485BPOS 1 compassg.htm compassg.htm

 
 
 

As filed with the Securities and Exchange Commission on April 29, 2009

Registration No. 002-99958
811-03745

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM N-4

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

Post-Effective Amendment No. 28

and

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

Amendment No. 8

SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
(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)

Depositor's Telephone Number: (781) 237-6030

Sandra M. DaDalt, Assistant Vice President and Senior Counsel
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park, SC 2335
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.
Suite 400 East
Washington, D.C. 20007

Approximate Date of Proposed Public Offering: Continuous

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, 2009 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 previously filed post-effective amendment.


 
 
 

PART A


 
 
 

PROSPECTUS
MAY 1, 2009

COMPASS G
Combination Fixed/Variable Group Annuity

Sun Life Assurance Company of Canada (U.S.) and Sun Life of Canada (U.S.) Variable Account D offer the master group flexible payment deferred annuity contracts described in this Prospectus to groups for use in connection with employer, association and other group retirement plans.

Contract owners may choose among a range of variable investment options and fixed options. The variable options are Sub-Accounts in the Variable Account. Each Sub-Account invests in one of the following mutual funds (the “Mutual Funds”) advised by our affiliate Massachusetts Financial Services Company (“MFS”), or one of the following fund options of the MFS Variable Insurance Trust II (the “Trust”), which also is a mutual fund advised by MFS:

Mutual Funds
Portfolios of the Trust
MFS Bond Fund
MFS Money Market Portfolio – I Class
MFS Total Return Fund
MFS High Yield Portfolio – I Class
Massachusetts Investors Trust
MFS Capital Appreciation Portfolio – I Class
Massachusetts Investors Growth Stock Fund
MFS Government Securities Portfolio – I Class

If a Contract is not tax-qualified or is not held by a trustee or custodian on behalf of the group or entity, the Contract owner may only choose among the Sub-Accounts that invest in the Trust.

The fixed account options are available for time periods of 1, 3, 5, or 7years, called Guarantee Periods, and pay interest at a guaranteed rate for each period. The Guarantee Periods are available for all Contracts.

This Prospectus must be accompanied by a current prospectus for the Trust. For tax qualified Contracts held by a trustee or custodian, this Prospectus also must be accompanied by a current prospectus for each of the Mutual Funds. Please read this Prospectus, the Trust prospectus, and, if applicable, the Mutual Fund prospectuses carefully before investing and keep them for future reference. They contain important information about the Contract, the Trust and the Mutual Funds.

We have filed a Statement of Additional Information dated May 1, 2009 (the “SAI”) with the Securities and Exchange Commission (the “SEC”), which is incorporated by reference in this Prospectus. The table of contents for the SAI is on page 37 of this Prospectus. You may obtain a copy without charge by writing to us at the address shown below (which we sometimes refer to as our “Annuity Service Mailing Address”) or by telephoning (800) 752-7215. In addition, you can inspect and copy all of our filings at the SEC's public reference facilities at: 100 F Street, N.E., Washington, D.C. 20549-0102, telephone (202) 551-8090. The SEC will provide copies by mail for a fee. The SEC also maintains a website (http://www.sec.gov) that contains the SAI, material incorporated by reference, and other information regarding companies that file with the SEC .

The Contracts are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency.

The SEC has not approved or disapproved these securities or passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense.

Any reference in this Prospectus to receipt by us means receipt at the following address:

Sun Life Assurance Company of Canada (U.S.)
P.O. Box 9133
Wellesley Hills, Massachusetts 02481



 
 
 


TABLE OF CONTENTS
SPECIAL TERMS [INSERT PAGE NUMBER]
PRODUCT HIGHLIGHTS [INSERT PAGE NUMBER]
FEES AND EXPENSES [INSERT PAGE NUMBER]
CONDENSED FINANCIAL INFORMATION [INSERT PAGE NUMBER]
THE ANNUITY CONTRACT [INSERT PAGE NUMBER]
COMMUNICATING TO US ABOUT THE CONTRACT [INSERT PAGE NUMBER]
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.) [INSERT PAGE NUMBER]
THE VARIABLE ACCOUNT [INSERT PAGE NUMBER]
VARIABLE ACCOUNT OPTIONS [INSERT PAGE NUMBER]
The MFS®Variable Insurance Trust II [INSERT PAGE NUMBER]
The Mutual Funds [INSERT PAGE NUMBER]
THE FIXED ACCOUNT [INSERT PAGE NUMBER]
THE FIXED ACCOUNT OPTIONS:  THE GUARANTEE PERIODS [INSERT PAGE NUMBER]
THE ACCUMULATION PHASE [INSERT PAGE NUMBER]
Issuing Your Certificate [INSERT PAGE NUMBER]
Amount and Frequency of Purchase Payments [INSERT PAGE NUMBER]
Allocation of Net Purchase Payments [INSERT PAGE NUMBER]
Your Account [INSERT PAGE NUMBER]
Your Account Value [INSERT PAGE NUMBER]
Variable Account Value [INSERT PAGE NUMBER]
Fixed Account Value [INSERT PAGE NUMBER]
Transfer Privilege [INSERT PAGE NUMBER]
WITHDRAWALS, WITHDRAWAL CHARGE, MARKET VALUE ADJUSTMENT AND LOAN PROVISION [INSERT PAGE NUMBER]
Cash Withdrawals [INSERT PAGE NUMBER]
Withdrawal Charge [INSERT PAGE NUMBER]
Market Value Adjustment [INSERT PAGE NUMBER]
Loans (Qualified Contracts Only but not an Individual Retirement Annuity)  [INSERT PAGE NUMBER]
CONTRACT CHARGES [INSERT PAGE NUMBER]
Mortality and Expense Risk Charge [INSERT PAGE NUMBER]
Premium Taxes [INSERT PAGE NUMBER]
Mutual Fund and Trust Expenses [INSERT PAGE NUMBER]
Modification of Charges [INSERT PAGE NUMBER]
DEATH BENEFIT [INSERT PAGE NUMBER]
Amount of Death Benefit [INSERT PAGE NUMBER]
Method of Paying Death Benefit [INSERT PAGE NUMBER]
Non-Qualified Contracts [INSERT PAGE NUMBER]
Selection and Change of Beneficiary [INSERT PAGE NUMBER]
Payment of Death Benefit [INSERT PAGE NUMBER]
Due Proof of Death [INSERT PAGE NUMBER]
THE INCOME PHASE -- ANNUITY PROVISIONS [INSERT PAGE NUMBER]
Selection of the Annuity Commencement Date [INSERT PAGE NUMBER]
Annuity Options [INSERT PAGE NUMBER]
Selection of Annuity Option [INSERT PAGE NUMBER]
Amount of Annuity Payments [INSERT PAGE NUMBER]
Exchange of Variable Annuity Units [INSERT PAGE NUMBER]
Annuity Payment Rates [INSERT PAGE NUMBER]
Annuity Options as Method of Payment for Death Benefit [INSERT PAGE NUMBER]
OTHER CONTRACT PROVISIONS [INSERT PAGE NUMBER]
Exercise of Contract Rights [INSERT PAGE NUMBER]
Change of Ownership [INSERT PAGE NUMBER]
Voting of Mutual Fund and Trust Shares [INSERT PAGE NUMBER]
Reports to Owners [INSERT PAGE NUMBER]
Substitution of Securities [INSERT PAGE NUMBER]
Change in Operation of Variable Account [INSERT PAGE NUMBER]
Splitting Units [INSERT PAGE NUMBER]
Modification [INSERT PAGE NUMBER]
Discontinuance of New Participants [INSERT PAGE NUMBER]
Right to Return (IRAs Only) [INSERT PAGE NUMBER]
TAX CONSIDERATIONS [INSERT PAGE NUMBER]
U.S. Federal Income Tax Considerations [INSERT PAGE NUMBER]
Qualified Retirement Plans [INSERT PAGE NUMBER]
Pension and Profit-Sharing Plans [INSERT PAGE NUMBER]
Tax-Sheltered Annuities [INSERT PAGE NUMBER]
Individual Retirement Arrangements [INSERT PAGE NUMBER]
Puerto Rico Tax Considerations [INSERT PAGE NUMBER]
TEXAS OPTIONAL RETIREMENT PROGRAM [INSERT PAGE NUMBER]
ADMINISTRATION OF THE CONTRACTS [INSERT PAGE NUMBER]
DISTRIBUTION OF THE CONTRACTS [INSERT PAGE NUMBER]
AVAILABLE INFORMATION [INSERT PAGE NUMBER]
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE [INSERT PAGE NUMBER]
STATE REGULATION [INSERT PAGE NUMBER]
LEGAL PROCEEDINGS [INSERT PAGE NUMBER]
FINANCIAL STATEMENTS [INSERT PAGE NUMBER]
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION [INSERT PAGE NUMBER]
APPENDIX A -  GLOSSARY [INSERT PAGE NUMBER]
APPENDIX B - WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT [INSERT PAGE NUMBER]
APPENDIX C - CONDENSED FINANCIAL INFORMATION [INSERT PAGE NUMBER]


 
 
 


The Contract is a legal document that uses a number of specially defined terms. We explain most of the terms that we use in this Prospectus in the context where they arise, and some are self-explanatory. In addition, for convenient reference, we have compiled a list of these terms in the Glossary included at the back of this Prospectus as Appendix A. If, while you are reading this Prospectus, you come across a term that you do not understand, please refer to the Glossary for an explanation.

PRODUCT HIGHLIGHTS

The headings in this section correspond to headings in the Prospectus under which we discuss these topics in more detail.

The Annuity Contract

The Compass G Fixed and Variable Annuity Contract is a master group flexible payment deferred annuity contract (“Contract”), designed for use with retirement and deferred compensation plans.  We issued the Contract to the employer or other group that establishes the plan, which we call the “Owner.”  We issue a “Certificate” to you as a participant under the Contract.  During the Accumulation Phase, you make Payments under the Certificate, which are allocated to one or more Variable Account or Fixed Account options.  During the Income Phase, we make annuity payments to you or someone else based on the amount you have accumulated.  The Certificate provides tax-deferral so that you do not pay taxes on your earnings until you withdraw them. When purchased in connection with a tax-qualified plan, the Contract provides no additional tax-deferral benefits because tax-qualified plans confer their own tax-deferral. The Certificate also provides a death benefit if you die during the Accumulation Phase.

The Accumulation Phase

The amount of Purchase Payments under a Certificate, may vary; however, each Purchase Payment must be at least $25, and we will not accept Purchase Payments that, on an annualized basis, are less than $300 in the first year of the Certificate.  We will not normally accept a Purchase Payment if your Account Value is over $1 million or, if the Purchase Payment would cause your Account Value to exceed $1 million.

Variable Account Options:  The Funds

The Owner (or you, if permitted under your plan) can allocate the Purchase Payments among Sub-Accounts investing in a number of Fund options.  Each Fund is either a mutual fund registered under the Investment Company Act of 1940 or a separate securities portfolio of shares of such a mutual fund. The investment returns on the Funds are not guaranteed.  You can make or lose money.  During the Accumulation Phase, the Owner can transfers all or a portion of a Participant’s Account among the Funds and the Fixed Account Options.

The Fixed Account Options:  The Guarantee Periods

The Owner (or you, if permitted under your plan) can allocate the Purchase Payments to the Fixed Account and elect to invest in one or more of the Guarantee Periods that are made available.  Each Guarantee Period earns interest at a Guaranteed Interest Rate that we publish.  We may change the Guaranteed Interest Rate from time to time, but no Guaranteed Interest Rate will ever be less than the minimum guaranteed interest rate permitted by law.  Once we have accepted your allocation to a particular Guarantee Period, we promise that the Guaranteed Interest Rate applicable to that allocation will not change for the duration of the Guarantee Period.  We may offer Guarantee Periods of different durations or stop offering some Guarantee Periods. Once we stop offering a Guarantee Period of a particular duration, future allocations, or transfers into that Guarantee Period will not be permitted.

Fees and Expenses

The Contract has insurance features and investment features, and there are costs related to each.

On each Account Anniversary, we deduct an annual Account Fee on your Account that ranges from $12 to $25, depending on the total amount of Purchase Payments made to all Certificates under the Contract.  We deduct insurance charges, the amount depending on the total amount of Purchase Payments made to all Certificates under the Contract.

If you take more than a specified amount of money out of your Contract, we assess a withdrawal charge against each Purchase Payment withdrawn.  The withdrawal charge (also known as a “contingent deferred sales charge”) starts at 6% in the first Payment year and declines to 0% after seven full years.

In addition to the charges we impose under the Contract, there are also charges (which include management fees and operating expenses) imposed by the Funds. The charges vary depending upon the Fund(s) selected.

The Income Phase:  Annuity Provisions

The Owner (or you, if permitted under your plan) can select one of several Annuity Options. The Owner (or you, if permitted under your plan) can choose to receive annuity payments from the Fixed Account, from the available Variable Account options, or from a combination of both.  If any part of your annuity payments come from the Variable Account, the dollar amount of the payments may fluctuate with the performance of the Funds. Subject to the maximum Annuity Commencement Date, The Owner (or you, if permitted under your plan) decide when your Income Phase will begin but, once it begins, you can not change your choice of annuity payment options.

Death Benefit

If you die before the Certificate reaches the Income Phase, the Beneficiary will receive a death benefit.  To calculate the death benefit, we use a “Death Benefit Date,” which is the earliest date we have both due proof of death and a written request specifying the manner of payment.  The death benefit is equal to the greater of (1) the value of your Account on the Death Benefit Date and (2) the total of the Purchase Payments made to your Account, minus all withdrawals and loans.  The death benefit will also be reduced by any unpaid net loan interest.

Withdrawals, Withdrawal Charge and Market Value Adjustment

You can withdraw money from your Certificate during the Accumulation Phase.  You may withdraw a portion of your Account Value each year without the imposition of a withdrawal charge.  For any Account Year, this “free withdrawal amount” equals 10% of all Purchase Payments made during the last 7 Account Years (including the current Account Year), plus all Purchase Payments we have held for at least 7 Account Years.  We do not apply any withdrawal charge to withdrawals made from a Certificate that has been established for at least 12 years, regardless of the amount or when any Purchase Payments were made. Withdrawals made from the Fixed Account may also be subject to a Market Value Adjustment (see “Market Value Adjustment”). You may also have to pay income taxes and tax penalties on money you withdraw.

Tax Considerations

Your earnings are not taxed until you take them out.  If you withdraw money during the Accumulation Phase, earnings come out first and are taxed as income.  If you are younger than 59½ when you take money out, you may be charged a 10% federal tax penalty.
————————

NOTE ABOUT OTHER ANNUITY CONTRACTS THAT WE OFFER: In addition to the Contracts, we currently offer many other forms of annuity contracts with a wide variety of features, benefits and charges. Depending on your circumstances and needs, some of these other contracts may be at lower cost to you. Not all of the annuity contracts that we offer are available in all jurisdictions or through all of the selling agents who offer the contracts. You should consider with your selling agent what annuity contract or financial product is most consistent with your needs and preferences.

If you have any questions about your Contract or need more information, please contact us at:

     Sun Life Assurance Company of Canada (U.S.)
     P. O. Box 9133
     Wellesley Hills, Massachusetts  02481
     Toll Free (800) 752-7215


 
 
 

FEES AND EXPENSES

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.

Contract Owner Transaction Expenses

 
Sales Load Imposed on Purchases (as a percentage of Purchase Payments):
  
0%
       
 
Maximum Withdrawal Charge (as a percentage of Purchase Payments):
  
6%*
       
 
Maximum Fee Per Transfer:
  
$0**
       
 
Premium Taxes (as a percentage of Certificate Value or total Purchase Payments):
  
0% - 3.5%***

*
 Number of Complete Account Years Since
Purchase Payment has been in the Account
Withdrawal Charge
 
0-2
6%
 
3
5%
 
4
4%
 
5
3%
 
6
2%
 
7
1%
 
8
0%

 
A portion of the Participant's Account may be withdrawn each year without imposition of any withdrawal charge and, after a Purchase Payment held by the Company for seven years, it may be withdrawn free of the withdrawal charge. (See “Withdrawal Charges.”) We do not apply any withdrawal charge to withdrawals made from a Certificate that has been established for at least 12 years, regardless of the amount or when any Purchase Payments were made.
   
**
We do impose certain restrictions upon the number and frequency of transfers. (See “Transfer Privilege”.)
   
***
The premium tax rate and base vary by your state of residence and the type of Certificate you own. Currently, we deduct premium taxes from Certificate Value upon full surrender (including a surrender for the death benefit) or annuitization. See “Contract Charges -- 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 Fund fees and expenses.

 
Annual Account Fee
$ 25*

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

 
Mortality and Expense Risks Charge:
1.30%*
 
Administrative Expenses Charge:
0.00%
     
Total Variable Account Annual Expenses:
1.30%

*
The Annual Contract Fee (“Account Fee”) and Mortality and Expense Risks Charges (“Asset Charge”) decline based on total Purchase Payments credited to all Participants' Accounts under a Contract in accordance with the following schedule:

 
Purchase Payments
Account Fee
Asset Charge
 
Up to $250,000
$25
1.30%
 
$250,000 to $1,499,999
$18
1.25%
 
$1,500,000 to $4,999,999
$15
1.10%
 
$5,000,000 and over
$12
0.95%

The table below shows the minimum and maximum total operating expenses charged by the Mutual Funds and Series (collectively, the “Funds”) that you may pay periodically during the time that you own the Contract.  More detail concerning each Fund's fees and expenses is contained in the prospectus for each Fund.

Total Annual Fund Operating Expenses
Minimum
Maximum
 
(expenses as a percentage of average daily Fund net assets that are deducted from Fund assets, including management fees, distribution and/or service (12b-1) fees, and other expenses)
    
   Prior to any fee waiver or expense reimbursement*
0.59%
0.93%

*
The expenses shown are for the year ended December 31, 2008, and do not reflect any fee waiver or expense reimbursement.

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

EXAMPLE

This Example is 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 Fund fees and expenses, and are based on a sample Contract with the maximum possible fees.

The Example assumes that you invest $10,000 in the Contract for the time periods indicated and that your Contract includes the maximum fees and expenses of any of the Funds. The Example also assumes that your investment has a 5% return each year and assumes the maximum fees and expenses of any of the Funds. For purpose of converting the Annual Account Fee to a percentage, the Example assumes an average Contract size of $35,000. In addition, this Example assumes no transfers were made and no premium taxes were deducted.  If these arrangements were considered, the expenses shown would be higher.  This Example also does not take into consideration any fee waiver or expense reimbursement arrangement of the 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
         
 
$796
$1,238
$1,615
$2,866

(2)
If you annuitize your Contract at the end of the applicable time period:

 
1 year
3 years
5 years
10 years
         
 
$256
$788
$1,345
$2,866

(3)
If you do not surrender your Contract:

 
1 year
3 years
5 years
10 years
         
 
$256
$788
$1,345
$2,866

The fee table and Example 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.  The Example does not include the deduction of state premium taxes, which may be assessed upon full surrender, death or annuitization, or any taxes and penalties you may be required to pay if you surrender the Contract. Similarly, the 5% annual rate of return assumed in the Example is not intended to be representative of past or future investment performance.  For more information about Fund expenses, including a description of any applicable fee waiver or expense reimbursement arrangement, see the prospectuses for the Funds.


Ten-year historical information about the value of the units we use to measure the variable portion of Contracts (“Variable Accumulation Units”) is included in the back of this Prospectus as Appendix C.


Sun Life Assurance Company of Canada (U.S.) and Sun Life of Canada (U.S.) Variable Account D (the “Variable Account”) offer the Compass G Combination Fixed/ Variable Group Annuity to employers, associations and other groups for use in connection with their retirement plans. We issue the Contract to the Owner. The Contract covers all individuals participating under the Contract. Each individual receives a Certificate that evidences his or her participation under the Contract.

In this Prospectus, unless we state otherwise, we refer to the employer, association or other group establishing the Contract as the “Owner” even though the legal owner of the Contract may be a trustee or custodian. We refer to participating individuals under Contracts as “Participants” and we refer to Participants as “you.” For the purpose of determining benefits under a Contract, we establish an Account for each Participant, which we will refer to as “your” Account or a “Participant Account.” We will only accept instructions and elections regarding Participant Accounts from the Owner. However, under the terms of your particular plan, you may be entitled to make certain decisions and elections which the Owner will communicate to us on your behalf.

The Contract provides a number of important benefits for your retirement planning. It has an Accumulation Phase, during which payments are made under the Contract and allocated to one or more Variable Account or Fixed Account options, and an Income Phase, during which we make payments based on the amount accumulated. The Contract provides tax deferral, so that you do not pay taxes on your earnings under the Contract until they are withdrawn. However, if you purchase your Contract in connection with a tax-qualified plan, your purchase should be made for reasons other than tax-deferral.  Tax-qualified plans provide tax-deferral without the need for purchasing an annuity contract.

Your Contract also provides a death benefit if you die during the Accumulation Phase. Finally, if the Owner (or you, if permitted by your plan) so elects, during the Income Phase we will make payments to you for life or for another period that the Owner (or you, if permitted by your plan) chooses.

The Owner (or you, if permitted by your plan) chooses these benefits on a variable or fixed basis or a combination of both. When a variable investment option or a Variable Annuity option is chosen, your Account Value will change in response to changes in the return available from the different types of investments you select under your Contract. With these options, you assume all investment risk under the Contract. When a Guarantee Period in our Fixed Account or a Fixed Annuity option is chosen, we assume the investment risk, except in the case of early withdrawals, where you bear the risk of unfavorable interest rate changes. You also bear the risk that the interest rates we will offer in the future and the rates we will use in determining your Fixed Annuity may not exceed our minimum guaranteed rate, which is 4% per year, compounded annually.

The Contracts are designed for use in connection with retirement and deferred compensation plans, some of which qualify for favorable federal income tax treatment under Sections 401, 403, 408(c), 408(k) or 408(p) of the Internal Revenue Code. After May 1, 1990 we will not issue Contracts for use with deferred compensation plans established under Section 457 of the Code. The Contracts are also designed so that they may be used in connection with certain non-tax-qualified retirement plans, such as payroll savings plans and such other groups (trusteed or nontrusteed) as may be eligible under applicable law. We refer to Contracts used with plans that receive favorable tax treatment as “Qualified Contracts,” and all others as “Non-Qualified Contracts.” A qualified retirement plan generally provides tax deferral regardless of whether the plan invests in an annuity contract.  A decision to purchase an annuity contract should not be based on the assumption that the purchase of an annuity contract is necessary to obtain tax-deferral benefits under a qualified retirement plan.


All materials sent to us, including Purchase Payments, must be sent to our Annuity Service Mailing Address as set forth on the first page of this Prospectus. For all telephone communications, you must call (800) 752-7215.

Unless this Prospectus states differently, we will consider all materials sent to us and all telephone communications to be received on the date we actually receive them at our Annuity Address. However, we will consider Purchase Payments, withdrawal requests and transfer instructions to be received on the next Business Day if we receive them (1) on a day that is not a Business Day or (2) after 4:00 p.m., Eastern Time. In some cases, receipt of financial transactions by the broker-dealer of record will be deemed to be constructive receipt by us.

When we specify that notice to us must be in writing, we reserve the right, in our sole discretion, to accept notice in another form.


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. Our 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 established the Variable Account as a separate account on August 20, 1985, pursuant to a resolution of our Board of Directors. Under Delaware insurance law and the Contract, the income, gains or losses of the Variable Account are credited to or charged against the assets of the Variable Account without regard to the other income, gains, or losses of the Company. These assets are held in relation to the Contracts described in this Prospectus that provide benefits that vary in accordance with the investment performance of the Variable Account. Although the assets maintained in the Variable Account will not be charged with any liabilities arising out of any other business we conduct, all obligations arising under the Contracts, including the promise to make annuity payments, are general corporate obligations of the Company.

The assets of the Variable Account are divided into Sub-Accounts. Each Sub-Account invests exclusively in (1) shares of one of the four Series of the MFS Variable Insurance Trust II (the “Trust”) that we offer for the Contracts and (2) for Qualified Contracts held by a trustee or custodian on behalf of the entity or group, Class A shares of one of the Mutual Funds. All amounts allocated by the Owner (or you, if permitted by your plan) to a Sub-Account will be used to purchase Mutual Fund or Trust shares at their net asset value. Any and all distributions made by the Mutual Funds or Trust with respect to the shares held by the Variable Account will be reinvested to purchase additional shares at their net asset value. Deductions from the Variable Account for cash withdrawals, loans, annuity payments, death benefits, Account Fees, contract charges against the assets of the Variable Account for the assumption of mortality and expense risks, administrative expenses and any applicable taxes will, in effect, be made by redeeming the number of Mutual Fund or Trust shares at their net asset value equal in total value to the amount to be deducted. The Variable Account will be fully invested in the Trust and Mutual Fund shares at all times.


The MFS® Variable Insurance Trust II

The MFS® Variable Insurance Trust II (the “Trust”) is an open-end management investment company registered under the Investment Company Act of 1940. Our affiliate Massachusetts Financial Services Company (“MFS®”) serves as the investment adviser to the Trust.

The Trust is composed of a number of independent portfolios of securities, each of which has separate investment objectives and policies. Shares of the Trust are issued in a number of Series, each corresponding to one of the portfolios. The Contracts allow investment by the Sub-Accounts in shares of the four Series of the Trust described below. Additional portfolios may be added to the Trust which may or may not be available for investment by the Variable Account.

MFS® Capital Appreciation Portfolio will seek to maximize capital appreciation by investing in securities of all types, with major emphasis on common stocks.

MFS® Government Securities Portfolio will seek current income and preservation of capital by investing in U.S. Government and U.S. Government-related securities.

MFS® High Yield Portfolio will seek high current income and capital appreciation by investing primarily in certain lower rated or unrated fixed income securities (possibly with equity features) of U.S. and foreign issuers.

MFS® Money Market Portfolio will seek maximum current income to the extent consistent with stability of principal by investing exclusively in money market instruments maturing in less than 13 months.

A more detailed description of the Trust, its management, its investment objectives, policies and restrictions and its expenses may be found in the accompanying current prospectus of the Trust, and in the Trust’s Statement of Additional Information, which is available by calling (800) 752-7215.

The Trust also offers its shares to other separate accounts established by the Company and our New York subsidiary in connection with variable annuity and variable life insurance contracts. Although we do not anticipate any disadvantages to this arrangement, 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 investing in the Trust. A conflict may occur due to differences in tax laws affecting the operations of variable life and variable annuity separate accounts, or some other reason. We and the Trust’s Board of Trustees will monitor events for such conflicts, and, in the event of a conflict, we will take steps necessary to remedy the conflict, including withdrawal of the Variable Account from participation in the Series which is involved in the conflict or substitution of shares of other Series or other mutual funds.

For Non-Qualified Contracts used for deferred compensation and payroll savings plans and Qualified Contracts that are not held by trustees or custodians, the portfolios of the Trust described above are the only variable investment options available.


For Qualified Contracts that are held by a trustee or custodian on behalf of the entity or group, the following Mutual Funds also are available as variable investment options:

MFS® Bond Fund (“MFB”) will primarily seek to provide as high a level of current income as is believed to be consistent with prudent risk. MFB’s secondary objective is to protect shareholders’ capital.

MFS® Total Return Fund (“MTR”) will primarily seek to provide above-average income (compared to a portfolio invested entirely in equity securities) consistent with the prudent employment of capital. Its secondary objective is to provide reasonable opportunity for growth of capital and income.

Massachusetts Investors Trust (“MIT”) will seek long-term growth of capital with a secondary objective to seek reasonable current income.

Massachusetts Investors Growth Stock Fund (“MIG”) will seek long-term growth of capital and future income rather than current income.

