuity considerations:
      
 
Direct
      
$             62,645
$              61,713
$              54,915
 
Assumed - Affiliated
      
50,986
-
-
 
Ceded - Affiliated
      
(25)
(7)
- 
 
Ceded - Non affiliated
      
(2,990)
(2,514)
(2,933)
Net premiums and annuity considerations:
$           110,616
$              59,192
$              51,982
               
Policyowner benefits:
      
 
Direct
      
$          260,008
$            197,872
$            225,936
 
Assumed - Affiliated
      
30,430
-
-
 
Ceded - Affiliated
      
(27,620)
(34,524)
(34,061)
 
Ceded - Non-affiliated
      
(33,333)
(6,378)
(4,862)
Net policyowner benefits:
$           229,485
$            156,970
$            187,013
               
Commission and expense:
            
 
Direct
      
5,617
25,175 
12,149 
 
Assumed – Affiliated
      
7,521
- 
- 
 
Ceded - Affiliated
      
(502)
(200) 
(602) 
 Net commission and expense
12,636
24,975 
11,547 



 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

9.  RETIREMENT PLANS

The Company sponsors three non-contributory defined benefit pension plans for its employees and certain affiliated employees.  These plans are the staff qualified pension plan (“retirement plan”), the agents’ qualified pension plan (“agents’ pension plan”) and the staff nonqualified pension plan (“UBF plan”). Expenses are allocated to participating companies based in a manner consistent with the allocation of employee compensation expenses.  The Company's funding policies for the two qualified pension plans are to contribute amounts which at least satisfy the minimum amount required by the Employee Retirement Income Security Act of 1974 ("ERISA").  Most pension plan assets consist of separate accounts of SLOC or other insurance company contracts.

Prior to 2006 the Company participated in the UBF plan which was sponsored by SLOC and expensed the portion of the plan cost that was allocated to the Company.  Effective January 1, 2006 the plan was divided, with the Company taking over the benefit obligation and the associated unrecognized gain/loss and prior service cost/credit.  The Company has included the allocated projected benefit obligation (“PBO”) in a separate line in the PBO reconciliation, and accounted for the plan as the Company’s own from that point forward.

The Company uses a measurement date of September 30 for its pension and other post retirement benefit plans.

On September 21, 2005, the Board of Directors of the Company approved amendments pertaining to the retirement plan including the following:

(a) To provide that no one shall become a participant in the plan after December 31, 2005;

(b) To freeze accruals under the plan as of December 31, 2005 for all participants except (i) those participants (x) who are at least age 50 and whose age plus service on January 1, 2006 equals or exceeds 60 and (y) who in 2005 chose to continue their participation in the plan (“Grandfathered participants”), (ii) those participants who are receiving severance or termination payments on December 31, 2005 and (iii) those participants who are receiving amounts paid under the Long Term Disability plan sponsored by the Company on December 31, 2005;

Due to the retirement plan changes, a $1.9 million curtailment charge was recognized in 2005.

Other post retirement benefit plans have been amended as follows:

a) To provide retiree medical coverage where the retiree pays the entire cost of coverage equal to the cost paid by active employees unless the participant is a retiree as of December 31, 2005, a "Grandfathered employee," or a “Rule 75 employee.”

A "Grandfathered employee" shall mean an active employee (i) who retires on or after January 1, 2006 and (ii) who as of January 1, 2006 is at least age 55 with 15 or more years or service and whose age plus service is at least 75.

A "Rule 75 employee" shall mean an active employee (i) who is not a Grandfathered employee, ii) who retires on or after January 1, 2006, and (iii) who, when retires, is at least age 55 with 15 or more years of service and whose age plus service is at least 75.

For Grandfathered and Rule 75 employees, retiree medical coverage is provided at a reduced cost.

On September 29, 2006, the FASB issued SFAS No. 158, “Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans,” which amends SFAS No. 87 and SFAS No. 106 to require recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet. Under SFAS No. 158, gains and losses, prior service costs and credits, and any remaining transition amounts under SFAS No. 87 and SFAS No. 106 that have not yet been recognized through net periodic benefit cost will be recognized in accumulated other comprehensive income, net of tax effects, until they are amortized as a component of net periodic cost.  The measurement date – the date at which the benefit obligation and plan assets are measured – is required to be the Company's fiscal year end.  SFAS No. 158 is effective for publicly-held companies for fiscal years ending after December 15, 2006, except for the measurement date provisions, which are effective for fiscal years ending after December 15, 2008.  The Company adopted the balance sheet recognition provisions of SFAS No. 158 at December 31, 2006 and will adopt the year end measurement date in 2008.  As of December 31, 2007, the adoption of SFAS No. 158 as not had a material impact on the Company’s financial condition or results of operations.

 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

9.  RETIREMENT PLANS (CONTINUED)

Effective January 1, 2007, the agents’ pension plan was amended for a cost of living adjustment for eligible participants.

The following table sets forth the change in the retirement plan, agents’ pension plan and UBF plan projected benefit obligations and assets, as well as the plans’ funded status at December 31:

   
2007
2006
Change in projected benefit obligation:
    
Projected benefit obligation at beginning of year
$        261,380
$          229,545
Other (uninsured benefit plan split)
-
28,118
Service cost
4,108
6,024
Interest cost
15,754
15,064
Actuarial gain
(11,210)
(9,862)
Benefits paid
(8,577)
(7,509)
Plan Amendments
1,302
-
Projected benefit obligation at end of year
$          262,757
$         261,380
     
Change in fair value of plan assets:
    
Fair value of plan assets at beginning of year
$        269,712
$         252,096
Other
(262)
(496)
Actual return on plan assets
30,951
25,621
Benefits paid
(8,577)
(7,509)
Fair value of plan assets at end of year
$        291,824
$        269,712
     
Information on the funded status of the plan:
    
Funded status
$             29,067
$            8,332
4th quarter contribution
(710)
(1,108)
Prepaid benefit cost
$             28,357
$            7,224




 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

9.  RETIREMENT PLANS (CONTINUED)

The accumulated benefit obligation for the retirement plan, agents’ pension plan and UBF plan at December 31, 2007 and 2006 was $253.6 million and $249.4 million, respectively.

Amounts recognized in the Company’s Consolidated Balance Sheets for the retirement plan, agents’ pension plan and UBF plan consist of the following as of December 31:

 
2007
2006
Other assets
$               59,423
$               38,345
Other liabilities
(31,066)
(31,121)
 
$               28,357
$                7,224

Amounts recognized in the Company’s Accumulated Other Comprehensive Income (“AOCI”) consist of the following:

 
2007
2006
     
Net actuarial gain
$              (22,103)
$              (1,923)
Prior service cost
4,529
3,564
Transition asset
(6,206)
(8,299)
 
$              (23,780)
$              (6,658)

The retirement plan and agent’s pension plan are overfunded at December 31, 2007 and 2006. The funded status of the UBF plan as of December 31, 2007 and 2006 was as follows:

 
2007
2006
     
Plan assets
$                  -
$                  -
Less: Projected benefit obligations
27,277
27,209
Funded status
$     (27,277)
$     (27,209)
     
Accumulated benefit obligation
$        25,138
$        24,084



 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

9.  RETIREMENT PLANS (CONTINUED)

The following table sets forth the components of the net periodic benefit cost and the Company’s share of net periodic benefit costs related to the retirement plan, agents’ plan, and UBF plan for the years ended December 31:

   
2007
2006
2005
         
Components of net periodic benefit cost:
      
Service cost
$                     4,108
$                   6,024
$                  10,948
Interest cost
15,754
15,065
13,839
Expected return on plan assets
(21,874)
(21,672)
(20,092)
Amortization of transition obligation asset
(2,093)
(2,093)
(3,051)
Amortization of prior service cost
337
266
855
Curtailment loss
-
-
1,856
Recognized net actuarial (gain) loss
(107)
437
1,918
Net periodic benefit cost (benefit)
$                  (3,875)
$                (1,973)
$                    6,273
The Company’s share of net periodic benefit cost
$                  (3,875)
$                (1,973)
$                    4,116

Prior to becoming the plan sponsor of the UBF plan the cost allocated to the Company for its participation in the UBF Plan was $2.9 million for the year ended December 31, 2005.

Changes in the Company’s accumulated other comprehensive income related to the retirement plan, agents’ plan, and UBF plan for the following periods:

 
 
2007
 
2006
2005
       
Net actuarial gain arising during the year
$               (20,287)
$                 (1,923)
$                            -
Net actuarial gain recognized during the year
107
-
-
Prior service cost arising during the year
1,302
3,564
-
Prior service cost recognized during the year
(337)
-
-
Transition asset recognized during the year
2,093
-
-
Transition asset arising during the year
-
(8,299)
  
Change in effect of additional minimum liability
-
(2,834)
2,834
Total recognized in AOCI
$               (17,122)
$                 (9,492)
$                    2,834
       
Total recognized in net periodic benefit cost and other comprehensive income
 
$              (20,997)
 
$               (11,465)
 
$                    9,107


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

9. RETIREMENT PLANS (CONTINUED)

The estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit costs in 2008 are as follows:

Actuarial gain
$           (792)
Prior service cost
337
Transition asset
(2,093)
Total
$      (2,548)

Assumptions

Weighted average assumptions used to determine benefit obligations for the retirement plan, agents’ pension plan, and UBF plan were as follows:

 
Pension Benefits
  
 
2007
2006
2005
Discount rate
6.35%
6.0%
5.8%
Rate of compensation increase
4.0%
4.0%
4.0%

Weighted average assumptions used to determine net benefit cost for the retirement plan, agents’ pension plan, and UBF plan were as follows:

 
Pension Benefits
 
2007
2006
2005
       
Discount rate
6.0%
5.8%
6.2%
Expected long term return on plan assets
8.25%
8.75%
8.75%
Rate of compensation increase
4.0%
4.0%
4.0%

Plan Assets

The asset allocation for the Company’s retirement plan and agents’ plan assets for 2007 and 2006 measurement, and the target allocation for 2008, by asset category, are as follows:

 
Target Allocation
Percentage of Plan Assets
Asset Category
2008
2007
2006
       
Equity Securities
60%
65%
63%
Debt Securities
25 
26 
27 
Commercial Mortgages
15 
9 
10 
Total
100%
100%
100%


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

9. RETIREMENT PLANS (CONTINUED)

The target allocations were established to reflect the Company’s investment risk posture and to achieve the desired level of return commensurate with the needs of the fund.  The target ranges are based upon a three to five year time horizon and may be changed as circumstances warrant.

The portfolio of investments should, over a period of time, earn a gross annualized rate of return that:

1)
exceeds the assumed actuarial rate;
2)
exceeds the return of customized index created by combining benchmark returns in appropriate weightings based on an average asset mix of funds; and
3)
generates a real rate of return of at least 3% after inflation, and sufficient income or liquidity to pay retirement benefits on a timely basis.

Cash Flow

Due to the over funded status of the retirement plan and the agent’s pension plan, the Company will not be making contributions to those plans in 2008. The Company will be making a contribution of $1.3 million to the UBF plan in 2008.

The Company has estimated the following future benefit payments for the years 2008 through 2017:

 
Pension Benefits
2008
  9,320
2009
  9,991
2010
10,629
2011
      11,531
2012
12,495
2013 to 2017
76,413

Savings and Investment Plan

The Company sponsors and participates in a savings account that qualifies under Section 401(k) of the Internal Revenue Code (“the 401(k) Plan”) for which substantially all employees of at least age 21 are eligible to participate at date of hire. Under the 401(k) Plan, the Company matches, up to specified amounts, the employees’ contributions to the plan.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

9. RETIREMENT PLANS (CONTINUED)

On September 21, 2005, the Board of Directors of the Company approved amendments pertaining to the 401(k) Plan including the following.

Effective January 1, 2006, the Savings and Investment Plan also includes a retirement investment account that qualifies under Section 401(a) of the Internal Revenue Code (“the RIA”).  The Company contributes a percentage of the participant’s eligible compensation determined under the following chart based on the sum of the participant’s age and service on January 1 of the applicable plan year.

Age Plus Service
Company Contribution
Less than 40
3%
At least 40 but less than 55
5%
At least 55
7%

For RIA participants who are at least age 40 on January 1, 2006 and whose age plus service on January 1, 2006 equals or exceeds 45, the Company also contributes to the RIA from January 1, 2006 through December 31, 2015, a percentage of the participant’s eligible compensation determined under the following chart based on the participant’s age and service on January 1, 2006.

 
Service
Age
Less than 5 years
5 or more years
At least 40 but less than 43
3.0%
5.0%
At least 43 but less than 45
3.5%
5.5%
At least 45
4.5%
6.5%

For RIA participants who did not become participants in the retirement plan before January 1, 2006, the Company made a one-time RIA contribution in January 2006 based on their applicable percentage from the first chart above as of January 1, 2006 and their eligible compensation paid during the period beginning on their hire date and ending on December 31, 2005.

The amount of the 2007 employer contributions under the 401(k) Plan sponsorship for the Company and its affiliates was $21.8 million.  Amounts are allocated to affiliates based on their respective employees’ contributions.  The Company’s portion of the expense was $ 16.1 million, $10.8 million and $4.6 million for the years ended December 31, 2007, 2006 and 2005, respectively.  The Company’s 2005 contribution includes a $1.6 million accrued retroactive adjustment related to the January 1, 2006 amendments to the 401(k) Plan.  This retroactive adjustment was funded in 2006.

Other Post-Retirement Benefit Plans

The Company sponsors a post-retirement benefit plan for its employees and certain affiliates employees providing certain health, dental and life insurance benefits (“post-retirement benefits”) for retired employees and dependents (the “Retirement Plan”).  Expenses are allocated to participating companies based on the number of participants.  Substantially all employees of the participating companies may become eligible for these benefits if they reach normal retirement age while working for the Company, or retire early upon satisfying an alternate age plus service condition.  Life insurance benefits are generally set at a fixed amount.



 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

9. RETIREMENT PLANS (CONTINUED)

On May 31, 2007, as part of Sun Life Financial’s acquisition of EBG, the Company provided prior service credit under its retiree medical plan to the transferred EBG employees not currently eligible for those benefits under the corresponding Genworth plan.  Additionally, as part of the acquisition, the fair value of the liabilities assumed by the Company included the unfunded accumulated postretirement benefit obligation (“APBO”) attributable to the prior service cost associated with the transferred EBG employees.  The final purchase price was adjusted at May 31, 2007 to settle the unfunded APBO undertaken by the Company.

The following table sets forth the change in the post-retirement benefit plan’s obligations and assets, as well as the plans' funded status at December 31:

Change in benefit obligation:
2007
2006
     
Benefit obligation at beginning of year
$             45,852
$              51,300
Service cost
1,234
1,311
Interest cost
2,915
2,967
Actuarial loss (gain)
213
(7,220)
Benefits paid
(2,979)
(2,756)
Federal Subsidy
194
250
Unfunded APBO as a result of EBG acquisition
4,800
-
Benefit obligation at end of year
$            52,229
$              45,852
     
Change in fair value of plan assets:
    
Fair value of plan assets at beginning of year
$                        -
$                        -
Employer contributions
2,979
2,756
Benefits paid
(2,979)
(2,756)
Fair value of plan assets at end of year
$                        -
$                        -
     
Information on the funded status of the plan:
    
Funded Status
$          (52,229)
$            (45,852)
4th quarter contribution
532
600
Unrecognized prior service cost
-
-
Accrued benefit cost
$          (51,697)
$             (45,252)

Amounts recognized in the Company’s Consolidated Balance Sheets for the post-retirement benefit plan consist of the following:

 
2007
2006
     
Other liabilities
$               (51,697)
$             (45,252)




 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

9. RETIREMENT PLANS (CONTINUED)

Amounts recognized in the Company’ AOCI consist of the following:

 
2007
2006
     
Net actuarial loss
$           13,437
$           14,070
Prior service credit
(4,551)
(5,080)
 
$             8,886
$             8,990

The following table sets forth the components of the net periodic post-retirement benefit costs and the Company’s allocated share for the year ended December 31:

   
2007
2006
2005
Components of net periodic benefit cost
      
Service cost
$            1,234
$            1,311 
$            1,333 
Interest cost
2,915
2,967 
2,994 
Amortization of prior service cost
(529)
(529)
(241)
Recognized net actuarial loss
912 
1,450 
1,273 
Net periodic benefit cost
$            4,532 
$            5,199 
$            5,359 
       
The Company’s share of net periodic benefit cost
$            3,910 
$            4,501 
$            4,947 

Changes in the Company’s AOCI for the following periods:

 
 2007
2006
2005
       
Net actuarial loss arising during the year
$                   279
$              14,070
$                        -
Net actuarial loss recognized during the year
(912)
    
Prior service cost arising during the year
  
(5,080)
-
Prior service cost recognized during the year
529
    
Total recognized in AOCI
$                 (104)
$                8,990
$                        -
       
Total recognized in net periodic benefit cost and
other comprehensive income
 
$                3,806
 
$             13,491
 
$               4,947

The estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit costs in 2008 are as follows:

Actuarial loss
$ 916
Prior service credit
(529)
Transition (asset)/obligation
-
Total
$      387


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

9. RETIREMENT PLANS (CONTINUED)

Assumptions

Weighted average assumptions used to determine benefit obligations were as follows:

 
Other  Benefits
 
2007
2006
2005
  
Discount rate
6.35%
6.0%
5.8%
  

Weighted average assumptions used to determine net cost were as follows:

 
Other  Benefits
 
2007
2006
2005
Discount rate
6.0%
5.8%
6.2%

In order to measure the post-retirement benefit obligation for 2007, the Company assumed a 9% annual rate of increase in the per capita cost of covered health care benefits.  In addition, medical cost inflation is assumed to be 9.5% in 2008 and assumed to decrease gradually to 5.00% for 2013 and remain at that level thereafter.  Assumed healthcare cost trend rates have a significant effect on the amounts reported for the health care plans.  A one-percentage point change in assumed health care cost trend rates would have the following effect:

 
1- Percentage-Point
  
1- Percentage-Point
 
Increase
  
Decrease
Effect on Post retirement benefit obligation
$                   4,570
  
$                    (4,152)
       
Effect on total of service and interest cost
$                      397
  
$                       (372)

The Company has estimated the following future benefit payments for the years 2008 through 2017:

 
Other Benefits
Expected Federal Subsidy
2008
$           3,146
$              236
2009
3,309
246
2010
3,474
252
2011
3,638
258
2012
3,768
260
2013 to 2017
$         20,479
$          1,226



 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

10. FEDERAL INCOME TAXES

The Company adopted FIN 48 on January 1, 2007.  FIN 48 establishes a comprehensive reporting model which addresses how a business entity should recognize, measure, present and disclose uncertain tax positions that the entity has taken or plans to take on a tax return.