A more detailed description of each Mutual Fund, its management, its investment objectives, policies and restrictions and its expenses may be found in the accompanying current prospectus of that Mutual Fund, and in that Mutual Fund’s Statement of Additional Information, which are available by calling (800) 752-7215.


Each of the Mutual Funds and the portfolios of the Trust pay fees to MFS for its services pursuant to investment advisory agreements. MFS also serves as investment adviser to the other funds in the MFS Family of Funds, and to certain other investment companies established by MFS and/or us. MFS Institutional Advisers, Inc., a wholly-owned subsidiary of MFS, provides investment advice to substantial private clients. MFS and its predecessor organizations have a history of money management dating from 1924. MFS operates as an autonomous organization and the obligation of performance with respect to the investment advisory agreements is solely that of MFS. We undertake no obligation in this regard.


The Fixed Account is made up of all the general assets of the Company other than those allocated to any separate account. Amounts allocated to Guarantee Periods become part of the Fixed Account, and are available to fund the claims of all classes of our customers, including claims for benefits under the Contracts.

We will invest the assets of the Fixed Account in those assets we choose that are allowed by applicable state insurance laws. In general, these laws permit investments, within specified limits and subject to certain qualifications, in federal, state and municipal obligations, corporate bonds, preferred and common stocks, real estate mortgages, real estate and certain other investments. We intend to invest primarily in investment-grade fixed income securities (i.e., rated by a nationally recognized rating service within the four highest grades) or instruments we believe are of comparable quality.

We are not obligated to invest amounts allocated to the Fixed Account according to any particular strategy, except as may be required by applicable state insurance laws. You will not have a direct or indirect interest in the Fixed Account investments.


The Owner (or you, if permitted by your plan) may elect one or more of the 1, 3, 5 or 7 year Guarantee Periods we make available for the Contracts. We publish Guaranteed Interest Rates for each Initial Guarantee Period and Subsequent Guarantee Period offered. We may change the Guaranteed Interest Rates we offer from time to time, but no Guaranteed Interest Rate will ever be less than 4% per year, compounded annually. Also, once we have accepted an allocation to a particular Guarantee Period, we promise that the Guaranteed Interest Rate applicable to that allocation will not change for the duration of the Guarantee Period. We determine Guaranteed Interest Rates at our discretion. We do not have a specific formula for establishing the rates for different Guarantee Periods. Our determination will be influenced by the interest rates on fixed income investments in which we may invest with amounts allocated to the Guarantee Periods. We will also consider other factors in determining these rates, including regulatory and tax requirements, sales commissions and administrative expenses borne by us, general economic trends and competitive factors. We cannot predict the level of future interest rates.

Early withdrawals from allocations to a 3, 5 or 7 year Initial Guarantee Period or Subsequent Guarantee Period, including cash withdrawals, transfers, loans and commencement of an annuity with a payout period of less than five years, may be subject to a Market Value Adjustment, which could decrease or increase the value of your Account. See “Withdrawals, Withdrawal Charge, Market Value Adjustment and Loan Provision.”


During the Accumulation Phase, Payments are made into your Account, and your earnings accumulate on a tax-deferred basis. The Accumulation Phase begins with our acceptance of your first Purchase Payment and ends the Business Day before your Annuity Commencement Date. The Accumulation Phase will end sooner if the Contract is surrendered, your Account is withdrawn in full or you die before the Annuity Commencement Date.


To purchase a Compass G Annuity, a completed Participant Enrollment Form and your initial Purchase Payment are sent to us for acceptance. We issue a Certificate to you as a Participant under a Contract when we accept your Participant Enrollment Form.

We will credit your initial Purchase Payment to your Account within 2 business days of receiving your completed Participant Enrollment Form. If your Participant Enrollment Form is not complete, we will notify you. If we do not have the necessary information to complete the Participant Enrollment Form within 5 business days, we will send your money back to you or ask your permission to retain your Purchase Payment until the Participant Enrollment Form is made complete. Then we will apply the Purchase Payment within 2 business days of when the Participant Enrollment Form is complete.


The amount of Purchase Payments may vary; however, we will not accept Purchase Payments that, on an annualized basis, are less than $300 for the first Account Year, and each Purchase Payment must be at least $25. In addition, we will not accept a Purchase Payment if your Account Value is over $1 million, or if the Purchase Payment would cause your Account Value to exceed $1 million, unless we have approved the Payment in advance. Within these limits, you may make Purchase Payments at any time during the Accumulation Phase.


Each Purchase Payment may be allocated among the different Sub-Accounts and Initial Guarantee Periods we offer. In your Participant Enrollment Form, you specify the percentage of each Purchase Payment to be allocated to each Sub-Account or Guarantee Period. These percentages are called your allocation factors. The Owner (or you, if permitted by your plan) may change the allocation factors for future Payments by sending us written notice of the change. We will use the new allocation factors for the first Purchase Payment we receive with or after we have received notice of the change, and for all future Purchase Payments, until we receive another change notice.

Although it is currently not our practice, we may deduct applicable premium taxes or similar taxes from Purchase Payments. See “Contract Charges -- Premium Taxes.” In that case, we will credit the Net Purchase Payment, which is the Purchase Payment minus the amount of those taxes.

Your Account

When we accept your first Purchase Payment, we establish an Account for you, which we maintain throughout the Accumulation Phase of your Certificate.

Your Account Value is the sum of the value of the two components of your Certificate: the Variable Account portion of your Certificate (“Variable Account Value”) and the Fixed Account portion of your Certificate (“Fixed Account Value”). These two components are calculated separately, as described under “Variable Account Value” and “Fixed Account Value”.


     Variable Accumulation Units

In order to calculate your Variable Account Value, we use a measure called a Variable Accumulation Unit for each Sub-Account. Your Variable Account Value is the sum of your Account Value in each Sub-Account, which is the number of your Variable Accumulation Units for that Sub-Account times the value of each Unit.

     Variable Accumulation Unit Value

The value of each Variable Accumulation Unit in a Sub-Account reflects the net investment performance of that Sub-Account. We determine that value once on each day that the New York Stock Exchange is open for trading, at the close of trading, which is currently 4:00 p.m., Eastern Time. We also may determine the value of Variable Accumulation Units of a Sub-Account on days the Exchange is closed if there is enough trading in securities held by that Sub-Account to materially affect the value of the Variable Accumulation Units. Each day we make a valuation is called a “Business Day.” The period that begins at the time Variable Accumulation Units are valued on a Business Day and ends at that time on the next Business Day is called a Valuation Period. On days other than Business Days, the value of a Variable Accumulation Unit does not change.

To measure these values, we use a factor, which we call the “Net Investment Factor”, which represents the net return on the Sub-Account’s assets. At the end of any Valuation Period, the value of a Variable Accumulation Unit for a Sub-Account is equal to the value of that Sub-Account’s Variable Accumulation Units at the end of the previous Valuation Period, multiplied by the Net Investment Factor. The Net Investment Factor for any Sub-Account for any Valuation Period is determined by dividing (a) by (b) and then subtracting (c) from the result, where:

(a)
is the net result of:
   
(1)
the net asset value of a Mutual Fund share or Series share held in the Sub-Account determined as of the end of the Valuation Period, plus
   
(2)
the per share amount of any dividend or other distribution declared by the Mutual Fund or Series issuing the shares held in the Sub-Account if the “ex-dividend” date occurs during the Valuation Period, plus or minus
   
(3)
a per share credit or charge with respect to any taxes paid, or reserved for by us during the Valuation Period which are determined to be attributable to the operation of the Sub-Account (no federal income taxes are applicable under present law);
   
(b)
is the net asset value of a Mutual Fund share or Series share held in the Sub-Account determined as of the end of the preceding Valuation Period; and
   
(c)
is the risk charge factor determined by us for the Valuation Period to reflect the charge for assuming the mortality and expense risks.

For a hypothetical example of how we calculate the value of a Variable Accumulation Unit, see the Statement of Additional Information.

     Crediting and Canceling Variable Accumulation Units

When we receive an allocation to a Sub-Account, either from a Net Purchase Payment or a transfer of Account Value, we credit that amount to your Account in Variable Accumulation Units. Similarly, we cancel Variable Accumulation Units when amounts are transferred, withdrawn or borrowed from a Sub-Account, or when we deduct certain charges under the Contract. We determine the number of Units credited or canceled by dividing the dollar amount by the Variable Accumulation Unit value for that Sub-Account at the end of the Valuation Period during which the transaction or charge is effective.


     Initial and Subsequent Guarantee Periods

Net Purchase Payments may be allocated to any Initial Guarantee Period we offer. Unless, within the 30 day period before the Expiration Date of an Initial Guarantee Period, we receive written notice from the Owner electing a different Subsequent Guarantee Period from among those we then offer, a Subsequent Guarantee Period of the same duration as the Initial Guarantee Period will begin automatically for the amount then allocated to the Initial Guarantee Period on the first day following the Expiration Date of the Initial Guarantee Period. Each Subsequent Guarantee Period also will automatically renew for another Subsequent Guarantee Period of the same length unless the Owner elects a different Subsequent Guarantee Period within the 30 day period prior to the Expiration Date of the current Subsequent Guarantee Period.

     Fixed Accumulation Units

In order to calculate your Fixed Account Value, we use a measure called a Fixed Accumulation Unit for each Guarantee Period. Your Fixed Account Value is the sum of the values of all Fixed Accumulation Units credited to your Account.

We determine the number of Fixed Accumulation Units credited to your Account by dividing the dollar amount of a Net Purchase Payment allocated to an Initial Guarantee Period by the value of the Fixed Accumulation Unit related to that Guarantee Period for the Valuation Period during which we receive the Purchase Payment.

     Fixed Accumulation Unit Value

We establish the value of each type of Fixed Accumulation Unit at $10.00 for the first Valuation Period of the calendar month in which a Purchase Payment is credited to your Account. The value of the Fixed Accumulation Unit increases for each successive Valuation Period as interest is accrued at the applicable Guaranteed Interest Rate. At the end of any Initial Guarantee Period we will exchange the Fixed Accumulation Units credited to your Account for a second type of Fixed Accumulation Unit with an equal aggregate value. The value of this second type of Fixed Accumulation Unit will increase for each Valuation Period during each Subsequent Guarantee Period to which your Account is allocated as interest is accrued at the applicable Guaranteed Interest Rate.

     Early Withdrawals

If, before its Expiration Date, an allocation to a 3, 5 or 7 year Guarantee Period is withdrawn, transferred, borrowed or annuitized over a payout period of less than five years, we will apply a Market Value Adjustment to the transaction. This could result in an increase or decrease of your Account Value, depending on interest rates at the time. You bear the risk that you will receive less than your principal if the Market Value Adjustment applies. See “Withdrawals, Withdrawal Charge, Market Value Adjustment and Loan Provision.”


     Permitted Transfers

During the Accumulation Phase, the Owner may transfer all or part of a Participant’s Account Value to one or more Sub-Accounts or Guarantee Periods then available, subject to the following restrictions:

l
no more than 12 transfers may be made in any Account Year; and
   
l
transfers to or from Sub-Accounts are subject to terms and conditions that may be imposed by the Trust or the applicable Mutual Fund.

There is no charge for transfers; however, transfers out of a 3, 5 or 7 year Guarantee Period will be subject to the Market Value Adjustment. Under current law there is no tax liability for transfers .

     Requests for Transfers

Owners may request transfers in writing.

If we receive a written transfer request before 4:00 p.m. Eastern Time on a Business Day, it will be effective that day. Otherwise, it will be effective the next Business Day.

     Short-Term Trading

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

The Company has policies and procedures to discourage frequent transfers of contract value.  As described above under “Transfer Privilege,” such policies include limiting the number and timing of certain transfers, subject to exceptions described in that section and exceptions designed to protect the interests of individual Contract Owners.  The Company also reserves the right to charge a fee for transfers.

Short-term trading activities whether by the Contract Owner or a third party authorized to initiate transfer requests on behalf of Contract Owner(s) may be subject to other restrictions as well.  For example, we reserve the right to take actions against short-term trading which restrict your transfer privileges more narrowly than the policies described under “Transfer Privilege,” such as requiring transfer requests to be submitted in writing through regular first-class U.S. mail (e.g., no overnight, priority or courier delivery allowed), and refusing any and all transfer instructions.

If we determine that a third party acting on your behalf is engaging (alone or in combination with transfers effected by you directly) in a pattern of short-term trading, we may refuse to process certain transfers requested by such a third party. In particular, we will treat as short-term trading activity any transfer that is requested by an authorized third party within 6 days of a previous transfer (whether the earlier transfer was requested by you or a third party acting on your behalf).  We may also impose special restrictions on third parties that engage in reallocations of contract values by limiting the frequency of the transfer, requiring advance notice of the transfer pursuant to in-force service agreements, and reallocating or exchanging 100% of the values in the redeeming sub-accounts.

We will provide you written notification of any restrictions imposed.

We reserve the right to waive short-term trading restrictions, where permitted by law and not adverse to the interests of the relevant underlying Fund, in the following instances:

l
when a new broker of record is designated for the Contract;
   
l
when the Participant changes;
   
l
when control of the Contract passes to the designated beneficiary upon the death of the Participant or Annuitant;
   
l
when necessary in our view to avoid hardship to a Participant; or
   
l
when underlying Funds are dissolved or merged or substituted.

If short-term trading results as a consequence of waiving the restrictions against short-term trading, it could expose Contract Owners to certain risks.  The short-term trading could increase costs for all Contract Owners as a result of excessive portfolio transaction fees.  In addition, the short-term trading 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 short-term trading 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 the risks. We uniformly apply the short-term trading policy and the permitted waivers of that policy to all Contracts. If we did not do so, some Contract Owners could experience a different application of the policy and therefore may be treated unfairly. Too much discretion on our part in allowing the waivers of short-term trading policy could result in an unequal treatment of short-term traders by permitting some short-term traders to engage in short-term trading while prohibiting others from doing the same.

     Funds' Shareholder Trading Policies

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

We are legally obligated to provide (at the Funds' request) information about each amount you cause to be deposited into a Fund (including by way of Purchase Payments and transfers under your Contract) or removed from the Fund (including by way of withdrawals and transfers under your Contract). If a Fund identifies you as having violated the Fund's Shareholder Trading Policies, we are obligated, if the 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 Fund. Any such restriction or prohibition may remain in place indefinitely.

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

Funds may differ significantly as to such matters as: (a) the amount, format, and frequency of information that the Funds request from us about transactions that our customers make; and (b) the extent and nature of any limits or restrictions that the 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 “Permitted Transfers” and under “ Short-Term Trading.” Also, if a 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 Fund.  For these and other reasons, we may disagree with the timing or substance of a Fund's requests for information from us or with any transaction limits or restrictions that the Fund requests us to impose upon our customers.  If any such disagreement with respect to a Fund cannot be satisfactorily resolved, the Fund might be restricted or, subject to obtaining any required regulatory approval, replaced as a variable investment option.

AND LOAN PROVISION

Cash Withdrawals

     Requesting a Withdrawal

At any time during the Accumulation Phase the Owner may withdraw in cash all or any portion of a Participant’s Account Value. To make a withdrawal, the Owner must send us a written request at our Annuity Service Mailing Address. We may require a signature guarantee for withdrawals of more than $5000. In some cases, such as withdrawals by a corporation, partnership, agent or fiduciary, we will require additional documentation.

A request must specify whether the Owner wants to withdraw the entire amount of a Participant Account or, if less, the amount the Owner wishes to withdraw. Upon request we will notify the Owner of the amount we would pay in the event of a full or partial withdrawal.

All withdrawals may be subject to a withdrawal charge (see “Withdrawal Charge”) and withdrawals from a Participant’s Fixed Account Value also may be subject to a Market Value Adjustment (see “Market Value Adjustment”). Withdrawals also may have adverse federal income tax consequences, including a 10% penalty tax (see “Tax Considerations”). You should carefully consider these tax consequences before requesting a cash withdrawal.

     Full Withdrawals

If the Owner requests a full withdrawal, we calculate the amount we will pay as follows. We start with the Participant Account Value at the end of the Valuation Period during which we receive the withdrawal request; we deduct the Account Fee for the Account Year in which the withdrawal is made; we deduct any applicable withdrawal charge; we deduct the amount, if any, of unpaid Net Loan Interest; and finally, we add or subtract the amount of any Market Value Adjustment applicable to withdrawn Fixed Account Value.

A full withdrawal results in the surrender of the Participant’s Certificate, and cancellation of all of the Participant’s rights and privileges under the Contract.

     Partial Withdrawals

If the Owner requests a partial withdrawal from a Participant Account, we calculate the amount we will pay as follows. We start with the amount specified in the request; we deduct any applicable withdrawal charge; we deduct the amount, if any, of unpaid Net Loan Interest; and finally, we add or subtract the amount of any Market Value Adjustment applicable to amounts withdrawn from the Fixed Account. We reduce the value of the Participant Account by deducting the amount specified in the request. Partial withdrawals may be limited by the maximum loan limitation.

The Owner may specify the amount to be withdrawn from each Sub-Account and Guarantee Period to which the Participant Account is allocated. If the Owner does not so specify, we will deduct the total amount requested pro rata, based on allocations at the end of the Valuation Period during which we receive the withdrawal request.

If the Owner requests a partial withdrawal that would result in the Participant’s Account Value being reduced to an amount less than the Account Fee for the Account Year in which the withdrawal is made, we reserve the right to treat it as a request for a full withdrawal.

     Time of Payment

We will pay the applicable amount of any full or partial withdrawal within 7 days after we receive the withdrawal request, except in cases where we are permitted to defer payment under the Investment Company Act of 1940 and applicable state insurance law. Currently, we may defer payment of amounts withdrawn from the Variable Account only for following periods:

l
when the New York Stock Exchange is closed except weekends and holidays or when trading on the New York Stock Exchange is restricted;
   
l
when it is not reasonably practical to dispose of securities held by the Mutual Funds or Trust or to determine the value of the net assets of the Mutual Funds or Trust, because an emergency exists; and
   
l
when an SEC order permits us to defer payment for the protection of Participants.

We also may defer payment of amounts withdrawn from the Fixed Account for up to 6 months from the date we receive a withdrawal request. We do not pay interest on the amount of any payments we defer.

     Withdrawal Restrictions for Qualified Plans

If you participate under a Qualified Contract, you should carefully check the terms of the plan for limitations and restrictions on cash withdrawals.

Special restrictions apply to withdrawals from Contracts used for Section 403(b) annuities. See “Tax Considerations -- Tax-Sheltered Annuities.”


We do not deduct any sales charge from Purchase Payments when they are made. However, we may impose a withdrawal charge (known as a “contingent deferred sales charge”) on certain amounts withdrawn from a Participant Account. We impose this charge primarily to defray some of our expenses related to the sale of the Contracts, such as commissions we pay to agents, the cost of sales literature, and other promotional costs and transaction expenses.

     Order of Withdrawal

We consider all amounts withdrawn from a Participant Account to be withdrawn first from Purchase Payments that have not previously been withdrawn, starting with the earliest Payment and continuing until all Payments have been withdrawn. Once all Purchase Payments have been withdrawn, we attribute additional amounts withdrawn to “accumulated value”; that is, the portion of a Participant’s Account Value that exceeds the total of all Purchase Payments made to the Account.

For convenience, in this Prospectus we refer to Purchase Payments made during the last 7 Account Years (including the current Account Year) as “New Payments,” and all Purchase Payments made before the last 7 Account Years as “Old Payments.”

     Free Withdrawal Amount

In each Account Year the Owner may withdraw the following amounts from a Participant’s Account Value before incurring the withdrawal charge: (1) all Old Payments not previously withdrawn, plus (2) a “free withdrawal amount” equal to 10% of the amount of all New Payments. We will apply the free withdrawal amount to reduce the amount of New Payments withdrawn that is subject to the withdrawal charge, starting with the earliest New Payment. All New Payments withdrawn in excess of the free withdrawal amount will be subject to the withdrawal charge.

Accumulated value may be withdrawn without the imposition of the withdrawal charge. In addition, we do not apply any withdrawal charge to withdrawals made from a Participant Account that has been established for at least 12 years, regardless of the amount or when any Purchase Payments were made.

     Calculation of Withdrawal Charge

We calculate the amount of the withdrawal charge by multiplying the portion of any New Payments withdrawn, less any applicable free withdrawal amount, by a percentage. The percentage varies according to the number of Account Years the New Payment has been held in the Participant Account, including the Account Year in which the Payment was made but not the Account Year in which it was withdrawn (Payments made and withdrawn in the same year are considered to be held for 0 years). The Withdrawal Charge scale is as follows:

Number of Account Years Purchase Payment
Has Been In Your Account
  
Percentage
0-2
  
6%
3
  
5%
4
  
4%
5
  
3%
6
  
2%
7
  
1%
8
  
0%

The withdrawal charge will never be greater than 6% of the aggregate amount of Purchase Payments made to the Participant’s Account.

We may modify the withdrawal charges and limits, upon notice to the Owner. However, any modification will only apply to Accounts established after the date of the modification.

     Example of Withdrawal Charge Calculation

Assume the Owner wishes to make a $25,000 withdrawal from a Participant Account in Account Year 10. An initial Purchase Payment of $10,000 was made in Account Year 1, an additional Purchase Payment of $8,000 was made in Account Year 8, and no previous withdrawals have been made. The Participant’s Account Value in Account Year 10 is $35,000.

We attribute the withdrawal first to the oldest Purchase Payment made, the $10,000 Payment made in Account Year 1. Because that Payment has been held in the Participant Account for more than 7 Account Years, it is an Old Payment and is not subject to the withdrawal charge.

We attribute the next $8,000 of the withdrawal to the Purchase Payment made in Account Year 8, which is a New Payment. The free withdrawal amount in Account Year 10 is $800 (10% of the $8000 Payment made in Account Year 8, the only New Payment). We apply the free withdrawal amount to reduce the amount of the New Payment withdrawn, so only $7,200 of the $8000 New Payment is subject to the withdrawal charge. Because the New Payment has been held in the Participant Account for only two Account Years, the withdrawal charge will be 5% of $7,200, or $360.

The remaining $7,000 of the withdrawal is attributed to accumulated value and is not subject to the withdrawal charge.

For additional examples of how we calculate withdrawal charges, please see Appendix B.

We do not impose the withdrawal charge on amounts applied to provide an annuity with a payout period of at least five years, amounts we pay as a death benefit, or amounts transferred among the Sub-Accounts, between the Sub-Accounts and the Fixed Account, or within the Fixed Account.


We will apply a Market Value Adjustment if the Owner withdraws, borrows or transfers amounts from Guarantee Periods of  3, 5 or 7 years. For this purpose, using Fixed Account Value to provide an annuity with a payout period of less than five years is considered a withdrawal, and the Market Value Adjustment will apply. We apply the Market Value Adjustment to each separate allocation made to a Guarantee Period together with interest credited on that allocation.

A Market Value Adjustment may decrease, increase or have no effect on your Account Value. This will depend on changes in interest rates since the last allocation to the Guarantee Period and the length of time remaining in the Guarantee Period. In general, if the Guaranteed Interest Rate we currently declare for Guarantee Periods equal to the balance of your Guarantee Period (or your entire Guarantee Period for Guarantee Periods of less than one year) is higher than your Guaranteed Interest Rate, the Market Value Adjustment is likely to decrease your Account Value. If our current Guaranteed Interest Rate is lower, the Market Value Adjustment is likely to increase your Account Value.

We determine the amount of the Market Value Adjustment by multiplying the amount that is subject to the adjustment by the following formula:

0.75 (A - B) x (C ÷ 12)

where:

A
is the Guaranteed Interest Rate applicable to the amount withdrawn, borrowed, transferred or annuitized;
   
B
is the Current Rate we declare at the time of the withdrawal, loan, transfer or annuitization for the Guarantee Period equal to the length of time of your Guarantee Period; and
   
C
is the number of complete months remaining in your Guarantee Period.

We will apply the Market Value Adjustment to the amount being withdrawn after deduction of any applicable Account Fee, withdrawal charge and unpaid Net Loan Interest.

For examples of how we calculate the Market Value Adjustment, see Appendix B.


At any time during the Accumulation Phase, the Owner of a Qualified Contract may request a loan from a Participant Account. The maximum amount that may be borrowed is the lesser of $50,000 and 50% of the Account Value less any loans outstanding and interest on those loans. The minimum amount is $1,000. All loans under a particular Contract are secured by a security interest we take in the Contract.

Loans are subject to restrictions in the Internal Revenue Code and may be subject to additional restrictions in a particular retirement plan. You should also carefully consider the tax consequences of a loan. See “Tax Considerations.”

The Owner requests a loan by sending us a written request in the form we specify. For loan requests of over $5,000, the Owner’s signature must be guaranteed. In some cases, such as loan requests by a corporation, partnership, agent or fiduciary, we may require additional documentation.

When we make a loan, we deduct from the Participant Account an amount equal to the loan amount requested plus or minus any Market Value Adjustment. We will deduct the total amount requested pro rata, based on allocations at the end of the Valuation Period during which we receive the loan request. We deposit an amount equal to the loan proceeds into a special loan account, which is part of the Fixed Account. We credit interest to the amount in the loan account at rate we specify at the time of the loan that is lower than the interest rate we charge on the loan itself.

Interest on the loan accrues daily at the rate we set at the time of the loan. Interest is payable on each anniversary of the date the loan is made and whenever a loan principal payment is made. If interest is not paid when due, we will deduct the amount of the interest from the Participant Account and add it to the principal amount of the loan. The difference between the interest on the loan payable to us and the interest we credit on the amount in the loan account is called “Net Loan Interest.”

The principal of the loan may be repaid in whole or in part at any time during the Accumulation Phase. We will treat any amounts repaid as Purchase Payments to the Participant Account that will be allocated to Guarantee Periods and/or Sub-Accounts in accordance with the allocation factors for the Account in effect at the time.

A loan must be repaid within five years of the date it is made, unless the loan is used to buy, construct, reconstruct or substantially rehabilitate a dwelling that is used as the principal residence of the Participant or a member of the Participant’s immediate family. In that case, the loan must be repaid within ten years.


Account Fee

During the Accumulation Phase of your Account, we will deduct from your Account an annual Account Fee to help cover the administrative expenses we incur related to the issuance of Contracts and the maintenance of Accounts. We deduct the Account Fee on each Account Anniversary, which is the anniversary of the first day of the month after we issue your Contract. We deduct the Account Fee pro rata from each Sub-Account and each Guarantee Period, based on the allocation of your Account Value on your Account Anniversary. The deduction of the Account Fee from amounts allocated to the Fixed Account will never cause your Fixed Account Value (adjusted for withdrawals and loans) to increase by less than 4% per year.

If your Account is withdrawn in full, we will deduct the full amount of the Account Fee at the time of the withdrawal. In addition, on the Annuity Commencement Date we will deduct a pro rata portion of the Account Fee to reflect the time elapsed between the last Account Anniversary and the day before the Annuity Commencement Date. After the Annuity Commencement Date, we will deduct the Account Fee in equal amounts from each annuity payment we make during the year.

The Account Fee deducted from your Account is based on the total Purchase Payments credited to all Participant Accounts under the Contract, as follows:

Total Purchase Payments
  
Account Fee
up to $250,000
  
$25
$250,000 to $1,499,000
  
$18
$1,500,000 to $4,999,999
  
$15
$5,000,000 and over
  
$12

We review the total Purchase Payments made under a Contract and semi-annually determine the applicable Account Fee for the next six months. Once total Purchase Payments under a Contract reach an amount that produces a lower Account Fee, the Account Fee for existing Accounts will not be increased even if subsequent withdrawals reduce the amount of total Purchase Payments.


We deduct a mortality and expense charge from the assets of the Variable Account during both the Accumulation Phase and the Income Phase. We assume numerous mortality and expense risks under the Contracts. These risks include, but are not limited to, (1) the risk that arises from our contractual obligation to continue to make annuity payments to each Annuitant, regardless of how long the Annuitant lives and regardless of how long all Annuitants as a group live; and (2) the risk that the Account Fee we assess under the Contracts may be insufficient to cover the actual total administrative expenses we incur. If the amount of the charge is insufficient to cover our costs from these and other mortality and expense risks, we will bear the loss. If, as we expect, the amount of the charge is more than sufficient to cover such costs, we will make a profit on the charge. We may use this profit for any proper corporate purpose, including the payment of marketing and distribution expenses for the Contracts. In setting the rate of this charge, we not only consider our expected mortality and expense risks, but also our objective to earn a profit from the Contracts, after all of the costs, expenses, credits, and benefits we expect to pay in connection with the Contracts.

The mortality and expense risk charge is based on the total Purchase Payments credited to all Participant Accounts under the Contract, and is deducted from the assets of the Variable Account at the following effective annual rate:

Total Purchase Payments
  
Annual Rate of Charge
up to $250,000
  
1.30%
$250,000 to $1,499,000
  
1.25%
$1,500,000 to $4,999,999
  
1.10%
$5,000,000 and over
  
0.95%

We review the total Purchase Payments made under a Contract and semi-annually determine the applicable mortality and expense risk charge for the next six months. Once total Purchase Payments under a Contract reach an amount that produces a lower charge, the charge for existing Accounts will not be increased even if subsequent withdrawals reduce the amount of total Purchase Payments.


Some states and local jurisdictions impose a premium tax on us that is equal to a specified percentage of the Purchase Payments made under the Contract. In many states there is no premium tax. We believe that the amounts of applicable premium taxes currently range from 0% to 3.5%. You should consult a qualified tax professional to find out if your state imposes a premium tax and the amount of any tax.

In order to reimburse us for the premium tax we may pay on Purchase Payments, our policy is to deduct the amount of such taxes from the amount applied to provide an annuity at the time of annuitization. However, we reserve the right to deduct the amount of any applicable tax from your Account at any time, including at the time a Purchase Payment or full or partial withdrawal is made. We do not make any profit on the deductions we make to reimburse premium taxes.


There are fees and charges deducted from each Mutual Fund and each portfolio of the Trust. These fees and expenses are described in the Mutual Funds and Trust prospectuses and related Statements of Additional Information.


We may modify the Account Fee and the mortality and expense risk charge upon notice to Owners. However, such modification will apply only with respect to Participant Accounts established after the effective date of the modification.


If you die during the Accumulation Phase, we will pay a death benefit to the designated Beneficiary(ies), using the payment method elected (a single cash payment or one of our Annuity Options). If the Beneficiary is not living on the date of death, we will pay the death benefit in one sum to your estate. We do not pay a death benefit if you die during the Income Phase. However, the Beneficiary will receive any payments provided under an Annuity Option that is in effect.


To calculate the amount of the death benefit, we use a “Death Benefit Date.” If the Owner has elected a death benefit payment method before your death and it remains effective, the Death Benefit Date is the date we receive proof of your death in an acceptable form (“Due Proof of Death”) (unless the Beneficiary is not living on the date of death, in which case the Death Benefit Date is the date we receive Due Proof of Death of both you and your Beneficiary). Otherwise, the Death Benefit Date is the later of the date we receive Due Proof of Death and any required consent or release or the date we receive the Beneficiary’s election of either payment method. If we do not receive the Beneficiary’s election within 60 days after we receive Due Proof of Death, the Death Benefit Date will be the last day of the 60-day period.

The amount of the death benefit is determined as of the Death Benefit Date. It is equal to greater of:

(1)
your Account Value or
   
(2)
the total Purchase Payments made to your Account less the sum of all withdrawals, loans and unpaid Net Loan Interest.


The death benefit may be paid in a single cash payment or as an annuity (either fixed, variable or a combination) under one or more of our Annuity Options. We describe the Annuity Options in this Prospectus under “Income Phase -- Annuity Provisions.”

During the Accumulation Phase, the Owner (or you, if permitted by your plan) may elect the method of payment for the death benefit. These elections are made by sending us at our Annuity Service Mailing Address an election form, which we will provide. If no such election is in effect on the date of your death, the Beneficiary may elect either a single cash payment or an annuity. If we do not receive the Beneficiary’s election within 60 days after we receive Due Proof of Death, we will pay the death benefit in a single cash payment.

If we pay the death benefit in the form of an Annuity Option, the Beneficiary becomes the Annuitant under the terms of that Annuity Option.


If you participate under a Non-Qualified Contract, special distribution rules apply to the payment of the death benefit. The amount of the death benefit must be distributed either (1) as a lump sum within 5 years after your death or (2) if in the form of an annuity, over a period not greater than the life or expected life of the “designated beneficiary” within the meaning of Section 72(s) of the Internal Revenue Code, with payments beginning no later than one year after your death.

The person you have named as Beneficiary under your Certificate, if any, will be the “designated beneficiary.” If the named Beneficiary is not living and no contingent beneficiary has been named, the surviving Participant, if any, or the estate of the deceased Participant automatically becomes the designated beneficiary.
 
If the designated beneficiary is your surviving spouse, your spouse may continue the Certificate in his or her own name as Participant. To make this election, your spouse must give us written notification within 60 days after we receive Due Proof of Death. In that case, we will not pay a death benefit and the Account Value will remain unchanged. The special distribution rules will then apply on the death of your spouse.

During the Income Phase, if the Annuitant dies, the remaining value of the Annuity Option in place must be distributed at least as rapidly as the method of distribution under that option.

Payments made in contravention of these special rules would adversely affect the treatment of the Contracts as annuity contracts under the Internal Revenue Code. Neither you nor the Beneficiary may exercise rights that would have that effect.


You select your Beneficiary in your Participant Enrollment Form. The Owner may change your Beneficiary at any time during the Accumulation Phase by sending us written notice, unless an irrevocable Beneficiary designation previously has been made. A new Beneficiary designation is not effective until we record the change.


Payment of the death benefit in cash will be made within 7 days of the Death Benefit Date, except if we are permitted to defer payment in accordance with the Investment Company Act of 1940. If an Annuity Option is elected, the Annuity Commencement Date will be the first day of the second calendar month following the Death Benefit Date, and your Account will remain in effect until the Annuity Commencement Date.


We accept any of the following as proof of any person’s death:

l
an original certified copy of an official death certificate;
   
l
an original certified copy of a decree of a court of competent jurisdiction as to the finding of death; or
   
l
any other proof we find satisfactory.


During the Income Phase, we make regular monthly payments to the Annuitant. If you are alive on the Annuity Commencement Date, you will be the Annuitant. When an Annuity Option has been selected as the method of paying the death benefit, the Beneficiary is the Annuitant.

The Income Phase of your Certificate begins with the Annuity Commencement Date. On that date, we apply your Account Value, adjusted as described, under the Annuity Option or Options selected, and we make the first payment.

Once the Income Phase begins, no lump sum settlement option or cash withdrawals are permitted, and the Annuity Option selected cannot be changed. The Owner may request a full withdrawal before the Annuity Commencement Date, which will be subject to all charges applicable on withdrawals. See “Withdrawals, Withdrawal Charge, Market Value Adjustment and Loan Provision.”


The Owner (or you, if permitted by your plan) selects the Annuity Commencement Date at the time your Account is established. The Owner (or you, if permitted by your plan) may change the Annuity Commencement Date by sending us written notice, with the following limitations:

l
The Annuity Commencement Date must always be the first day of a calendar month.
   
l
We must receive the notice, in good order, at least 30 days before the current Annuity Commencement Date.
   
l
The new Annuity Commencement Date must be at least 30 days after we receive the notice.
   
l
The latest possible Annuity Commencement Date (“maximum Annuity Commencement Date”) is the first day of the month following your 85th birthday.

There may be other restrictions on the selection of the Annuity Commencement Date imposed by your retirement plan or applicable law. For example, in most situations, current law requires that the Annuity Commencement Date for a Qualified Contract must be no later than April 1 following the year the Annuitant reaches age 70½ (or, for Qualified Contracts other than IRAs, no later than April 1 following the year the Annuitant retires, if later than the year the Annuitant reaches age 70½).


We offer the following Annuity Options for payments during the Income Phase. Annuity Options A, B, and C may be selected for either a Variable Annuity, a Fixed Annuity, or a combination of both. Annuity Options D and E may be selected only to provide a Fixed Annuity. We may also agree to other settlement options, at our discretion.

     Annuity Option A - Life Annuity

We provide monthly payments during the lifetime of the Annuitant. Annuity payments stop when the Annuitant dies. There is no provision for continuation of any payments to a Beneficiary.

     Annuity Option B - Life Annuity With 60, 120, 180 or 240 Monthly Payments Certain

We make monthly payments during the lifetime of the Annuitant. In addition, we guarantee that the Beneficiary will receive monthly payments for the remainder of the period certain, if the Annuitant dies during that period. The election of a longer period results in smaller monthly payments. If no Beneficiary is designated, we pay the discounted value of the remaining payments in one sum to the Annuitant’s estate. The Beneficiary may also elect to receive the discounted value of the remaining payments in one sum. The discount rate for Variable Annuity payments will be 4%; the discount rate for a Fixed Annuity will be based on the interest rate we used to determine the amount of each payment.

     Annuity Option C - Joint and Survivor Annuity

We make monthly payments during the lifetime of the Annuitant and another designated person and during the lifetime of the survivor of the two. We stop making payments when the survivor dies. There is no provision for continuance of any payments to a Beneficiary.

     Annuity Option D - Fixed Monthly Payments for a Specified Period Certain

We make monthly payments for a specified period of time from 5 years to 30 years for Non-Qualified Contracts and 3 years to 30 years for Qualified Contracts, as elected. The longer the period elected, the smaller the monthly payments will be. In addition, we guarantee that the Beneficiary will receive monthly payments for the remainder of the period certain, if the Annuitant dies during that period. If no Beneficiary is designated, we pay some or all of the discounted value of the remaining payments to the Annuitant’s estate. The Beneficiary may also elect to receive some or all of the discounted value of the remaining payments. The discount rate for this purpose will be based on the interest rate we used to determine the amount of each payment. The election of this Annuity Option may result in the imposition of a penalty tax.

     Annuity Option E - Fixed Payments

We will hold the amount applied to provide fixed payments in accordance with this option at interest. We will make fixed payments in such amounts and at such times (at least over a period of five years for Non-Qualified Contracts) as we have agreed upon and will continue until the amount we hold with interest is exhausted. We will credit interest yearly on the amount remaining unpaid at a rate which we will determine from time to time but which will not be less than 4% per year compounded annually. We may change the rate so determined at any time; however, the rate may not be reduced more frequently than once during each calendar year. In addition, we guarantee that the Beneficiary will receive any remaining payments if the Annuitant dies before the amount we hold is exhausted. If no Beneficiary is designated, we pay the amount remaining unpaid in one sum to the Annuitant’s estate. The Beneficiary may also elect to receive the amount remaining unpaid in one sum. The election of this Annuity Option may result in the imposition of a penalty tax.


The Owner (or you, if permitted by your plan) selects one or more of the Annuity Options, which the Owner (or you, if permitted by your plan) may change from time to time during the Accumulation Phase, as long as we receive the selection or change in writing at least 30 days before the Annuity Commencement Date. If we have not received a written selection on the 30th day before the Annuity Commencement Date, you will receive Annuity Option B, for a life annuity with 120 monthly payments certain.

The Owner (or you, if permitted by your plan) may specify the proportion of your Adjusted Account Value that will provide a Variable Annuity or a Fixed Annuity. Under a Variable Annuity, the dollar amount of payments will vary, while under a Fixed Annuity, the dollar amount of payments will remain the same. If a Variable Annuity or a Fixed Annuity is not specified, your Adjusted Account Value will be divided between Variable Annuities and Fixed Annuities in the same proportions as your Account Value was divided between the Variable and Fixed Accounts on the Annuity Commencement Date. Your Adjusted Account Value applied to a Variable Annuity may be allocated among the Sub-Accounts, or we will use the existing allocations.

There may be additional limitations on the options that may be elected under your particular retirement plan or applicable law.

Remember that the Annuity Options may not be changed once annuity payments begin.


     Adjusted Account Value

The Adjusted Account Value is the amount we apply to provide a Variable Annuity and/or a Fixed Annuity. We calculate Adjusted Account Value by taking your Account Value on the Business Day just before the Annuity Commencement Date and making the following adjustments:

l
we deduct a proportional amount of the Account Fee, based on the fraction of the current Account Year that has elapsed;
   
l
if applicable, we deduct the withdrawal charge and any unpaid Net Loan Interest;
   
l
if applicable, we apply the Market Value Adjustment to your Account Value in the Fixed Account, which may result in a deduction, an addition, or no change; and
   
l
we deduct any applicable premium tax or similar tax if not previously deducted.

     Variable Annuity Payments

Variable Annuity payments may vary each month. We determine the dollar amount of the first payment using the portion of your Adjusted Account Value applied to a Variable Annuity and the Annuity Payment Rates in your Contract, which are based on an assumed interest rate of 4% per year, compounded annually. See “Annuity Payment Rates.”

To calculate the remaining payments, we convert the amount of the first payment into Annuity Units for each Sub-Account; we determine the number of those Annuity Units by dividing the portion of the first payment attributable to the Sub-Account by the Annuity Unit Value of that Sub-Account for the Valuation Period ending just before the Annuity Commencement Date. This number of Annuity Units for each Sub-Account will remain constant (unless the Annuitant requests an exchange of Annuity Units). However, the dollar amount of the next Variable Annuity payment, which is the sum of the number of Annuity Units for each Sub-Account times its Annuity Unit Value for the Valuation Period ending just before the date of the payment, will increase, decrease, or remain the same, depending on the net investment return of the Sub-Accounts.

If the net investment return of the Sub-Accounts selected is the same as the assumed interest rate of 4%, compounded annually, the payments will remain level. If the net investment return exceeds the assumed interest rate, payments will increase and, conversely, if it is less than the assumed interest rate, payments will decrease.

Please refer to the Statement of Additional Information for more information about calculating Variable Annuity Units and Variable Annuity payments, including examples of these calculations.

     Fixed Annuity Payments

Fixed Annuity payments are the same each month. We determine the dollar amount of each Fixed Annuity payment using the fixed portion of your Adjusted Account Value and the applicable Annuity Payment Rates. These will be either (1) the rates in your Contract, which are based on a minimum guaranteed interest rate of 4% per year, compounded annually, or (2) new rates we have published and are using on the Annuity Commencement Date, if they are more favorable. See “Annuity Payment Rates.”

Exchange of Variable Annuity Units

During the Income Phase, the Annuitant may exchange Annuity Units from one Sub-Account to another, up to 12 times each Account Year. To make an exchange, the Annuitant sends us, at our Annuity Service Mailing Address, a written request stating the number of Annuity Units in the Sub-Account he or she wishes to exchange and the new Sub-Account for which Annuity Units are requested. The number of new Annuity Units will be calculated so the dollar amount of an annuity payment on the date of the exchange would not be affected. To calculate this number, we use Annuity Unit values for the Valuation Period during which we receive the exchange request.

We permit only exchanges among Sub-Accounts. No exchanges to or from a Fixed Annuity are permitted.

Account Fee

During the Income Phase, we deduct the applicable Account Fee in equal amounts from each annuity payment.

Annuity Payment Rates

The Contract contains Annuity Payment Rates for each Annuity Option described in this Prospectus. The rates show, for each $1,000 applied, the dollar amount of: (a) the first monthly Variable Annuity payment based on the assumed interest rate specified in the applicable Contract (at least 4% per year, compounded annually); and (b) the monthly Fixed Annuity payment, when this payment is based on the minimum guaranteed interest rate specified in the Contract (at least 4% per year, compounded annually). We may change these rates for Accounts established after the effective date of such change (See “Other Contract Provisions -- Modification”).

The Annuity Payment Rates may vary according to the Annuity Option elected and the adjusted age of the Annuitant. The Contract also describes the method of determining the adjusted age of the Annuitant. The mortality table used in determining the Annuity Payment Rates for Options A, B and C is the 1971 Individual Annuitant Mortality Table with ages reduced by one year for Annuity Commencement Dates occurring during the 1980s, two years for Annuity Commencement Dates occurring during the 1990s, and so on.


 
 
 


The Owner or your Beneficiary may also select one or more Annuity Options to be used in the event of your death before the Income Phase, as described under the “Death Benefit” section of this Prospectus. In that case, your Beneficiary will be the Annuitant. The Annuity Commencement Date will be the first day of the second month beginning after the Death Benefit Date.


Exercise of Contract Rights

The Contract belongs to the Owner. All Contract rights and privileges can be exercised by the Owner without the consent of the Participant, the Beneficiary or any other person, except as the Owner may provide under the plan or other applicable documents. Such rights and privileges may be exercised, with respect to a particular Participant, only during the lifetime of the Participant before the Annuity Commencement Date, except as the Contract otherwise provides.

The Annuitant becomes the Payee on and after the Annuity Commencement Date. The Beneficiary becomes the Payee on the death of the Participant prior to the Annuity Commencement Date, or on the death of the Annuitant after the Annuity Commencement Date. Such Payee may thereafter exercise such rights and privileges, if any, of ownership which continue.


Ownership of a Qualified Contract may not be transferred except to: (1) the Participant or Beneficiary; (2) a trustee or successor trustee of a pension or profit sharing trust which is qualified under Section 401 of the Internal Revenue Code; (3) the employer of the Annuitant, provided that the Qualified Contract after transfer is maintained under the terms of a retirement plan qualified under Section 403(a) of the Internal Revenue Code for the benefit of the Annuitant; (4) the trustee of an individual retirement account plan qualified under Section 408 of the Internal Revenue Code for the benefit of the participants under a group contract; or (5) as otherwise permitted from time to time by laws and regulations governing the retirement or deferred compensation plans for which a Qualified Contract may be issued. Subject to the foregoing, a Qualified Contract may not be sold, assigned, transferred, discounted or pledged as collateral for a loan or as security for the performance of an obligation or for any other purpose to any person other than the Company.

The Owner of a Non-Qualified Contract may change the ownership of the Contract during the lifetime of any Participant and prior to the last remaining Participant’s Annuity Commencement Date. A change of ownership will not be binding on us until we receive written notification. When we receive such notification, the change will be effective as of the date on which the request for change was signed by the Owner or Participant, as appropriate, but the change will be without prejudice to us on account of any payment we make or any action we take before receiving the change.


We will vote Mutual Fund and Trust shares held by the Sub-Accounts at meetings of shareholders of the Mutual Funds and Trust or in connection with similar solicitations, but will follow voting instructions received from persons having the right to give voting instructions. During the Accumulation Phase, the Owner will have the right to give voting instructions. During the Income Phase, the Payee (that is the Annuitant or Beneficiary entitled to receive benefits) is the person having such voting rights. We will vote any shares attributable to us and Mutual Fund and Trust shares for which no timely voting instructions are received in the same proportion as the shares for which we receive instructions from Owners and Payees, as applicable.

Owners of Qualified Contracts may be subject to other voting provisions of the particular plan and under the Investment Company Act of 1940. Employees who contribute to plans that are funded by the Contracts may be entitled to instruct the Owners as to how to instruct us to vote the Mutual Fund and Trust shares attributable to their contributions. Such plans may also provide the additional extent, if any, to which the Owners shall follow voting instructions of persons with rights under the plans. If no voting instructions are received from any such person with respect to a particular Participant Account, the Owner may instruct the Company as to how to vote the number of Trust shares for which instructions may be given.

Neither the Variable Account nor the Company is under any duty to provide information concerning the voting instruction rights to persons who may have such rights under plans, other than rights afforded under the Investment Company Act of 1940, or any duty to inquire as to the instructions received by Owners, Participants or others, or the authority of any such persons, to instruct the voting of Mutual Fund or Trust shares. Except as the Variable Account or the Company has actual knowledge to the contrary, the instructions given by Owners and Payees will be valid as they affect the Variable Account, the Company and any others having voting instruction rights with respect to the Variable Account.

All Mutual Fund and Trust proxy material, together with an appropriate form to be used to give voting instructions, will be provided to each person having the right to give voting instructions at least 10 days prior to each meeting of the shareholders of the particular Mutual Fund or Trust portfolio. We will determine the number of Mutual Fund or Trust shares as to which each such person is entitled to give instructions as of a record not more than 90 days prior to each such meeting. Prior to the Annuity Commencement Date, the number of Mutual Fund or Trust shares as to which voting instructions may be given to the Company is determined by dividing the value of all of the Variable Accumulation Units of the particular Sub-Account credited to the Participant Account by the net asset value of one of the shares of the applicable Mutual Fund or Trust portfolio as of the same date. On or after the Annuity Commencement Date, the number of Mutual Fund or Trust shares as to which such instructions may be given by a Payee is determined by dividing the reserve held by the Company in the Sub-Account with respect to the particular Payee by the net asset value of one of the shares of the applicable Mutual Fund or Trust portfolio as of the same date. After the Annuity Commencement Date, the number of Mutual Fund or Trust shares as to which a Payee is entitled to give voting instructions will generally decrease due to the decrease in the reserve.


We will send you, by regular U.S. mail, confirmation of all Purchase Payments (including any interest credited), withdrawals, (including any withdrawal charges, negative market value adjustments, 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 Account Quarter, we will send you a statement showing your current Account Value, death benefit value, and investment allocation by asset class.  Each quarterly statement will detail transactions that occurred during the last Account 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.


Shares of any or all portfolios of the Trust or any particular Mutual Fund may not always be available for investment under the Contract. We may add or delete Mutual Funds or portfolios of the Trust or other investment companies as variable investment options under the Contracts. We may also substitute for the shares held in any Sub-Account shares of another Mutual Fund or portfolios of the Trust or shares of another registered open-end investment company or unit investment trust, provided that the substitution has been approved, if required, by the SEC. In the event of any substitution pursuant to this provision, we may make appropriate endorsement to the Contract to reflect the substitution.


At our election and subject to any necessary vote by persons having the right to give instructions with respect to the voting of Mutual Fund and Trust shares held by the Sub-Accounts, the Variable Account may be operated as a management company under the Investment Company Act of 1940 or it may be deregistered under the Investment Company Act of 1940 in the event registration is no longer required. Deregistration of the Variable Account requires an order by the SEC. In the event of any change in the operation of the Variable Account pursuant to this provision, we may make appropriate endorsement to the Contract to reflect the change and take such other action as may be necessary and appropriate to effect the change.


We reserve the right to split or combine the value of Variable Accumulation Units, Annuity Units or any of them. In effecting any such change of unit values, strict equity will be preserved and no change will have a material effect on the benefits or other provisions of the Contract.


Upon notice to the Owner (or the Payee(s) during the Income Phase), we may modify the Contract if such modification: (1) is necessary to make the Contract or the Variable Account comply with any law or regulation issued by a governmental agency to which the Company or the Variable Account is subject; (2) is necessary to assure continued qualification of the Contract under the Internal Revenue Code or other federal or state laws relating to retirement annuities or annuity contracts; ( 3) is necessary to reflect a change in the operation of the Variable Account or the Sub-Account(s) (See “Change in Operation of Variable Account”); (4) provides additional Variable Account and/or fixed accumulation options or (5) as may otherwise be in the best interests of Owners, Participants, or Payees, as applicable. In the event of any such modification, we may make appropriate endorsement in the Contract to reflect such modification.

In addition, upon notice to the Owner, we may modify a Contract to change the withdrawal charges, Account Fees, mortality and expense risk charges, the tables used in determining the amount of the first monthly Variable Annuity and Fixed Annuity payments and the formula used to calculate the Market Value Adjustment, provided that such modification applies only to Participant Accounts established after the effective date of such modification. In order to exercise our modification rights in these particular instances, we must notify the Owner of such modification in writing. The notice shall specify the effective date of such modification which must be at least 60 days following the date we mail notice of modification. All of the charges and the annuity tables which are provided in the Contract prior to any such modification will remain in effect permanently, unless improved by the Company, with respect to Participant Accounts established prior to the effective date of such modification.


We may limit or discontinue the acceptance of new Participant Enrollment Forms and the issuance of new Certificates under a Contract by giving 30 days prior written notice to the Owner. This will not affect rights or benefits with respect to any Participant Accounts established under such Contract prior to the effective date of such limitation or discontinuance.


If the Owner is establishing an Individual Retirement Annuity (“IRA”), the Internal Revenue Code requires that we give the Owner a disclosure statement containing certain information about the Contract and applicable legal requirements. We must give the Owner this statement on or before the date the IRA is established. If we give the Owner the disclosure statement before the seventh day preceding the date the IRA is established, the Owner will not have any right of revocation under the Code. If we give the Owner the disclosure statement at a later date, then the Owner may give us a notice of revocation at any time within 7 days after the date the IRA is established. Upon such revocation, we will refund all Purchase Payments made to the Contract.


The Contracts described in this Prospectus are designed for use by employer, association and other group retirement plans under the provisions of Sections 401 (including Section 401(k), 403, 408(c), 408(k) and 408(p)) of the Internal Revenue Code (the “Code”), as well as certain non-qualified retirement plans, such as payroll savings plans. The ultimate effect of federal income taxes on the Contract’s Accumulation Account and the Participant Account, on an annuity payments and on the economic benefit to the Owner, the Participant, the Annuitant, the Payee or the Beneficiary may depend upon the type of Plan for which the Contract is purchased and a number of different factors. The discussion contained herein is general in nature, is based upon the Company’s understanding of current federal income tax laws, is not intended as tax advice, and makes no attempt to consider any applicable federal estate, federal gift, state or other tax laws. Legislation affecting the tax treatment of annuity contracts could be enacted in the future and could apply retroactively to Contracts purchased before the date of enactment. A person contemplating the purchase of a Contract or the execution of a Contract transaction (such as a rollover, distribution, withdrawal or payment) should consult a qualified tax professional. The Company does not make any guarantee regarding the federal, state or local tax status of any Contract or any transaction involving the Contracts.

U.S. Federal Income Tax Considerations

The following discussion applies only to those Contracts issued in the United States. For a discussion of tax considerations affecting Contracts issued in Puerto Rico, see “Puerto Rico Tax Considerations.”

      Deductibility of Purchase Payments

For federal income tax purposes, contributions made under Non-Qualified Contracts are not deductible.  Under certain circumstances, contributions made under Qualified Contracts may be excludible or deductible from taxable income.  Any such amounts will also be excluded from a Qualified Contract’s cost basis for purposes of determining the taxable portion of any distributions from a Qualified Contract. As a general rule, regardless of whether you own a Qualified or a Non-Qualified Contract, the amount of your tax liability on earnings and distributions will depend upon the specific tax rules applicable to your Contract and your particular circumstances.

      Pre-Distribution Taxation of Contracts

Generally, no taxes are imposed on the increases in the value of a Contract until a distribution occurs, either as annuity payments under the Annuity Option elected or in the form of cash withdrawals or lump-sum payments prior to the Annuity Commencement Date.

Corporate Owners and other Owners that are non-natural persons (other than the estate of a decedent Owner) are subject to current taxation on the annual increase in the value of a Non-Qualified Contract’s Accumulation Account. This rule does not apply where a non-natural person holds the Contract as agent for a natural person (such as where a bank holds a Contract as trustee under a trust agreement). This provision does not apply to earnings accumulated where the Annuity Commencement Date occurs within one year of the Date of Coverage. This provision applies to earnings on Purchase Payments made after February 28, 1986.