As a result of the implementation of FIN 48, the Company recognized a decrease of $5.2 million in the liability for UTBs and related net interest, which was accounted for as an increase to its January 1, 2007 balance of retained earnings.  The liability for UTBs related to permanent and temporary tax adjustments, exclusive of interest, was $63.0 million and $54.1 million at December 31, 2007 and January 1, 2007, respectively.  Of the $63.0 million, $6.4 million represents the amount of UTBs that, if recognized, would favorably affect the Company’s effective income tax rate in future periods, exclusive of any related interest.  In addition, consistent with the provisions of FIN 48, the Company reclassified $56.6 million of income taxes from deferred tax liabilities to accrued expenses and taxes at December 31, 2007.

The net increase in the tax liability for UTBs of $8.9 million since the date of adoption resulted from the following:

             
Balance at January 1, 2007
$
 54,086 
    
Gross increases related to tax positions in prior years
  
20,717 
    
Gross decreases related to tax positions in prior years
  
(11,760)
    
Gross increases related to tax positions in current year
  
- 
    
Settlements
  
- 
    
Close of tax examinations/statutes of limitations
  
- 
    
         
Balance at December 31, 2007
    
$
 63,043 
    

The Company has elected on a prospective basis, with the adoption of FIN 48, to recognize interest and penalties accrued related to UTBs in interest expense.  The Company had accrued $10.8 million of gross interest as of January 1, 2007.  During the year ended December 31, 2007, the Company recognized an additional $2.0 million in gross interest related to UTBs.  The Company has not accrued any penalties.

While the Company expects the amount of unrecognized tax liabilities to change in the next twelve months, it does not expect the change to have a significant impact on its results of operations or financial position.

The Company files federal income tax returns and income tax returns in various state and local jurisdictions.  With few exceptions, the Company is no longer subject to examinations by the tax authorities in these jurisdictions for tax years before 2001.  In August 2006, the IRS issued a Revenue Agent’s Report for the Company’s tax years 2001 and 2002.  The Company is currently at the Appeals Division of the IRS ("Appeals") with respect to the tax years 2001 and 2002.  In the first quarter of 2007, the IRS commenced an examination of the Company’s U.S. federal income tax returns for the tax years 2003 and 2004.  This examination is anticipated to be completed by August 1, 2008. While the final outcome of the appeal and ongoing tax examinations is not determinable, the Company does not believe that any adjustments would be material to its financial position.





 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

10. FEDERAL INCOME TAXES (CONTINUED)

The Company will file a consolidated return with SLC -U.S. Ops Holdings for the year ended December 31, 2007 as the Company did for the years ended December 31, 2006 and 2005. The Company’s subsidiaries, INDY and SLNY, will be included as part of the consolidation for the year ended December 31, 2007.  For the years ended December 31, 2006 and 2005, INDY and SLNY filed stand-alone federal income tax returns.  Sun Life Vermont, a new subsidiary in 2007, will also be included as part of the consolidated return for the year ended December 31, 2007.  A summary of the components of income tax expense (benefit) in the consolidated statements of income for the years ended December 31 is as follows:

   
2007
  
2006
  
2005
Income tax (benefit) expense:
            
Current
$
    (108,526)
$
         (5,792)
$
        11,237
Deferred
  
     84,668 
  
4,180 
  
28,852
             
Total income tax (benefit) expense
$
  (23,858)
$
         (1,612)
$
        40,089

Federal income taxes attributable to the Company’s consolidated operations are different from the amounts determined by multiplying income before federal income taxes by the expected federal income tax rate at 35%. The Company's effective rate differed from the federal income tax rate as follows:

   
2007
  
2006
  
2005
             
Expected federal income tax expense
$ 
     407
$ 
       26,838
$ 
       60,210
Low income housing credit
  
(5,490)
  
(6,225)
  
(5,947)
Separate account dividend received deduction
  
(11,988)
  
(13,090)
  
(10,150)
Prior year adjustments/settlements
  
932
  
(8,396)
  
(2,802)
FIN 48 adjustments/settlements
  
(6,375)
  
- 
  
- 
Other items
  
      (1,775)
  
(844)
  
(1,220)
             
Federal income tax (benefit) expense
  
(24,289)
  
(1,717)
  
40,091
State income tax expense (benefit)
  
431
  
105
  
(2)
             
Total income tax (benefit) expense
$ 
       (23,858)
$ 
   (1,612)
$ 
   40,089

The deferred income tax asset (liability) represents the tax effects of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. The components of the Company's deferred tax assets and (liabilities) as of December 31 were as follows:

           
   
2007
    
2006
Deferred tax assets:
          
    Actuarial liabilities
$
110,617
  
$
128,848
    Net operating loss
  
- 
    
7,954
    Investments, net
  
230,416
    
146,116
Total deferred tax assets
  
341,033
    
282,918
           
Deferred tax liabilities:
          
    Deferred policy acquisition costs
  
(322,461)
    
(250,469)
    Other
  
(2,627)
    
(28,852)
Total deferred tax liabilities
  
(325,088)
    
(279,321)
           
Net deferred tax asset
$
15,945
  
$
3,597


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

10. FEDERAL INCOME TAXES (CONTINUED)

The Company makes or receives payments under certain tax sharing agreements with SLC – U.S. Ops Holdings.  Under these agreements, such payments are determined based on the Company’s stand-alone taxable income (as if it were filing as a separate company) and based upon the SLC - U.S. Ops Holdings’ consolidated group’s overall taxable position.  Sun Life Vermont is subject to an adjustment in the amount payable or receivable under its Tax Allocation Agreement to the extent of a subsequent change in its stand-alone taxable income.  Sun Life Vermont is not required to pay SLC – U.S. Ops Holdings for changes in the consolidated federal tax liability that may result from changes in the timing of the utilization of Sun Life Vermont’s losses in the consolidated federal tax return.  The Company received income tax refunds of $16.2 million and $32.0 million in 2007 and 2005, respectively, and made income tax payments of $22.7 million in 2006.

11.  LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSES

Activity in the liability for unpaid claims and claims adjustment expenses, which is related to the Company’s group life, group disability insurance, group dental and stop loss products is summarized below:

 
 
2007
  
 
2006
       
Balance at January 1
$         36,689
  
$         33,141
Less reinsurance recoverable
(5,906)
  
(5,886)
Net balance at January 1
30,783
  
27,255
Incurred related to:
      
 
Current year
96,377
  
26,644
 
Prior years
(1,805)
  
(1,294)
Total incurred
94,572
  
25,350
Paid losses related to:
      
 
Current year
(47,531)
  
(14,881)
 
Prior years
(8,867)
  
(6,941)
Total paid
(56,398)
  
(21,822)
         
Balance at December 31
74,878
  
36,689
Less reinsurance recoverable
(5,921)
  
(5,906)
       
Net balance at December 31
$        68,957
  
$         30,783

The Company regularly updates its estimates of liabilities for unpaid claims and claims adjustment expenses as new information becomes available and events occur which may impact the resolution of unsettled claims.   Changes in prior estimates are recorded in results of operations in the year such changes are made.

As a result of changes in estimates of insured events in prior years, the liability for unpaid claims and claims adjustment expense decreased by $1.8 million and $1.3 million in 2007 and 2006, respectively.  The favorable development experienced in both years was driven mainly by better than expected loss experience in group life.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

12.  LIABILITIES FOR CONTRACT GUARANTEES

The major provisions of AICPA SOP 03-1 that affect the Company require:

o
Establishment of reserves primarily related to death benefit and income benefit guarantees provided under variable annuity contracts;
o
Deferral of sales inducements that meet certain criteria, and amortization using the same method used for DAC; and,
o
Reporting and measuring the Company’s interest in its separate accounts as investments.

The Company offers various guarantees to certain policyholders including a return of no less than (a) total deposits made on the contract adjusted for any customer withdrawals, (b) total deposits made on the contract adjusted for any customer withdrawals plus a minimum return, or (c) the highest contract value on a specified anniversary date minus any customer withdrawals following the contract anniversary.  These guarantees include benefits that are payable in the event of death, upon annuitization, or at specified dates during the accumulation period of an annuity.

The table below represents information regarding the Company’s variable annuity contracts with guarantees at December 31, 2007:

 
Benefit Type
 
Account Balance
Net Amount
at Risk 1
Average Attained Age
Minimum Death
$          17,771,546
$         1,318,150
66.4
Minimum Income
$               343,853
 $              43,233
60.3
Minimum Accumulation or
Withdrawal
$            5,321,780
$                4,204
62.4

The table below represents information regarding the Company’s variable annuity contracts with guarantees at December 31, 2006:

 
Benefit Type
 
Account Balance
Net Amount
at Risk 1
Average Attained Age
Minimum Death
$       16,848,818
$       1,612,783
66.4
Minimum Income
$            387,699
$            56,526
 60.0
Minimum Accumulation or
Withdrawal
$         3,068,060
$                   41
61.9

1 Net amount at risk represents the difference between guaranteed benefits and account balance.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

12.  LIABILITIES FOR CONTRACT GUARANTEES (CONTINUED)

The following roll-forward summarizes the change in reserve for the GMDBs and GMIBs for the year ended December 31, 2007:

 
Guaranteed
Minimum
Death Benefit
  
Guaranteed
Minimum
Income Benefit
  
 
 
Total
Balance at January 1, 2007
$             39,923
  
$           1,448
  
$          41,371
           
Benefit Ratio Change / Assumption Changes
3,016
  
9,206
  
12,222
Incurred guaranteed benefits
24,841
  
704
  
25,545
Paid guaranteed benefits
(30,158)
  
(6,613)
  
(36,771)
Interest
2,051
  
72
  
2,123
           
Balance at December 31, 2007
$             39,673
  
$             4,817
  
$            44,490

The following roll-forward summarizes the change in reserve for the GMDBs and GMIBs for the year ended December 31, 2006:

 
Guaranteed
Minimum
Death Benefit
  
Guaranteed
Minimum
Income Benefit
  
 
 
Total
Balance at January 1, 2006
$             41,749
  
$            3,000
  
$         44,749
           
Benefit Ratio Change / Assumption Changes
            (6,594)
  
                (925)
  
    (7,519)
Incurred guaranteed benefits
                 51,255
  
                383
  
       51,638
Paid guaranteed benefits
(49,242)
  
     (1,153)
  
   (50,395)
Interest
 2,755
  
  143
  
        2,898
           
Balance at December 31, 2006
$             39,923
  
$           1,448
  
$          41,371


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

12.  LIABILITIES FOR CONTRACT GUARANTEES (CONTINUED)

The liability for death and income benefit guarantees is established equal to a benefit ratio multiplied by the cumulative contract charges earned, plus accrued interest less contract benefit payments.  The benefit ratio is calculated as the estimated present value of all expected contract benefits divided by the present value of all expected contract charges.  The benefit ratio may be in excess of 100%.  For guarantees in the event of death, benefits represent the current guaranteed minimum death payments in excess of the current account balance.  For guarantees at annuitization, benefits represent the present value of the minimum guaranteed annuity benefits in excess of the current account balance.

Projected benefits and assessments used in determining the liability for contract guarantees are developed using models and stochastic scenarios that are also used in the development of estimated expected future gross profits.  Underlying assumptions for the liability related to income benefits include assumed future annuitization elections based upon factors such as eligibility conditions and the annuitant’s attained age.

The liability for guarantees is re-evaluated regularly, and adjustments are made to the liability balance through a charge or credit to policyholder benefits.

Guaranteed minimum accumulation benefits (“GMABs”) and withdrawal benefits (“GMWBs”) are considered to be derivatives under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and are recorded at fair value through earnings.  The fair value of the embedded derivatives is calculated stochastically using risk neutral scenarios over a fifty-year projection.  Policyholder assumptions are based on experience studies and industry standards.  The net balance of GMABs and GMWBs constituted (a liability) an asset in the amount of $(37.4) million and $8.4 million at December 31, 2007 and 2006, respectively.





 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

13. DEFERRED POLICY ACQUISITION COSTS (DAC)

The changes in DAC for the years ended December 31 were as follows:

 
2007
  
2006
Balance at January 1
$
1,234,206
  
$
1,341,377
Acquisition costs deferred
  
356,087
    
264,648
Amortized to expense during the year
  
(169,799)
    
(391,585)
Adjustment for unrealized investment losses during the year
  
182,903
    
19,766
Balance at December 31
$
1,603,397
  
$
1,234,206

14. VALUE OF BUSINESS AND CUSTOMER RENEWALS ACQUIRED

The changes in VOBA and customer renewals acquired for the years ended December 31 were as follows:

 
2007
  
2006
Balance at January 1
$
47,744
  
$
53,670
Amount capitalized due to acquisition of new business
  
23,854
    
-
Amortized to expense during the year
  
(19,322)
    
(7,597)
Adjustment for unrealized investment (gains) losses during the year
  
(470)
    
1,671
Balance at December 31
$
51,806
  
$
47,744

Additions to VOBA and customer renewals acquired were a result of the SLHIC to SLNY asset transfer, as described in Footnote 1.  VOBA transferred was $7.6 million and the value of customer renewals transferred was $16.2 million.

15. CONSOLIDATING FINANCIAL INFORMATION

The following consolidating financial statements are provided in compliance with Regulation S-X of the U.S. Securities and Exchange Commission (the “SEC”) and in accordance with SEC Rule 12h-5.

The Company’s wholly-owned subsidiary, SLNY, sells, among other products, combination fixed and variable annuity contracts (the “contracts”) in the State of New York.  These contracts contain a fixed investment option, where interest is paid at a guaranteed rate for a specified period of time, and withdrawals made before the end of the specified period may be subject to a market value adjustment that can increase or decrease the amount of the withdrawal proceeds (the “fixed investment option period”).  Effective September 27, 2007, the Company provided a full and unconditional guarantee (the “guarantee”) of SLNY’s obligation related to SLNY contracts’ fixed investment option period related to policies currently in-force or sold on or after September 30, 2007.  The guarantee relieves SLNY of its obligation to file annual, quarterly, and current reports with the SEC on Form 10-K, Form 10-Q and Form 8-K.

In the following presentation of consolidating financial statements, the term "SLUS as Parent" is used to denote the Company as a stand-alone entity, isolated from its subsidiaries and the term "Other Subs" is used to denote the Company's other subsidiaries, with the exception of SLNY.  All consolidating financial statements are presented in thousands.


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Income
For the year ended December 31, 2007

 
SLUS
as Parent
  
 
SLNY
  
Other
Subs
  
 
Elimination
  
Consolidated
Company
                             
Revenues
                            
                             
Premiums and annuity considerations
$
15,330 
  
$
95,286 
  
$
- 
  
$
- 
  
$
110,616 
Net investment income
  
941,185 
    
94,309 
    
63,098 
    
- 
    
1,098,592 
Net derivative loss
  
(185,682)
    
(3,967)
    
(3,475)
    
- 
    
(193,124)
Net realized investment losses
  
(57,547)
    
(3,487)
    
(14)
    
- 
    
(61,048)
Fee and other income
  
445,248 
    
26,648 
    
8,008 
    
- 
    
479,904 
Subordinated notes early redemption premium
  
- 
    
- 
    
25,578 
    
- 
    
25,578 
                             
Total revenues
  
1,158,534 
    
208,789 
    
93,195 
    
- 
    
1,460,518 
                             
Benefits and Expenses
                            
                             
Interest credited
  
571,309 
    
51,390 
    
7,124 
    
- 
    
629,823 
Interest expense
  
75,052 
    
74 
    
26,406 
    
- 
    
101,532 
Policyowner benefits
  
155,903 
    
69,309 
    
4,273 
    
- 
    
229,485 
Amortization of DAC and VOBA
  
165,666 
    
19,921 
    
3,534 
    
- 
    
189,121 
Other operating expenses
  
238,810 
    
37,061 
    
7,944 
    
- 
    
283,815 
Partnership capital securities early redemption payment
  
 
- 
    
 
- 
    
 
25,578 
    
 
- 
    
 
25,578 
                             
Total benefits and expenses
  
1,206,740 
    
177,755 
    
74,859 
    
- 
    
1,459,354 
                             
(Loss) income before income tax (benefit) expense
  
(48,206)
    
31,034 
    
18,336 
    
- 
    
1,164 
                             
Income tax (benefit) expense
  
(40,222)
    
10,231 
    
6,133 
    
- 
    
(23,858)
Equity in the net income of subsidiaries
  
33,006 
    
- 
    
1,811 
    
(34,817)
    
- 
                             
Net income
$
25,022 
  
$
20,803 
  
$
14,014 
  
$
(34,817)
  
$
25,022 



 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Income
For the year ended December 31, 2006

 
SLUS
as Parent
  
 
SLNY
  
Other
Subs
  
 
Elimination
  
Consolidated
Company
                             
Revenues
                            
                             
Premiums and annuity considerations
$
20,870 
  
$
38,322 
  
$
- 
  
$
- 
  
$
59,192 
Net investment income
  
1,049,425 
    
97,365 
    
59,784 
    
(493)
    
1,206,081 
Net derivative income
  
8,596 
    
- 
    
- 
    
493 
    
9,089 
Net realized investment losses
  
(38,327)
    
(6,081)
    
(103)
    
- 
    
(44,511)
Fee and other income
  
375,144 
    
21,083 
    
2,395 
    
- 
    
398,622 
                             
Total revenues
  
1,415,708 
    
150,689 
    
62,076 
    
- 
    
1,628,473 
                             
Benefits and Expenses
                            
                             
Interest credited
  
573,178 
    
56,379 
    
3,848 
    
- 
    
633,405 
Interest expense
  
79,637 
    
- 
    
51,157 
    
8 
    
130,802 
Policyowner benefits
  
126,393 
    
29,257 
    
1,320 
    
- 
    
156,970 
Amortization of DAC and VOBA
  
380,760 
    
18,422 
    
- 
    
- 
    
399,182 
Other operating expenses
  
207,903 
    
22,988 
    
551 
    
(8)
    
231,434 
                             
Total benefits and expenses
  
1,367,871 
    
127,046 
    
56,876 
    
- 
    
1,551,793 
                             
Income before income tax expense
  
47,837 
    
23,643 
    
5,200 
    
- 
    
76,680 
                             
Income tax (benefit) expense
  
(10,495)
    
7,410 
    
1,473 
    
- 
    
(1,612)
Equity in the net income of subsidiaries
  
19,960 
    
- 
    
3,096 
    
(23,056)
    
- 
                             
Net income
$
78,292 
  
$
16,233 
  
$
6,823 
  
$
(23,056)
  
$
78,292 




 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Income
For the year ended December 31, 2005

 
SLUS
as Parent
  
 
SLNY
  
Other
Subs
  
 
Elimination
  
Consolidated
Company
                             
Revenues
                            
                             
Premiums and annuity considerations
$
19,735 
  
$
32,247 
  
$
- 
  
$
- 
  
$
51,982 
Net investment income
  
958,397 
    
94,264 
    
59,599 
    
269 
    
1,112,529 
Net derivative income
  
16,743 
    
- 
    
- 
    
(269)
    
16,474 
Net realized investment gains (losses)
  
20,924 
    
(4,086)
    
87 
    
- 
    
16,925 
Fee and other income
  
346,449 
    
13,578 
    
2,248 
    
- 
    
362,275 
                             
Total revenues
  
1,362,248 
    
136,003 
    
61,934 
    
- 
    
1,560,185 
                             
Benefits and Expenses
                            
                             
Interest credited
  
567,028 
    
69,641 
    
833 
    
- 
    
637,502 
Interest expense
  
72,122 
    
- 
    
51,157 
    
- 
    
123,279 
Policyowner benefits
  
161,350 
    
25,663 
    
- 
    
- 
    
187,013 
Amortization of DAC and VOBA
  
234,330 
    
9,491 
    
- 
    
- 
    
243,821 
Other operating expenses
  
172,753 
    
23,489 
    
301 
    
- 
    
196,543 
                             
Total benefits and expenses
  
1,207,583 
    
128,284 
    
52,291 
    
- 
    
1,388,158 
                             
Income before income tax expense, and minority interest share of loss
  
 
154,665 
    
 
7,719 
    
 
9,643 
    
 
- 
    
 
172,027 
                             
Income tax expense
  
34,757 
    
2,278 
    
3,054 
    
- 
    
40,089 
Equity in the net income of subsidiaries
  
12,030 
    
- 
    
3,074 
    
(15,104)
    
- 
Minority interest share of loss
  
(1,214)
    
- 
    
- 
    
- 
    
(1,214)
                             
Net income
$
133,152 
  
$
5,441 
  
$
9,663 
  
$
(15,104)
  
$
133,152 





 
 
 

 SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Balance Sheets at December 31, 2007

 
SLUS
as Parent
  
 
SLNY
  
Other
Subs
  
 
Elimination
  
Consolidated
Company
ASSETS
                            
                             
Investments
                            
Available-for-sale fixed maturities at fair value
$
10,157,376 
  
$
1,288,568 
  
$
57,286 
  
$
- 
  
$
11,503,230 
Trading fixed maturities at fair value
  
3,288,671 
    
- 
    
578,340 
    
- 
    
3,867,011 
Investment in subsidiaries
  
559,851 
    
- 
    
- 
    
(559,851)
    
- 
Mortgage loans
  
2,146,286 
    
170,205 
    
1,850 
    
- 
    
2,318,341 
Derivative instruments – receivable
  
609,261 
    
- 
    
- 
    
- 
    
609,261 
Limited partnerships
  
164,464 
    
- 
    
- 
    
- 
    
164,464 
Real estate
  
157,147 
    
- 
    
44,630 
    
- 
    
201,777 
Policy loans
  
686,099 
    
118 
    
26,416 
    
- 
    
712,633 
Other invested assets
  
499,538 
    
69,138 
    
- 
    
- 
    
568,676 
Cash and cash equivalents
  
415,494 
    
65,901 
    
688,306 
    
- 
    
1,169,701 
Total investments and cash
  
18,684,187 
    
1,593,930 
    
1,396,828 
    
(559,851)
    
21,115,094 
                             
Accrued investment income
  
268,732 
    
15,245 
    
6,386 
    
- 
    
290,363 
Deferred policy acquisition costs
  
1,469,976 
    
118,126 
    
15,295 
    
- 
    
1,603,397 
Value of business and customer renewals acquired
  
35,735 
    
16,071 
    
- 
    
- 
    
51,806 
Net deferred tax asset
  
171,899 
    
- 
    
- 
    
(155,954)
    
15,945 
Goodwill
  
658,051 
    
45,167 
    
5,611 
    
- 
    
708,829 
Receivable for investments sold
  
2,796 
    
615 
    
71 
    
- 
    
3,482 
Reinsurance receivable
  
1,937,814 
    
123,214 
    
648,221 
    
- 
    
2,709,249 
Other assets
  
278,573 
    
32,877 
    
155,221 
    
(154,672)
    
311,999 
Separate account assets
  
23,996,463 
    
929,008 
    
71,132 
    
- 
    
24,996,603 
                             
Total assets
$
47,504,226 
  
$
2,874,253 
  
$
2,298,765 
  
$
(870,477)
  
$
51,806,767 
                             
LIABILITIES
                            
                             
Contractholder deposit funds and other policy liabilities
$
16,361,329 
  
$
1,285,259 
  
$
615,981 
  
$
- 
  
$
18,262,569 
Future contract and policy benefits
  
706,657 
    
93,001 
    
23,930 
    
- 
    
823,588 
Payable for investments purchased
  
169,606 
    
635 
    
28,969 
    
- 
    
199,210 
Accrued expenses and taxes
  
169,532 
    
22,915 
    
85,290 
    
(154,672)
    
123,065 
Deferred tax liability
  
- 
    
1,045 
    
154,909 
    
(155,954)
    
-
Debt payable to affiliates
  
945,000 
    
- 
    
1,000,000 
    
- 
    
1,945,000 
Reinsurance payable to affiliate
  
1,574,517 
    
117,367 
    
- 
    
- 
    
1,691,884 
Derivative instruments – payable
  
446,508 
    
- 
    
132 
    
- 
    
446,640 
Other liabilities
  
704,467 
    
107,458 
    
76,136 
    
- 
    
888,061 
Separate account liabilities
  
23,996,463 
    
929,008 
    
71,132 
    
- 
    
24,996,603 
                             
Total liabilities
  
45,074,079 
    
2,556,688 
    
2,056,479 
    
(310,626)
    
49,376,620 
                             
STOCKHOLDER’S EQUITY
                            
                             
Common stock
$
6,437 
  
$
2,100 
  
$
2,542 
  
$
(4,642)
  
$
6,437 
Additional paid-in capital
  
2,146,436 
    
239,963 
    
274,555 
    
(514,518)
    
2,146,436 
Accumulated other comprehensive loss
  
(92,403)
    
(11,924)
    
(1,333)
    
13,257 
    
(92,403)
Retained earnings
  
369,677 
    
87,426 
    
(33,478)
    
(53,948)
    
369,677 
                             
Total stockholder’s equity
  
2,430,147 
    
317,565 
    
242,286 
    
(559,851)
    
2,430,147 
                             
Total liabilities and stockholder’s equity
$
47,504,226 
  
$
2,874,253 
  
$
2,298,765 
  
$
(870,477)
  
$
51,806,767 


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Balance Sheets at December 31, 2006

 
SLUS
as Parent
  
 
SLNY
  
Other
Subs
  
 
Elimination
  
Consolidated
Company
ASSETS
                            
                             
Investments
                            
Available-for-sale fixed maturities at fair value
$
12,061,211 
  
$
1,463,043 
  
$
113,719 
  
$
- 
  
$
13,637,973 
Trading fixed maturities at fair value
  
3,856,053 
    
- 
    
- 
    
- 
    
3,856,053 
Subordinated note from affiliate held-to-maturity
  
- 
    
- 
    
600,000 
    
- 
    
600,000 
Investment in subsidiaries
  
449,307 
    
- 
    
63,952 
    
(513,259)
    
- 
Mortgage loans
  
2,111,884 
    
161,292 
    
- 
    
- 
    
2,273,176 
Derivative instruments – receivable
  
653,854 
    
- 
    
- 
    
- 
    
653,854 
Limited partnerships
  
193,728 
    
- 
    
- 
    
- 
    
193,728 
Real estate
  
157,281 
    
- 
    
29,610 
    
- 
    
186,891 
Policy loans
  
672,553 
    
139 
    
36,934 
    
- 
    
709,626 
Other invested assets
  
884,304 
    
65,922 
    
- 
    
- 
    
950,226 
Cash and cash equivalents
  
513,190 
    
54,231 
    
10,659 
    
- 
    
578,080 
Total investments and cash
  
21,553,365 
    
1,744,627 
    
854,874 
    
(513,259)
    
23,639,607 
                             
Accrued investment income
  
266,141 
    
15,125 
    
9,952 
    
- 
    
291,218 
Deferred policy acquisition costs
  
1,149,185 
    
85,021 
    
- 
    
- 
    
1,234,206 
Value of business acquired
  
47,744 
    
- 
    
- 
    
- 
    
47,744 
Net deferred tax asset
  
8,587 
    
- 
    
1,963 
    
(6,953)
    
3,597 
Goodwill
  
658,052 
    
37,788 
    
5,611 
    
- 
    
701,451 
Receivable for investments sold
  
30,146 
    
1,244 
    
1,851 
    
- 
    
33,241 
Reinsurance receivable
  
1,812,093 
    
5,906 
    
- 
    
- 
    
1,817,999 
Other assets
  
136,406 
    
15,146 
    
1,678 
    
- 
    
153,230 
Separate account assets
  
20,190,709 
    
796,827 
    
72,719 
    
- 
    
21,060,255 
                             
Total assets
$
45,852,428 
  
$
2,701,684 
  
$
948,648 
  
$
(520,212)
  
$
48,982,548 
                             
LIABILITIES
                            
                             
Contractholder deposit funds and other policy liabilities
$
17,945,270 
  
$
1,437,396 
  
$
45,959 
  
$
- 
  
$
19,428,625 
Future contract and policy benefits
  
696,012 
    
54,100 
    
- 
    
- 
    
750,112 
Payable for investments purchased
  
210,668 
    
5,735 
    
2,062 
    
- 
    
218,465 
Accrued expenses and taxes
  
141,607 
    
- 
    
213 
    
2,875 
    
144,695 
Deferred tax liability
  
- 
    
6,953 
    
- 
    
(6,953)
    
- 
Debt payable to affiliates
  
1,325,000 
    
- 
    
- 
    
- 
    
1,325,000 
Partnership capital securities
  
- 
    
- 
    
607,826 
    
- 
    
607,826 
Reinsurance payable to affiliate
  
1,605,626 
    
- 
    
- 
    
- 
    
1,605,626 
Derivative instruments – payable
  
160,504 
    
- 
    
- 
    
- 
    
160,504 
Other liabilities
  
1,073,678 
    
90,517 
    
16,766 
    
(2,875)
    
1,178,086 
Separate account liabilities
  
20,190,709 
    
796,827 
    
72,719 
    
- 
    
21,060,255 
                             
Total liabilities
  
43,349,074 
    
2,391,528 
    
745,545 
    
(6,953)
    
46,479,194 
                             
STOCKHOLDER’S EQUITY
                            
                             
Common stock
$
6,437 
  
$
2,100 
  
$
2,542 
  
$
(4,642) 
  
$
6,437 
Additional paid-in capital
  
2,143,408 
    
239,963 
    
185,529 
    
(425,492)
    
2,143,408 
Accumulated other comprehensive  income
  
14,030 
    
1,432 
    
1,369 
    
(2,801)
    
14,030 
Retained earnings
  
339,479 
    
66,661 
    
13,663 
    
(80,324)
    
339,479 
                             
Total stockholder’s equity
  
2,503,354 
    
310,156 
    
203,103 
    
(513,259)
    
2,503,354 
                             
Total liabilities and stockholder’s equity
$
45,852,428 
  
$
2,701,684 
  
$
948,648 
  
$
(520,212)
  
$
48,982,548 


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Cash Flow
For the year ended December 31, 2007

 
SLUS
as Parent
  
 
SLNY
  
Other
Subs
  
 
Elimination
  
Consolidated
Company
                             
Cash Flows From Operating Activities:
                            
Net income from operations
$
25,022 
  
$
20,803 
  
$
14,014 
  
$
(34,817)
  
$
25,022 
Adjustments to reconcile net income to net cash provided by operating activities:
                            
Amortization of discount and premiums
  
38,661 
    
1,782 
    
225 
    
- 
    
40,668 
Amortization of DAC, VOBA and SIA
  
165,666 
    
19,921 
    
3,534 
    
- 
    
189,121 
Depreciation and amortization
  
6,467 
    
164 
    
829 
    
- 
    
7,460 
Net loss on derivatives
  
124,290 
    
3,970 
    
3,243 
    
- 
    
131,503 
Net realized losses on available-for-sale investments
  
 
57,547 
    
 
3,487 
    
 
14 
    
 
- 
    
 
61,048 
Changes in fair value of trading investments
  
89,159 
    
- 
    
(761)
    
- 
    
88,398 
Net realized gains on trading investments
  
(3,438)
    
- 
    
(1,217)
    
- 
    
(4,655)
Net change in unrealized and undistributed gains in private equity limited partnerships
  
 
(23,027)
    
 
- 
    
 
- 
    
 
- 
    
 
(23,027)
Interest credited to contractholder deposits
  
571,309 
    
51,390 
    
7,124 
    
- 
    
629,823 
Deferred federal income taxes
  
(114,110)
    
290 
    
157,186 
    
- 
    
43,366 
Equity in net income of subsidiaries
  
(33,006)
    
- 
    
(1,811)
    
34,817 
    
- 
Changes in assets and liabilities:
                            
DAC and VOBA additions
  
(304,466)
    
(56,650)
    
(18,825)
    
- 
    
(379,941)
Accrued investment income
  
(2,591)
    
(120)
    
3,566 
    
- 
    
855 
Net reinsurance receivable/payable
  
127,619 
    
59 
    
(94,517)
    
- 
    
33,161 
Future contract and policy benefits
  
3,184 
    
39,436 
    
23,930 
    
- 
    
66,550 
Dividends received from subsidiaries
  
63,995 
    
- 
    
- 
    
(63,995)
    
- 
Other, net
  
(122,356)
    
4,931 
    
(16,931)
    
- 
    
(134,356)
Purchases of trading fixed maturities, net of sales
  
475,340 
    
- 
    
(576,176)
    
- 
    
(100,836)
                             
Net cash provided by operating activities
  
1,145,265 
    
89,463 
    
(496,573)
    
(63,995)
    
674,160 
                             
Cash Flows From Investing Activities:
                            
Sales, maturities and repayments of:
                            
Available-for-sale fixed maturities
  
3,847,569 
    
337,825 
    
67,386 
    
- 
    
4,252,780 
Mortgage loans
  
314,620 
    
40,526 
    
- 
    
- 
    
355,146 
Other invested assets
  
669,930 
    
24 
    
960 
    
(3,231)
    
667,683 
Redemption of subordinated note from affiliate
  
- 
    
- 
    
600,000 
    
- 
    
600,000 
Purchases of:
                            