      Distributions and Withdrawals from Non-Qualified Contracts

The following discussion of annuity taxation applies only to contributions (and attributable earnings) made to Non-Qualified Contracts after August 13, 1982. If an Owner has made contributions before August 14, 1982 to another annuity contract and exchanges that contract for the Contract offered by this Prospectus, then different tax treatment will apply to the contributions (and attributable earnings) made before August 14, 1982. For example, non-taxable principal may be withdrawn before taxable earnings and the ten percent (10%) penalty tax for early withdrawal is not applicable.

The Code is unclear in its application to a group annuity contract where the Owner is distinct from the individuals with respect to whom the Contract benefits are accumulated (the Participants). The following discussion is the Company’s best understanding of the operation of the Code in the context of group contracts. However, Owners and Participants should consult a qualified tax professional.

For Non-Qualified Contracts offered by this Prospectus (other than Contracts issued in exchange for contracts issued prior to August 14, 1982, as described above), a partial cash withdrawal (that is, a withdrawal of less than the entire value of the Participant’s Account) must be treated first as a withdrawal from the increase in the Participant’s Account’s value over the Contract’s cost basis. The amount of the withdrawal so allocable will be includable in the Participant’s income. Similarly, if a Participant receives a loan under a Contract or if part or all of a Participant’s Account is assigned or pledged as collateral for a loan, the amount of the loan or the amount assigned or pledged must be treated as if withdrawn from the Contract. For Non-Qualified Contracts entered into after October 21, 1988 (or any annuity contract entered into on or before such date that is exchanged for a Non-Qualified Contract issued after such date), any withdrawal or loan amount that is includable in the Participant’s income will increase the Contract’s cost basis. Repayment of a loan or payment of interest on a loan will not affect the Contract’s cost basis. For these purposes the Participant’s Account value will not be reduced by the amount of any loan, assignment or pledge of the Contract. In addition, all non-qualified deferred annuity certificates or other non-qualified deferred annuity contracts that are issued by the Company to the same Participant during any calendar year will be treated as a single annuity contract. Therefore, the proceeds of a withdrawal from, or assignment or pledge of, one or more such contracts or certificates will be fully includable in the Participant’s income to the extent of the aggregate excess of the accumulation account values over the cost bases of all such contracts or certificates entered into during the calendar year.

The taxable portion of a cash withdrawal or a lump-sum payment prior to the Annuity Commencement Date is subject to tax at ordinary income rates. In the case of payments after the Annuity Commencement Date under the Annuity Option elected, a portion of each payment generally is taxable at ordinary income rates. The nontaxable portion is determined by applying to each payment an “exclusion ratio” which is the ratio that the Participant’s cost basis in the Contract bears to the Payee’s expected return under the Contract. The remainder of the payment is taxable.

The total amount that a Payee may exclude from income through application of the “exclusion ratio” is limited to the cost basis in the Contract. If the Payee survives for his or her full life expectancy, and thereby recovers the entire basis in the Contract, any subsequent annuity payment after basis recovery will be fully taxable as income. Conversely, if the Payee dies prior to recovering the entire basis, he or she will be allowed a deduction on his or her final income tax return for the amount of the unrecovered basis. This limitation applies to distributions made under a Contract with an Annuity Commencement Date after December 31, 1986.

In the case of Non-Qualified Contracts, taxable cash withdrawals and lump-sum payments will be subject to a ten percent (10%) penalty, except in the circumstances described below. This ten percent (10%) penalty also affects certain annuity payments. In a situation where this penalty applies, the recipient’s tax for the tax year in which the amount is received shall be increased by an amount equal to ten percent (10%) of the portion of the amount which is includible in the recipient’s gross income. The circumstances in which this penalty will not apply are distributions which are: (a) made upon the death of the Participant; or (b) allocable to Purchase Payments made before August 14, 1982. Further, in the case of Contracts issued prior to January 18, 1985, the ten percent (10%) penalty on taxable cash withdrawals and lump-sum distributions will not apply if the amount withdrawn is allocable to a Purchase Payment made prior to the preceding ten (10) year period. For this purpose, a “first in, first out” rule is used, so that the earliest Purchase Payment with respect to which amounts have not been previously fully allocated will be deemed to be the source of the amount.

In the case of the Non-Qualified Contracts, if the Participant dies before the Annuity Commencement Date the entire value of the Participant’s account must be either (1) distributed within 5 years after the date of death of the Participant, or (2) distributed over some period not greater than the life expectancy of the designated Beneficiary, with annuity payments beginning within one year after the date of death of the Participant. If a Payee dies on or after the Annuity Commencement Date and before the entire Participant’s Account has been distributed, the remaining portion of such accumulation, if any, must be distributed at least as rapidly as the method of distribution then in effect. These distribution requirements will not apply where the Beneficiary is the spouse of the Participant; rather, in such a case, the Contract may be continued in the name of the spouse as Participant or Payee. In the case of the Contracts issued prior to January 18, 1985, these rules regarding distributions upon the death of the Participant or the Annuitant will not apply. In the case of Contracts issued after April 22, 1987, a change in the Participant would be treated as the death of the Participant. Distributions required due to the death of the Participant will not be subject to the ten percent (10%) penalty on premature distributions. A purchaser of a Qualified Contract should refer to the terms of the applicable retirement plan and contact a qualified tax professional regarding distribution requirements upon the death of the Participant.

A transfer of a Non-Qualified Contract by gift (other than to the Participant’s spouse) is treated as the receipt by the Participant of income in an amount equal to the excess of the cash surrender value over the Contract’s cost basis. This provision applies to Contracts issued after April 22, 1987.

      Distributions and Withdrawals from Qualified Contracts

In the case of Qualified Contracts, distributions made prior to age 59½ generally are subject to a ten percent (10%) penalty tax, although this tax will not apply in certain circumstances. Certain distributions, known as “eligible rollover distributions,” if rolled over to certain other qualified retirement plans (either directly or after being distributed to the Participant or Payee), are not taxable until distributed from the plan to which they are rolled over. In general, an eligible rollover distribution is any taxable distribution other than a distribution that is part of a series of payments made for life or for a specified period of ten years or more. Owners, Participants, Annuitants, Payees and Beneficiaries should seek qualified advice about the tax consequences of distributions, withdrawals, rollovers and payments under the retirement plans in connection with which the Contracts are purchased.


 
 
 

      Withholding

The Company will withhold and remit to the U.S. Government a part of the taxable portion of each distribution made under a Non-Qualified Contract or under a Qualified Contract issued for use with an individual retirement account unless the Participant or Payee provides his or her taxpayer identification number to the Company and notifies the Company (in the manner prescribed) before the time of the distribution that the Participant or Payee chooses not to have any amounts withheld.

In the case of distributions from a Qualified Contract (other than distributions from a Contract issued for use with an individual retirement account), the Company or the plan administrator must withhold and remit to the U.S. Government 20% of each distribution that is an eligible rollover distribution (as defined above) unless the Participant or Payee elects to make a direct rollover of the distribution to another qualified retirement plan that is eligible to receive the rollover. If a distribution from a Qualified Contract is not an eligible rollover distribution, then the Participant or Payee can choose not to have amounts withheld as described above for Non-Qualified Contracts and Qualified Contracts issued for use with individual retirement accounts.

Amounts withheld from any distribution may be credited against the Participant’s or Payee’s federal income tax liability for the year of the distribution.

      Investment Diversification and Control

The Treasury Department has issued regulations that prescribe investment diversification requirements for the mutual fund series underlying nonqualified variable contracts. All Non-Qualified Contracts must comply with these regulations to qualify as annuities for federal income tax purposes. The owner of a Non-Qualified Contract that does not meet these guidelines will be subject to current taxation on annual increases in value of the Contract.  The Company believes that each Series of the Trust available as an investment option under the Contract complies with these regulations.

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 in those assets, 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 therefore reserve the right to modify the Contracts as necessary to attempt to prevent you from being considered the owner, for tax purposes, of the underlying assets.  We also reserve the right to notify you if we determine that it is no longer practicable to maintain the Contract in a manner that was designed to prevent you from being considered the owner of the assets of the Variable Account.  You bear the risk that you may be treated as the owner of Variable Account assets and taxed accordingly.

      Tax Treatment of the Company and the Variable Account

As a life insurance company under the Code, we will record and report operations of the Variable Account separately from other operations. The Variable Account will not, however, constitute a regulated investment company or any other type of taxable entity distinct from our other operations. Under present law, we will not incur tax on the income of the Variable Account (consisting primarily of interest, dividends, and net capital gains) if we use this income to increase reserves under Contracts participating in the Variable Account.

Qualified Retirement Plans

“Qualified Contracts” are Contracts used with plans that receive tax-deferral treatment pursuant to specific provisions of the Code.  Annuity contracts also receive tax-deferral treatment.  It is not necessary that you purchase an annuity contract to receive the tax-deferral treatment available through a Qualified Contract.  If you purchase this annuity Contract as a Qualified Contract, you do not received additional tax-deferral.  Therefore, if you purchase this annuity Contract as a Qualified Contract, you should do so for reasons other than obtaining tax deferral.

The Qualified Contracts described in this Prospectus are designed for use with several types of qualified retirement plans. Following are brief descriptions of various types of qualified retirement plans and the use of the Qualified Contracts in connection therewith. The tax rules applicable to participants in such qualified retirement plans vary according to the type of plan and its terms and conditions. Therefore, no attempt is made herein to provide more than general information about the use of the Qualified Contracts with the various types of qualified retirement plans. Participants under such plans, as well as Owners, Annuitants, Payees and Beneficiaries, are cautioned that the rights of any person to any benefits under these plans may be subject to the terms and conditions of the plans themselves, regardless of the terms and conditions of the Qualified Contracts issued in connection therewith. These terms and conditions may include restrictions on, among other things, ownership, transferability, assignability, contributions and distributions.

Any person contemplating the purchase of a Qualified Contract should consult a qualified tax professional. In addition, Owners, Participants, Payees, Beneficiaries and administrators of qualified retirement plans should consider and consult a qualified tax professional concerning whether the death benefit payable under the Contract affects the qualified status of their retirement plan. Following are brief descriptions of various types of qualified retirement plans and the use of the Qualified Contracts in connection therewith.

Pension and Profit-Sharing Plans

Sections 401(a), 401(k) and 403(a) of the Code permit business employers and certain associations to establish various types of retirement plans for employees. The Code requirements are similar for qualified retirement plans of corporations and those of self-employed individuals. The Contract may be purchased by those who would have been covered under the rules governing old H.R. 10 (Keogh) Plans, as well as by corporate plans. Such retirement plans may permit the purchase of the Qualified Contracts to provide benefits under the plans. Employers intending to use the Qualified Contracts in connection with such plans should seek qualified advice in connection therewith.

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 limitations, exclude the amount of purchase payments from gross income for tax purposes. The Code imposes restrictions on cash withdrawals from Section 403(b) annuities (“TSA”).

Effective October 1, 2008, we stopped issuing any new TSAs, including Texas Optional Retirement Program annuities. We no longer accept any additional Purchase Payments to any previously issued TSAs.

The Internal Revenue Service’s (“IRS”) comprehensive TSA regulations are generally effective January 1, 2009, and these regulations, subsequent IRS guidance, and/or the terms of an employer’s TSA plan impose new restrictions on TSAs, including restrictions on (1) the availability of hardship distributions and loans, (2) TSA exchanges within the same employer’s TSA plan, and (3) TSA transfers to another employer’s TSA plan.  You should consult with a qualified tax professional about how the regulations affect you and your TSA.

If TSAs are to receive tax deferred treatment, cash withdrawals of amounts attributable to salary reduction contributions (other than withdrawals of accumulation account value as of December 31, 1988) may be made only when you attain age 59½, have a severance from employment with the employer, die or become disabled (within the meaning of Section 72(m)(7) of the Code). These restrictions apply to (i) any post-1988 salary reduction contributions, (ii) any growth or interest on post-1988 salary reduction contributions, and (iii) any growth or interest on pre-1989 salary reduction contributions that occurs on or after January 1, 1989, and (iv) any pre-1989 salary reduction contributions since we do not maintain records that separately account for such contributions. It is permissible, however, to withdraw post-1988 salary reduction contributions (but not the earnings attributable to such contributions) in cases of financial hardship. Financial hardship withdrawals (as well as certain other premature withdrawals) are fully taxable and will be subject to a 10% federal income tax penalty, in addition to any applicable Contract withdrawal charge. Under certain circumstances the 10% federal income tax penalty will not apply if the withdrawal is for medical expenses. A financial hardship withdrawal may not be repaid once it is taken.

The IRS’s TSA regulations provide that TSA financial hardship withdrawals will be subject to the IRS rules applicable to hardship distributions from 401(k) plans.  Specifically, if you have not terminated your employment or reached age 59½, you may be able to withdraw a limited amount of monies if you have an immediate and heavy financial need and the withdrawal amount is necessary to satisfy such financial need.  An immediate and heavy financial need may arise only from:

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deductible medical expenses incurred by you, your spouse, or your dependents;
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payments of tuition and related educational fees for the next 12 months of post-secondary education for you, your spouse, or your dependents;
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costs related to the purchase of your principal residence (not including mortgage payments);
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payment necessary to prevent eviction from your principal residence or foreclosure of the mortgage on your principal residence;
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payments for burial or funeral expenses for your parent, spouse, children, or dependents; or
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expenses for the repair of damage to your principal residence that would qualify for the federal income tax casualty deduction.

You will be required to represent in writing to us (1) that your specified immediate and heavy financial need cannot reasonably be relieved through insurance or otherwise, by liquidation of your assets, by ending any contributions you are making under your TSA plan, by other distributions and nontaxable loans under any of your qualified plans, or by borrowing from commercial sources and (2) that your requested withdrawal amount complies with applicable law, including the federal tax law limit.  And, unless your TSA was issued prior to September 25, 2007 and the only payments you made to such TSA were TSA funds you transferred directly to us from another TSA carrier (a “90-24 Transfer TSA”), your TSA employer also may need to agree in writing to your hardship request.

If your TSA contains a provision that permits loans, you may request a loan but you will be required to represent in writing to us that your requested loan amount complies with applicable law, including the federal tax law limit.  And, unless your TSA is a 90-24 Transfer TSA, your TSA employer also may need to agree in writing to your loan request.

TSAs, like IRAs, are subject to required minimum distributions under the Code.  TSAs are unique, however, in that any account balance accruing before January 1, 1987 (the “pre-1987 balance”) needs to comply with only the minimum distribution incidental benefit (MDIB) rule and not also with the minimum distribution rules set forth in Section 401(a)(9) of the Code.  This special treatment for any pre-1987 balance is, however, conditioned upon the issuer identifying the pre-1987 balance and maintaining accurate records of changes to the balance.  Since we do not maintain such records, your pre-1987 balance, if any, will not be eligible for special distribution treatment.

Under the terms of a particular TSA plan, you may be entitled to transfer or exchange all or a portion of your TSA to one or more alternative funding options within the same or different TSA plan. You should consult the documents governing your TSA plan and your plan administrator for information as to such investment alternatives. If you wish to transfer/exchange your TSA, you will be able to do so only if the issuer of the new TSA certifies to us that the transfer/exchange is permissible under the TSA regulations and the applicable TSA plan.  Your TSA employer also may need to agree in writing to your transfer/exchange request.

Individual Retirement Arrangements

Sections 219 and 408 of the Code permit eligible individuals to contribute to a so-called “traditional” individual retirement program, including Individual Retirement Accounts and Annuities, and Simplified Employee Pension Plans. Such IRAs are subject to limitations on contribution levels, the persons who may be eligible, and on the time when distributions may commence. In addition, certain distributions from some other types of retirement plans may be placed in an IRA on a tax-deferred basis. The Internal Revenue Service imposes special information requirements with respect to IRAs and we will provide purchasers of the Contracts as Individual Retirement Annuities with any necessary information. You will have the right to revoke a Contract issued as an Individual Retirement Annuity under certain circumstances, as described in the section of this Prospectus entitled “Right to Return.” If your Contract is issued in connection with an Individual Retirement Account, we have no information about the Account and you should contact the Account’s trustee or custodian.

     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 70½ or, for non-IRAs, the date of retirement instead of age 70½ if it is later. The RMD amount for a distribution calendar year is generally calculated by dividing the account balance 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 so that it can be used in the Account’s RMD calculations.

Effective with the 2006 distribution calendar year, IRS regulations require that the actuarial present value of any additional benefits (such as death benefits) is to be added to the 12/31 account balance in order to calculate the RMD amount. There are two exceptions to this requirement and one of these exceptions is applicable to the Contracts. Since 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 account balance.

Puerto Rico Tax Considerations

The Contract offered by this Prospectus is considered a non-qualified annuity contract under Section 1022 of the Puerto Rico Internal Revenue Code of 1994, as amended (the “1994 Code”). Under the current provisions of the 1994 Code, no income tax is payable on increases in value of accumulation shares of annuity units credited to a variable annuity contract until payments are made to the annuitant or other payee under such contract.

When payments are made from your Contract in the form of an annuity, the annuitant or other payee will be required to include as gross income the lesser of the amount received during the taxable year or the portion of the amount received equal to 3% of the aggregate premiums or other consideration paid for the annuity. The amount, if any, in excess of the included amount is excluded from gross income as a return of premium. After an amount equal to the aggregate premiums or other consideration paid for the annuity has been excluded from gross income, all of the subsequent annuity payments are considered to be taxable income.

When a payment under a Contract is made in a lump sum, the amount of the payment would be included in the gross income of the Annuitant or other Payee to the extent it exceeds the Annuitant's aggregate premiums or other consideration paid.

The provisions of the 1994 Code with respect to qualified retirement plans described in this Prospectus vary significantly from those under the Internal Revenue Code. We currently offer the Contract in Puerto Rico in connection with Individual Retirement Arrangements that qualify under the U.S. Internal Revenue Code but do not qualify under the Puerto Rico 1994 Code. See the applicable text of this Prospectus under the heading “Federal Tax Status” dealing with such arrangements and their RMD requirements. We may make Contracts available for use with other retirement plans that similarly qualify under the U.S. Internal Revenue Code but do not qualify under the Puerto Rico 1994 Code.

As a result of IRS Revenue Ruling 2004-75, as amplified by Revenue Ruling 2004-97, we will treat Contract distributions and withdrawals occurring on or after January 1, 2005 as U.S.-source income that is subject to U.S. income tax withholding and reporting.  Under “TAX CONSIDERATIONS”, see “Pre-Distribution Taxation of Contracts”, “Distributions and Withdrawals from Non-Qualified Contracts” and “Withholding”.  You should consult a qualified tax professional for advice regarding the effect of Revenue Ruling 2004-75 on your U.S. and Puerto Rico income tax situation.

For information regarding the income tax consequences of owning a Contract in Puerto Rico, you should consult a qualified tax professional.


We perform certain administrative functions relating to the Contracts, Participant Accounts, and the Variable Account. These functions include, but are not limited to, maintaining the books and records of the Variable Account and the Sub-Accounts; maintaining records of the name, address, taxpayer identification number, Contract number, Participant Account number and type, the status of each Participant Account and other pertinent information necessary to the administration and operation of the Contracts; processing Contract applications, Participant Enrollment Forms, Purchase Payments, transfers and full and partial withdrawals; issuing Contracts and Certificates; administering annuity payments; furnishing accounting and valuation services; reconciling and depositing cash receipts; providing confirmations; providing toll-free customer service lines; and furnishing telephonic transfer services.


Contracts are sold by licensed insurance agents (“the Selling Agents”) in those states where the Contract 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 Regulatory Authority (“FINRA”) and who have entered into selling agreements with the Company and the general distributor, Clarendon Insurance Agency, Inc. (“Clarendon”), One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481.  Clarendon is a wholly-owned subsidiary of the Company, is registered with the SEC under the Securities Exchange Act of 1934 as a broker-dealer and is a member of FINRA.

The Company (or its affiliate, for purposes of this section only, collectively, “the Company”), 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 the Company 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.  The Company intends to recoup this compensation through fees and charges imposed under the Contract, and from profits on payments received by the Company for providing administrative, marketing, and other support and services to the Funds.

The amount and timing of commissions the Company may pay to Selling Broker-Dealers may vary depending on the selling agreement but is not expected to be more than 4.00% of Purchase Payments, and 0% annually of the Participant's Account Value. The Company 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 in amount 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.

In addition to the compensation described above, the Company may make additional cash payments, in certain circumstances referred to as “override” compensations, or reimbursements to Selling Broker-Dealers in recognition of their marketing and distribution, transaction processing and/or administrative services support.  These payments are not offered to all Selling Broker-Dealers, and the terms of any particular agreement governing the payments may vary among Selling Broker-Dealers depending on, among other things, the level and type of marketing and distribution support provided. Marketing and distribution support services may include, among other services, placement of the Company's products on the Selling Broker-Dealers' preferred or recommended list, access to the Selling Broker-Dealers' registered representatives for purposes of promoting sales of the Company's products, assistance in training and education of the Selling Agents, and opportunities for the Company to participate in sales conferences and educational seminars.  The payments or reimbursements may be calculated as a percentage of the particular Selling Broker-Dealer's actual or expected aggregate sales of our variable contracts (including the Contract) or assets held within those contracts and/or may be a fixed dollar amount. Broker-dealers receiving these additional payments may pass on some or all of the payments to the Selling Agent. 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.

Commissions may be waived or reduced in connection with certain transactions described in this Prospectus. No commissions were paid to Clarendon in connection with the distribution of the Contracts in 2006, 2007, and 2008.


The Company and the Variable Account have filed with the SEC registration statements under the Securities Act of 1933 relating to the Contracts. This Prospectus does not contain all of the information contained in the registration statements and their exhibits. For further information regarding the Variable Account, the Company and the Contracts, please refer to the registration statements and their exhibits.

In addition, the Company is subject to the informational requirements of the Securities Exchange Act of 1934. We file reports and other information with the SEC to meet these requirements.

You can inspect and copy this information and our registration statements at the SEC’s public reference facilities at the following locations: Washington, D.C. 100 F Street, N.E., Washington, D.C. 20549-0102, telephone (202) 551-8090; Chicago, Illinois 500 West Madison Street, Chicago, IL 60661. The Washington, D.C. office will also provide copies by mail for a fee. You may also find these materials on the SEC’s website (http://www.sec.gov).


The Company’s Annual Report on Form 10-K for the year ended December 31, 2008 filed with the SEC pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is incorporated herein by reference. All documents or reports we file pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act, after the date of this prospectus and prior to the termination of the offering, shall be deemed incorporated by reference into the prospectus.

The Company will furnish, without charge, to each person to whom a copy of this Prospectus is delivered, upon the written or oral request of such person, a copy of the documents referred to above which have been incorporated by reference into this Prospectus, other than exhibits to such document (unless such exhibits are specifically incorporated by reference in this Prospectus). Requests for such document should be directed to the Secretary, Sun Life Assurance Company of Canada (U.S.), One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481, telephone (800) 225-3950.


The Company is subject to the laws of the State of Delaware governing life insurance companies and to regulation by the Commissioner of Insurance of Delaware. An annual statement is filed with the Commissioner of Insurance on or before March lst in each year relating to the operations of the Company for the preceding year and its financial condition on December 31st of such year. Its books and records are subject to review or examination by the Commissioner or his agents at any time and a full examination of its operations is conducted at periodic intervals.

The Company is also subject to the insurance laws and regulations of the other states and jurisdictions in which it is licensed to operate. The laws of the various jurisdictions establish supervisory agencies with broad administrative powers with respect to licensing to transact business, overseeing trade practices, licensing agents, approving policy forms, establishing reserve requirements, fixing maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values, prescribing the form and content of required financial statements and regulating the type and amounts of investments permitted. Each insurance company is required to file detailed annual reports with supervisory agencies in each of the jurisdictions in which it does business and its operations and accounts are subject to examination by such agencies at regular intervals.

In addition, many states regulate affiliated groups of insurers, such as the Company, Sun Life (Canada) and its affiliates, under insurance holding company legislation. Under such laws, inter-company transfers of assets and dividend payments from insurance subsidiaries may be subject to prior notice or approval, depending on the size of such transfers and payments in relation to the financial positions of the companies involved. Under insurance guaranty fund laws in most states, insurers doing business therein can be assessed (up to prescribed limits) for policyholder losses incurred by insolvent companies. The amount of any future assessments of the Company under these laws cannot be reasonably estimated. However, most of these laws do provide that an assessment may be excused or deferred if it would threaten an insurer’s own financial strength and many permit the deduction of all or a portion of any such assessment from any future premium or similar taxes payable.

Although the federal government generally does not directly regulate the business of insurance, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures which may significantly affect the insurance business include employee benefit regulation, removal of barriers preventing banks from engaging in the insurance business, tax law changes affecting the taxation of insurance companies, the tax treatment of insurance products and its impact on the relative desirability of various personal investment vehicles.


There are no pending legal proceedings affecting the Variable Account. We and our subsidiaries are engaged in various kinds of routine litigation which, in management’s judgment, is not of material importance to our respective total assets or material with respect to the Variable Account.


The financial statements of the Company which are included in the Statement of Additional Information should be considered only as bearing on the ability of the Company to meet its obligations with respect to amounts allocated to the Fixed Account and with respect to the death benefit and the Company’s assumption of the mortality and expense risks. They should not be considered as bearing on the investment performance of the Fund shares held in the Sub-Accounts of the Variable Account.

The financial statements of the Variable Account for the year ended December 31, 2008 are also included in the Statement of Additional Information.


Sun Life Assurance Company of Canada (U.S.)
Calculations
  Example of Variable Accumulation Unit Value Calculation
  Example of Variable Annuity Unit Calculation
  Example of Variable Annuity Payment Calculation
Distribution of the Contracts
Designation and Change of Beneficiary
Custodian
Independent Registered Public Accounting Firm
Financial Strength and Credit Ratings
Financial Statements

This Prospectus sets forth information about the Contracts and the Variable Account that a prospective purchaser should know before investing. Additional information about the Contracts and the Variable Account has been filed with the Securities and Exchange Commission in a Statement of Additional Information dated May 1, 2009 which is incorporated herein by reference. The Statement of Additional Information is available upon request and without charge from Sun Life Assurance Company of Canada (U.S.). To receive a copy, return this request form to the address shown below or telephone or (800) 752-7215.

To:
Sun Life Assurance Company of Canada (U.S.)
 
P.O. Box 9133
 
Wellesley Hills, Massachusetts 02481

Please send me a Statement of Additional Information for Compass G Combination Fixed/Variable Group Annuity
Sun Life of Canada (U.S.) Variable Account D.


Name:
  
   
Address:
  
   
   
   
City:
  
State:
  
Zip Code:
  
           
Telephone:
  


 
 
 

GLOSSARY

The following terms as used in this Prospectus have the indicated meanings:

ACCOUNT or PARTICIPANT ACCOUNT: An account established for each Participant to which Net Purchase Payments are credited.

ACCOUNT VALUE: The Variable Accumulation Value, if any, plus the Fixed Accumulation Value, if any, of your Account for any Valuation Period.

ACCOUNT YEAR and ACCOUNT ANNIVERSARY: Your first Account Year is the period of (a) 12 full calendar months plus (b) the part of the calendar month in which we issue your Certificate (if not on the first day of the month), beginning with the Contract Date. Your Account Anniversary is the first day immediately after the end of an Account Year. Each Account Year after the first is the 12 calendar month period that begins on your Account Anniversary. If, for example, the Contract Date is in March, the first Account Year will be determined from the Contract Date but will end on the last day of March in the following year; your Account Anniversary is April 1 and all Account Years after the first will be measured from April 1.

ACCUMULATION ACCOUNT: An account established for the Contract.

ACCUMULATION PHASE: The period before the Annuity Commencement Date and during the lifetime of the Annuitant during which you Purchase Payments are made under the Contract. This is called the “Accumulation Period” in the Contract.

*ANNUITANT: The Participant.

*ANNUITY COMMENCEMENT DATE: The date on which the first annuity payment under each Certificate is to be made.

*ANNUITY OPTION: The method chosen for making annuity payments.

ANNUITY UNIT: A unit of measure used in the calculation of the amount of the second and each subsequent variable annuity payment from the Variable Account.

APPLICATION: The document signed by the Owner or other evidence acceptable to us that serves as the Owner’s application for the Contract.

*BENEFICIARY: Prior to the Annuity Commencement Date, the person or entity having the right to receive the death benefit and, for Non-Qualified Contracts, who, in the event of the Participant’s death, is the “designated beneficiary” for purposes of Section 72(s) of the Internal Revenue Code. After the Annuity Commencement Date, the person or entity having the right to receive any payments due under the Annuity Option elected, if applicable, upon the death of the Payee.

BUSINESS DAY: Any day the New York Stock Exchange is open for trading or any other day on which there is enough trading in securities held by a Sub-Account to materially affect the value of the Variable Accumulation Units.

CERTIFICATE: The document for each Participant which evidences the coverage of the Participant under the Contract.

COMPANY (“WE,” “US,” “SUN LIFE (U.S.)”): Sun Life Assurance Company of Canada (U.S.).

CONTRACT DATE: The date on which we issue your Certificate. This is called the “Date of Coverage” in the Contract.

CURRENT RATE: As of a particular date, the interest rate for a Guarantee Period that would be credited on a compound annual basis on Payments allocated to the Fixed Account on that date. We determine the Current rate from time to time but it will never be less than 4%.

DEATH BENEFIT DATE: If the Owner has elected a death benefit payment option before your death that remains in effect, the date on which we receive Due Proof of Death. If the Beneficiary is not living on the date of your death, the date on which we receive Due Proof of Death of you and the Beneficiary. If your Beneficiary elects the death benefit payment option, the later of (a) the date on which we receive the Beneficiary’s election and (b) the date on which we receive Due Proof of Death. If we do not receive the Beneficiary’s election within 60 days after we receive Due Proof of Death, the Death Benefit Date will be the last day of the 60 day period and we will pay the death benefit in cash.

DUE PROOF OF DEATH: An original certified copy of an official death certificate, an original certified copy of a decree of a court of competent jurisdiction as to the finding of death, or any other proof satisfactory to the Company.

EXPIRATION DATE: The last day of any Guarantee Period.

FIXED ACCOUNT: The general account of the Company, consisting of all assets of the Company other than those allocated to a separate account of the Company.

FIXED ACCOUNT VALUE: The value of that portion of your Account allocated to the Fixed Account.

FIXED ACCUMULATION UNIT: A unit of measure used in the calculation of Fixed Account Value.

FIXED ANNUITY: An annuity with payments which do not vary as to dollar amount.

GUARANTEE PERIOD: The period for which a Guaranteed Interest Rate is credited, which may be 1, 3, 5 or 7 years. There are two types of Guarantee Periods: Initial Guarantee Periods and Subsequent Guarantee Periods.

GUARANTEED INTEREST RATE: The rate of interest we credit on a compound annual basis during any Initial or Subsequent Guarantee Period.

INCOME PHASE: The period on and after the Annuity Commencement Date and during the lifetime of the Annuitant during which we make annuity payments under the Contract.

NET LOAN INTEREST: Loan interest payable to us, less any interest credited by us on amounts in the loan account established for the loan.

NON-QUALIFIED CONTRACT: A Contract used in connection with a retirement plan that does not receive favorable federal income tax treatment under Sections 401, 403, or 408 of the Internal Revenue Code.

*OWNER: The employer, association or other group entitled to the ownership rights stated in the Contract and in whose name or names the Contract is issued. The Owner may designate a trustee or custodian of a retirement plan which meets the requirements of Section 401, Section 408(c), or Section 408(k) of the Internal Revenue Code to serve as legal owner of assets of a retirement plan, but the term “Owner,” as used herein, shall refer to the organization entering into the Contract.

PARTICIPANT: The person named in the Certificate who is entitled to benefits under the plan as determined and reported to the Company by the Owner.

PARTICIPANT ENROLLMENT FORM: The document signed by you that serves as your application for participation under the Contract.

PAYEE: A recipient of payments under a Contract. The term includes an Annuitant or a Beneficiary who becomes entitled to benefits upon the death of the Participant.

PURCHASE PAYMENT (PAYMENT): An amount paid to the Company as consideration for the benefits provided by a Contract.

QUALIFIED CONTRACT: A Contract used in connection with a retirement plan which may receive favorable federal income tax treatment under Sections 401, 403, 408(c), 408(k) or 408(p) of the Internal Revenue Code of 1986, as amended.

SUB-ACCOUNT: That portion of the Variable Account which invests in shares of a specific Mutual Fund or a specific series of the Trust.

TRUST: MFS/Sun Life Variable Insurance Trust II.

VALUATION PERIOD: The period of time from one determination of Accumulation Unit or Annuity Unit values to the next subsequent determination of these values. Value determinations are made as of the close of the New York Stock Exchange on each day that the Exchange is open for trading.

VARIABLE ACCOUNT: Variable Account D of the Company, which is a separate account of the Company consisting of assets set aside by the Company, the investment performance of which is kept separate from that of the general assets of the Company.

VARIABLE ACCUMULATION UNIT: A unit of measure used in the calculation of Variable Account Value.

VARIABLE ACCOUNT VALUE: The value of that portion of your Account allocated to the Variable Account.

VARIABLE ANNUITY: An annuity with payments which vary as to dollar amount in relation to the investment performance of the Variable Account.

* These items are specified in the Participant Enrollment Form, and may be changed as we describe in this Prospectus.


 
 
 

WITHDRAWALS, WITHDRAWAL CHARGES AND THE MARKET VALUE ADJUSTMENT

A. Fixed Account  3, 5 and 7 Year Guarantee Periods:

For the purposes of this illustration, the following assumptions have been made:

1.
100% of Purchase Payments have been allocated to the Fixed Account and the Owner has elected Initial Guarantee Periods of five 5 years.
   
2.
The date of full surrender or partial withdrawal is the last day of the 12th month following the Date of Coverage.
   
3.
The Guarantee Rate being credited on Payments allocated to the five 5-year Guarantee Period on the date of full surrender or partial withdrawal is 4.40%.
   
4.
The Account Fee is $25.

Please refer to the Table below.
Table 1*

1
2
3
4
5
6
  
7
8
9
  
10
1
$ 100
4.25%
$ 104.25
--
$ 0.00
  
$ 104.25($79.25)
–0.45%
–$0.47( –$0.36)
  
$ 103.78($78.89)
2
100
4.25
103.90
6.00%
4.80
  
99.10 
–0.46
–0.46
  
98.64 
3
100
4.50
103.75
6.00
6.00
  
97.75 
  0.31
0.31
  
98.06 
4
100
4.50
103.38
6.00
6.00
  
97.38 
  0.32
0.31
  
97.69 
5
100
4.70
103.13
6.00
6.00
  
97.13 
  098
0.95
  
98.08 
6
100
4.70
102.74
6.00
6.00
  
96.74 
  0.99
0.96
  
97.70 
7
100
4.70
102.35
6.00
6.00
  
96.35 
  1.01
0.98
  
 97.33 
8
100
4.50
101.88
6.00
6.00
  
95.88 
  0.34
0.33
  
96.20 
9
100
4.50
101.50
6.00
6.00
  
95.50 
  0.35
0.33
  
95.83 
10
100
4.50
101.13
6.00
6.00
  
95.13 
  0.36
0.34
  
95.46 
11
100
4.50
100.75
6.00
6.00
  
94.75 
  0.36
 0.34
  
95.09 
12
100
4.40
100.37
6.00
6.00
  
94.37 
  0.00
0.00
  
94.37 
 
$1,200
  
$1,229.11
  
$64.80
  
$1,164.31
  
$3.92
  
$1,168.23
             
$1,139.31
  
$4.03
  
$1,143/34

*See “Explanation of Columns in Table 1.”

Explanation of Columns in Table 1.

Columns 1 and 2:
Represent Payments and Payment amounts, respectively. Each Payment of $100 was made on the first day of each month for one year (12 payments).

Column 3:
Represents the Initial Guarantee Rate being credited to each Payment.

Column 4:
Represents the value of each Payment on the date of full surrender or partial withdrawal before the imposition of any Withdrawal Charge and Market Value Adjustment.

Column 5:
Represents the Withdrawal Charge percentage that is applied to each Payment on the date of full surrender or partial withdrawal.

The percentage is 6% for Payments 2 through 12 because these Payments have been in the Account for less than one year. No Withdrawal Charge is imposed on Payment 1 because up to 10% of Payments credited to a Participant’s Account may be withdrawn each Account Year without imposition of this charge. In this example, 10% represents (10% x $1,200) = $120. The 10% amount is applied to the oldest previously unliquidated Payment, then the next oldest and so forth. This results in no Withdrawal Charge being imposed on Payment 1 and a Withdrawal Charge imposed on $80 of Payment 2.

Column 6:
Represents the amount of Withdrawal Charge imposed on each Payment. It is calculated by multiplying the Payment in Column 2 by the Withdrawal Charge percentage in Column 5.

For example, the Withdrawal Charge imposed on Payment 8 = $100 x 6% = $6.00.

The Withdrawal Charge imposed on Payment 2 = ($100 – $20) x 6% = $4.80. The $20 represents the portion of the Payment on which no Withdrawal Charge is imposed as described under the explanation of Column 5 above.

Column 7:
Represents the value of each Payment in Column 4 on the date of full surrender or partial withdrawal after the imposition of the Withdrawal Charge in Column 6.

In the case of a full surrender, the Account Fee is deducted from the oldest unliquidated payment. This deduction is reflected in the Table by the amount in parentheses beside Column 7, $79.25.

Column 8:
Represents the Market Value Adjustment (MVA) percentage applied to the value of each Payment on the date of full surrender or partial withdrawal after imposition of the Withdrawal Charge.

For example:

The MVA% applied to Payment 3 = 0.75 (A – B) x (C/12)

Where
A =
The Guarantee Rate of the Payment being surrendered (Column 3)
 
=
4.50%,
 
B =
The Guarantee Rate being credited to Payments allocated to the 5-year Guarantee Period on the date of full surrender or partial withdrawal,
 
=
4.40% and
 
C =
The number of months remaining in the Guarantee Period of the Payment being surrendered,
 
=
60 (5 years) – 10,
 
=
50
 
MVA% =
0.75 (A – B) x (C ÷ 12)
 
=
0.75 (4.50 – 4.40) x (50 ÷ 12)
 
=
0.75 (0.10) x (50 ÷ 12)
 
=
0.31%

Column 9:
Represents the dollar amount of the MVA. For each Payment, it is determined by multiplying the value in Column 7 by the MVA percentage in Column 8.

For example, the MVA for Payment 3

= Column 7
x
Column 9
= $97.75
x
.31%
= $0.31
    

Column 10:
Represents the values of Payments on the date of full surrender or partial withdrawal after deducting the Withdrawal Charge and either deducting or adding the MVA. For any Payment, the amount in Column 10 is determined by adding the amounts in Columns 7 and 9.

In each of Columns 9 and 10, the amounts in parentheses, $.36 and $78.89, respectively, reflect the deduction of the Account Fee, in the case of a full surrender.


 
 
 

Full Surrender:

The lower total of Column 10, $1,143.34, reflects the amount of a full surrender after imposition of Withdrawal Charges, Account Fee and Market Value Adjustments.

Partial Withdrawal:

The sum of amounts in Column 10 for as many payments as are liquidated reflects the amount of a partial withdrawal.

For example, if $1,000 of Payments were withdrawn, the amount of the withdrawal would be the sum of the amounts in Column 10 for Payments 1 through 10 which is $978.77.

B.
Variable Account and Fixed Account--1-Year Guarantee Period (No Market Value Adjustment Applicable):

For the purposes of this illustration, the following assumptions have been made:

1.
Purchase Payments have been allocated to either the Variable Account, the Fixed Account -- 1-Year Guarantee Period or to a combination of both.
   
2.
The date of full surrender or partial withdrawal is during the ninth (9th) Account Year.

Please refer to the Table below.
Table 2*
1
2
3
4
5
6
1
$  1,000
$1,000
$         0
0%
$         0
2
1,200
1,200
0
0
0
3
1,400
1,280
120
1
1.20
4
1,600
0
1,600
2
32.00
5
1,800
0
1,800
3
54.00
6
2,000
0
2,000
4
80.00
7
2,000
0
2,000
5
100.00
8
2,000
0
2,000
6
120.00
9
2,000
0
2,000
6
120.00
 
$15,000
$3,480
$11,520
  
$507.20

* See “Explanation of Columns in Table 2.”

Explanation of Columns in Table 2

Columns 1 and 2:

Represent Payments and amounts of Payments. Each Payment was made at the beginning of each Account Year.

Column 3:

Represents the amounts that may be withdrawn without the imposition of withdrawal charges, as follows:

a)
Payments 1 and 2 ($1,000 and $1,200, respectively) have been credited to the Participant’s Account for more than 7 years.
   
b)
$1,280 of Payment 3 represents 10% of Payments that have been credited to the Participant’s Account for less than 7 years. The 10% amount is applied to the oldest unliquidated Payment, then the next oldest and so forth.


 
 
 

Column 4:

Represents the amount of each Payment that is subject to a withdrawal charge. It is determined by subtracting the amount in Column 3 from the Payment in Column 2.

Column 5:

Represents the withdrawal charge percentages imposed on the amounts in Column 4.

Column 6:

Represents the withdrawal charge imposed on each Payment. It is determined by multiplying the amount in Column 4 by the percentage in Column 5.

For example, the withdrawal charge imposed on Payment 8

= Payment 8 Column 4 x Payment 8 Column 5
= $2,000 x 6%
= $120

Full Surrender:

The total of Column 6, $507.20, represents the total amount of withdrawal charges imposed on Payments in this illustration.

Partial Withdrawal:

The sum of amounts in Column 6 for as many Payments as are liquidated reflects the withdrawal charges imposed in the case of a partial withdrawal.

For example, if $7,000 of Payments (Payments 1, 2, 3, 4 and 5) were withdrawn, the amount of the withdrawal charges imposed would be the sum of amounts in Column 6 for Payments 1, 2, 3, 4 and 5 which is $87.20.




 
 
 

APPENDIX C -
CONDENSED FINANCIAL INFORMATION

The following information should be read in conjunction with the Variable Account's financial statements appearing in the Statement of Additional Information.

 
Accumulation
Accumulation
Number of
  
 
Unit Value
Unit Value
Accumulation
  
 
Beginning
End
Units End
  
Sub-Account
of Period
of Period
of Period
Year
         
Massachusetts Investors Trust
$61.1349
40.5832
28,517
2008
 
55.9911
61.1349
41,357
2007
 
50.0786
55.9911
50,507
2006
 
47.2567
50.0786
66,879
2005
 
42.9105
47.2567
77,952
2004
 
35.5715
42.9105
85,961
2003
 
46.1603
35.5715
138,567
2002
 
55.8146
46.1603
215,963
2001
 
57.7053
55.8146
372,444
2000
 
53.6738
57.7053
465,628
1999
         
Massachusetts Investors Growth Stock Fund
62.9800
39.2132
26,138
2008
 
57.1916
62.9800
28,965
2007
 
53.8764
57.1916
22,921
2006
 
52.5086
53.8764
30,206
2005
 
48.4963
52.5086
39,943
2004
 
40.0362
48.4963
54,321
2003
 
56.6487
40.0362
62,568
2002
 
76.2273
56.6487
85,450
2001
 
83.2189
76.2273
142,278
2000
 
67.2231
83.2189
149,986
1999
         
MFS Total Return Fund
59.3254
45.3302
29,963
2008
 
57.2260
59.3254
46,226
2007
 
51.8365
57.2260
70,375
2006
 
50.8089
51.8365
86,159
2005
 
46.1883
50.8089
103,969
2004
 
40.0175
46.1883
112,672
2003
 
42.9160
40.0175
139,529
2002
 
43.7077
42.9160
230,775
2001
 
37.1635
43.7077
336,200
2000
 
36.7917
37.1635
520,185
1999
         
MFS Bond Fund
31.2675
27.7845
5,078
2008
 
30.5751
31.2675
5,264
2007
 
29.4978
30.5751
6,179
2006
 
29.3615
29.4978
6,041
2005
 
28.0238
29.3615
7,125
2004
 
25.9154
28.0238
13,189
2003
 
24.1468
25.9154
13,191
2002
 
22.6703
24.1468
20,212
2001
 
21.1036
22.6703
47,612
2000
 
21.7979
21.1036
51,937
1999
         
MFS Capital Appreciation Portfolio
49.8003
30.9732
140,480
2008
 
45.3724
49.8003
162,957
2007
 
43.1865
45.3724
188,523
2006
 
43.3276
43.1865
247,291
2005
 
39.5154
43.3276
310,428
2004
 
31.0846
39.5154
360,890
2003
 
46.5495
31.0846
402,277
2002
 
63.1123
46.5495
496,320
2001
 
72.1308
63.1123
567,141
2000
 
55.0679
72.1308
582,574
1999
         
MFS Government Securities Portfolio
30.1794
32.3531
48.726
2008
 
28.5119
30.1794
58,143
2007
 
27.8413
28.5119
70,368
2006
 
27.5538
27.8413
91,479
2005
 
26.8879
27.5538
124,047
2004
 
26.6512
26.8879
136,149
2003
 
24.5752
26.6512
152,940
2002
 
23.1585
24.5752
177,020
2001
 
20.9090
23.1585
204,141
2000
 
21.5873
20.9090
244,048
1999
         
MFS High Yield Portfolio
34.8781
24.2282
38,382
2008
 
34.6488
34.8781
42,957
2007
 
31.7782
34.6488
42,816
2006
 
31.4835
31.7782
51,143
2005
 
29.1005
31.4835
79,592
2004
 
24.2621
29.1005
82,554
2003
 
23.9194
24.2621
87,279
2002
 
23.8025
23.9194
91,516
2001
 
25.8500
23.8025
112,758
2000
 
24.4991
25.8500
125,543
1999
         
MFS Money Market Portfolio
19.5699
19.721
44,761
2008
 
18.8993
19.5699
45,161
2007
 
18.2944
18.8993
47,626
2006
 
18.0320
18.2944
49,829
2005
 
18.1085
18.0320
63,548
2004
 
18.2201
18.1085
74,246
2003
 
18.2157
18.2201
90,586
2002
 
17.7723
18.2157
89,155
2001
 
16.4256
17.7723
147,352
2000
 
16.4256
16.9810
211,856
1999
         



 
 
 


PART B


 
 
 


MAY 1, 2009

COMPASS G

VARIABLE AND FIXED ANNUITY

STATEMENT OF ADDITIONAL INFORMATION

SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D

TABLE OF CONTENTS

Sun Life Assurance Company of Canada (U.S.)
  
Calculations
  
     Example of Variable Accumulation Unit Value Calculation
  
     Example of Variable Annuity Unit Calculation
  
     Example of Variable Annuity Payment Calculation
  
Distribution of the Contract
  
Custodian
  
Independent Registered Public Accounting Firm
  
Financial Strength and Credit Ratings
 
Financial Statements
  

The Statement of Additional Information sets forth information which may be of interest to prospective purchasers of the Compass G Variable and Fixed Annuity Contract (the "Contract") issued by Sun Life Assurance Company of Canada (U.S.) (the "Company") in connection with Sun Life of Canada (U.S.) Variable Account D (the "Variable Account") which is not included in the Prospectus dated May 1, 2009.  This Statement of Additional Information should be read in conjunction with the Prospectus, a copy of which may be obtained without charge from the Company by writing to Sun Life Assurance Company of Canada (U.S.), c/o Annuity Division, P.O. Box 9133, Wellesley Hills, Massachusetts 02481, or by telephoning (800) 752-7215.

The terms used in this Statement of Additional Information have the same meanings as in the Prospectus.

------------------------------------------------------------------------------------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE PURCHASERS ONLY IF PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.

 
 
 


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

Sun Life Financial Inc. ("Sun Life Financial"), a reporting company under the Securities Exchange Act of 1934 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.

CALCULATIONS

EXAMPLE OF VARIABLE ACCUMULATION UNIT VALUE CALCULATION

Suppose the net asset value of a Fund share at the end of the current valuation period is $18.38; at the end of the immediately preceding valuation period was $18.32; the valuation period is one day; no dividends or distributions caused Fund shares to go "ex-dividend" during the current valuation period. $18.38 ÷ $18.32 = 1.00327511. Subtracting the one day risk factor for mortality and expense risks of .00003539 (the daily equivalent of the current maximum charge of 1.3% on an annual basis) gives a net investment factor of 1.00323972. If the value of the variable accumulation unit for the immediately preceding valuation period had been 14.5645672, the value for the current valuation period would be 14.6117523 (14.5645672 x 1.00323972).

EXAMPLE OF VARIABLE ANNUITY UNIT CALCULATION

Suppose the circumstances of the first example exist, and the value of an annuity unit for the immediately preceding valuation period had been 12.3456789. If the first variable annuity payment is determined by using an annuity payment based on an assumed interest rate of 4% per year, the value of the annuity unit for the current valuation period would be 12.3843446 (12.3456789 x 1.00323972 (the Net Investment Factor) x 0.99989255). 0.99989255 is the factor, for a one day valuation period, that neutralizes the assumed interest rate of four percent (4%) per year used to establish the Annuity Payment Rates found in the Contract.

EXAMPLE OF VARIABLE ANNUITY PAYMENT CALCULATION

Suppose that a Participant’s Account is credited with 8,756.4321 variable accumulation units of a particular Sub-Account but is not credited with any fixed accumulation units; that the variable accumulation unit value and the annuity unit value for the particular Sub-Account for the valuation period which ends immediately preceding the annuity commencement date are 14.5645672 and 12.3456789, respectively; that the annuity payment rate for the age and option elected is $6.78 per $1,000; and that annuity unit value on the day prior to the second variable annuity payment date is 12.3843446. The first variable annuity payment would be $865.57 (8,765.4321 x 14.564572 x 6.78 ÷ 1,000). The number of annuity units credited would be 70.1112 ($865.57 ÷ 12.3456789) and the second variable annuity payment would be $868.28 (70.1112 x 12.3843446).

DISTRIBUTION OF THE CONTRACT

We offer the Contract on a continuous basis through the general distributor and principal underwriter of the Contracts, Clarendon Insurance Agency, Inc. ("Clarendon"). Clarendon also acts as the general distributor of certain other annuity contracts issued by the Company and its subsidiary, Sun Life Insurance and Annuity Company of New York, and variable life insurance contracts issued by the Company.

CUSTODIAN

We are the Custodian of the assets of the Variable Account.  We will purchase Mutual Fund and Series Fund shares at net asset value in connection with amounts allocated to the Sub-Accounts in accordance with the instructions of the Owner, and we will redeem Mutual Fund and Series Fund shares at net asset value for the purpose of meeting the contractual obligations of the Variable Account, paying charges relative to the Variable Account or making adjustments for annuity reserves held in the Variable Account.

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, 2009, accompanying such financial statements expresses an unqualified opinion and includes an explanatory paragraph, referring to the Company changing its method of accounting for certain assets and liabilities to a fair value measurement approach as required by accounting guidance adopted on January 1, 2008, and changing its method of accounting for income taxes as required by accounting guidance adopted on January 1, 2007), 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 Sun Life of Canada (U.S.) Variable Account D 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 24, 2009, 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.

FINANCIAL STRENGTH AND CREDIT RATINGS

Financial strength and credit ratings risk is the risk of a downgrade by rating agencies of the Company’s financial strength and/or credit ratings.

Financial strength ratings represent the opinions of rating agencies regarding the financial ability of an insurance company to meet its obligations under insurance policies. In recent months, the rating agencies have placed a negative outlook on the North American life insurance industry, as a result of the deterioration of global equity and credit markets. Three independent rating agencies have lowered the Company’s financial strength ratings. On March 6, 2009, Standard & Poor’s lowered the Company’s financial strength rating from AA+ (very strong) to AA (very strong). On February 27, 2009, A.M. Best lowered the Company’s financial strength rating from A++ (superior) to A+ (superior). On February 12, 2009, Moody’s lowered the Company’s financial strength rating from Aa2 (excellent) to Aa3 (excellent).

A material downgrade in the Company’s financial strength ratings may have an adverse effect on its financial condition and results of operations through loss of sales, higher levels of surrenders and withdrawals, higher reinsurance and may potentially require the Company to reduce prices for products and services to remain competitive.

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 Certificates and should not be considered as bearing on the investment performance of the assets held in the Variable Account.


 
 
 

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, 2008 and 2007, and the related consolidated statements of operations, comprehensive income, stockholder’s equity, and cash flows for each of the three years in the period ended December 31, 2008.  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, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, 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, the Company changed its method of accounting for certain assets and liabilities to a fair value measurement approach as required by accounting guidance adopted on January 1, 2008, and changed its method of accounting for income taxes as required by accounting guidance adopted on January 1, 2007.



DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 27, 2009





 
 
 

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

     
 
2008
    
 
2007
    
 
2006
                   
Revenues:
                  
Premiums and annuity considerations
  
$
122,733 
  
$
110,616 
  
$
59,192 
Net investment (loss) income (1)
    
(1,789,835)
    
1,098,592 
    
1,206,081 
Net derivative (loss) income (2)
    
(871,544)
    
(193,124)
    
9,089 
Net realized investment losses
    
(38,241)
    
(61,048)
    
(44,511)
Fee and other income
    
564,753 
    
479,904 
    
398,622 
Subordinated notes early redemption premium
    
- 
    
25,578 
    
- 
                   
Total revenues
    
(2,012,134)
    
1,460,518 
    
1,628,473 
                   
Benefits and expenses:
                  
Interest credited
    
561,626 
    
629,823 
    
633,405 
Interest expense
    
106,777 
    
101,532 
    
130,802 
Policyowner benefits
    
443,517 
    
229,485 
    
156,970 
Amortization of deferred policy acquisition costs and value
of business and customer renewals acquired (3)
    
 
(1,021,026)
    
 
189,121 
    
 
399,182 
Goodwill impairment
    
701,450 
    
- 
    
- 
Other operating expenses
    
289,346 
    
283,815 
    
231,434 
Partnership capital securities early redemption payment
    
- 
    
25,578 
    
- 
                   
Total benefits and expenses
    
1,081,690 
    
1,459,354 
    
1,551,793 
                   
(Loss) income before income tax benefit
    
(3,093,824)
    
1,164 
    
76,680 
                   
Income tax benefit:
                  
Federal
    
(858,989)
    
(24,289)
    
(1,717)
State
    
6 
    
431 
    
105 
Income tax benefit
    
(858,983)
    
(23,858)
    
(1,612)
                   
Net (loss) income
  
$
(2,234,841)
  
$
25,022 
  
$
78,292 

(1)
Net investment (loss) income includes a (decrease) increase in market value of trading fixed maturity securities of $(2,762.9) million, $(88.4) million and $15.2 million for the years ended December 31, 2008, 2007 and 2006, respectively.
(2)
Net derivative loss for the year ended December 31, 2008 includes $166.1 million of income related to the Company’s adoption of Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurement,” which is further discussed in Note 5.
(3)
Amortization of deferred policy acquisition costs and value of business and customer renewals acquired for the year ended December 31, 2008 includes $3.2 million of expenses related to the Company’s adoption of SFAS No. 157, which is further discussed in Note 5.