Available-for-sale fixed maturities
  
(2,366,255)
    
(205,932)
    
14,346 
    
- 
    
(2,557,841)
Mortgage loans
  
(348,256)
    
(49,460)
    
(1,850)
    
- 
    
(399,566)
Real estate
  
(3,590)
    
- 
    
(15,849)
    
- 
    
(19,439)
Other invested assets
  
(57,864)
    
(3,231)
    
- 
    
3,231 
    
(57,864)
Net change in other investing activities
  
(365,012)
    
3,231 
    
- 
    
- 
    
(361,781)
Net change in policy loans
  
(13,546)
    
21 
    
10,518 
    
- 
    
(3,007)
Early redemption premium
  
- 
    
- 
    
25,578 
    
- 
    
25,578 
                             
Net cash provided by investing activities
$
1,677,596 
  
$
123,004 
  
$
701,089 
  
$
- 
  
$
2,501,689 

Continued on next page


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Cash Flow (continued)
For the year ended December 31, 2007

 
SLUS
as Parent
  
 
SLNY
  
Other
Subs
  
 
Elimination
  
Consolidated
Company
                             
Cash Flows From Financing Activities:
                            
Additions to contractholder deposit funds
$
1,725,614 
  
$
180,702 
  
$
18,468 
  
$
- 
  
$
1,924,784 
Withdrawals from contractholder deposit funds
  
(4,132,822)
    
(388,199)
    
(12,384)
    
- 
    
(4,533,405)
Repayments of debt
  
(380,000)
    
- 
    
(600,000)
    
- 
    
(980,000)
Issuance of debt
  
- 
    
- 
    
1,000,000 
    
- 
    
1,000,000 
Dividends paid to parent
  
- 
    
- 
    
(63,995)
    
63,995 
    
- 
Early redemption payment
  
- 
    
- 
    
(25,578)
    
- 
    
(25,578)
Additional capital contributed to subsidiaries
  
(156,620)
    
- 
    
156,620 
    
- 
    
- 
Other, net
  
23,271 
    
6,700 
    
- 
    
- 
    
29,971 
                             
Net cash used in financing activities
  
(2,920,557)
    
(200,797)
    
473,131 
    
63,995 
    
(2,584,228)
                             
Net change in cash and cash equivalents
  
(97,696)
    
11,670 
    
677,647 
    
- 
    
591,621 
                             
Cash and cash equivalents, beginning of period
  
513,190 
    
54,231 
    
10,659 
    
- 
    
578,080 
                             
Cash and cash equivalents, end of period
$
415,494 
  
$
65,901 
  
$
688,306 
  
$
- 
  
$
1,169,701 




 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Cash Flow
For the year ended December 31, 2006

 
SLUS
as Parent
  
 
SLNY
  
Other
Subs
  
 
Elimination
  
Consolidated
Company
                             
Cash Flows From Operating Activities:
                            
Net income from operations
$
78,292 
  
$
16,233 
  
$
6,823 
  
$
(23,056)
  
$
78,292 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
                            
Amortization of discount and premiums
  
53,995 
    
3,956 
    
801 
    
- 
    
58,752 
Amortization of DAC and VOBA
  
380,760 
    
18,422 
    
- 
    
- 
    
399,182 
Depreciation and amortization
  
4,008 
    
- 
    
600 
    
- 
    
4,608 
Net gains on derivatives
  
(11,360)
    
- 
    
- 
    
(493)
    
(11,853)
Net realized losses on available-for-sale investments
  
 
38,328 
    
 
6,081 
    
 
102 
    
 
- 
    
 
44,511 
Changes in fair value of trading investments
  
(15,235)
    
- 
    
- 
    
- 
    
(15,235)
Net realized gains on trading investments
  
(373)
    
- 
    
- 
    
- 
    
(373)
Net change in unrealized and undistributed gains in private equity limited partnerships
  
 
(29,120)
    
 
- 
    
 
- 
    
 
- 
    
 
(29,120)
Interest credited to contractholder deposits
  
573,178 
    
56,379 
    
3,848 
    
- 
    
633,405 
Deferred federal income taxes
  
(6,146)
    
10,193 
    
133 
    
- 
    
4,180 
Equity in net income of subsidiaries
  
(19,960)
    
- 
    
(3,096)
    
23,056 
    
- 
Changes in assets and liabilities:
                            
Deferred acquisition cost additions
  
(238,986)
    
(23,909)
    
- 
    
- 
    
(262,895)
Accrued investment income
  
(32,925)
    
3,275 
    
(61)
    
- 
    
(29,711)
Net reinsurance receivable/payable
  
77,083
    
(20)
    
-
    
-
    
77,063
Future contract and policy benefits
  
(9,725)
    
3,106 
    
- 
    
- 
    
(6,619)
Dividends received from subsidiaries
  
8,000 
    
- 
    
- 
    
(8,000)
    
- 
Other, net
  
39,943 
    
(24,855)
    
(1,313)
    
493 
    
14,268 
Purchases of trading fixed maturities, net of sales
  
(1,866,153)
    
- 
    
- 
    
- 
    
(1,866,153)
                             
Net cash (used in) provided by operating activities
  
(976,396)
    
68,861 
    
7,837 
    
(8,000)
    
(907,698)
                             
Cash Flows From Investing Activities:
                            
Sales, maturities and repayments of:
                            
Available-for-sale fixed maturities
  
5,041,508 
    
757,662 
    
73,020 
    
- 
    
5,872,190 
Mortgage loans
  
218,849 
    
29,415 
    
- 
    
- 
    
248,264 
Other invested assets
  
184,646 
    
- 
    
- 
    
- 
    
184,646 
Purchases of:
                            
Available-for-sale fixed maturities
  
(3,380,467)
    
(549,218)
    
(72,559)
    
- 
    
(4,002,244)
Mortgage loans
  
(734,307)
    
(46,285)
    
- 
    
- 
    
(780,592)
Real estate
  
(20,464)
    
- 
    
(155)
    
- 
    
(20,619)
Other invested assets
  
(423,635)
    
(65,858)
    
- 
    
- 
    
(489,493)
Net change in other investing activities
  
333,669 
    
65,845 
    
- 
    
- 
    
399,514 
Net change in policy loans
  
(9,979)
    
49 
    
2,073 
    
- 
    
(7,857)
                             
Net cash provided by investing activities
$
1,209,820 
  
$
191,610 
  
$
2,379 
  
$
- 
  
$
1,403,809 

Continued on next page


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Cash Flow (continued)
For the year ended December 31, 2006

 
SLUS
as Parent
  
 
SLNY
  
Other
Subs
  
 
Elimination
  
Consolidated
Company
                             
Cash Flows From Financing Activities:
                            
Additions to contractholder deposit funds
$
3,395,794 
  
$
121,837 
  
$
- 
  
$
2,507 
  
$
3,520,138 
Withdrawals from contractholder deposit funds
  
(3,301,631)
    
(382,617)
    
(3,596)
    
(2,507)
    
(3,690,351)
Issuance of debt
  
200,000 
    
- 
    
- 
    
- 
    
200,000 
Dividends paid to parent
  
(300,000)
    
- 
    
(8,000)
    
8,000 
    
(300,000)
Additional capital contributed to subsidiaries
  
(265)
    
- 
    
265 
    
- 
    
- 
Other, net
  
4,528 
    
- 
    
- 
    
- 
    
4,528 
                             
Net cash provided by (used in) financing activities
  
(1,574)
    
(260,780)
    
(11,331)
    
8,000 
    
(265,685)
                             
Net change in cash and cash equivalents
  
231,850 
    
(309)
    
(1,115)
    
- 
    
230,426 
                             
Cash and cash equivalents, beginning of period
  
281,340 
    
54,540 
    
11,774 
    
- 
    
347,654 
                             
Cash and cash equivalents, end of period
$
513,190 
  
$
54,231 
  
$
10,659 
  
$
- 
  
$
578,080 






 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Cash Flow
For the year ended December 31, 2005

 
SLUS
as Parent
  
 
SLNY
  
Other
Subs
  
 
Elimination
  
Consolidated
Company
                             
Cash Flows From Operating Activities:
                            
Net income from operations
$
133,152 
  
$
5,441 
  
$
9,663 
  
$
(15,104)
  
$
133,152 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
                            
Minority interest in loss
  
(1,214)
    
- 
    
- 
    
- 
    
(1,214)
Amortization of discount and premiums
  
63,251 
    
7,224 
    
882 
    
- 
    
71,357 
Amortization of DAC and VOBA
  
234,330 
    
9,491 
    
- 
    
- 
    
243,821 
Depreciation and amortization
  
3,338 
    
- 
    
647 
    
- 
    
3,985 
Net (gains) losses on derivatives
  
(77,294)
    
- 
    
- 
    
269 
    
(77,025)
Net realized (gain) loss on available-for-sale investments
  
 
(20,924)
    
 
4,086 
    
 
(87)
    
 
- 
    
 
(16,925)
Changes in fair value of trading investments
  
80,324 
    
- 
    
- 
    
- 
    
80,324 
Net realized gains on trading
  
(11,162)) 
    
- 
    
- 
    
- 
    
(11,162) 
Net change in unrealized and undistributed gains in private equity limited partnerships
  
 
(48,244)
    
 
- 
    
 
- 
    
 
- 
    
 
(48,244)
Interest credited to contractholder deposits
  
567,028 
    
69,641 
    
833 
    
- 
    
637,502 
Deferred federal income taxes
  
22,860 
    
(947)
    
134 
    
- 
    
22,047 
Equity in net income of subsidiaries
  
(12,030)
    
- 
    
(3,074)
    
15,104 
    
- 
Changes in assets and liabilities:
                            
Deferred acquisition cost additions
  
(252,271)
    
(9,646)
    
- 
    
- 
    
(261,917)
Accrued investment income
  
17,191 
    
844 
    
(119)
    
- 
    
17,916 
Net reinsurance receivable/payable
  
85,381
    
495
    
-
    
-
    
85,876
Future contract and policy benefits
  
24,387 
    
736 
    
- 
    
- 
    
25,123 
Other, net
  
25,350 
    
29,109 
    
(654)
    
(269)
    
53,536 
Purchases of trading fixed maturities, net of sales
  
(651,921)
    
- 
    
- 
    
- 
    
(651,921)
                             
Net cash (used in) provided by operating activities
  
181,532 
    
116,474 
    
8,225 
    
- 
    
306,231 
                             
Cash Flows From Investing Activities:
                            
Sales, maturities and repayments of:
                            
Available-for-sale fixed maturities
  
4,955,938 
    
673,665 
    
55,405 
    
- 
    
5,685,008 
Mortgage loans
  
109,854 
    
7,584 
    
- 
    
- 
    
117,438 
Real estate
  
947 
    
- 
    
- 
    
- 
    
947 
Other invested assets
  
483,700 
    
- 
    
- 
    
- 
    
483,700 
Net cash from sale of subsidiary
  
17,040 
    
- 
    
- 
    
- 
    
17,040 
Purchases of:
                            
Available-for-sale fixed maturities
  
(4,642,052)
    
(568,813)
    
(58,346)
    
- 
    
(5,269,211)
Mortgage loans
  
(374,931)
    
(15,445)
    
- 
    
- 
    
(390,376)
Real estate
  
(6,264)
    
- 
    
(384)
    
- 
    
(6,648)
Other invested assets
  
(171,539)
    
- 
    
- 
    
- 
    
(171,539)
Net change in other investing activities
  
(239,910)
    
- 
    
- 
    
- 
    
(239,910)
Net change in policy loans
  
(5,471)
    
(35)
    
42 
    
- 
    
(5,464)
Net change in short-term investments
  
(4,576)
    
- 
    
- 
    
- 
    
(4,576)
                             
Net cash provided by investing activities
$
122,736 
  
$
96,956 
  
$
(3,283)
  
$
- 
  
$
216,409 

Continued on next page


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Cash Flow (continued)
For the year ended December 31, 2005

 
SLUS
as Parent
  
 
SLNY
  
Other
Subs
  
 
Elimination
  
Consolidated
Company
                             
Cash Flows From Financing Activities:
                            
Additions to contractholder deposit funds
$
2,663,596 
  
$
53,495 
  
$
- 
  
$
3050 
  
$
2,720,141 
Withdrawals from contractholder deposit funds
  
(3,142,775)
    
(255,647)
    
(2,996)
    
(3050)
    
(3,404,468)
Issuance of debt
  
100,000 
    
- 
    
- 
    
- 
    
100,000 
Dividends paid to parent
  
(150,600)
    
- 
    
- 
    
- 
    
(150,600)
Additional capital contributed to subsidiaries
  
(340)
    
- 
    
340 
    
- 
    
- 
Other, net
  
6,992 
    
- 
    
- 
    
- 
    
6,992 
                             
Net cash provided by (used in) financing activities
  
(523,127)
    
(202,152)
    
(2,656)
    
- 
    
(727,935)
                             
Net change in cash and cash equivalents
  
(218,859)
    
11,278 
    
2,286 
    
- 
    
(205,295)
                             
Cash and cash equivalents, beginning of period
  
500,199 
    
43,262 
    
9,488
    
- 
    
552,949 
                             
Cash and cash equivalents, end of period
$
281,340 
  
$
54,540 
  
$
11,774 
  
$
- 
  
$
347,654 






 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

16. SEGMENT INFORMATION

As described below, the Company conducts business principally in three operating segments and maintains a Corporate Segment to provide for the capital needs of the three operating segments and to engage in other financing related activities. Each segment is defined consistently with the way results are evaluated by the chief operating decision-maker.

Net investment income is allocated based on segmented assets by line of business.  Allocations of operating expenses among segments are made using both standard rates and actual expenses incurred.  Management evaluates the results of the operating segments on an after-tax basis.  The Company does not depend on one or a few customers, brokers or agents for a significant portion of its operations.

Effective January 1, 2006, the Company adopted a new capital allocation methodology for measurement of segment operating results to more closely align with rating agency standards.  The changes impact the amount of capital and income on capital that is allocated to the Wealth Management, Individual Protection and Group Protection Segments from the Corporate Segment.

Wealth Management

The Wealth Management Segment markets, sells and administers funding agreements, individual and group variable annuity products, individual and group fixed annuity products and other retirement benefit products.  These contracts may contain any of a number of features including variable or fixed interest rates and equity index options and may be denominated in foreign currencies.  The Company uses derivative instruments to manage the risks inherent in the contract options.  Additionally, the Company consolidates the CARS Trust as a component of the Wealth Management Segment.

Individual Protection

The Individual Protection Segment markets, sells and administers a variety of life insurance products sold to individuals and corporate owners of life insurance. The products include whole life, universal life and variable life products.

Group Protection

The Group Protection Segment markets, sells and administers group life, long-term disability, short-term disability, dental and stop loss insurance to small and mid-size employers in the State of New York, through the Company's subsidiary, SLNY.

Corporate

The Corporate Segment includes the unallocated capital of the Company, its debt financing, certain consolidated investments in VIEs, and items not otherwise attributable to the other segments.



 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

16. SEGMENT INFORMATION (CONTINUED)

The following amounts pertain to the various business segments:

 
Year ended December 31, 2007
    
                   
 
Wealth
  
Individual
  
Group
        
 
Management
  
Protection
  
 Protection
  
Corporate
  
Totals
                   
Total revenues
$        1,087,817
  
$        184,315
  
$        97,657
  
$     90,729
  
$    1,460,518
Total expenditures
1,139,538
  
148,122
  
93,950
  
77,744
  
1,459,354
(Loss) income before
income tax (benefit)
expense
 
 
(51,721)
  
 
 
36,193
  
 
 
3,707
  
 
 
12,985
  
 
 
1,164
                   
Net (loss) income
(19,734)
  
23,665
  
2,409
  
18,682
  
25,022
                   
Total assets
$      39,855,777
  
$   10,767,117
  
$      121,096
  
$1,062,777
  
$  51,806,767
                   
 
Year ended December 31, 2006
    
                   
 
Wealth
  
Individual
  
Group
        
 
Management
  
Protection
  
 Protection
  
Corporate
  
Totals
                   
Total revenues
$        1,386,626
  
$         101,447
  
$       39,833
  
$   100,567
  
$    1,628,473
Total expenditures
1,354,554
  
95,815
  
35,356
  
66,068
  
1,551,793
Income before income tax
expense
 
32,072
  
 
5,632
  
 
4,477
  
 
34,499
  
 
76,680
                   
Net income
39,857
  
3,801
  
2,910
  
31,724
  
78,292
                   
Total assets
$      41,485,295
  
$     5,784,705
  
$       78,838
  
$1,633,710
  
$  48,982,548
                   
 
Year ended December 31, 2005
    
                   
 
Wealth
  
Individual
  
Group
        
 
Management
  
Protection
  
 Protection
  
Corporate
  
Totals
                   
Total revenues
$        1,342,509
  
$           74,535
  
$         32,604
  
$   110,537
  
$    1,560,185
Total expenditures
1,220,198
  
70,991
  
32,333
  
64,636
  
1,388,158
Income before income tax
expense and minority
interest
 
 
122,311
  
 
 
3,544
  
 
 
271
  
 
 
45,901
  
 
 
172,027
                   
Net income
93,570
  
2,443
  
176
  
36,963
  
133,152
                   
Total assets
$      38,631,963
  
$      6,005,424
  
$         55,319
  
$1,314,140
  
$  46,006,846


 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

17.  REGULATORY FINANCIAL INFORMATION

The Company and its insurance subsidiaries are required to file annual statements with state regulatory authorities prepared on a statutory accounting basis prescribed or permitted by such authorities.  For the years ended December 31, 2007, 2006 and 2005, there were no permitted practices followed.  Statutory surplus differs from stockholder's equity reported in accordance with GAAP primarily because policy acquisition costs are expensed when incurred, policy liabilities are based on different assumptions, investments are valued differently, post-retirement benefit costs are based on different assumptions, and deferred income taxes are calculated differently.  The Company’s statutory financials are not prepared on a consolidated basis.

At December 31, the Company and its insurance subsidiaries combined statutory capital and surplus and net income were as follows:

 
Unaudited for the Years ended December 31,
 
 
2007
 
2006
 
2005
       
Statutory capital and surplus
$       1,790,457
$       1,610,425
$       1,778,241
Statutory net (loss) income
(913,114)
123,305
140,827




 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

18. DIVIDEND RESTRICTIONS

The Company’s and its insurance company subsidiaries’ ability to pay dividends is subject to certain statutory restrictions.  Delaware, New York, Rhode Island, and Vermont have enacted laws governing the payment of dividends to stockholders by domestic insurers.

Pursuant to Delaware's statute, the maximum amount of dividends and other distributions that a domestic insurer may pay in any twelve-month period without prior approval of the Delaware Commissioner of Insurance is limited to the greater of (i) ten percent of its statutory surplus as of the preceding December 31, or (ii) the individual company's statutory net gain from operations for the preceding calendar year.  Any dividends to be paid by an insurer from a source other than statutory surplus, whether or not in excess of the aforementioned threshold, would also require the prior approval of the Delaware Commissioner of Insurance.  The Company is permitted to pay dividends up to a maximum of $179.0 million in 2008 without prior approval from the Delaware Commissioner of Insurance.

In 2007, the Company did not pay any dividends to the Parent.  In 2006, the Company’s board of directors approved and the Company paid a $300.0 million dividend to the Parent.  In 2005, the Company’s board of directors approved and the Company paid a $200.0 million dividend to the Parent, consisting of $150.6 million in cash and $49.4 million in notes.

New York law permits a domestic stock life insurance company to distribute a dividend to its shareholders without prior notice to the New York Superintendent of Insurance, where the aggregate amount of such dividends in any calendar year does not exceed the lesser of: (i) ten percent of its surplus to policyholders as of the immediately preceding calendar year; or (ii) its net gain from operations for the immediately preceding calendar year, not including realized capital gains.  SLNY is permitted to pay dividends up to a maximum of $20.7 million in 2008 without prior approval from the New York Commissioner of Insurance.  No dividends were paid by SLNY during 2007, 2006 or 2005.

Rhode Island law requires prior regulatory approval for any dividend where the amount of such dividend paid during the preceding twelve-month period would exceed the lesser of (i) ten percent of the insurance company’s surplus as of the December 31 next preceding, or (ii) its net gain from operations, not including realized capital gains, for the immediately preceding calendar year, excluding pro rata distributions of any class of the insurance company’s own securities.  INDY is permitted to pay dividends up to a maximum of $2.3 million in 2008 without prior approval from the Rhode Island Commissioner of Insurance.  .No dividends were paid by INDY during 2007, 2006 or 2005.

The Company’s new Vermont domestic insurance company subsidiary, Sun Life Vermont, is permitted to pay dividends only to the extent that its surplus and capital exceeds specified risk-based capital levels.  Sun Life Vermont may declare and pay dividends or distributions with respect to its common stock from its capital and surplus, subject to the following: (i) its total adjusted capital will equal or exceed 200% of its company action level risk-based capital after giving effect to the dividend or distribution and (ii) notice of each dividend or distribution is provided to the Vermont regulator within five days following the payment of the dividend or distribution.  No dividends were paid by Sun Life Vermont during 2007.





 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)
For the years ended December 31, 2007, 2006 and 2005

19. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The components of accumulated other comprehensive (loss) income as of December 31 were as follows:

 
2007
  
2006
  
2005
Unrealized (losses) gains on available-for-sale
securities
 
$     (317,402)
  
 
$         38,400
  
 
$          56,493
Changes in reserves due to unrealized (losses)
gains on available-for-sale securities
 
(26,702)
  
 
(9,346)
  
 
(22,039)
Unrealized gains (losses) on pension and other
postretirement plan adjustments
 
14,894
  
 
(2,332)
  
 
(2,834)
Changes in DAC due to unrealized (losses)
gains on available-for-sale securities
 
189,687
  
 
(2,719)
  
 
(12,842)
Changes in VOBA due to unrealized (losses)
gains on available-for-sale securities
 
-
  
 
470
  
 
(1,201)
Tax effect and other
47,120
  
(10,443)
  
1,683
           
Accumulated Other Comprehensive (Loss)
Income
 
$     (92,403)
  
 
$          14,030
  
 
$         19,260

20. COMMITMENTS AND CONTINGENCIES

Regulation and Regulatory Developments

Under insurance guaranty fund laws in each state, the District of Columbia and Puerto Rico, insurers licensed to do business can be assessed by state insurance guaranty associations for certain obligations of insolvent insurance companies to policyholders and claimants.  Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's solvency and further provide annual limits on such assessments.  Part of the assessments paid by the Company pursuant to these laws may be used as credits for a portion of the associated premium taxes.

Litigation, Income Taxes and Other Matters

In Revenue Ruling 2007-61, issued on September 25, 2007, the IRS announced its intention to issue regulations with respect to certain computational aspects of the dividends-received-deduction (the “DRD”) on separate account assets held in connection with variable annuity contracts.  Revenue Ruling 2006-61 suspended Revenue Ruling 2007-54, issued on August 16, 2007, that purported to change accepted industry and IRS interpretations of the statutes governing computational questions impacting the DRD.  New DRD regulations that the IRS proposes for issuance on this matter will be subject to public comment, at which time the insurance industry and other interested parties will have the opportunity to raise comments and questions about the content, scope, and application of new regulations.  The timing, substance, and effective date of the new regulations are unknown, but they could result in the elimination of some or all of the separate account DRD tax benefit that the Company ultimately receives.  For the year ended December 31, 2007, the Company recorded a benefit of $12.0 million related to the separate account DRD.

The Company is not aware of any contingent liabilities arising from litigation or other matters that could have a material effect upon the financial condition, results of operations or cash flows of the Company.



 
 
 

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands)

For the years ended December 31, 2007, 2006 and 2005

20. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Indemnities

In the normal course of its business, the Company has entered into agreements that include indemnities in favor of third parties, such as contracts with advisors and consultants, outsourcing agreements, underwriting and agency agreements, information technology agreements, distribution agreements, and service agreements.  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 Company believes any potential liability under these agreements is neither probable nor estimatable. Therefore, the Company has not recorded any associated liability.

Lease Commitments

The Company leases various facilities and equipment under operating leases with terms of up to six years. As of December 31, 2007, minimum future lease payments under such leases were as follows:

2008
$             1,377
2009
283
2010
45
      Total
$             1,705

Total rental expense for the years ended December 31, 2007, 2006 and 2005 was $9.4 million, $7.6 million and $8.5 million, respectively.

The Company has four noncancelable sublease agreements that expire on March 31, 2008.  As of December 31, 2007, the minimum future lease payments under the sublease agreements was $0.3 million.




 
 
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of
Sun Life Assurance Company of Canada (U.S.)
Wellesley Hills, Massachusetts

We have audited the accompanying consolidated balance sheets of Sun Life Assurance Company of Canada (U.S.) and subsidiaries (the "Company") as of December 31, 2007 and 2006, and the related consolidated statements of income, comprehensive income, stockholder’s equity, and cash flows for each of the three years in the period ended December 31, 2007.  Our audits also included the financial statement schedules listed in the Index at Item 15.  These financial statements and financial statement schedules are the responsibility of the Company's management.  Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Sun Life Assurance Company of Canada (U.S.) and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2007, the Company adopted the provisions of the Financial Accounting Standards Board Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No.109”.

DELOITTE & TOUCHE LLP

/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 27, 2008


 
 
 


KMA VARIABLE ACCOUNT
Statements of Condition
December 31, 2007


Assets
                
Investment in:
  
Shares
  
Cost
  
Value
Columbia Funds Variable Insurance Trust:
                
Columbia Asset Allocation Fund, VS (A) Sub-Account ("Columbia Asset Allocation Fund, VS (A)")
  
3,727,527
  
$
43,620,371
  
$
56,844,781
Columbia Federal Securities Fund, VS (A) Sub-Account ("Columbia Federal Securities Fund, VS (A)")
  
986,153
    
9,676,695
    
10,325,017
Columbia International Fund, VS (A) Sub-Account ("Columbia International Fund, VS (A)")
  
6,267,584
    
11,056,593
    
13,475,306
Columbia Large Cap Growth Stock Fund, VS (A) Sub-Account ("Columbia Large Cap Growth Stock Fund, VS (A)")
  
858,742
    
12,218,027
    
26,921,562
Columbia Large Cap Value Fund, VS (A) Sub-Account ("Columbia Large Cap Value Fund, VS (A)")
  
1,613,993
    
18,033,818
    
29,939,568
Columbia Money Market Fund, VS (A) Sub-Account ("Columbia Money Market Fund, VS (A)")
  
21,311,287
    
21,311,287
    
21,311,287
Columbia Small Company Growth Fund, VS (A) Sub-Account ("Columbia Small Company Growth Fund, VS (A)")
  
2,106,837
    
30,766,877
    
30,549,140
Columbia Strategic Income Fund, VS (A) Sub-Account (" Columbia Strategic Income Fund, VS (A)")
  
1,281,200
    
13,391,246
    
12,132,962
                 
Keystone Custodian Funds:
                
Evergreen Diversified Bond Fund - A Sub-Account ("Evergreen Diversified Bond Fund - A")
  
733
    
11,190
    
10,496
Evergreen Emerging Growth Fund - A Sub-Account ("Evergreen Emerging Growth Fund - A")
  
24,161
    
142,586
    
160,432
Evergreen High Yield Bond Fund - A Sub-Account ("Evergreen High Yield Bond Fund - A")
  
1
    
4
    
4
Evergreen Money Market Fund - A Sub-Account ("Evergreen Money Market Fund - A")
  
64,380
    
64,380
    
64,380
                 
Net Assets
      
$
160,293,074
  
$
201,734,935


Net Assets Applicable to Contract Owners:
                              
                               
   
Deferred Variable Annuity Contracts
  
Variable Annuity Reserve
          
   
Units
  
Value
  
Units
  
Value
  
Total Units
  
Total Value
                               
Columbia Asset Allocation Fund, VS (A)
  
1,340,072
  
$
54,412,759
  
61,006
  
$
2,432,022
  
1,401,078
  
$
56,844,781
Columbia Federal Securities Fund, VS (A)
  
374,796
    
9,998,970
  
12,042
    
326,047
  
386,838
    
10,325,017
Columbia International Fund, VS (A)
  
739,154
    
12,449,163
  
59,119
    
1,026,143
  
798,273
    
13,475,306
Columbia Large Cap Growth Stock Fund, VS (A)
  
606,225
    
26,289,295
  
14,868
    
632,267
  
621,093
    
26,921,562
Columbia Large Cap Value Fund, VS (A)
  
820,855
    
28,244,654
  
51,263
    
1,694,914
  
872,118
    
29,939,568
Columbia Money Market Fund, VS (A)
  
1,035,190
    
21,173,162
  
7,894
    
138,125
  
1,043,084
    
21,311,287
Columbia Small Company Growth Fund, VS (A)
  
538,680
    
29,823,916
  
15,228
    
725,224
  
553,908
    
30,549,140
Columbia Strategic Income Fund, VS (A)
  
522,456
    
11,386,528
  
34,024
    
746,434
  
556,480
    
12,132,962
Evergreen Diversified Bond Fund - A
  
176
    
10,496
  
-
    
-
  
176
    
10,496
Evergreen Emerging Growth Fund - A
  
1,888
    
160,363
  
1
    
69
  
1,889
    
160,432
Evergreen High Yield Bond Fund - A
  
1
    
4
  
-
    
-
  
1
    
4
Evergreen Money Market Fund - A
  
2,455
    
64,379
  
1
    
1
  
2,456
    
64,380
                               
Net Assets
      
$
194,013,689
      
$
7,721,246
      
$
201,734,935


See notes to financial statements.


 
 
 


KMA VARIABLE ACCOUNT
Statements of Operations
For the Year Ended December 31, 2007


   
Columbia Asset
  
Columbia Federal
  
Columbia
   
Allocation
  
Securities
  
International
   
Fund, VS (A)
  
Fund, VS (A)
  
Fund, VS (A)
                   
Income
                  
Dividends
  
$
1,632,832
  
$
670,627
  
$
412,113
Expenses
                  
Mortality and expense risk
                  
and administrative charges
    
850,765
    
166,456
    
210,952
Net investment income (loss)
    
782,067
    
504,171
    
201,161
                   
                   
Realized gains (losses) on investment
                  
Realized gain (loss) on sale of fund shares
    
1,059,131
    
128,592
    
644,167
Realized gain distributions
    
5,450,184
    
-
    
2,518,351
Realized gain (loss)
    
6,509,315
    
128,592
    
3,162,518
                   
Change in unrealized appreciation
                  
(depreciation) during the year
    
(2,833,690)
    
(138,982)
    
(2,408,853)
                   
Net increase in net assets
                  
from operations
  
$
4,457,692
  
$
493,781
  
$
954,826


   
Columbia Large Cap
  
Columbia
  
Columbia
   
Growth Stock
  
Large Cap Value
  
Money Market
   
Fund, VS (A)
  
Fund, VS (A)
  
Fund, VS (A)
                   
Income
                  
Dividends
  
$
105,473
  
$
487,290
  
$
1,077,967
Expenses
                  
Mortality and expense risk
                  
and administrative charges
    
400,501
    
493,783
    
295,106
Net investment income (loss)
    
(295,028)
    
(6,493)
    
782,861
                   
                   
Realized gains (losses) on investment
                  
Realized gain (loss) on sale of fund shares
    
2,798,197
    
1,699,565
    
-
Realized gain distributions
    
-
    
2,321,024
    
-
Realized gain (loss)
    
2,798,197
    
4,020,589
    
-
                   
Change in unrealized appreciation
                  
(depreciation) during the year
    
1,233,706
    
(3,358,349)
    
-
                   
Net increase in net assets
                  
from operations
  
$
3,736,875
  
$
655,747
  
$
782,861


See notes to financial statements.

 
 
 


KMA VARIABLE ACCOUNT
Statements of Operations
For the Year Ended December 31, 2007


   
Columbia Small
  
Columbia Strategic
  
Evergreen
   
Company Growth
  
Income
  
Diversified
   
Fund, VS (A)
  
Fund, VS (A)
  
Bond Fund - A
                   
Income
                  
Dividends
  
$
-
  
$
1,027,533
  
$
983
Expenses
                  
Mortality and expense risk
                  
and administrative charges
    
433,820
    
177,780
    
203
Net investment income (loss)
    
(433,820)
    
849,753
    
780
                   
                   
Realized gains (losses) on investment
                  
Realized gain (loss) on sale of fund shares
    
(606,382)
    
(63,464)
    
(406)
Realized gain distributions
    
-
    
-
    
-
Realized gain (loss)
    
(606,382)
    
(63,464)
    
(406)
                   
Change in unrealized appreciation
                  
(depreciation) during the year
    
4,731,712
    
(198,274)
    
352
                   
Net increase in net assets
                  
from operations
  
$
3,691,510
  
$
588,015
  
$
726


   
Evergreen
  
Evergreen High
  
Evergreen Money
   
Emerging
  
Yield Bond
  
Market
   
Growth Fund - A
  
Fund - A
  
Fund - A
                   
Income
                  
Dividends
  
$
2,033
  
$
1,216
  
$
3,461
Expenses
                  
Mortality and expense risk
                  
and administrative charges
    
2,232
    
231
    
1,005
Net investment income (loss)
    
(199)
    
985
    
2,456
                   
                   
Realized gains (losses) on investment
                  
Realized gain (loss) on sale of fund shares
    
12,308
    
(12,116)
    
-
Realized gain distributions
    
4,633
    
-
    
-
Realized gain (loss)
    
16,941
    
(12,116)
    
-
                   
Change in unrealized appreciation
                  
(depreciation) during the year
    
12,456
    
11,633
    
-
                   
Net increase in net assets
                  
from operations
  
$
29,198
  
$
502
  
$
2,456


See notes to financial statements.