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, 2008
  
December 31, 2007
Investments
          
Available-for-sale fixed maturities at fair value (amortized cost of
$782,861 and $11,848,397 in 2008 and 2007, respectively)
$
674,020 
  
$
11,503,230 
Trading fixed maturities at fair value (amortized cost of $14,909,429 and
$3,938,088 in 2008 and 2007, respectively)
  
11,762,146 
    
3,867,011 
Mortgage loans
  
2,083,003 
    
2,318,341 
Derivative instruments – receivable
  
727,103 
    
609,261 
Limited partnerships
  
78,289 
    
164,464 
Real estate
  
201,470 
    
201,777 
Policy loans
  
729,407 
    
712,633 
Other invested assets
  
211,431
    
568,676 
Cash and cash equivalents
  
1,624,149 
    
1,169,701 
Total investments and cash
  
18,091,018 
    
21,115,094 
           
Accrued investment income
  
282,564 
    
290,363 
Deferred policy acquisition costs
  
2,862,401 
    
1,603,397 
Value of business and customer renewals acquired
  
179,825 
    
51,806 
Net deferred tax asset
  
856,845 
    
15,945 
Goodwill
  
7,299 
    
708,829 
Receivable for investments sold
  
7,548 
    
3,482 
Reinsurance receivable
  
3,076,615 
    
2,709,249 
Other assets
  
222,840 
    
311,999 
Separate account assets
  
20,531,724 
    
24,996,603 
           
Total assets
$
46,118,679 
  
$
51,806,767 
           
LIABILITIES
          
           
Contractholder deposit funds and other policy liabilities
$
17,545,721 
  
$
18,262,569 
Future contract and policy benefits
  
1,014,688 
    
823,588 
Payable for investments purchased
  
363,513 
    
199,210 
Accrued expenses and taxes
  
118,671 
    
123,065 
Debt payable to affiliates
  
1,998,000 
    
1,945,000 
Reinsurance payable to affiliate
  
1,650,821 
    
1,691,884 
Derivative instruments – payable
  
1,494,341 
    
446,640 
Other liabilities
  
605,945 
    
888,061 
Separate account liabilities
  
20,531,724 
    
24,996,603 
           
Total liabilities
  
45,323,424
    
49,376,620 
           
Commitments and contingencies – Note 21
          
           
STOCKHOLDER’S EQUITY
          
           
Common stock, $1,000 par value – 10,000 shares authorized; 6,437 shares issued and outstanding in 2008 and 2007
  
6,437 
    
6,437
Additional paid-in capital
  
2,872,242 
    
2,146,436
Accumulated other comprehensive loss
  
(129,884)
    
(92,403)
(Accumulated deficit) Retained earnings
  
(1,953,540)
    
369,677 
           
Total stockholder’s equity
  
795,255 
    
2,430,147 
           
Total liabilities and stockholder’s equity
$
46,118,679 
  
$
51,806,767 


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,


   
 
2008
    
 
2007
    
 
2006
                 
Net (loss) income
$
(2,234,841)
  
$
25,022 
  
$
78,292 
                 
Other comprehensive loss:
                
Change in unrealized losses on available-for-sale
securities, net of tax and policyholder amounts (1)
  
(84,234)
    
(119,775)
    
(46,229)
Change in pension and other postretirement plan
adjustments, net of tax (2)
  
(66,998)
    
11,197 
    
1,842 
Reclassification adjustments of net realized investment
losses into net (loss) income (3)
  
25,718 
    
2,145 
    
40,673 
Other comprehensive loss
  
(125,514)
    
(106,433)
    
(3,714)
                 
Comprehensive (loss) income
$
(2,360,355)
  
$
(81,411) 
  
$
74,578 

(1)  
Net of tax benefit of $ 45.4 million, $64.7 million and $25.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.
(2)  
Net of tax benefit (expense) of $36.1 million, $(6.0) million and $(0.2) million for the years ended December 31, 2008, 2007 and 2006, respectively.
(3)  
Net of tax expense of $13.8 million, $1.2 million and $21.9 million for the years ended December 31, 2008, 2007 and 2006, 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)
  
(Accumulated
Deficit)
Retained
Earnings
  
Total
Stockholder’s
Equity
                             
Balance at December 31, 2005
$
6,437
  
$
2,138,880
  
$
19,260 
  
$
561,187 
  
$
2,725,764 
                             
Adjustment to initially apply SFAS
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 related to the adoption of
FASB Interpretation No. 48, 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 
                             
Cumulative effect of accounting
changes related to the adoption of
SFAS Nos.158 and 159, net of tax
  
-
    
-
    
88,033 
    
(88,376 
    
(343)
Net loss
  
-
    
-
    
-  
    
(2,234,841)
    
(2,234,841)
Tax benefit from stock options
  
-
    
806
    
-  
    
- 
    
806 
Capital contribution from Parent
  
-
    
725,000
    
-  
    
- 
    
725,000 
Other comprehensive loss
  
-
    
-
    
(125,514)
    
- 
    
(125,514)
                             
Balance at December 31, 2008
$
6,437
  
$
2,872,242
  
$
(129,884)
  
$
(1,953,540)
  
$
795,255













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,

   
 
2008
    
 
2007
    
 
2006
                 
Cash Flows From Operating Activities:
                
Net (loss) income
$
(2,234,841)
  
$
25,022 
  
$
78,292 
Adjustments to reconcile net income to net cash
provided by operating activities:
                
Net amortization of premiums on investments
  
28,371 
    
40,668 
    
58,752 
Amortization of deferred policy acquisition costs and
value of business and customer renewals acquired
  
(1,021,026)
    
189,121 
    
399,182 
Depreciation and amortization
  
6,711 
    
7,460 
    
4,608 
Net losses (gains) on derivatives
  
812,717 
    
131,503 
    
(11,853)
Net realized losses on available-for-sale investments
  
38,241 
    
61,048 
    
44,511 
Changes in fair value of trading investments
  
2,762,893 
    
88,398 
    
(15,235)
Net realized losses (gains) on trading investments
  
380,969 
    
(4,655)
    
(373)
Undistributed income on private equity limited
partnerships
  
(9,796)
    
(23,027)
    
(29,120)
Interest credited to contractholder deposits
  
561,626 
    
629,823 
    
633,405 
Goodwill impairment
  
701,450 
    
-
    
- 
Deferred federal income taxes
  
(773,143)
    
43,366 
    
4,180 
Changes in assets and liabilities:
                
Additions to deferred policy acquisition costs and value
of business and customer renewals acquired
  
(365,686)
    
(379,941)
    
(262,895)
Accrued investment income
  
7,799 
    
855 
    
(29,711)
Net change in reinsurance receivable/payable
  
(260,860)
    
33,161 
    
77,063 
Future contract and policy benefits
  
191,024 
    
66,550 
    
(6,619)
Other, net
  
253,160 
    
(134,356)
    
14,268 
Net cash provided by operating activities
  
1,079,609 
    
774,996 
    
958,455
                 
Cash Flows From Investing Activities:
                
Sales, maturities and repayments of:
                
Available-for-sale fixed maturities
  
101,757 
    
4,252,780 
    
5,872,190
Trading fixed maturities
  
1,808,498 
    
728,633 
    
2,172,797
Mortgage loans
  
294,610 
    
355,146 
    
248,264
Real estate
  
1,141 
    
- 
    
- 
Other invested assets
  
692,157 
    
667,683 
    
184,646
Redemption of subordinated note from affiliates
  
- 
    
600,000 
    
- 
Purchases of:
                
Available-for-sale fixed maturities
  
(129,474)
    
(2,557,841)
    
(4,002,244)
Trading fixed maturities
  
(2,175,143)
    
(829,469)
    
(4,038,950)
Mortgage loans
  
(58,935)
    
(399,566)
    
(780,592)
Real estate
  
(5,414)
    
(19,439)
    
(20,619)
Other invested assets
  
(122,447)
    
(57,864)
    
(489,493)
Early redemption premium
  
- 
    
25,578 
    
- 
Net change in other investments
  
(349,964)
    
(361,781)
    
399,514 
Net change in policy loans
  
(16,774)
    
(3,007)
    
(7,857)
                 
Net cash provided by (used in) investing activities
$
40,012 
  
$
2,400,853 
  
$
(462,344) 

Continued on next page

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,

   
 
2008
    
 
2007
    
 
2006
                 
Cash Flows From Financing Activities:
                
Additions to contractholder deposit funds
$
2,190,099 
  
$
1,924,784 
  
$
3,520,138 
Withdrawals from contractholder deposit funds
  
(3,616,458)
    
(4,533,405)
    
(3,690,351)
Repayments of debt
  
(122,000)
    
(980,000)
    
- 
Debt proceeds
  
175,000 
    
1,000,000 
    
200,000 
Dividends paid to stockholder
  
- 
    
- 
    
(300,000)
Capital contribution from Parent
  
725,000 
    
- 
    
- 
Early redemption payment
  
- 
    
(25,578)
    
- 
Other, net
  
(16,814)
    
29,971 
    
4,528 
Net cash used in financing activities
  
(665,173)
    
(2,584,228)
    
(265,685)
                 
Net change in cash and cash equivalents
  
454,448 
    
591,621 
    
230,426 
                 
Cash and cash equivalents, beginning of year
  
1,169,701 
    
578,080 
    
347,654 
                 
Cash and cash equivalents, end of year
$
1,624,149 
  
$
1,169,701 
  
$
578,080 
                 
Supplemental Cash Flow Information
                
Interest paid
$
109,532 
  
$
73,116 
  
$
130,686 
Income taxes (refunded) paid
$
(113,194)
  
$
(16,281)
  
$
22,724 

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 9.  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, 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 did not pay any dividends to its direct parent in 2008 and 2007, respectively.  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.













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, 2008, 2007 and 2006

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 also 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, 2008, 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 Financial (U.S.) Reinsurance Company (“Sun Life Vermont”), a Vermont special purpose financial captive insurance company; Clarendon Insurance Agency, Inc., a registered broker-dealer; 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 September 6, 2006 the Company entered into an agreement with Credit and Repackaged Securities Limited Series 2006-10 Trust (the “CARS Trust”).  Through this agreement, the Company purchased a funded note, which is referenced through a credit default swap to the credit performance of a portfolio of corporate reference entities.  The Company entered into this credit structure for yield enhancement.  As the sole beneficiary of the CARS Trust, the Company is required to consolidate this trust under the requirements of FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 (Revised December 2003)” (“FIN 46(R)”).  As a result of the consolidation, the Company has recorded in its balance sheet a credit default swap held by the CARS Trust.   At issue, the swap had a seven year term, maturing in 2013.  Under the terms of the swap, the CARS Trust will be required to make payments to the swap counterparty upon the occurrence of a credit event, with respect to any reference entity, that is in excess of the threshold amount specified in the swap agreement.  At December 31, 2008, the CARS Trust has not had to make any payments under the terms of the swap as the sum of all credit events has not exceeded the threshold amount.  At December 31, 2008 the fair value of the credit default swap is $(42.1) million.  Under the terms of the credit derivative, the maximum future payments the CARS Trust could be required to make is $55.0 million.  In the event the trust was required to make any payments under the swap, the underlying assets held by the trust would be liquidated to fund the payment.  If the disposition of these assets is insufficient to fund the payment calculated, then under the terms of the agreement, the cash settlement amount would be capped at the amount of the proceeds from the sale of the underlying assets.  As of December 31, 2008, the fair value of the assets held as collateral by the CARS Trust was $42.3 million.

The Company had a greater than or equal to 20%, but less than 50%, interest in seven variable interest entities (“VIEs”) at December 31, 2008.  The Company is a creditor in four trusts and three limited liability companies 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 $36.5 million and $88.4 million at December 31, 2008 and 2007, respectively.  The investments in these VIEs mature between January 2008 and October 2024.  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(R).  See Note 4 for information with respect to leveraged leases.

 
 
 

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, 2008, 2007 and 2006

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

BASIS OF PRESENTATION (CONTINUED)

In order to determine whether the Company is, or is not, the primary beneficiary of a VIE, the Company performs an assessment of the level of each party’s participation in controlling the entity by means other than a voting interest, which includes assumptions about the sufficiency of an equity investment at risk, the essential characteristics of a controlling financial interest, and the significance of voting rights in relation to economic interests.  If the Company is exposed to the majority of the expected losses, the majority of the expected residual returns, or both, associated with a VIE then the Company is the VIE’s primary beneficiary and must consolidate the entity.

The VIEs are generally financed with equity through the establishment of a trust by a trustee.  The carrying amount of the VIEs for which the Company has significant influence have been included in trading fixed maturities on the consolidated balance sheets.

All material intercompany transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.

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, deferred policy acquisition costs (“DAC”), value of business acquired (“VOBA”), value of customer renewals acquired (“VOCRA”), liabilities for future contract and policyholder benefits, other-than-temporary impairments of investments and valuation allowance on deferred tax assets.  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 securities, 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 and money market investments.  All such investments have maturities of three months or less when purchased.

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 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 which the Company has elected to measure at fair value under SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” are classified as trading securities.  Although classified as trading securities, the Company’s intent is to not sell these securities in the near term.  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 maturity securities are forward purchase commitments on mortgage backed securities better known as To Be Announced (“TBA”) securities.  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, that are not considered other-than-temporarily impaired, are carried at fair value with the unrealized gains or losses reported in other comprehensive income.



 
 
 

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, 2008, 2007 and 2006

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

INVESTMENTS (continued)

The Company determines the fair value of its publicly traded fixed maturities using four primary pricing methods: third-party pricing services, independent non-binding broker 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.  The Company generally does not adjust quotes or prices obtained from brokers or pricing services.

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 broker 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 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 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.  The Company performs further testing on those securities whose prices do not fall within a pre-established tolerance range.  This testing includes looking at specific market events that may affect pricing or obtaining additional information or new prices from the third-party pricing service.  Additionally, the Company makes a selection of securities from its portfolio and compares the price received from its third-party pricing services to an independent source, creates option adjusted spreads or obtains additional broker quotes to corroborate the current market price.  Historically, the Company has found no material variances between the prices received from third-party pricing sources and the results of its testing.

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.


 
 
 

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, 2008, 2007 and 2006

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

INVESTMENTS (continued)

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.

Other-than-temporary impairments are classified as either credit-related or interest-related.  The Company categorizes other-than-temporary impairments as credit-related if there are current fundamental credit 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 primarily 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 from other-than-temporary impairments 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 $41.9 million and $68.1 million for the years ended December 31, 2008 and 2007, respectively, for other-than-temporary impairments on its available-for-sale fixed maturity securities.  The entire balance of $41.9 million realized losses for other-than-temporary impairments for the year ended December 31, 2008 were credit-related.  Of the $68.1 million realized losses for other-than-temporary impairments for the year ended December 31, 2007, $52.0 million was credit-related and $16.1 million was interest-related.

The Company discontinues the accrual of income on its holdings for issuers that are in default.  Investment income would have increased by $4.6 million for the year ended December 31, 2008, if these holdings were performing.  Accrued income was not materially impacted by the termination of accrual accounting on these holdings for the year ended December 31, 2007. As of December 31, 2008, the fair market value of holdings for issuers in default was $17.9 million.  As of December 31, 2007, the Company did not have any holding for issuers that were in default.


 
 
 

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, 2008, 2007 and 2006

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.  The Company assesses the value of the collateral annually.

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. For the year ended December 31, 2008, the Company incurred realized losses of $3.0 million for impairments on mortgage loans.  A specific valuation allowance is established if the fair value of the impaired loan is less than the recorded amount.  The Company did not incur losses for impairments on mortgage loans for the year ended December 31, 2007.  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 calculating the valuation allowance.

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 or market.  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 position, 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.

The Company manages funds withheld assets related to certain reinsurance agreements.  These assets are primarily comprised of fixed maturity securities and mortgages and are accounted for consistent with the policies described above.  Investment income on funds withheld reinsurance portfolios is included as a component of net investment income.  See Note 7.

 
 
 

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, 2008, 2007 and 2006

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

DEFERRED POLICY ACQUISITION COSTS

Acquisition costs consist of commissions, underwriting and other costs that vary with and are primarily related to the production of new business.  Acquisition costs related to investment-type contracts, primarily deferred annuity, universal life and guaranteed investment contracts (“GICs”) 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 and unrealized investment gains and losses, life and variable annuity fees, surrender charges, interest credited, policyholder benefits and direct variable administrative expenses.

Estimating future gross profit is a complex process requiring considerable judgment and the forecasting of events into the future based on historical information and actuarial assumptions.  These assumptions are subject to an annual review process.  Changes in any of the assumptions that serve to increase or decrease the estimated future gross profits will cause the amortization of DAC to decrease or increase, respectively, in the current period.  During 2008 and 2007, changes in estimated future gross profits were driven by recent experience and expectations of future performance and are related mainly to changes in lapse assumptions, future growth rates of capital markets assumptions, and expense assumptions.

DAC amortization is reviewed regularly and adjusted retrospectively when the Company calculates the actual profits or losses and revises its estimate of future gross profits to be realized from investment-type contracts, including realized and unrealized 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.

Prior to the Company’s adoption of SFAS No. 159 on January 1, 2008, DAC was adjusted for amounts relating to the change in unrealized investment gains and losses on available-for-sale fixed maturity securities that supported policyholder liabilities.  This adjustment, net of tax, was included with the change in net unrealized investment gains or losses that were recorded in accumulated other comprehensive loss.  Due to the adoption of SFAS No. 159, the net change in the market value of the securities supporting policyholder liabilities is recorded in the statement of operations in 2008, versus accumulated other comprehensive income in prior years. Accordingly, the effect of such market value changes on DAC is recorded in the statement of operations in 2008.

VALUE OF BUSINESS AND CUSTOMER RENEWALS 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.

VOCRA 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.

Although recovery of VOBA and VOCRA 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 VOBA and VOCRA considered recoverable, however, could be reduced in the near term if the future estimates of gross profits are reduced.


 
 
 

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, 2008, 2007 and 2006

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 acquisition of Keyport Life Insurance Company (“Keyport”) on November 1, 2001 and the transfer of goodwill to SLNY based on a series of agreements between SLNY and Sun Life and Health Insurance Company (U.S.) (“SLHIC”), an affiliate, effective May 31, 2007.  Goodwill obtained in connection with the purchase of Keyport is allocated to the Wealth Management Segment.  Goodwill obtained through the agreement between SLHIC and SLNY is allocated to the Group Protection 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 2008 and concluded that these assets were not impaired.   Due to market declines in the fourth quarter of 2008, the Company performed additional analyses of goodwill and indefinite-lived intangible assets and concluded that the goodwill obtained in connection with the purchase of Keyport was impaired.  An estimate of the fair value of the reporting unit was calculated, based on an actuarial appraisal of the embedded value of the reporting unit.  This fair value was then allocated among the reporting unit’s tangible and intangible assets and its liabilities to determine the implied fair value of goodwill.  As a result, the Company recorded an impairment charge of $701.5 million in the fourth quarter, which represents the entire balance of goodwill obtained in connection with the purchase of Keyport.  The impairment charge is allocated to the Wealth Management Segment.

The Company also tested the goodwill maintained in the Group Protection Segment and concluded that it is not impaired at December 31, 2008.

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.  Depreciation and amortization expenses were $1.3 million and $2.5 million for years ended December 31, 2008 and 2007, respectively.

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.


 
 
 


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, 2008, 2007 and 2006

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

POLICY LIABILITIES AND ACCRUALS (continued)

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. The Company did not record any adjustment to reserves related to loss recognition for the year ended December 31, 2008.

Reserves for guaranteed minimum death benefits and guaranteed minimum income benefits are calculated according to the methodology of American Institute of Certified Public Accountants (“AICPA”) Statement of Position  (“SOP”) 03-1, “Accounting and Reporting by Insurance Enterprises for Certain Nontraditional Long-Duration Contracts and for Separate Accounts,” whereby the expected benefits provided by the guarantees are spread over the duration of the contract in proportion to the benefit assessments.

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 and 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.


 
 
 

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, 2008, 2007 and 2006

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

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

The Company accounts for current and deferred income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes,” and recognizes reserves for income taxes in accordance with FASB Interpretation Number (“FIN”) 48, “Accounting for Uncertainty in Income Taxes.”

Under the applicable asset and liability method for recording deferred income taxes, deferred taxes are recognized when assets and liabilities have different values for financial statement and tax reporting purposes, using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. The Company’s differences between the bases of assets and liabilities used for financial statement versus tax reporting primarily result from policy reserves, policy acquisition expenses and unrealized gains and losses on investments.

Also as prescribed by SFAS No. 109, the Company performs the required recoverability test in terms of its ability to realize its recorded net deferred tax assets.  In making this determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations.  Using this available evidence, the Company performs an assessment of the future recoverability of its net deferred tax assets and records a valuation allowance in instances when it is not more likely than not that the deferred tax assets will be realized.

For the years ended December 31, 2008, 2007 and 2006, the Company participated in a consolidated federal income tax return with the Parent and other affiliates. For the year ended December 31, 2008, the Company and its subsidiaries were part of the consolidated federal income tax return.  For the year ended December 31, 2007, INDY and Sun Life Vermont were included as part of the consolidated federal income tax return, but SLNY filed stand-alone federal income tax returns.  For the year ended December 31, 2006, the Company’s subsidiaries INDY and SLNY filed stand-alone federal income tax returns.


 
 
 

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, 2008, 2007 and 2006

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 January 2009, the FASB issued FASB Staff Position (“FSP”) No. EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20.”  FSP No. EITF 99-20-1 amends EITF 99-20 to achieve more consistent determination of whether an other-than-temporary impairment has occurred.  This guidance also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements.  FSP No. EITF 99-20-1 is effective for all interim and annual reporting periods after December 15, 2008.  The Company adopted FSP No. EITF 99-20-1 on December 31, 2008 and the adoption did not have a material impact on the Company's financial position or results of operations.

In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.”  This FSP amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” to require public entities to provide additional disclosures about transfers of financial assets.  It also amends FIN 46(R) to require public enterprises to provide additional disclosures about their involvement with VIEs.  The disclosures required by FSP No. FAS 140-4 and FIN 46(R)-8 are intended to provide greater transparency to financial statement users about a transferor's continuing involvement with transferred financial assets and an enterprise's involvement with VIEs.  FSP No. FAS 140-1 and FIN 46(R)-8 is effective for all interim and annual reporting periods after December 15, 2008.  The Company adopted the FSP on December 31, 2008.  The FSP only requires additional disclosure and had no effect on the Company's consolidated financial position or results of operations. The new disclosure is included previously in Note 1.

In September 2008, the FASB issued FSP No. FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An amendment of FASB Statement No. 133 and FASB Interpretation No. 45.”  FSP No. FAS 133-1 and FIN 45-4 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” to require additional disclosures by sellers of credit derivatives, including derivatives embedded in a hybrid instrument.  This FSP also amends FIN No. 45, “Guarantor’s Accounting and Disclosure Requirement for Guarantees, Including Indirect Guarantees of Indebtedness of Others” to require an additional disclosure about the current status of the payment/performance risk of a guarantee.  FSP No. FAS 133-1 and FIN 45-4 is effective for all interim and annual reporting periods after November 15, 2008.  The Company adopted the FSP on December 31, 2008.  The FSP only requires additional disclosures about credit derivatives and guarantees and had no effect on the Company's consolidated financial position or results of operations.  The new disclosure is included previously in Note 1.

In February 2007, the FASB issued SFAS No. 159 which permits entities to choose to measure many financial instruments and certain other items at fair value (the “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.



 
 
 

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, 2008, 2007 and 2006

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

New and Adopted Accounting Pronouncements (continued)

SFAS No. 159 was adopted by the Company on January 1, 2008, and the FV option was elected 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, and are now classified as trading securities.  The adoption of the FV option does not relieve the Company from its obligation to monitor those available-for-sale securities that were in an unrealized loss position at December 31, 2007, which the Company does through its current portfolio monitoring process.

The FV option adoption resulted in a cumulative-effect adjustment to the Company’s December 31, 2007, balance of retained earnings and accumulated other comprehensive income of $88.4 million related to the unrealized loss on investments, net of DAC, VOBA, policyholder liabilities, and tax effects.  See Note 5 for further disclosure related to the adoption of SFAS No. 159.

In September 2006, the FASB issued SFAS No. 157 which defines fair value, establishes a framework for measuring fair value under GAAP, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and expands disclosures about fair value measurements.  SFAS No. 157 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.

The provisions of SFAS No. 157 are effective for fiscal years beginning after November 15, 2007, and are to be applied prospectively.  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 October 2008, the FASB issued FSP No. SFAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”.  FSP No. SFAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in the determination of the fair value of a financial asset when the market for that asset is not active.  FSP No. SFAS 157-3 was effective upon issuance and did not have an impact on the Company’s consolidated financial statements.

See Note 5 for further disclosure related to the adoption of SFAS No. 157.



 
 
 

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, 2008, 2007 and 2006

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

New and Adopted Accounting Pronouncements (continued)

In September 2006, the FASB issued SFAS No. 158, “Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans,” which amends SFAS No. 87, “Employers’ Accounting for Pensions,” and SFAS No. 106, “Employers' Accounting for Postretirement Benefits Other Than Pensions,” 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 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 adopted the year-end measurement date provisions effective January 1, 2008.  The adoption of the year-end measurement date provisions resulted in a net of tax cumulative-effect decrease of $0.3 million to the Company’s December 31, 2007 accumulated other comprehensive income.

In June 2006, the FASB issued 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.  The Company elected on a prospective basis, with the adoption of FIN 48, to recognize interest and penalties accrued related to UTBs in interest expense.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets-an amendment of FASB Statement 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, “Accounting for Derivative Instruments and Hedging Activities.”  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 and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities-a replacement of FASB Statement No. 125,” 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 adoption of this statement did not have a material impact on the Company’s financial position or results of operations.

In September 2005, the AICPA issued SOP 05-1, “Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection with Modifications or Exchanges of Insurance Contracts”.  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 position and 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, 2008, 2007 and 2006

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

Accounting Standards Not Yet Adopted

In December of 2008, the FASB issued FSP FAS 132(R)-1 “Employers’ Disclosures about Postretirement Benefit Plan Assets”, which amends Statement 132(R) to require more detailed disclosure about employers’ plan assets, including employers’ investment strategies, major categories of plan assets, concentrations of risk within plan assets and valuation techniques used to measure the fair value of plan assets.  This FSP is effective for fiscal years ending after December 15, 2009.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts – an interpretation of FASB Statement No. 60.”  The scope of SFAS No. 163 is limited to financial guarantee insurance (and reinsurance) contracts issued by enterprises that are included within the scope of SFAS No. 60, “Accounting and Reporting by Insurance Enterprises,” and that are not accounted for as derivative instruments.  SFAS No. 163 excludes from its scope insurance contracts that are similar to financial guarantee insurance, such as mortgage guaranty insurance and credit insurance on trade receivables.  SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and all interim periods within those fiscal years, except for certain disclosures about the insurance enterprise’s risk management activities.  Except for certain disclosures, earlier application is not permitted.  The Company does not have any contracts with guarantees within the scope of this standard.  The Company’s adoption of SFAS No. 163 on January 1, 2009 will have no impact on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133.”  This statement amends and expands disclosures about an entity’s derivative and hedging activities with the intent to provide users of financial statements with an enhanced understanding of (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.  SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  SFAS No. 161 encourages, but does not require, comparative disclosures.  The Company will adopt SFAS No. 161 on January 1, 2009.

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 statement of operations, (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, and (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 does not have any noncontrolling interests within the scope of this guidance; therefore, the adoption of SFAS No. 160 on January 1, 2009 will have no impact on its 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, 2008, 2007 and 2006

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

Accounting Standards Not Yet Adopted (continued)

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.

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 will adopt SFAS No. 141(R) on January 1, 2009 and will apply this guidance to future business combinations as appropriate.