 
 
 


KMA VARIABLE ACCOUNT
Statements of Changes In Net Assets
For the Years Ended December 31


   
Columbia Asset
  
Columbia Federal
   
Allocation Fund, VS (A)1
  
Securities Fund, VS (A)2
   
2007
  
2006
  
2007
  
2006
Increase (decrease) in net assets from operations:
                        
Net investment income (loss)
  
$
782,067
  
$
643,828
  
$
504,171
  
$
537,307
Realized gain (loss) on sale of fund shares
    
6,509,315
    
4,980,390
    
128,592
    
140,683
Change in unrealized appreciation (depreciation) during the year
    
(2,833,690)
    
388,865
    
(138,982)
    
(412,943)
Net increase in net assets from operations
    
4,457,692
    
6,013,083
    
493,781
    
265,047
                         
Contract transactions:
                        
Payments received from contract owners
    
46,305
    
77,813
    
6,652
    
36,604
Transfers between subaccounts, net
    
(604,623)
    
(245,164)
    
(103,039)
    
(348,619)
Transfers for contract terminations
    
(8,565,984)
    
(8,399,321)
    
(2,522,102)
    
(2,173,067)
Net increase (decrease) in net assets
                        
from contract transactions
    
(9,124,302)
    
(8,566,672)
    
(2,618,489)
    
(2,485,082)
                         
Increase (decrease) in amounts retained
                        
in KMA Variable Account, net
    
-
    
-
    
-
    
-
                         
Total increase (decrease) in net assets
    
(4,666,610)
    
(2,553,589)
    
(2,124,708)
    
(2,220,035)
                         
Net assets at beginning of year
    
61,511,391
    
64,064,980
    
12,449,725
    
14,669,760
                         
Net assets at end of year
  
$
56,844,781
  
$
61,511,391
  
$
10,325,017
  
$
12,449,725
                         
                         
   
Columbia International
  
Columbia LargeCap
   
Fund, VS (A)
  
Growth Stock Fund, VS (A)
   
2007
  
2006
  
2007
  
2006
Increase (decrease) in net assets from operations:
                        
Net investment income (loss)
  
$
201,161
  
$
(6,263)
  
$
(295,028)
  
$
(318,006)
Realized gain (loss) on sale of fund shares
    
3,162,518
    
1,990,613
    
2,798,197
    
1,531,355
Change in unrealized appreciation (depreciation) during the year
    
(2,408,853)
    
1,103,661
    
1,233,706
    
1,208,123
Net increase in net assets from operations
    
954,826
    
3,088,011
    
3,736,875
    
2,421,472
                         
Contract transactions:
                        
Payments received from contract owners
    
59,795
    
139,370
    
38,305
    
99,354
Transfers between subaccounts, net
    
(15,819)
    
(74,789)
    
(373,911)
    
(174,925)
Transfers for contract terminations
    
(2,429,918)
    
(2,579,059)
    
(5,650,194)
    
(4,402,263)
Net increase (decrease) in net assets
                        
from contract transactions
    
(2,385,942)
    
(2,514,478)
    
(5,985,800)
    
(4,477,834)
                         
Increase (decrease) in amounts retained
                        
in KMA Variable Account, net
    
-
    
-
    
-
    
-
                         
Total increase (decrease) in net assets
    
(1,431,116)
    
573,533
    
(2,248,925)
    
(2,056,362)
                         
Net assets at beginning of year
    
14,906,422
    
14,332,889
    
29,170,487
    
31,226,849
                         
Net assets at end of year
  
$
13,475,306
  
$
14,906,422
  
$
26,921,562
  
$
29,170,487


1 Changed name from Liberty Asset Allocation Fund, VS (A) effective 05/01/2006
  2 Changed name from Liberty Federal Securities Fund, VS (A) effective 05/01/2006


See notes to financial statements.


 
 
 


KMA VARIABLE ACCOUNT
Statements of Changes In Net Assets
For the Years Ended December 31


   
Columbia Large Cap Value
  
Columbia Money
   
Fund, VS (A)3
  
Market Fund, VS (A)4
   
2007
  
2006
  
2007
  
2006
Increase (decrease) in net assets from operations:
                        
Net investment income (loss)
  
$
(6,493)
  
$
(46,883)
  
$
782,861
  
$
797,625
Realized gain (loss) on sale of fund shares
    
4,020,589
    
2,835,215
    
-
    
-
Change in unrealized appreciation (depreciation) during the year
    
(3,358,349)
    
2,814,447
    
-
    
-
Net increase in net assets from operations
    
655,747
    
5,602,779
    
782,861
    
797,625
                         
Contract transactions:
                        
Payments received from contract owners
    
19,093
    
50,206
    
11,047
    
158,606
Transfers between subaccounts, net
    
(485,822)
    
293,395
    
2,572,056
    
1,598,729
Transfers for contract terminations
    
(6,608,977)
    
(7,971,059)
    
(5,159,502)
    
(5,527,327)
Net increase (decrease) in net assets
                        
from contract transactions
    
(7,075,706)
    
(7,627,458)
    
(2,576,399)
    
(3,769,992)
                         
Increase (decrease) in amounts retained
                        
in KMA Variable Account, net
    
-
    
-
    
-
    
-
                         
Total increase (decrease) in net assets
    
(6,419,959)
    
(2,024,679)
    
(1,793,538)
    
(2,972,367)
                         
Net assets at beginning of year
    
36,359,527
    
38,384,206
    
23,104,825
    
26,077,192
                         
Net assets at end of year
  
$
29,939,568
  
$
36,359,527
  
$
21,311,287
  
$
23,104,825
                         
                         
   
Columbia Small
  
Columbia Strategic
   
Company Growth Fund, VS (A)5
  
Income Fund, VS (A)6
   
2007
  
2006
  
2007
  
2006
Increase (decrease) in net assets from operations:
                        
Net investment income (loss)
  
$
(433,820)
  
$
(465,390)
  
$
849,753
  
$
1,269,228
Realized gain (loss) on sale of fund shares
    
(606,382)
    
(1,623,795)
    
(63,464)
    
(89,660)
Change in unrealized appreciation (depreciation) during the year
    
4,731,712
    
5,635,881
    
(198,274)
    
(412,278)
Net increase in net assets from operations
    
3,691,510
    
3,546,696
    
588,015
    
767,290
                         
Contract transactions:
                        
Payments received from contract owners
    
27,205
    
58,053
    
9,753
    
27,824
Transfers between subaccounts, net
    
(641,962)
    
(236,512)
    
(84,332)
    
(88,733)
Transfers for contract terminations
    
(4,506,444)
    
(5,436,382)
    
(2,060,663)
    
(2,486,095)
Net increase (decrease) in net assets
                        
from contract transactions
    
(5,121,201)
    
(5,614,841)
    
(2,135,242)
    
(2,547,004)
                         
Increase (decrease) in amounts retained
                        
in KMA Variable Account, net
    
-
    
-
    
-
    
-
 
Total increase (decrease) in net assets
    
(1,429,691)
    
(2,068,145)
    
(1,547,227)
    
(1,779,714)
                         
Net assets at beginning of year
    
31,978,831
    
34,046,976
    
13,680,189
    
15,459,903
                         
Net assets at end of year
  
$
30,549,140
  
$
31,978,831
  
$
12,132,962
  
$
13,680,189


     3 Changed name from Liberty Growth & Income Fund, VS (A) effective 05/01/2006
4 Changed name from Liberty Money Market Fund, VS (A) effective 05/01/2006
               5 Changed name from Liberty Small Company Growth Fund, VS (A) effective 05/01/2006
     6 Changed name from Colonial Strategic Income Fund, VS (A) effective 05/01/2006


See notes to financial statements.


 
 
 




KMA VARIABLE ACCOUNT
Statements of Changes In Net Assets
For the Years Ended December 31





   
Evergreen Diversified
    
Evergreen
   
Bond Fund - A
  
Emerging Growth Fund - A
   
2007
  
2006
  
2007
  
2006
Increase (decrease) in net assets from operations:
                        
Net investment income (loss)
  
$
780
  
$
817
  
$
(199)
  
$
(2,089)
Realized gain (loss) on sale of fund shares
    
(406)
    
-
    
16,941
    
2,750
Change in unrealized appreciation (depreciation) during the year
    
352
    
(242)
    
12,456
    
22,067
Net increase in net assets from operations
    
726
    
575
    
29,198
    
22,728
                         
Contract transactions:
                        
Payments received from contract owners
    
-
    
-
    
-
    
-
Transfers between subaccounts, net
    
(5)
    
5,478
    
(62)
    
(4)
Transfers for contract terminations
    
(8,742)
    
(5,457)
    
(78,202)
    
(8,148)
Net increase (decrease) in net assets
                        
from contract transactions
    
(8,747)
    
21
    
(78,264)
    
(8,152)
                         
Increase (decrease) in amounts retained
                        
in KMA Variable Account, net
    
-
    
-
    
-
    
-
                         
Total increase (decrease) in net assets
    
(8,021)
    
596
    
(49,066)
    
14,576
                         
Net assets at beginning of year
    
18,517
    
17,921
    
209,498
    
194,922
                         
Net assets at end of year
  
$
10,496
  
$
18,517
  
$
160,432
  
$
209,498
                         
                         
   
Evergreen High
  
Evergreen Money
   
Yield Bond Fund, VS (A)
  
Market Fund - A
   
2007
  
2006
  
2007
  
2006
Increase (decrease) in net assets from operations:
                        
Net investment income (loss)
  
$
985
  
$
1,192
  
$
2,456
  
$
2,282
Realized gain (loss) on sale of fund shares
    
(12,116)
    
(120)
    
-
    
-
Change in unrealized appreciation (depreciation) during the year
    
11,633
    
445
    
-
    
-
Net increase in net assets from operations
    
502
    
1,517
    
2,456
    
2,282
                         
Contract transactions:
                        
Payments received from contract owners
    
-
    
-
    
-
    
-
Transfers between subaccounts, net
    
48
    
(5,478)
    
-
    
-
Transfers for contract terminations
    
(20,139)
    
-
    
(17,479)
    
-
Net increase (decrease) in net assets
                        
from contract transactions
    
(20,091)
    
(5,478)
    
(17,479)
    
-
                         
Increase (decrease) in amounts retained
                        
in KMA Variable Account, net
    
-
    
-
    
-
    
-
                         
Total increase (decrease) in net assets
    
(19,589)
    
(3,961)
    
(15,023)
    
2,282
                         
Net assets at beginning of year
    
19,593
    
23,554
    
79,403
    
77,121
                         
Net assets at end of year
  
$
4
  
$
19,593
  
$
64,380
  
$
79,403


See notes to financial statements.


 
 
 

KMA VARIABLE ACCOUNT

Notes to Financial Statements

1.  Organization

KMA Variable Account (the “Variable Account”) is a separate investment account established by Sun Life Assurance Company of Canada (U.S.) (the “Sponsor”) as a funding vehicle for individual variable annuity contracts issued by the Sponsor.

The Variable Account exists in accordance with the regulations of the Delaware Department of Insurance and is registered with the Securities and Exchange Commission as a unit investment trust under the Investment Company Act of 1940 as amended. With the exception for Keystone-100 contract holders whose contract series were issued prior to May 1, 1986 pursuant to Section 457 of the Internal Revenue Code (the “Keystone-100 contract holders”), the eligible fund options for the annuity contracts are as follows:

Columbia Funds Variable Insurance Trust (the “Trust”)
 
Columbia Asset Allocation Fund, VS (A)
Columbia Federal Securities Fund, VS (A)
Columbia International Fund, VS (A)
Columbia Large Cap Growth Stock Fund, VS (A)
Columbia Large Cap Value Fund, VS (A)
Columbia Money Market Fund, VS (A)
Columbia Small Company Growth Fund, VS (A)
Columbia Strategic Income Fund, VS (A)
 
The following eligible fund options are only available for Keystone -100 contract holders:
 
Keystone Custodian Funds
 
Evergreen Diversified Bond Fund - A
Evergreen Emerging Growth Fund - A
Evergreen High Yield Bond Fund - A
Evergreen Money Market Fund – A

On May 1, 2006, the SteinRoe Variable Investment Trust (“SRVIT”) and the Liberty Variable Investment Trust (“LVIT”) were changed to Columbia Funds Variable Insurance Trust.

On May 1, 2006, the fund name of Colonial Strategic Income Fund, VS (A) was changed to Columbia Strategic Income Fund, VS (A); Liberty Asset Allocation Fund, VS (A) was changed to Columbia Asset Allocation Fund, VS (A); Liberty Federal Securities Fund, VS (A) was changed to Columbia Federal Securities Fund, VS (A); Liberty Growth & Income Fund, VS (A) was changed to Columbia Large Cap Value Fund, VS (A); Liberty Money Market Fund, VS (A) was changed to Columbia Money Market Fund, VS (A); Liberty Small Company Growth Fund, VS (A) was changed to Columbia Small Company Growth Fund, VS (A).

On February 25, 2005, the fund name of Stein Roe Growth Stock Fund, VS (A) was changed to Columbia Large Cap Growth Stock Fund, VS (A).

On February 18, 2005, Newport Tiger Fund, VS (A) was closed, and on June 10, 2005, Evergreen Blue Chip Fund-A was closed.

Under applicable insurance law, the assets and liabilities of the Variable Account are clearly identified and distinguished from the Sponsor’s other assets and liabilities. The portion of assets applicable to the variable annuity contracts is not chargeable with liabilities arising out of any other business the Sponsor may conduct.

 
 
 

KMA VARIABLE ACCOUNT

Notes to Financial Statements
 (continued)

2.  Significant Accounting Policies

General
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).  The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported therein. Actual results could differ from these estimates.

Investment Valuation
Investments made in the mutual funds are valued at their reported net assets value and are carried at fair value. Transactions are recorded on a trade date basis.  Income from dividends and gains from realized gain distributions are recorded at the ex-distribution date.  Realized gains and losses on sales of investments are computed on the basis of identified cost of the investments sold.

Variable Annuity Reserves
Annuity reserves represent actuarial present value of future contract benefits for those contract holders who are in the payout phase of their contract and chose the variable payout option. Annuity reserves are computed for contracts in the income stage according to the 1983a Individual Annuity Mortality Table.  The assumed investment rate is either 3.0%, 4.0%, 5.0% or 6.0% unless the annuitant elects otherwise, in which case the rate may vary from 3.0% to 6.0%, as regulated by the laws of the respective states. The mortality risk is fully borne by the Sponsor and may result in additional amounts being transferred into the variable annuity account by the Sponsor to cover greater longevity of annuitants than expected.

Federal Income Tax Status
The operations of the Variable Account are part of the operations of the Sponsor and are not taxed separately. The Sponsor qualifies for the federal income tax treatment granted to life insurance companies under Subchapter L of the
Internal Revenue Code. Under existing federal income tax law, investment income and capital gains earned by the Variable Account on contract owner reserves are not taxable, and therefore, no provision has been made for federal income taxes. The Sponsor will review periodically the status of this policy in the event of changes in the tax law.
A provision may be made in future years for any federal income taxes that would be attributable to the contract.

If a policyholder’s financial transaction is not executed on the appropriate investment date, a correcting buy or sell of shares is required by the Sponsor to make the policyholder whole.  The resulting risk of a gain or loss from this correction does not have any effect on the policyholder’s account and is fully assumed by the Sponsor.

3.  Contract Charges

There are no deductions made from purchase payments for contingent deferred sales charges at the time of purchase. In the event of a contract termination, a contingent deferred sales charge, based on a graded table of charges, is deducted. An annual contract maintenance charge of $36 to cover the cost of contract administration is deducted from each contract holder’s account on the contract anniversary date. Daily deductions made from each Sub-Account for assumption of mortality and expense risk at an effective annual rate of contract value are as follows:

KEYFLEX contracts:                          1.25%
FLEX 2 contracts:                               1.35%
K-100 contracts:                                  1.00%
Preferred Advisor Variable Annuity:   1.25%

For Preferred Advisor Variable Annuity, a daily sales charge is also deducted at an effective annual rate of 0.15% of contract value.


 
 
 

KMA VARIABLE ACCOUNT

Notes to Financial Statements
 (continued)

3. Contract Charges (continued)

Contracts sold to persons who are officers, directors, or employees of the Sponsor, trustees or officers of the Trust, employees of the investment advisor or sub-investment advisor of the Trust are not subject to a contract maintenance charge, sales charge or the contingent deferred sales charges and have a mortality and expense risk charge of 0.35% per year.

4.  Related Party Transactions

The Sponsor provides administrative services necessary for the operation of the Variable Account.  The Sponsor absorbs all organizational expenses including the fees of registering the Variable Account and its contracts for distribution under federal and state securities laws.  Clarendon Insurance Agency, Inc. (“Clarendon”), a wholly owned subsidiary of the Sponsor, is the principal underwriter of the variable insurance products issued by the Sponsor. The compensation of Columbia Management Advisor, Inc., the investment advisor of the Variable Account, is based on the fair value of the mutual funds.