 
 
 

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, 2008, 2007 and 2006

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

Accounting Standards Not Yet Adopted (continued)

In June 2007, the AICPA issued SOP 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 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 position or results of operations.

2. MERGERS, ACQUISITIONS AND DISPOSITIONS

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 dissolved 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 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 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.



 
 
 

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, 2008, 2007 and 2006

2. MERGERS, ACQUISITIONS AND DISPOSITIONS (CONTINUED)

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 in-force business acquired, which is 20 years.  The Company recorded amortization for these intangible assets for the periods identified as follows:

 
Value of
Distribution
  
VOBA
  
VOCRA
Year ended December 31, 2008
$
299
  
$
782
  
$
4,627
Year ended December 31, 2007
$
149
  
$
5,928
  
$
1,854

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES

Below is a summary of transactions with affiliates not included in these financial statements.

Reinsurance Related Transactions

As more fully described in Note 9, the Company is party to several reinsurance transactions with SLOC and other affiliates.

On October 31, 2007, the Company subscribed to $0.25 million 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 special purpose financial captive insurance company which, effective November 8, 2007, 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 by SLOC prior to December 31, 2008.  This agreement is described more fully in Note 9.  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, in 2008 and 2007, floating rate surplus notes of $115 million and $1 billion, respectively, (the “Surplus Notes”) 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 Sun Life Assurance Company of Canada – U.S Operations Holdings, Inc. (“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(R).  Sun Life Vermont has agreed to reimburse SLC – U.S. Ops Holdings for certain costs incurred in connection with the issuance of the Surplus Notes.  For the years ended December 31, 2008 and 2007, the amount of interest expense incurred by Sun Life Vermont was $46.5 million and $8.6 million, respectively.

Effective December 31, 2007, SLNY entered into a reinsurance agreement with SLOC under which SLOC will fund a portion of the statutory reserves required by New York Regulation 147, which is substantially similar to Actuarial Guideline 38 (“AXXX reserves”), as adopted by the National Association of Insurance Commissioners (“the NAIC”), attributable to certain individual universal life (“UL”) policies sold by SLNY.  Under this agreement, SLNY ceded, and SLOC assumed, on a funds withheld 90% coinsurance basis, certain in-force policies at December 31, 2007.  Future new business also will be reinsured under this agreement.


 
 
 

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, 2008, 2007 and 2006

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Capital Transactions

On September 30, 2008 and November 13, 2008, the Company received capital contributions of $300.0 and $425.0 million, respectively, from the Parent.  The $725.0 million cash contributions were recorded as additional paid-in capital and were made to ensure the Company continues to exceed certain capital requirements, as prescribed by the NAIC.  The NAIC has established regulations that provide minimum capitalization requirements based on risk-based capital formulas for life companies.  The risk-based capital formula for life companies establishes capital requirements relating to insurance, business, asset and interest rate risks, including equity, interest rate and expense recovery risks associated with variable annuities that contain death benefits or certain living benefits.

In 2006, the Company declared and paid $300.0 million in a cash dividend to the Parent. The Company did not declare or pay a dividend to the Parent in 2008 or 2007.

Debt Transactions

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.  On December 29, 2008, the Company redeemed in part, $62.0 million of the $80 million remaining note and paid $64.3 million, including $2.3 million in accrued interest, to Sun Life (Hungary) LLC.  At December 31, 2008 and 2007, the Company had $18 million and $80.0 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 $4.5 million, $13.3 million and $26.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.

On July 17, 2008, the Company issued a $60 million promissory note to Sun Life (Hungary) LLC which will mature on September 27, 2011.  The Company pays interest quarterly to Sun Life (Hungary) LLC. Total interest incurred was $1.3 million for the year ended December 31, 2008. The Company used the proceeds of the note for general corporate purposes. On December 29, 2008, the Company redeemed the note and paid $60.8 million to Sun Life (Hungary) LLC, including $0.8 million in accrued interest.

At December 31, 2008 and 2007, the Company had $565 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, 2008, 2007 and 2006.


 
 
 

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, 2008, 2007 and 2006

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED

Debt Transactions (continued)

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 dissolved 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 and $51.2 million for the years ended December 31, 2007 and 2006, respectively.  The Company also earned interest income, through the Partnership, $17.8 million and $51.2 million for the years ended December 31, 2007 and 2006, respectively.

Institutional Investments Contracts

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.  On April 7, 2008, the Company issued additional floating rate funding agreement totaling $5.8 million to LLC III. Total interest credited for the funding agreements was $36.5 million, $51.6 million and $14.9 million for the years ended December 31, 2008, 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 $4.0 million, $5.8 million and $1.7 million for interest on this demand note for the years ended December 31, 2008, 2007 and 2006, respectively.

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.




 
 
 

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, 2008, 2007 and 2006

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Institutional Investments Contracts (continued)

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.  On April 7, 2008, the Company issued additional floating rate funding agreement totaling $7.5 million to LLC II. Total interest credited for the funding agreement was $35.7 million, $50.8 million and $30.7 million for the years ended December 31, 2008, 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 $4.0 million, $5.7 million and $3.4 million for interest on this demand note for the years ended December 31, 2008, 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 and June 29, 2005, the Company issued two floating rate funding agreements with a combined total of $900 million to Sun Life Financial Global Funding, L.L.C. (“LLC”) due 2010.  On April 7, 2008, the Company issued an additional floating rate funding agreement totaling $10 million to LLC.  Total interest credited for these funding agreements was $36.6 million, $51.6 million and $49.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.  On June 10, 2005, the Company also issued a $100.0 million floating rate demand note payable to LLC.  For interest on this demand note, the Company expensed $4.0 million, $5.8 million and $5.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.

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





 
 
 

 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, 2008, 2007 and 2006

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Institutional Investments Contracts (continued)

The following table lists the details of notes due to affiliates at December 31, 2008:

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
1,115,000
46,492
Sun Life (Hungary) Group Financing Limited
Company
Promissory
5.710%
06/30/2012
18,000
6
Sun Life Financial Global Funding, L.L.C.
Demand
LIBOR + 0.35%
07/6/2010
100,000
4,055
Sun Life Financial Global Funding II, L.L.C.
Demand
LIBOR + 0.26%
07/6/2011
100,000
3,963
Sun Life Financial Global Funding III, L.L.C.
Demand
LIBOR + 0.35%
10/6/2013
100,000
4,055
       
$  1,998,000
$     101,154

The following table lists the details of notes due to affiliates at December 31, 2007:

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


 
 
 

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, 2008, 2007 and 2006

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Administrative service agreements, rent and other

The Company and certain of its subsidiaries have administrative services agreements with SLOC which provide that SLOC will furnish, as requested, certain services and facilities on a cost-reimbursement basis. Expenses under these agreements amounted to approximately $9.9 million, $14.2 million and $9.4 million for the years ended December 31, 2008, 2007 and 2006, 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 $316.7 million, $301.0 million and $212.4 million for the years ended December 31, 2008, 2007 and 2006, 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 $17.6 million, $16.9 million and $10.7 million for the years ended December 31, 2008, 2007 and 2006, 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 $24.3 million, $26.0 million and $19.6 million for the years ended December 31, 2008, 2007 and 2006, 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 $17.2 million, $22.3 million and $22.6 million for the years ended December 31, 2008, 2007 and 2006, respectively.

The Company has an administrative services agreement with Sun Capital Advisers LLC (“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 $2.1 million, $1.9 million and $1.5 million for the years ended December 31, 2008, 2007 and 2006, respectively. The Company paid $18.6 million, $15.9 million and $14.9 million for the years ended December 31, 2008, 2007 and 2006, respectively, in investment management services fees to SCA.

Effective November 7, 2007, Independent Financial Marketing Group, Inc. (“IFMG”) was sold by the Parent and is no longer an affiliate of the Company.  For that period of time in 2007 during which it was still affiliated, the Company paid $22.6 million in commission fees to IFMG. The Company did not pay commission fees to IFMG in 2008. During the year ended December 31, 2006, the Company paid $20.1 million in commission fees to IFMG.

During the years ended December 31, 2008, 2007 and 2006, the Company paid $23.7 million, $31.3 million and $24.3 million, respectively, in distribution fees to Sun Life Financial Distributors, Inc. (“SLFD”), an affiliate.  The Company also had an agreement with SLFD and the Parent whereby the Parent provided 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.


 
 
 

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, 2008, 2007 and 2006

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (continued)

Administrative service agreements, rent and other (continued)

The Company leases office space to SLOC under lease agreements with terms expiring on 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, 2008, 2007 and 2006, respectively.  Rental income is reported as a component of net investment income.

During the year ended December 31, 2008, the Company sold mortgages to SLOC with a book value of $150.2 million and a market value of $150.2 million.

During the year ended December 31, 2008, the Company sold certain limited partnership investments to SLOC with a book value and market value of $87.2 million.

The Company records a tax benefit through paid-in-capital for SLF stock options issued to employees of the Company. Related to these stock options, the Company recorded tax benefits of approximately $0.8 million, $3.0 and $4.5 million for the years ended December 31, 2008, 2007 and 2006, respectively.

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 $5.9 million, $4.4 million and $7.3 million relating to RSUs for the years ended December 31, 2008, 2007 and 2006, respectively.

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, 2008, 2007 and 2006

4. INVESTMENTS

Fixed Maturities

The amortized cost and fair value of fixed maturities at December 31, 2008, was as follows:

   
Gross
Gross
  
 
Amortized
Unrealized
Unrealized
Fair
Available-for-sale fixed maturities:
Cost
Gains
Losses
Value
Collateralized Mortgage Obligations
$            22,504
$             94
$           (4,489)
$            18,109
Mortgage Backed Securities
40,107
1,060
(17)
41,150
Foreign Government & Agency Securities
509
-
(37)
472
U.S. Treasury & Agency Securities
61,824
13,262
(105)
74,981
Total non-corporate
124,944
14,416
(4,648)
134,712
         
Corporate securities:
        
Basic Industry
11,619
-
(3,062)
8,557
Capital Goods
29,853
317
(7,137)
23,033
Communications
111,380
1,724
(7,820)
105,284
Consumer Cyclical
62,112
1,160
(11,769)
51,503
Consumer Noncyclical
44,947
571
(1,845)
43,673
Energy
47,968
257
(8,200)
40,025
Finance
254,505
302
(67,240)
187,567
Technology
4,485
-
(624)
3,861
Transportation
6,861
4
(1,585)
5,280
Utilities
84,187
140
(13,802)
70,525
Total Corporate
657,917
4,475
(123,084)
539,308
         
Total available-for-sale fixed maturities
$           782,861
$       18,891
$        (127,732)
$           674,020
         
 
Amortized
Gross
Gross
Fair
Trading fixed maturities:
Cost
Gains
Losses
Value
Asset Backed Securities
$           796,032
$      4,357
$         (294,557)
$          505,832
Collateralized Mortgage Obligations
2,627,715
8,543
(1,141,245)
1,495,013
Mortgage Backed Securities
213,175
4,579
(325)
217,429
Foreign Government & Agency Securities
110,991
1,972
(3,788)
109,175
U.S. Treasury & Agency Securities
484,910
36,528
(18,332)
503,106
Total non-corporate
4,232,823
55,979
(1,458,247)
2,830,555
         
Corporate securities:
        
Basic Industry
201,573
67
(31,623)
170,017
Capital Goods
461,583
2,477
(71,733)
392,327
Communications
1,642,250
4,730
(165,902)
1,481,078
Consumer Cyclical
1,189,335
7,776
(250,384)
946,727
Consumer Noncyclical
496,392
2,036
(25,794)
472,634
Energy
430,413
810
(40,710)
390,513
Finance
4,188,983
2,773
(976,868)
3,214,888
Industrial Other
250,656
1,390
(9,647)
242,399
Municipals
610
-
(82)
528
Technology
88,573
-
(16,016)
72,557
Transportation
246,398
5,552
(24,662)
227,288
Utilities
1,479,840
11,365
(170,570)
1,320,635
Total Corporate
10,676,606
38,976
(1,783,991)
8,931,591
         
Total trading fixed maturities
$         14,909,429
$      94,955
$     (3,242,238)
$     11,762,146


 
 
 

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, 2008, 2007 and 2006

4. INVESTMENTS (CONTINUED)

Fixed Maturities (continued)

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, 2008, 2007 and 2006

4. INVESTMENTS (CONTINUED)

Fixed Maturities (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 ABS and MBS because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
December 31, 2008
 
Amortized Cost
Fair Value
Maturities of available-for-sale fixed securities:
    
Due in one year or less
$                  476
$                  439
Due after one year through five years
59,496
52,545
Due after five years through ten years
87,028
70,484
Due after ten years
573,250
491,293
Subtotal – Maturities available-for-sale
720,250
614,761
ABS, CMO and MBS securities
62,611
59,259
Total Available-for-sale
$           782,861
$            674,020
     
Maturities of trading fixed securities:
    
Due in one year or less
$           409,847
$            383,929
Due after one year through five years
5,571,645
4,812,789
Due after five years through ten years
3,098,890
2,531,157
Due after ten years
2,192,125
1,815,997
Subtotal – Maturities  of trading
11,272,507
9,543,872
ABS, CMO and MBS securities
3,636,922
2,218,274
Total Trading
$       14,909,429
$       11,762,146

Gross gains of $17.8 million, $52.8 million and $39.5 million and gross losses of $321.9 million, $52.3 million and $92.3 million were realized on the sale of fixed maturities for the years ended December 31, 2008, 2007 and 2006, respectively.

Fixed maturities with an amortized cost of approximately $12.4 million and $12.0 million at December 31, 2008 and 2007, respectively, were on deposit with federal and state governmental authorities as required by law.

As of December 31, 2008 and 2007, 94.6% and 96.0%, respectively, of the Company's fixed maturity securities were investment grade.  Investment grade securities are those that are rated “BBB” or better by nationally recognized statistical rating organizations.  During 2008, 2007 and 2006, the Company incurred realized losses totaling $41.9 million, $68.1 million and $6.3 million, respectively, for other-than-temporary impairment of value of its available-for-sale fixed maturity securities.

The Company had outstanding commitments with respect to funding of limited partnerships of approximately $18.2 million and $34.9 million at December 31, 2008 and 2007, 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, 2008, 2007 and 2006

4. INVESTMENTS (CONTINUED)

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

At December 31, 2008, the Company held $18.1 billion in invested assets and cash.  Of this balance, $12.4 billion was invested in fixed-maturity securities designated as either available-for-sale ($674.0 million) or trading ($11.8 billion).  Of the $674.0 million of available-for-sale fixed maturities, securities with a fair value of $462.2 million were in an unrealized loss position totaling $127.7 million.  At December 31, 2008, 30 % 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 $6.1 million.

In the available-for-sale fixed maturity portfolio, securities with a fair value of $34.1 million, representing 0.19 % of the total invested asset balance, were comprised of below-investment-grade or not-rated securities.  Of the securities that were below-investment-grade or not-rated at December 31, 2008, securities with a fair value of $23.1 million, representing 0.13% of the total invested asset balance, were in an unrealized loss position that totaled $3.1 million.  At December 31, 2008, 73 % 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 position  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.

“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.  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.  Other-than-temporary impairments are classified as either credit-related or interest-related.  The Company categorizes other-than-temporary impairments as credit-related if there are current fundamental credit concerns regarding the issuers’ ability to pay all principal and interest amounts due, according to the contractual terms of the security.  The Company characterizes other-than-temporary 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 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, 2008, other-than-temporary impairments on available-for-sale fixed maturities of $41.9 million were recorded as a charge to income.  The $41.9 million realized losses for other-than-temporary impairments for the year ended December 31, 2008 were credit-related.  Of the $68.1 million realized losses for other-than-temporary impairments for the year ended December 31, 2007, $52.0 million was credit-related and $16.1 million was interest-related.  The $6.3 million realized loss for other-than-temporary impairments for the year ended December 31, 2006, was credit-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, 2008, 2007 and 2006

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.  Investment income would have increased by $4.6 million for the year ended December 31, 2008, if these holdings were performed.  Accrued income was not materially impacted by the termination of accrual accounting on these holdings for the years ended December 31, 2007 and 2006.  As of December 31, 2008, the fair market value of holdings for issuers in default was $17.9 million.  As of December 31, 2007 and 2006, the Company did not have any holding for issuers that were in default.



 
 
 

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, 2008, 2007 and 2006

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, 2008.

 
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
$       5,008
$   (1,231)
$         3,549
$        (1,831)
$         8,557
$         (3,062)
Capital Goods
2,337
(55)
11,447
(7,082)
13,783
(7,137)
Communications
65,855
(7,747)
17,237
(73)
83,092
(7,820)
Consumer Cyclical
8,473
(2,139)
28,071
(9,630)
36,544
(11,769)
Consumer Noncyclical
11,799
(341)
11,329
(1,504)
23,128
(1,845)
Energy
21,290
(4,496)
16,469
(3,704)
37,759
(8,200)
Finance
39,132
(11,130)
122,697
(56,110)
161,829
(67,240)
Industrial Other
-
- 
-
- 
-
- 
Technology
3,861
(624)
-
- 
3,861
(624)
Transportation
435
(29)
4,709
(1,556)
5,143
(1,585)
Utilities
55,467
(9,638)
10,787
(4,164)
66,254
(13,802)
             
Total Corporate
213,657
(37,430)
226,295
(85,654)
439,952
(123,084)
             
Non-Corporate
            
Asset Backed Securities
-
- 
-
- 
-
- 
Collateralized Mortgage Obligations
2,967
(1,162)
12,739
(3,327)
15,706
(4,489)
Mortgage Backed Securities
1,054
(7)
3,137
(10)
4,191
(17)
U.S. Treasury & Agency Securities
1,855
(105)
-
- 
1,855
(105)
Foreign Government & Agency Securities
473
(37)
-
- 
472
(37)
             
Total Non-Corporate
6,349
(1,311)
15,876
(3,337)
22,224
(4,648)
             
Grand Total
$    220,006
$   (38,741)
$     242,171
$       (88,991)
$     462,176
$     (127,732)




 
 
 

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, 2008, 2007 and 2006

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, 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, 2008, 2007 and 2006

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 of the Company’s available-for-sale fixed maturities investments with gross unrealized losses, which were deemed to be temporarily impaired, at December 31, 2008 (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
6
2
8
Capital Goods
1
6
7
Communications
36
8
44
Consumer Cyclical
7
20
27
Consumer Noncyclical
7
4
11
Energy
12
6
18
Finance
41
73
114
Industrial Other
-
-
-
Technology
4
-
4
Transportation
1
4
5
Utilities
28
10
38
       
Total Corporate
143
133
276
       
Non-Corporate
      
Asset Backed Securities
-
-
-
Collateralized Mortgage Obligations
8
10
18
Foreign Government & Agency Securities
1
-
1
Mortgage Backed Securities
2
6
8
U.S. Treasury & Agency Securities
2
-
2
       
Total Non-Corporate
13
16
29
       
Grand Total
156
149
305



 
 
 

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, 2008, 2007 and 2006

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 of the Company’s available-for-sale fixed maturities investments 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

The Company’s available-for-sale fixed maturity gross unrealized loss position decreased $384.1 million as of December 31, 2008, as compared to December 31, 2007.  The change in unrealized losses was primarily due to the adoption of SFAS No. 159, under which the Company elected the FV option for all fixed maturity securities attributable to certain life, health and annuity products, which had previously been designated as available-for-sale.  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.


 
 
 

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, 2008, 2007 and 2006

4. INVESTMENTS (CONTINUED)

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

Unrealized Losses (continued)

The sectors in the Company’s portfolio that recognized the largest unrealized losses at December 31, 2008 were financial services, consumer cyclical, and utilities.  As of December 31, 2008, there were 114 securities accounting for unrealized losses of $67.2 million in the Finance sector.   Of these unrealized losses, 99.3% were related to investment grade issues (rated AAA through BBB).

As of December 31, 2008, there were 38 securities accounting for unrealized losses of $13.8 million in the Utility sector.   Of these unrealized losses, 99.03% were related to investment-grade issues (rated AAA through BBB). As of December 31, 2008, there were 27 securities accounting for unrealized losses of $11.8 million in the Consumer Cyclical sector.   Of these unrealized losses, 95.54% were related to investment-grade issues (rated AAA through BBB). All securities held at December 31, 2008 were subject to the Company’s portfolio monitoring process.

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 have recently led to higher delinquency and loss rates especially within the 2006 and 2007 vintage years.  Ninety-two percent of these below-prime investments, based upon fair value, held by the Company were either issued before 2006 or have an AAA rating.  At December 31, 2008, the Company had exposure to residential sub-prime and Alt-a mortgages of $165.5 million and $116.9 million, respectively, representing approximately 1.6% 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.

Realized Losses

During the year ended December 31, 2008, the Company did not record any realized losses related to the sale of available-for-sale securities that were in an unrealized loss position.  During the year ended December 31, 2007, the Company recorded $47.3 million realized losses related to the sale of available-for-sale fixed maturity securities that were in an unrealized loss position.

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, 2008, 2007 and 2006

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,
 
2008
2007
     
Total mortgage loans
$       2,083,003
$     2,318,341
     
Real estate:
    
Held for production of income
201,470
201,777
Total real estate
$          201,470
$        201,777
     
Total mortgage loans and real estate
$       2,284,473
$     2,520,118

Accumulated depreciation on real estate was $36.7 million and $31.8 million at December 31, 2008 and 2007, respectively.

The Company monitors the condition of the mortgage loans in its portfolio.  In those cases where mortgages have been restructured, appropriate allowances for losses have been made.  The Company has recognized impairment on mortgage loans totaling $3.0 million and $3.3 million at December 31, 2008 and 2007, respectively.

Activity for the investment valuation allowances was as follows:

 
Balance at
    
Balance at
 
January 1,
Additions
Subtractions
December 31,
2008
        
Mortgage loans
$           3,288
$         3,000
$      (3,288)
$             3,000
         
2007
        
Mortgage loans
$           3,928
$                  -
$        (640)
$           3,288

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

 
2008
2007
Property Type:
    
Office building
$        763,405 
$       820,803 
Residential
198 
369 
Retail
923,592 
1,067,483 
Industrial/warehouse
262,436 
306,769 
Apartment
106,362 
109,919 
Other
231,480 
218,063 
Valuation allowances
(3,000)
(3,288)
Total
$     2,284,473 
$    2,520,118 


 
 
 

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, 2008, 2007 and 2006

4. INVESTMENTS (CONTINUED)

MORTGAGE LOANS AND REAL ESTATE (continued)

 
2008
  
2007
Geographic region:
      
       
Alabama
$           9,049
  
$           9,387
Alaska
5,873
  
6,000
Arizona
4,349
  
449
Arkansas
55,987
  
59,024
California
124,004
  
132,829
Colorado
36,521
  
39,276
Connecticut
12,599
  
13,133
Delaware
7,029
  
7,188
Florida
229,681
  
269,254
Georgia
62,418
  
68,371
Idaho
3,832
  
3,885
Illinois
49,635
  
47,521
Indiana
32,082
  
32,584
Iowa
1,469
  
325
Kansas
7,620
  
7,853
Kentucky
28,038
  
29,396
Louisiana
36,426
  
38,470
Maine
1,090
  
13,425
Maryland
52,202
  
72,659
Massachusetts
120,059
  
139,203
Michigan
19,789
  
20,649
Minnesota
41,013
  
41,909
Mississippi
3,836
  
3,959
Missouri
61,293
  
64,624
Montana
3,112
  
30,843
Nebraska
12,937
  
13,457
Nevada
6,665
  
5,987
New Hampshire
649
  
762
New Jersey
35,964
  
37,952
New Mexico
13,310
  
13,787
New York
328,439
  
345,887
North Carolina
37,620
  
39,453
North Dakota
1,678
  
1,920
Ohio
145,192
  
148,743
Oklahoma
8,180
  
8,811
Oregon
31,261
  
33,852
Pennsylvania
118,744
  
132,665
South Carolina
32,318
  
33,334
South Dakota
921
  
949
Tennessee
37,845
  
39,405
Texas
340,082
  
348,817
Utah
24,363
  
27,088
Virginia
12,926
  
14,070
Washington
56,547
  
76,767
West Virginia
4,576
  
4,730
Wisconsin
3,942
  
17,785
All other
24,308
  
24,969
Valuation allowances
(3,000)
  
(3,288)
Total
$     2,284,473
  
$     2,520,118


 
 
 

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, 2008, 2007 and 2006

4. INVESTMENTS (CONTINUED)

MORTGAGE LOANS AND REAL ESTATE (continued)

At December 31, 2008, scheduled mortgage loan maturities were as follows:

2009
$             33,474
2010
34,454
2011
124,344
2012
75,628
2013
129,595
Thereafter
1,685,508
Total
$        2,083,003

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 $2.0 million and $17.8 million at December 31, 2008 and 2007, 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, 2008, 2007 and 2006

4. INVESTMENTS (CONTINUED)

SECURITIES LENDING

The Company participates in a securities lending program to generate additional income, whereby certain fixed maturity securities are loaned for a specified period of time from the Company’s portfolio to qualifying third parties, via a lending agent.  Borrowers of these securities provide collateral of 102% of the market value of the loaned securities.  The Company generally accepts cash as the only form of collateral.  Under the terms of the securities lending program, the lending agent indemnifies the Company against borrower defaults.

As of December 31, 2008 and 2007, the fair value of the loaned securities was approximately $175.0 million and $536.4 million, respectively, and was included in fixed maturities, available-for-sale, and cash and cash equivalents in the Company’s consolidated balance sheets.  The Company had accepted cash collateral relating to the securities lending program in the amount of $183.5 million and $533.5 million as of December 31, 2008 and 2007, respectively, all of which was re-invested in certain cash instruments and other available-for-sale securities.  The Company records the collateral investments at fair value in the consolidated balance sheets in other invested assets and changes in the fair value of the available-for-sale securities are recorded in other comprehensive income.  The fair value of the collateral investments at December 31, 2008 and 2007 was $179.9 million and $517.7 million, respectively.

The Company earns income from the reinvestment of the cash collateral.  The Company recorded before-tax income from securities lending transactions, net of lending fees, of $2.6 million, $2.2 million and $2.3 million for the years ended December 31, 2008, 2007 and 2006, respectively, which was included in net investment income.

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,
 
2008
  
2007
Lease contract receivable
$          7,042 
  
$         12,836 
Less: non-recourse debt
- 
  
- 
Net Receivable
7,042 
  
12,836 
Estimated value of leased assets
20,795 
  
20,795 
       
Less: unearned and deferred income
(2,373)
  
(4,304)
Investment in leveraged leases
25,464 
  
29,327 
Less: fees
(37)
  
(87)
Net investment in leveraged leases
$        25,427 
  
$         29,240 



 
 
 

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, 2008, 2007 and 2006

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. 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 or derivative instruments - payable 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 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.

On September 6, 2006 the Company entered into an agreement with the CARS Trust.  Through this agreement, the Company purchased a funded note, which is referenced through a credit default swap to the credit performance of a portfolio of corporate reference entities.  The Company entered into this credit structure for yield enhancement.  As the sole beneficiary of the CARS Trust, the Company is required to consolidate this trust under the requirements of FIN 46(R).  As a result of the consolidation, the Company has recorded in its balance sheet a credit default swap held by the CARS Trust.   At issue, the swap had a seven year term, maturing in 2013.  Under the terms of the swap, the CARS Trust will be required to make payments to the swap counterparty upon the occurrence of a credit event, with respect to any reference entity, that is in excess of the threshold amount specified in the swap agreement.  At December 31, 2008, the CARS Trust has not had to make any payments under the terms of the swap as the sum of all credit events has not exceeded the threshold amount.  At December 31, 2008 the fair value of the credit default swap is $(42.1) million.  Under the terms of the credit derivative, the maximum future payments the CARS Trust could be required to make is $55.0 million.  In the event the trust was required to make any payments under the swap, the underlying assets held by the trust would be liquidated to fund the payment.  If the disposition of these assets is insufficient to fund the payment calculated, then under the terms of the agreement, the cash settlement amount would be capped at the amount of the proceeds from the sale of the underlying assets.  As of December 31, 2008, the fair value of the assets held as collateral by the CARS Trust was $42.3 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, 2008, 2007 and 2006

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 income are gains (losses) on the translation of foreign currency denominated GIC liabilities of $167.7 million, $45.5 million and $(90.2) million for the years ended December 31, 2008, 2007 and 2006, respectively.