 
 
 

KMA VARIABLE ACCOUNT
Notes to Financial Statements
(continued)
5. Financial Highlights

A summary of the units outstanding, unit fair values, net assets, the investment income ratios, the expense ratios (excluding expenses of the underlying funds) and the total return for the year ending December 31 is as follows:

   
At December 31
  
For the year ended December 31
                           
Investment
                
         
Unit Fair Value
  
Net
  
Income
  
Expense Ratio2
  
Total Return3
   
Units5
  
lowest to highest
  
Assets4
  
Ratio1
  
lowest to highest
  
lowest to highest
                                             
Columbia Asset Allocation Fund, VS (A) (Formerly Liberty Asset Allocation Fund, VS (A))
2007
    
1,401,078
  
$
27.544 to
  
$
63.057
  
$
56,844,781
  
2.74%
  
0.35% to
  
1.39%
  
7.66% to
  
8.79%
2006
    
1,638,352
    
25.318 to
    
58.340
    
61,511,391
  
2.46%
  
0.35% to
  
1.39%
  
10.25% to
  
11.40%
2005
    
1,895,431
    
22.728 to
    
52.710
    
64,064,980
  
2.62%
  
0.35% to
  
1.39%
  
5.06% to
  
6.16%
2004
    
2,228,972
    
21.410 to
    
49.970
    
71,298,886
  
2.44%
  
0.35% to
  
1.39%
  
8.47% to
  
9.60%
2003
    
2,645,837
    
19.534 to
    
45.891
    
77,585,081
  
3.24%
  
0.35% to
  
1.39%
  
18.80% to
  
20.04%
                                             
Columbia Federal Securities Fund, VS (A) (Formerly Liberty Federal Securities Fund, VS (A))
2007
    
386,838
    
21.128 to
    
29.827
    
10,325,017
  
5.84%
  
0.35% to
  
1.39%
  
4.71% to
  
5.81%
2006
    
484,643
    
19.967 to
    
28.441
    
12,449,725
  
5.44%
  
0.35% to
  
1.39%
  
2.29% to
  
3.36%
2005
    
585,341
    
19.319 to
    
27.764
    
14,669,760
  
5.75%
  
0.35% to
  
1.39%
  
1.17% to
  
2.22%
2004
    
708,038
    
18.900 to
    
27.400
    
17,515,940
  
5.18%
  
0.35% to
  
1.39%
  
2.71% to
  
3.78%
2003
    
829,627
    
18.210 to
    
26.640
    
19,950,900
  
4.39%
  
0.35% to
  
1.39%
  
1.22% to
  
2.28%
                                             
Columbia International Fund, VS (A) (Formerly Colonial International Fund for Growth Fund, VS (A))
2007
    
798,273
    
      -     to
    
19.849
    
13,475,306
  
2.82%
  
0.35% to
  
1.39%
  
0.00% to
  
7.41%
2006
    
939,299
    
15.792 to
    
18.480
    
14,906,422
  
1.41%
  
0.35% to
  
1.39%
  
23.44% to
  
24.73%
2005
    
1,116,043
    
12.793 to
    
14.816
    
14,332,889
  
0.00%
  
0.35% to
  
1.39%
  
11.60% to
  
12.76%
2004
    
1,360,312
    
11.463 to
    
13.140
    
15,646,491
  
1.14%
  
0.35% to
  
1.39%
  
0.00% to
  
13.33%
2003
    
1,630,207
    
10.221 to
    
11.593
    
16,712,847
  
1.37%
  
0.35% to
  
1.39%
  
33.67% to
  
35.07%
                                             
Columbia Large Cap Growth Fund, VS (A) (Formerly SteinRoe Growth Stock Fund, VS (A))
2007
    
621,093
    
28.686 to
    
106.374
    
26,921,562
  
0.38%
  
0.35% to
  
1.39%
  
14.16% to
  
15.36%
2006
    
772,652
    
24.866 to
    
92.808
    
29,170,487
  
0.36%
  
0.35% to
  
1.39%
  
8.72% to
  
9.85%
2005
    
904,367
    
22.636 to
    
85.033
    
31,226,849
  
0.63%
  
0.35% to
  
1.39%
  
3.30% to
  
4.38%
2004
    
1,111,921
    
21.690 to
    
81.990
    
37,022,550
  
0.17%
  
0.35% to
  
1.39%
  
-3.31% to
  
-2.29%
2003
    
1,355,835
    
22.196 to
    
84.463
    
46,824,951
  
0.42%
  
0.35% to
  
1.39%
  
23.51% to
  
24.80%
                                             
Columbia Large Cap Value Fund, VS (A) (Fromerly Liberty Growth & Income Fund, VS (A))
2007
    
872,118
    
10.251 to
    
39.762
    
29,939,568
  
1.43%
  
0.35% to
  
1.39%
  
0.00% to
  
2.37%
2006
    
1,073,251
    
31.077 to
    
38.839
    
36,359,527
  
1.32%
  
0.35% to
  
1.39%
  
16.53% to
  
17.74%
2005
    
1,320,429
    
26.655 to
    
32.986
    
38,384,206
  
0.00%
  
0.35% to
  
1.39%
  
4.92% to
  
6.01%
2004
    
1,638,982
    
25.392 to
    
31.120
    
45,408,792
  
1.69%
  
0.35% to
  
1.39%
  
0.00% to
  
13.36%
2003
    
2,006,743
    
22.622 to
    
27.448
    
49,559,208
  
1.58%
  
0.35% to
  
1.39%
  
18.14% to
  
19.37%
                                             
Columbia Money Market Fund, VS (A) (Formerly Liberty Money Market Fund, VS (A))
2007
    
1,043,084
    
16.351 to
    
31.104
    
21,311,287
  
4.90%
  
0.35% to
  
1.39%
  
3.56% to
  
4.65%
2006
    
1,184,029
    
15.625 to
    
29.916
    
23,104,825
  
4.60%
  
0.35% to
  
1.39%
  
3.28% to
  
4.36%
2005
    
1,397,995
    
14.973 to
    
28.853
    
26,077,192
  
2.76%
  
0.35% to
  
1.39%
  
1.40% to
  
2.45%
2004
    
1,477,998
    
14.610 to
    
28.340
    
27,158,169
  
0.86%
  
0.35% to
  
1.39%
  
-0.52% to
  
0.52%
2003
    
1,676,819
    
14.538 to
    
28.380
    
31,138,106
  
0.69%
  
0.35% to
  
1.39%
  
-0.70% to
  
0.34%
                                             
Columbia Small Company Growth Fund, VS (A) (Formerly Liberty Small Company Growth Fund, VS (A))
2007
    
553,908
    
30.288 to
    
126.546
    
30,549,140
  
0.00%
  
0.35% to
  
1.39%
  
11.88% to
  
13.06%
2006
    
658,619
    
26.789 to
    
112.658
    
31,978,831
  
0.00%
  
0.35% to
  
1.39%
  
10.85% to
  
12.01%
2005
    
785,915
    
23.917 to
    
101.230
    
34,046,976
  
0.00%
  
0.35% to
  
1.39%
  
1.30% to
  
2.35%
2004
    
967,004
    
23.370 to
    
99.540
    
40,847,840
  
0.00%
  
0.35% to
  
1.39%
  
9.94% to
  
11.09%
2003
    
1,131,397
    
21.035 to
    
90.188
    
43,081,365
  
0.00%
  
0.35% to
  
1.39%
  
42.13% to
  
43.62%
                                             
Columbia Strategic Income Fund, VS (A) (Formerly Colonial Strategic Income Fund, VS (A))
2007
    
556,480
    
19.370 to
    
24.783
    
12,132,962
  
7.90%
  
0.35% to
  
1.39%
  
4.60% to
  
5.69%
2006
    
657,436
    
18.491 to
    
  23.447
    
 13,680,189
  
10.20%
  
0.35% to
  
1.39%
  
5.59% to
  
6.69%
2005
    
785,510
    
17.486 to
    
21.977
    
15,459,903
  
0.00%
  
0.35% to
  
1.39%
  
0.21% to
  
1.25%
2004
    
942,320
    
17.420 to
    
21.700
    
18,487,913
  
7.72%
  
0.35% to
  
1.39%
  
8.64% to
  
9.78%
2003
    
1,078,834
    
16.015 to
    
19.772
    
19,464,517
  
7.11%
  
0.35% to
  
1.39%
  
16.77% to
  
17.99%



 
 
 


KMA VARIABLE ACCOUNT
Notes to Financial Statements
(continued)
5. Financial Highlights (continued)

   
At December 31
  
For the year ended December 31
                           
Investment
                
         
Unit Fair Value
  
Net
  
Income
  
Expense Ratio2
  
Total Return3
   
Units5
  
lowest to highest
  
Assets4
  
Ratio1
  
lowest to highest
  
lowest to highest
                                             
Evergreen Diversified Bond Fund - A
2007
    
176
  
$
36.140 to
  
$
59.517
  
$
10,496
  
5.40%
  
1.00% to
  
1.00%
  
-2.59% to
  
3.98%
2006
    
324
    
36.813 to
    
57.242
    
18,517
  
5.77%
  
1.00% to
  
1.00%
  
-2.59% to
  
3.45%
2005
    
324
    
37.790 to
    
55.332
    
17,921
  
5.36%
  
1.00% to
  
1.00%
  
-4.05% to
  
1.20%
2004
    
324
    
39.380 to
    
54.680
    
17,730
  
4.85%
  
1.00% to
  
1.00%
  
-1.73% to
  
3.39%
2003
    
325
    
39.727 to
    
52.884
    
17,170
  
5.18%
  
1.00% to
  
1.00%
  
0.53% to
  
5.76%
                                             
Evergreen Emerging Growth Fund – A (Formerly Evergreen Small Company Growth Fund - A)
2007
    
1,889
    
64.728 to
    
85.258
    
160,432
  
0.95%
  
1.00% to
  
1.00%
  
0.00% to
  
13.34%
2006
    
2,915
    
66.182 to
    
75.223
    
209,498
  
0.00%
  
1.00% to
  
1.00%
  
12.03% to
  
12.03%
2005
    
3,048
    
59.077 to
    
67.149
    
194,922
  
0.00%
  
1.00% to
  
1.00%
  
0.71% to
  
0.71%
2004
    
3,057
    
58.660 to
    
66.670
    
194,041
  
0.00%
  
1.00% to
  
1.00%
  
0.00% to
  
9.00%
2003
    
3,379
    
53.817 to
    
61.170
    
196,034
  
0.00%
  
1.00% to
  
1.00%
  
48.23% to
  
48.23%
                                             
Evergreen High Yield Bond Fund - A
2007
    
1
    
31.778 to
    
55.005
    
4
  
7.07%
  
1.00% to
  
1.00%
  
0.00% to
  
1.68%
2006
    
362
    
31.778 to
    
54.095
    
19,593
  
7.18%
  
1.00% to
  
1.00%
  
7.99% to
  
7.99%
2005
    
470
    
50.092 to
    
50.092
    
23,554
  
7.04%
  
1.00% to
  
1.00%
  
-0.12% to
  
-0.12%
2004
    
464
    
50.151 to
    
50.151
    
23,295
  
7.45%
  
1.00% to
  
1.00%
  
0.00% to
  
7.59%
2003
    
451
    
46.612 to
    
46.612
    
21,036
  
8.10%
  
1.00% to
  
1.00%
  
19.41% to
  
19.41%
                                             
Evergreen Money Market Fund - A
2007
    
2,456
    
19.329 to
    
26.213
    
64,380
  
4.45%
  
1.00% to
  
1.00%
  
-1.00% to
  
3.50%
2006
    
3,135
    
21.914 to
    
25.326
    
79,403
  
4.20%
  
1.00% to
  
1.00%
  
-0.99% to
  
3.26%
2005
    
3,145
    
22.133 to
    
24.527
    
77,121
  
2.59%
  
1.00% to
  
1.00%
  
-0.99% to
  
1.38%
2004
    
1,362
    
22.354 to
    
24.194
    
32,964
  
0.55%
  
1.00% to
  
1.00%
  
-0.99% to
  
0.00%
2003
    
1,667
    
19.329 to
    
24.297
    
40,503
  
0.38%
  
1.00% to
  
1.00%
  
-0.84% to
  
-0.64%

1  These amounts represent the dividends and other income received by the Sub-Account from the underlying mutual funds, net of management fees assessed by the portfolio manager, divided by the average net assets. These ratios exclude those expenses, such as mortality and expense charges, that result in direct reductions in the unit values. The recognition of investment income by the Sub-Account is affected by the timing of the declaration of dividends by the underlying funds in which the Sub-Account invest. These ratios represent the annualized investment income ratios.
 
2   These ratio ranges represent the annualized contract expenses of the Sub-Account, consisting primarily of mortality and expense charges, for each period indicated. The ratio ranges include only those expenses that result in a direct reduction to unit values. Charges made directly to contract owner accounts through the redemption of units and expenses of the underlying fund are excluded.
 
3  These return ranges represent the total returns for the periods indicated in the Statements of Operations and the Statements of Changes in Net Assets, including changes in the value of the underlying fund and expenses assessed through the reduction of unit values. The total return ratio does not include any expenses assessed through the redemption of units; inclusion of these expenses in the calculation would result in a reduction in the total return presented. Investment options with a date notation indicate in the Statements of Operations and the Statements of Changes in Net Assets the effective date of that investment option in the Variable Account. The total return ratio is calculated for the period indicated or from the effective date as noted in the Statements of Operations and the Statements of Changes in Net Assets through the end of the reporting period.
 
4  These net assets do not include seed money retained by the Company. The seed money was invested by the Company in certain Sub-Accounts that required funds to commence operations.
 
 
5
These units represent both the deferred and the payout units of the underlined Sub-Account.




 
 
 

KMA VARIABLE ACCOUNT
Notes to Financial Statements
(continued)
6. Investment Purchases and Sales

The following table shows the aggregate cost of shares purchased and proceeds from the sales of shares of the funds for each Sub-Account for the year ended December 31, 2007:

 
Purchases
  
Sales
           
Columbia Asset Allocation Fund, VS (A)
$
7,265,903
  
$
10,157,953
           
Columbia Federal Securities Fund, VS (A)
  
710,434
    
2,824,753
           
Columbia International Fund, VS (A)
  
3,181,286
    
2,847,716
           
Columbia Large Cap Growth Stock Fund, VS (A)
  
419,387
    
6,700,216
           
Columbia Large Cap Value Fund, VS (A)
  
2,969,850
    
7,731,025
           
Columbia Money Market Fund, VS (A)
  
3,567,936
    
5,361,474
           
Columbia Small Company Growth Fund, VS (A)
  
70,413
    
5,625,434
           
Columbia Strategic Income Fund, VS (A)
  
1,109,700
    
2,395,188
           
Evergreen Diversified Bond Fund - A
  
983
    
8,949
           
Evergreen Emerging Growth Fund - A
  
6,666
    
80,495
           
Evergreen High Yield Bond Fund - A
  
1,216
    
20,321
           
Evergreen Money Market Fund - A
  
3,462
    
18,485


 
 
 


KMA VARIABLE ACCOUNT
Notes to Financial Statements
(continued)
7. Changes in Units Outstanding

The changes in units outstanding of each Sub-Account for the year ended December 31, 2007 were as follow:

 
Units Issued
  
Units Redeemed
  
Net Decrease
Columbia Asset Allocation Fund, VS (A)
4,789
  
242,063
  
(237,274)
           
Columbia Federal Securities Fund, VS (A)
1,574
  
99,379
  
(97,805)
           
Columbia International Fund, VS (A)
14,902
  
155,928
  
(141,026)
           
Columbia Large Cap Growth Stock Fund, VS (A)
4,338
  
155,897
  
(151,559)
           
Columbia Large Cap Value Fund, VS (A)
4,814
  
205,948
  
(201,134)
           
Columbia Money Market Fund, VS (A)
137,546
  
278,491
  
(140,945)
           
Columbia Small Company Growth Fund, VS (A)
799
  
105,510
  
(104,711)
           
Columbia Strategic Income Fund, VS (A)
4,268
  
105,224
  
(100,956)
           
Evergreen Diversified Bond Fund - A
-
  
147
  
(147)
           
Evergreen Emerging Growth Fund - A
    
1,026
  
(1,026)
           
Evergreen High Yield Bond Fund - A
-
  
362
  
(362)
           
Evergreen Money Market Fund - A
-
  
679
  
(679)


 
 
 

KMA VARIABLE ACCOUNT

Notes to Financial Statements
 (continued)

8.  Tax Diversification Requirements

Under the provisions of Section 817(h) of the Internal Revenue Code (the “Code”), a variable contract, other than a contract issued in connection with certain types of employee benefit plans, is not treated as an annuity contract for federal tax purposes for any period for which the investments of the segregated asset account on which the contract is based are not adequately diversified.  The Code provides that the “adequately diversified” requirement may be met if the underlying investments satisfy either a statutory safe harbor test or diversification requirements set forth in regulations issued by the Secretary of Treasury.

The Internal Revenue Service has issued regulations under Section 817(h) of the Code which allows the contract owner to avoid current taxation of both current and built-up earnings of the contract. The Sponsor believes that the Variable Account satisfies the current requirements of the regulations, and it intends that the Variable Account will continue to meet such requirements.

9.  New and Adopted Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes –an interpretation of FASB Statement No. 109” (“FIN48”).  FIN 48 clarifies the accounting for uncertainty in income taxes recognized in accordance with FASB Statement No. 109, Accounting for Income Taxes”.  This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  It also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.  FIN 48 is effective during the first required financial reporting period for fiscal years beginning after December 15, 2006.  The Sub-Accounts adopted FIN 48 on January 1, 2007.  The Sub-Accounts are not responsible for the payment or recording of income taxes and therefore the adoption of FIN 48 did not have an impact on the financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements, but does not change existing guidance as to whether or not an instrument is carried at fair value.

SFAS No. 157 clarifies that fair value is an exit price, representing the amount that would be exchanged to sell an asset or transfer a liability in an orderly transaction between market participants.  The statement establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels (“Level 1, 2 and 3”).  Level 1 inputs are observable inputs that reflect quoted prices for identical assets or liabilities in active markets that the Sponsor has the ability to access at the measurement date.  Level 2 inputs are observable inputs, other than quoted prices included in Level 1, for the asset or liability or prices for similar assets and liabilities.  Level 3 inputs are unobservable inputs reflecting the reporting entity’s estimates of the assumptions that market participants would use in pricing the asset or liability.  SFAS No. 157 requires that a fair value measurement technique include an adjustment for risks inherent in a particular valuation technique (such as a pricing model) and/or the risks inherent in the inputs to the model, if market participants would also include such an adjustment.  Quantitative and qualitative disclosures will focus on the inputs used to measure fair value for both recurring and non-recurring fair value measurements and the effects of the measurements in the financial statements.

The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007, and are to be applied prospectively, except for changes in fair value measurements that result from the initial application of SFAS No. 157, which are to be recorded as an adjustment to opening retained earnings in the year of adoption.  Sponsor of the Sub-Accounts will adopt SFAS No. 157 effective January 1, 2008 and will apply the provisions of the statement prospectively to assets and liabilities measured and disclosed at fair value.  The adoption of SFAS No. 157 is not expected to have a material impact on the Sub-Account's financial position or results of operations.



 
 
 

Report of Independent Registered Public Accounting Firm

 
To the Participants of KMA Variable Account and the Board of Directors of Sun Life Assurance Company of Canada (U.S.) (the “Sponsor”):
 
We have audited the accompanying statements of condition of Columbia Asset Allocation Fund, VS (A) Sub-Account, Columbia Federal Securities Fund, VS (A) Sub-Account, Columbia International Fund, VS (A) Sub-Account, Columbia Large Cap Growth Stock Fund, VS (A) Sub-Account, Columbia Large Cap Value Fund, VS (A) Sub-Account, Columbia Money Market Fund, VS (A) Sub-Account, Columbia Small Company Growth Fund, VS (A) Sub-Account, Columbia Strategic Income Fund, VS (A) Sub-Account, Evergreen Diversified Bond Fund – A Sub-Account, Evergreen Emerging Growth Fund – A Sub-Account, Evergreen High Yield Bond Fund – A Sub-Account, and Evergreen Money Market Fund – A Sub-Account of KMA Variable Account (collectively the “Sub-Accounts”), as of December 31, 2007, and the related statements of operations for the year then ended and the statements of changes in net assets for each of the two years in the period then ended.  These financial statements are the responsibility of the Sponsor’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Sub-Accounts are not required to have, nor were we engaged to perform, an audit of their internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Sub-Accounts’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of December 31, 2007, by correspondence with the custodian. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of each of the Sub-Accounts as of December 31, 2007, the results of their operations for the year then ended and the changes in their net assets for each of the two years in the period then ended in conformity with accounting principles generally accepted in the United States of America.


/s/ Deloitte & Touche LLP

Boston, Massachusetts
April 18, 2008



 
 
 




PART C



 
 
 

Item 24. Financial Statements and Exhibits

 
(a)
Financial Statements:
   
Included in Part B:
   
KMA Variable Account:
   
Statement of Assets and Liabilities - December 31, 2007
   
Statement of Operations for the years ended December 31, 2007
   
Statement of Changes in Net Assets for the years ended December 31, 2007 and 2006
   
Notes to Financial Statements
   
Report of Independent Registered Public Accounting Firm
   
Sun Life Assurance Company of Canada (U.S.):
     
Consolidated Statement of Income, Years Ended December 31, 2007, 2006 and 2005;
     
Consolidated Balance Sheets, December 31, 2007 and 2006;
     
Consolidated Statements of Comprehensive Income, Years Ended December 31, 2007, 2006 and 2005;
     
Consolidated Statements of Stockholder's Equity, Years Ended December 31, 2007, 2006 and 2005;
     
Consolidated Statements of Cash Flows, Years Ended December 31, 2007, 2006 and 2005;
     
Notes to Consolidated Financial Statement; and
     
Report of Independent Registered Public Accounting Firm.
     
 
(b)
Exhibits:

 
(1)
Amended and Restated Resolution of the Board of Directors establishing KMA Variable Account. (Incorporated by reference to the Registration Statement on Form N-4 (File No. 333-111639) filed on or about December 31, 2003.)
     
 
(2)
Not applicable.
     
 
(3)(a)
Marketing Services Agreement by and between Sun Life Assurance Company of Canada (U.S.), Sun Life of Canada (U.S.) Distributors, Inc. and Clarendon Insurance Agency, Inc. (Incorporated by reference to Pre-Effective Amendment No. 1 to the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4 (File No. 333-37907) filed on or about January 16, 1998.)
     
 
(3)(b)
Specimen Sales Operations and General Agent Agreement. (Incorporated by reference to Pre-Effective Amendment No. 1 to the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4 (File No. 333-37907) filed on or about January 16, 1998.)
     
 
(4)(a)
Contract FLEX(4). (Incorporated by reference to Post-Effective Amendment No. 23 to the Registration Statement on Form N-4 (File No. 002-66388) filed on or about April 26, 1989.)
     
 
(4)(b)
Endorsement END.A(52) for FLEX(4). (Incorporated by reference to Post-Effective Amendment No. 25 to the Registration Statement on Form N-4 (File No. 002-66388) filed on or about March 1, 1991.)
     
 
(4)(c)
Contract FLEX(4)V with Endorsement END.A(52). (Incorporated by reference to Post-Effective Amendment No. 25 to the Registration Statement on Form N-4 (File No. 002-66388) filed on or about March 1, 1991.)
     
 
(4)(d)
Contract FLEX(4)/WA. (Incorporated by reference to Post-Effective Amendment No. 27 to the Registration Statement on Form N-4 (File No. 002-66388) filed on or about April 27, 1992.)
     
 
(4)(e)
Endorsement END.A(90) for Contracts issued July 1, 1993 to July 4, 1994 and Endorsement END.A(89), a replacement for END.A(52), for Contracts issued on or after July 5, 1994. (Incorporated by reference to Post-Effective Amendment No. 32 to the Registration Statement on Form N-4 (File No. 002-66388) filed on or about June 3, 1994.)
     
 
(4)(f)
Name Change Endorsement. (Incorporated by reference to the Registration Statement of Keyport Variable Account A on Form N-4 (File No. 333-114126) filed on or about April 1, 2004.)
     
 
(5)
Application Form FLEX-APP(REV)3 (Incorporated by reference to Post-Effective Amendment No. 31 to the Registration Statement on Form N-4 (File No. 002-66388) filed on or about April 26, 1994.)
     
 
(6)(a)
Articles of Incorporation of Sun Life Assurance Company of Canada (U.S.). (Incorporated by reference to the Depositor's Annual Report on Form 10-K (File No. 333-82824) filed on or about March 29, 2004.)
     
 
(6)(b)
By-Laws, amended March 19, 2004, of Sun Life Assurance Company of Canada (U.S.). (Incorporated by reference to the Depositor's Annual Report on Form 10-K (File No. 333-82824) filed on or about March 29, 2004.)
     
 
(7)
Not applicable.
     
 
(8)(a)
Participation Agreement Among Liberty Variable Investment Trust, Liberty Funds Distributor, Inc., and Sun Life Assurance Company of Canada (U.S.). (Incorporated by reference to the Registration Statement of Keyport Variable Account A on Form N-4 (File No. 333-114126) filed on or about April 1, 2004.)
     
 
(8)(a)(i)
Amendment to Participation Agreement. (Incorporated by reference to the Registration Statement of Keyport Variable Account A on Form N-4 (File No. 333-114126) filed on or about April 1, 2004.)
     
 
(8)(b)
Participation Agreement Among SteinRoe Variable Investment Trust, Liberty Funds Distributor, Inc., and Sun Life Assurance Company of Canada (U.S.). (Incorporated by reference to the Registration Statement of Keyport Variable Account A on Form N-4 (File No. 333-114126) filed on or about April 1, 2004.)
     
 
(8)(b)(i)
Amendment to Participation Agreement. (Incorporated by reference to the Registration Statement of Keyport Variable Account A on Form N-4 (File No. 333-114126) filed on or about April 1, 2004.)
     
 
(9)
Opinion and Consent of Counsel. (Incorporated by reference to the Registration Statement on Form N-4 (File No. 333-111639) filed on or about December 31, 2003.)
     
 
(10)(a)
Consent of Independent Registered Public Accounting Firm. (Filed herewith)
     
 
(10)(b)
Representation of Counsel pursuant to Rule 485(b). (Filed herewith)
     
 
(11)
Not applicable.
     
 
(12)
Not applicable.
     
 
(13)(a)
Powers of Attorney. (Filed herewith)
     
 
(13)(b)
Resolution of the Board of Directors of the depositor dated July 24, 2003, authorizing the use of powers of attorney for Officer signatures. (Incorporated by reference to the Registration Statement of Keyport Variable Account A on Form N-4 (File No. 333-112506) filed on or about February 5, 2004.)
     
 
(14)
Chart of Affiliations. (Incorporated by reference to Post-Effective Amendment No. 25 the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4 (File No. 333-83516) filed on or about February 12, 2008.)

Item 25. Directors and Officers of the Depositor.

Name and Principal
Business Address*
Positions and Offices
With Depositor

Thomas A. Bogart
Sun Life Assurance Company of Canada
150 King Street West, SC 114D10
Toronto, Ontario Canada  M5H 1J9
Director and Chairman
Scott M. Davis
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park, SC 3358
Wellesley Hills, MA  02481
Senior Vice President and General Counsel and
Director
Mary M. Fay
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park, SC 4250
Wellesley Hills, MA  02481
Senior Vice President and General Manager,
Annuities and Director
Ronald H. Friesen
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park, SC 3380
Wellesley Hills, MA  02481
Senior Vice President and Chief Financial Officer
and Treasurer and Director
Richard P. McKenney
Sun Life Assurance Company of Canada
150 King Street West, SC 105D10
Toronto, Ontario Canada  M5H 1J9
Director
Robert C. Salipante
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park, SC 3376
Wellesley Hills, MA 02481
President and Director
James M.A. Anderson
Sun Life Assurance Company of Canada
150 King Street West, SC 104A25
Toronto, Ontario Canada M5H 1J9
Executive Vice President and Chief Investment
Officer
Michael S. Bloom
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park, SC 1335
Wellesley Hills, MA 02481
Assistant Vice President and Senior Counsel and
Secretary
Keith Gubbay
Sun Life Assurance Company of Canada  (U.S.)
One Sun Life Executive Park, SC 3370
Wellesley Hills, MA  02481
Senior Vice President and Chief Actuary
Michael K. Moran
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park, SC 3305
Wellesley Hills, MA 02481
Vice President and Chief Accounting Officer
Michael E. Shunney
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park, SC 3364
Wellesley Hills, MA 02481
Senior Vice President and General Manager,
Sun Life Financial Distribution Group
John R. Wright
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park , SC 2163
Wellesley Hills, MA 02481
Executive Vice President, Sun Life Financial U.S.
Operations

Item 26. Persons Controlled by or Under Common Control with the Depositor or Registrant.

     No person is directly or indirectly controlled by the Registrant. The Registrant is a separate account of Sun Life Assurance Company of Canada (U.S.), which is ultimately controlled by Sun Life Financial.

     The chart for the affiliations of the Depositor is incorporated by reference to Post-Effective Amendment No. 25 to the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4 (File No. 333-83516) filed on or about February 12, 2008.

     None of the companies listed in such Exhibit 14 is a subsidiary of the Registrant; therefore, the only financial statements being filed are those of Sun Life Assurance Company of Canada (U.S.).

Item 27. Number of Contract Owners.

     At March 31, 2008, there were 2,196 Qualified Contract Owners and 2,400 Non-Qualified Contract Owners.

Item 28. Indemnification.

     Pursuant to Section 145 of the Delaware Corporation Law, Article 8 of the By-laws of Sun Life Assurance Company of Canada (U.S.) ("Sun Life (U.S.)"), as amended effective as of January 1, 2000 (a copy of which was filed as Exhibit 6(b) to Pre-Effective Amendment No. 1 to Registrant's Registration Statement on Form N-4, File No. 333-30844) provides for the indemnification of directors, officers and employees of Sun Life (U.S.). Insofar as indemnification for liability arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of Sun Life (U.S.) pursuant to the certificate of incorporation, by-laws, or otherwise, Sun Life (U.S.) has bee advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Sun Life (U.S.) of expenses incurred or paid by a director, officer, or controlling person of Sun Life (U.S.) in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, Sun Life (U.S.) will submit to a court of appropriate jurisdiction the question whether such indemnification by them is against public policy as expressed in the Act, unless in the opinion of their counsel the matter has bee settled by controlling precedent, and will be governed by the final adjudication of such issue.

Item 29. Principal Underwriters.

     Clarendon Insurance Agency, Inc., which is a wholly-owned subsidiary of Sun Life Assurance Company of Canada (U.S.), acts as general distributor for the Registrant, Sun Life of Canada (U.S.) Variable Accounts C, D, E, F, G, I, and K, KMA Variable Account, Keyport Variable Account I, KBL Variable Account A, KBL Variable Annuity Account, Sun Life (N.Y.) Variable Accounts A, B, C, D, J and N, and Money Market Variable Account, High Yield Variable Account, Capital Appreciation Variable Account, Government Securities Variable Account, World Governments Variable Account, and Total Return Variable Account.

The directors and officers of Clarendon Insurance Agency, Inc. are:

Name and Principal
Position and Offices
Business Address*
with Underwriter
   
James J. Cahill
President
Michele G. Van Leer
Director
Scott M. Davis
Director
Mary M. Fay
Director
Michael S. Bloom
Secretary
Ann B. Teixeira
Assistant Vice President, Compliance
Kathleen T. Baron
Chief Compliance Officer
Michael L. Gentile
Vice President
William T. Evers
Assistant Vice President and Senior Counsel
Jane F. Jette
Financial/Operations Principal and Treasurer
Alyssa Gair
Assistant Secretary
Michelle D'Albero
Counsel

* The principal business address of all directors and officers of the principal underwriter is One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481.

Item 30. Location of Accounts and Records.

     Sun Life Assurance Company of Canada (U.S.), 112 Worcester Street, Wellesley Hills, Massachusetts  02481.

Item 31. Management Services.

     Not applicable.

Item 32. Undertakings.

The Registrant hereby undertakes:

(a)
To file a post-effective amendment to this Registration Statement as frequently as is necessary to ensure that the audited financial statements in the Registration Statement are never more than 16 months old for so long as payments under the variable annuity Contracts may be accepted;
   
(b)
To include either (1) as part of any application to purchase a Contract offered by the prospectus, a space that an Applicant can check to request a Statement of Additional Information, or (2) a post card or similar written communication affixed to or included in the prospectus that the Applicant can remove to send for a Statement of Additional Information;
   
(c)
To deliver any Statement of Additional Information and any financial statements required to be made available under SEC Form N-4 promptly upon written or oral request.
   
(d)
Representation with respect to Section 26(f)(2)(A) of the Investment Company Act of 1940: Sun Life Assurance Company of Canada (U.S.) represents that the fees and charges deducted under the Contracts, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred, and the risks assumed by the insurance company.
   
 
The Registrant is relying on the no-action letter issued by the Division of Investment Management of the Securities and Exchange Commission to American Council of Life Insurance, Ref. No. IP-6-88, dated November 28, 1988, the requirements for which have been complied with by the Registrant.


 
 
 

SIGNATURES

As required by the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Registration Statement to be signed on its behalf, in the Town of Wellesley Hills and State of Massachusetts, on this 25th day of April, 2008.

     
KMA Variable Account
     
(Registrant)
       
       
   
BY:
Sun Life Assurance Company of Canada (U.S.)
     
(Depositor)
       
       
   
BY:
/s/ Robert C. Salipante*
     
Robert C. Salipante
     
President

*By:
/s/Sandra M. DaDalt
  
 
Sandra M. DaDalt
  
 
Assistant Vice President
 
and Senior Counsel

     As required by the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.

SIGNATURE
TITLE
DATE
     
     
/s/ Robert C. Salipante*
President and Director
April 25, 2008
Robert C. Salipante
(Principal Executive Officer)
  
     
     
/s/ Ronald H. Friesen*
Senior Vice President and Chief Financial Officer
April 25, 2008
Ronald H. Friesen
and Treasurer and Director
  
 
(Principal Financial Officer)
  
     
     
/s/ Michael K. Moran*
Vice President, Chief Accounting Officer
April 25, 2008
Michael K. Moran
 (Principal Accounting Officer)
  
     
     
*By: /s/ Sandra M. DaDalt
Attorney-in-Fact for:
April 25, 2008
Sandra M. DaDalt
Thomas A. Bogart, Director
  
 
Scott M. Davis, Director
  
 
Mary M. Fay, Director
  
 
Richard P. McKenney, Director
  
     

* Sandra M. DaDalt has signed this document on the indicated date on behalf of the above Directors and Officers for the Depositor pursuant to powers or attorney duly executed by such persons and a resolution of the Board of Directors authorizing use of powers of attorney for Officer signatures. Resolution of the Board of Directors is incorporated herein by reference to the Registration Statement of Keyport Variable Account A on Form N-4, File No. 333-112506, filed on or about February 5, 2004. Powers of attorney are included herein as Exhibit 13(a).


 
 
 



EXHIBIT INDEX


Item
  
   
(10)(a)
Consent of Independent Registered Public Accounting Firm
   
(10(b)
Representation of Counsel pursuant to Rule 485(b)
   
(13)(a)
Powers of Attorney