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 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:

   
2008
    
2007
    
2006
                 
Net (expense) income on swap agreements
$
(54,513)
  
$
6,943 
  
$
(7,749)
Change in fair value of swap agreements
(interest rate, currency, and equity)
  
(613,961)
    
(255,727)
    
8,392 
Change in fair value of options, futures and
embedded derivatives
  
(203,070)
    
55,660 
    
8,446 
Total derivative (losses) income
$
(871,544)
  
$
(193,124)
  
$
9,089 

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 counterparties.  The Company currently pledges cash and U.S. Treasury bonds to satisfy this collateral requirement.  At December 31, 2008 and 2007, $400.7 million and $132.9 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 and the fair value of the (liability) asset were as follows for the years ended December 31:

 
2008
 
Notional
  
Fair Value
 
Principal
  
(Liability)
 
Amounts
  
Asset
           
Interest rate swaps
$
14,036,100
  
$
(881,867)
Currency swaps
  
408,773
    
50,554
Credit default swaps
  
55,000
    
(42,067)
Equity swaps
  
5,400
    
2,668
Currency forwards
  
-
    
-
Futures
  
1,991,840
    
(22,819)
Swaptions
  
1,150,000
    
1,863
S&P 500 index call options
  
1,166,148
    
17,125
S&P 500 index put options
  
591,385
    
107,305
           
Total
$
19,404,646
  
$
(767,238)

 
 
 

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, 2008, 2007 and 2006

4. INVESTMENTS (CONTINUED)

DERIVATIVES (continued)

 
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

5. FAIR VALUE MEASUREMENT

On January 1, 2008, the Company adopted SFAS No. 157.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements.  SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  In determining fair value, the Company uses various methods including market, income and cost approaches.  The Company utilizes valuation techniques that maximize the use of observable inputs and minimizes the use of unobservable inputs.

The impact on January 1, 2008, of adopting SFAS No. 157 was a reduction to the value of the Company’s embedded derivative liabilities of $166.1 million.  This change is primarily a result of changes to the valuation assumptions regarding policyholder behavior, primarily lapses, as well as the incorporation of risk margins and the Company’s own credit standing in the valuation of embedded derivatives.

In compliance with SFAS No. 157, the Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

Please refer to Note 8 regarding the valuation techniques utilized by the Company to measure the fair values included herein.  There were no changes to these techniques during the year ended December 31, 2008.


 
 
 


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, 2008, 2007 and 2006

5. FAIR VALUE MEASUREMENT (CONTINUED)

Financial assets and liabilities recorded at fair value on the Balance Sheets are categorized as follows:

Level 1

·  
Unadjusted quoted prices for identical assets or liabilities in an active market.

The types of assets and liabilities utilizing Level 1 valuations include U.S. Treasury and agency securities, investments in publicly-traded mutual funds with quoted market prices and listed derivatives.

Level 2

·  
Quoted prices in markets that are not active or significant inputs that are observable either directly or indirectly.

Level 2 inputs include the following:

a)  
Quoted prices for similar assets or liabilities in active markets

b)  
Quoted prices for identical or similar assets or liabilities in non-active markets

c)  
Inputs other than quoted market prices that are observable

d)  
Inputs that are derived principally from or corroborated by observable market data through correlation or other means

The types of assets and liabilities utilizing Level 2 valuations generally include U.S. Government securities not backed by the full faith and credit of the Government, municipal bonds, structured notes and certain MBS and ABS, certain corporate debt, certain private equity investments and certain derivates.

Level 3

·  
Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management's own assumptions about the assumptions a market participant would use in pricing the asset or liability.

 
 
 

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, 2008, 2007 and 2006

5. FAIR VALUE MEASUREMENT (CONTINUED)

Generally, the types of assets and liabilities utilizing Level 3 valuations are certain MBS and ABS, certain corporate debt, certain private equity investments, certain mutual fund holdings and certain derivatives, including derivatives embedded in annuity contracts and funding agreements.

Fair Value Hierarchy

The following table presents the Company's categories for its assets measured at fair value on a recurring basis as of December 31, 2008:

   
Level 1
  
Level 2
  
Level 3
  
Total
Assets
                        
Available-for-sale fixed maturities
                        
Asset-backed and mortgage-backed securities
  
$
-
  
$
54,793
  
$
4,466
  
$
59,259
Foreign government
    
-
    
472
    
-
    
472
States and political subdivisions
    
-
    
-
    
-
      
U.S. Treasury and agency securities
    
56,478
    
18,503
    
-
    
74,981
Corporate securities
    
-
    
531,420
    
7,888
    
539,308
Total available-for-sale fixed maturities
    
56,478
    
605,188
    
12,354
    
674,020
                         
Trading fixed maturities
                        
Asset-backed and mortgage-backed securities
    
-
    
1,771,382
    
462,253
    
2,233,635
Foreign governments
    
-
    
84,615
    
9,200
    
93,815
States and political subdivisions
    
-
    
528
    
-
    
528
U.S. Treasury and agency securities
    
445,732
    
57,373
    
-
    
503,105
Corporate securities
    
-
    
8,796,558
    
134,505
    
8,931,063
Total trading fixed maturities
    
445,732
    
10,710,456
    
605,958
    
11,762,146
                         
Derivative instruments - receivable
    
-
    
724,435
    
2,668
    
727,103
Other invested assets
    
36,300
    
143,645
    
-
    
179,945
Cash and cash equivalents
    
1,624,149
    
-
    
-
    
1,624,149
Total investments and cash
    
2,162,659
    
12,183,724
    
620,980
    
14,967,363
                         
Other assets
                        
Separate account assets (1) (2)
    
376,709
    
18,957,344
    
801,873
    
20,135,926
                         
                         
Total assets measured at fair value on a recurring basis
  
$
2,539,368
  
$
31,141,068
  
$
1,422,853
  
$
35,103,289

(1) Pursuant to the conditions set forth in AICPA SOP 03-1, the value of separate account liabilities is set to equal the fair value for separate account assets.

(2) Excludes $395.8 million, primarily related to investment sales receivable, net of investment purchases payable, that are not subject to SFAS No. 157.


 
 
 

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, 2008, 2007 and 2006

5. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table presents the Company's categories for its liabilities measured at fair value on a recurring basis as of December 31, 2008:

   
Level 1
  
Level 2
  
Level 3
  
Total
Liabilities
                        
Other policy liabilities
                        
Guaranteed minimum withdrawal benefit liability
  
$
-
  
$
- 
  
$
335,612
  
$
335,612 
Guaranteed minimum accumulation benefit liability
    
-
    
- 
    
358,604
    
358,604 
Derivatives embedded in reinsurance contracts
    
-
    
(50,792)
    
-
    
(50,792)
Fixed index annuities
    
-
    
- 
    
106,619
    
106,619 
Total other policy liabilities
    
-
    
(50,792)
    
800,835
    
750,043 
                         
Derivative instruments – payable
    
22,818
    
1,429,457 
    
42,066
    
1,494,341 
                         
Other liabilities
                        
Bank overdrafts
    
87,534
    
-
    
-
    
87,534 
                         
Total liabilities measured at fair value on a recurring basis
  
$
110,352
  
$
1,378,665 
  
$
842,901
  
$
2,331,918 




 
 
 

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, 2008, 2007 and 2006

5. FAIR VALUE MEASUREMENT (CONTINUED)

The following table shows a reconciliation of the beginning and ending balances for assets and liabilities which are categorized as Level 3 for the year ended December 31, 2008:

Assets
Beginning
balance
Total realized and unrealized
gains (losses)
Purchases,
issuances,
and
settlements
(net)
Transfers in
and/or (out)
of level 3 (2)
Ending
balance
Change in
unrealized gains
(losses) included in
earnings relating
to instruments still
held at the
reporting date
Included in
earnings
Included in
other
comprehensive
income
Available-for-sale fixed maturities
              
Asset-backed and mortgage-backed
securities
$       4,330
(591)
(1,990)
-
2,717
4,466
-
Foreign government
-
-
-
-
-
-
-
States and political subdivisions
-
-
-
-
-
-
-
U.S. Treasury and agency securities
-
-
-
-
-
-
-
Corporate securities
9,039
583
(4,808)
(1,403)
4,477
7,888
-
Total available-for-sale fixed maturities
13,369
(8)
(6,798)
(1,403)
7,194
12,354
-
               
Trading fixed maturities
              
Asset-backed and mortgage-backed
securities
1,085,287
(728,122)
-
38,480
66,608
462,253
(627,739)
Foreign governments
63,331
(1,250)
-
-
(52,881)
9,200
-
States and political subdivisions
-
-
-
-
-
-
-
U.S. Treasury and agency securities
-
-
-
-
-
-
-
Corporate securities
134,446
(37,157)
-
(2,305)
39,521
134,505
(18,872)
Total trading fixed maturities
1,283,064
(766,529)
-
36,175
53,248
605,958
(646,611)
               
Derivative instruments – receivable
24,073
2,487
-
(24,255)
363
2,668
2,668
Other invested assets
-
-
-
  
-
-
-
Cash and cash equivalents
-
-
-
  
-
-
-
Total investments and cash
1,320,506
(764,050)
(6,798)
10,517
60,805
620,980
(643,943)
               
Other assets
              
Separate account assets (1)
1,752,495
(322,652)
-
192,166
(820,136)
801,873
(238,261)
               
Total assets measured at fair value on
a recurring basis
3,073,001
(1,086,702)
(6,798)
202,683
(759,331)
1,422,853
(882,204)

(1)  
The realized/unrealized gains (losses) included in net income for separate account assets are offset by an equal amount for separate account liabilities which results in a net zero impact on net income for the Company.
(2)  
Transfer in and/or (out) of level 3 during the year ended December 31, 2008 are primarily attributable to changes in the observability of inputs used to price the securities.


 
 
 

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, 2008, 2007 and 2006

5. FAIR VALUE MEASUREMENT (CONTINUED)

The following table shows a reconciliation of the beginning and ending balances for assets and liabilities which are categorized as Level 3 for the year ended December 31, 2008:
Liabilities
Beginning
balance
Total realized and unrealized
(gains) losses
Purchases,
issuances, and
settlements
(net)
Transfers in
and/or (out)
of level 3
Ending
balance
Change in
unrealized
(gains) losses
included in
earnings relating
to instruments
still held at the
reporting date
Included in
earnings
Included in
other
comprehensive
income
               
Other policy liabilities
              
Guaranteed minimum withdrawal benefit liability
10,151
296,048
-
29,413
-
335,612
297,426
Guaranteed minimum accumulation  benefit liability
22,649
313,928
-
22,027
-
358,604
315,548
Derivatives embedded in reinsurance contracts
-
-
-
-
-
-
-
Fixed index annuities
392,017
(263,765)
-
(21,633)
-
106,619
(206,413)
Total other policy liabilities
424,817
346,211
-
29,807
-
800,835
406,561
               
Derivative instruments – payable
11,627
30,439
-
-
-
42,066
30,440
               
Total liabilities measured at fair value on a recurring basis
436,444
376,650
-
29,807
-
842,901
437,001

The FV Option

SFAS No. 159 provides entities the option to measure certain financial assets and financial liabilities at fair value with changes in fair value recognized in earnings each period.  SFAS No. 159 permits the FV option election on an instrument-by-instrument basis at initial recognition of an asset or liability or upon an event that gives rise to a new basis of accounting for that instrument.  The Company adopted SFAS No. 159 as of January 1, 2008.  The Company elected to apply the provisions of SFAS No. 159 for all fixed maturity securities attributable to certain life, health and annuity products, which had previously been designated as available-for-sale.  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, and are now classified as trading securities.

The Company adopted the FV option to more closely align the changes in the fair values of its derivative instruments, which are reported as a component of net derivative loss in the statement of operations, with the changes in the fair value of its fixed maturity investments, a significant portion of which are now reported as a component of net investment income in the statement of operations, due to the election of the FV option.  The Company does not employ hedge accounting for any of its derivative instruments.  The Company primarily uses interest rate swaps as part of its asset-liability management strategy, which generally experiences changes in fair value due to interest rate changes.  As such, the Company is attempting to mitigate earnings volatility by electing the FV option for a significant portion of its fixed maturity investment portfolio, which is expected to experience inverse movements in fair value related to interest rate changes.  Additionally, this election provides greater accounting consistency with the Parent and SLF, and will make it possible for the Company to employ different investment strategies in the future, whereby portfolio trading will not influence the Company’s accounting.

In accordance with SFAS No. 159 and SFAS No. 95, “Statement of Cash Flows (as amended),” the Company has changed the presentation of purchases and sales of its fixed maturity securities previously designated as trading in the statement of cash flows, which supports the nature and purpose for which those securities were acquired, which was to not sell them in the near term.  The prior period cash flow has been reclassified to conform to this change.  Purchases and sales of these securities are reported gross in the investing section of the statement of cash flows.


 
 
 

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, 2008, 2007 and 2006

5. FAIR VALUE MEASUREMENT (CONTINUED)

The FV Option (continued)

Investment income for both trading and available-for-sale fixed maturities is recognized when earned, including amortization of any premium or accrual of any discount, and the effect of estimated principal repayments, if applicable.  Investment income is reported as a component of net investment income in the statement of operations.

As a result of adoption of SFAS No. 159, the Company recorded an increase to opening accumulated other comprehensive income and a related decrease to opening retained earnings of $88.4 million, related to the unrealized loss on investments, net of DAC, VOBA, policyholder liabilities, and tax effects at January 1, 2008, the date of adoption.

6. NET REALIZED INVESTMENT LOSSES

Net realized investment losses on available-for-sale fixed maturities and other investments consisted of the following for the years ended December 31:

 
2008
2007
2006
       
Fixed maturities
$            2,162 
$          (4,107)
$          (53,120)
Equity securities
- 
395 
519 
Mortgage and other loans
360 
780 
1,543 
Real estate
431 
- 
- 
Other invested assets
175 
(32)
(19)
Other-than-temporary impairments
(41,864)
(68,092)
(6,329)
Sales of previously impaired assets
495 
10,008 
12,895 
       
Net realized investment losses
$        (38,241)
$          (61,048)
$          (44,511)

7. NET INVESTMENT (LOSS) INCOME

Net investment (loss) income by asset class consisted of the following for the years ended December 31:

 
2008
2007
2006
       
Fixed maturities - Interest and other income
$      930,217 
$          998,246 
$        1,073,114 
Fixed maturities - Change in fair value and net realized
(losses) gains on trading securities
(3,143,862)
(83,743)
15,608 
Mortgages and other loans
134,963 
153,228 
135,515 
Real estate
8,575 
9,347 
10,460 
Policy loans
44,601 
43,708 
44,516 
Assumed under funds withheld reinsurance agreements
295,409 
27,477 
- 
Ceded under funds withheld reinsurance agreements
(63,513)
(78,246)
(96,984)
Other
23,604 
44,426 
38,858 
Gross investment (loss) income
(1,770,006)
1,114,488 
1,221,087 
Less: Investment expenses
19,829 
15,896 
15,006 
Net investment (loss) income
$  (1,789,835)
$        1,098,592 
$        1,206,081 

 
 
 

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, 2008, 2007 and 2006

7. NET INVESTMENT (LOSS) INCOME (CONTINUED)

Investment income on funds withheld reinsurance portfolios is included as a component of net investment income and is accounted for consistent with the policies outlined in Note 1.

The assumed and ceded investment income relates to certain funds withheld reinsurance agreements. The $267.9 million increase in assumed investment income during 2008 as compared to 2007 relates to the funds withheld reinsurance agreement between Sun Life Vermont, a subsidiary of the Company, and SLOC.  This reinsurance agreement was effective during the fourth quarter of 2007.  The $14.7 million decrease in ceded investment income during 2008 as compared to 2007, primarily relates to the funds withheld reinsurance agreement between the Company and SLOC.

8.  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:

 
2008
  
2007
 
Carrying
Estimated
  
Carrying
Estimated
 
Amount
Fair Value
  
Amount
Fair Value
Financial assets:
          
Cash and cash equivalents
$           1,624,149
$           1,624,149
  
$              1,169,701
$             1,169,701
Fixed maturities
12,436,166
12,436,166
  
15,370,241
15,370,241
Mortgages
2,083,003
2,083,089
  
2,318,341
2,324,351
Derivative instruments -receivables
727,103
727,103
  
609,261
605,058
Policy loans
729,407
768,658
  
712,633
712,633
Other invested assets
179,945
179,945
  
533,476
533,476
Separate accounts
20,531,724
20,531,724
  
24,996,603
24,996,603
           
Financial liabilities:
          
Contractholder deposit funds and
other policy liabilities
14,292,665
13,256,964
  
15,716,209
14,060,467
Derivative instruments - payables
1,494,341
1,494,341
  
446,640
442,437
Long-term debt to affiliates
1,998,000
1,998,000
  
1,945,000
1,945,000
Other liabilities
87,534
87,534
  
105,154
105,154
Separate accounts
20,531,724
20,531,724
  
24,996,603
24,996,603

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 carrying value for cash and cash equivalents approximates fair values due to the short-term nature and liquidity of the 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, 2008, 2007 and 2006

8. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Fixed maturities: The Company determines the fair value of its publicly traded fixed maturities using four primary pricing methods: third-party pricing services, non-binding broker 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.  The Company generally does not adjust quotes or prices obtained from brokers or pricing services.

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 broker quotes.

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, dealer quotes and market prices.  Fair values for options and futures are also based on dealer quotes and market prices.

Policy loans:  The fair value of policy loans is determined by estimating future cash flows, discounted at the current average policy loan rate.

Other invested assets:  This financial instrument primarily consists of certain cash instruments and fixed maturity securitites, which were purchased using cash collateral related to a securities lending program in which the Company participates.  The fair value of the cash instrument is consistent with the method used in calculating the fair value of the cash and cash equivalents, as described above.  The pricing methods used for the fixed maturity securities component of the securities lending is as explained in the fair value of fixed maturities above.

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.



 
 
 

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, 2008, 2007 and 2006

8. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

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 and are included in contractholder deposit funds.  Prior to the adoption of SFAS No. 157, the fair value of the embedded derivatives was calculated stochastically using risk neutral scenarios over a fifty-year projection.  Policyholder assumptions were based on experience studies and industry standards.  Consistent with the provisions of SFAS No. 157, effective January 1, 2008, the Company began incorporating risk margins and the Company’s own credit standing, as well as changes in assumptions regarding policyholder behavior, in the calculation of the fair value of embedded derivatives.

Long term debt: The fair value of notes payable and other borrowings is based on future cash flow discounted at the stated interest rate, considering all appropriate terms of the related agreements. Due to provisions included in such agreements, whereby the issuer of the notes has the ability to call each note at par with appropriate approvals, the fair value is equal to par value.

Other liabilities:  This financial instrument consists of issued checks and transmitted wires that have not been cashed and processed in the Company’s bank accounts at the end of the reporting period.  The fair value of other liabilities is consistent with the method used in calculating the fair value of the cash and cash equivalents, as described above.



 
 
 

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, 2008, 2007 and 2006

9. 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.

The effects of the Company’s reinsurance agreement were as follows:


 
For the Years Ended December 31,
 
2008
2007
2006
Premiums and annuity considerations:
      
Direct
$           67,938 
$          62,645 
$          61,713 
Assumed
58,961 
50,986 
- 
Ceded
(4,166)
(3,015)
(2,521)
Net premiums and annuity considerations
$         122,733 
$        110,616 
$          59,192 
       
Policyowner benefits:
      
Direct
$          482,737 
$        260,008 
$        197,872 
Assumed
95,086 
30,430 
- 
Ceded
(134,306)
(60,953)
(40,902)
Net policyowner benefits:
$          443,517 
$        229,485 
$        156,970 
       
Commission and expense:
      
Direct
$            13,203 
$            5,617 
$         25,175 
Assumed
28,490 
7,521 
- 
Ceded
(9,560)
(502)
(200) 
Net commission and expense
$            32,133 
$          12,636 
$         24,975 
       
Interest Credited:
      
Direct
$          601,435 
$         693,665 
$       705,943 
Assumed
38,834 
14,075 
8,749 
Ceded
(78,643)
(77,917)
(81,287)
Net interest credited
$          561,626 
$         629,823 
$       633,405 
       
Fee and other income:
      
Direct
$          608,066 
$         599,132 
$       477,600 
Assumed
114,762 
4,495 
- 
Ceded
(158,075)
(123,723)
(78,978)
Net fee and other income
$          564,753 
$         479,904 
$       398,622 



 
 
 

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, 2008, 2007 and 2006

9. REINSURANCE (CONTINUED)

A brief discussion of the Company’s significant reinsurance agreements by business segment follows.  (See Note 17 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 policies in response to certain tax law changes in the 1980s.  The Company had SPWL policyholder balances of approximately $1.6 billion as of December 31, 2008 and 2007.  On December 31, 2003, this entire block of business was reinsured on a funds withheld coinsurance basis with SLOC, an affiliate.

Related to this agreement, the Company held the following assets and liabilities at December 31:

 
2008
  
2007
Assets
          
Reinsurance receivables
$
1,560,946
  
$
1,591,315
Other assets
  
38,998
    
6,380
           
Liabilities
          
Contractholder deposit funds and other policy
liabilities
  
1,428,331
    
1,591,315
Reinsurance payable to an affiliate
  
1,509,989
    
1,574,516

The funds withheld assets are comprised of trading bonds and mortgages being managed by the Company.  The significant decline in the value of the funds withheld assets during the year ended December 31, 2008 increased the value of an embedded derivative which has been separated from the host reinsurance contract and recorded at fair value in the Company’s consolidated balance sheet.  The fair value of the embedded derivative reduced contractholder deposit funds and other policy liabilities by $130.6 million at December 31, 2008 and resulted in derivative income of $130.6 million for the year ended December 31, 2008.  Reinsurance payable to affiliates includes a funds withheld liability of $1,510.0 million and $1,534.0 million at December 31, 2008 and 2007.

By reinsuring the SPWL policies, the Company reduced net investment income by $60.3 million, $78.2 million and $97.0 million for the years ended December 31, 2008, 2007 and 2006, respectively.  The Company also reduced interest credited by $74.8 million, $74.8 million and $76.0 million for the years ended December 31, 2008, 2007 and 2006, respectively.  In addition, the Company increased net investment income, relating to an experience rating refund under the reinsurance agreement with SLOC, by $5.3 million, $8.9 million and $13.0 million for the years ended December 31, 2008, 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, 2008, 2007 and 2006

9. REINSURANCE (CONTINUED)

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, UL, 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.  In accordance with these agreements, fee income was reduced by $80.0 million, $21.6 million and $37.8 million for the years ended December 31, 2008, 2007 and 2006, respectively.

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 issued through December 31, 2008 has been 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 the reinsurance agreement, Sun Life Vermont 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.  Under the reinsurance agreement, Sun Life Vermont held the following assets and liabilities at December 31:

 
2008
  
2007
Assets
          
Reinsurance receivable for funds withheld
$
1,105,722 
  
$
626,608 
Reinsurance receivable for deferred costs
  
19,686 
    
22,322 
           
Liabilities
          
Contractholder deposit funds and other policy
liabilities
  
813,387 
    
580,613 
Future contract and policy benefits
  
73,058 
    
23,692 
Other liabilities
  
12,004 
    
33,150 




 
 
 


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, 2008, 2007 and 2006

9. REINSURANCE (CONTINUED)

Individual Protection Segment (continued)

Funds withheld assets comprised of trading bonds, mortgages and derivatives, amounting to $1,105.7 million and $626.6 million at December 31, 2008 and 2007, respectively, are being held in a separate trust account for the protection of policyholders and claimants of the Branch.  The Company recorded assumed investment income of $295.4 million and $27.5 million for the years ended December 31, 2008 and 2007, respectively.  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 as 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 increased contractholder deposit funds and other policy liabilities by $91.8 million and $3.1 million at December 31, 2008 and 2007, respectively.  Included in derivative income are losses of $88.7 million and $3.1 million for the years ended December 31, 2008 and 2007, respectively, related to the embedded derivative.

In addition, the reinsurance agreement between SLOC and Sun Life Vermont has increased revenues by approximately $321.2 million and $29.7 million for the years ended December 31, 2008 and 2007, respectively, and increased expenses by $134.0 million and $14.1 million for the years ended December 31, 2008 and 2007, respectively.

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 in-force policies at December 31, 2007.  Future new business will also be reinsured under this agreement.  Related to this agreement, SLNY held the following assets and liabilities at December 31:

 
2008
  
2007
Assets
          
Reinsurance receivables
$
77,628 
  
$
117,293 
Other assets
  
2,676 
    
- 
           
Liabilities
          
Contractholder deposit funds and other policy
liabilities
  
63,210 
    
66,170 
Future contract and policy benefits
  
3,162 
    
3,974 
Reinsurance payable to an affiliate
  
140,832 
    
117,367 
Other liabilities
  
1,057 
    
- 

Reinsurance payable to an affiliate includes a funds withheld liability of $89.4 million and $71.6 million at December 31, 2008 and 2007, respectively; and, a deferred gain of $51.4 million and $45.7 million at December 31, 2008 and 2007, respectively.  The funds withheld assets comprised of trading bonds and mortgages being managed by the Company.  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 reduced contractholder deposit funds and other policy liabilities by $12.0 million at December 31, 2008 and resulted in derivative income of 12.0 million for the year ended December 31, 2008.

In addition, the reinsurance agreement between SLOC and SLNY has decreased revenues by $9.7 million and decreased expenses by $11.5 million for the year ended December 31, 2008.




 
 
 

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, 2008, 2007 and 2006

9. REINSURANCE (CONTINUED)

Group Protection Segment

The Company, through its subsidiary, SLNY, has several agreements with unrelated companies whereby the unrelated companies reinsure the mortality and morbidity risks of certain of the Company’s group contracts.

The Company, through its subsidiary, SLNY, has also an agreement, effective May 31, 2007, to assume the net risks of SLHIC’s New York issued contracts.  At December 31, 2008, SLNY held policyholder liabilities of $32.8 million related to this agreement. In addition, the activities related to the reinsurance agreement have increased revenues by $59.0 million and $51.0 million for the years ended December 31, 2008 and 2007, respectively, and increased expenses by $48.6 million and $34.6 million for the years ended December 31, 2008 and 2007, 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, 2008, 2007 and 2006

10.  RETIREMENT PLANS

Prior to the December 31, 2008 merger of plans described below, the Company sponsored three non-contributory defined benefit pension plans for its employees and certain affiliated employees.  These plans were the staff qualified pension plan (“staff pension plan”), the agents’ qualified pension plan (“agents’ pension plan”) and the staff nonqualified pension plan (“UBF plan”) (collectively, the “Pension Plans”).  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 staff pension plan is 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.

Effective December 31, 2008, the agents’ pension plan was merged into the staff pension plan. The plan merger resulted in a transfer from the agents’ pension plan to the staff pension plan of a projected benefit obligation of $8.8 million and plan assets of $28.3 million. The plan merger did not change the provisions of the agents’ pension plan.

Until the funding requirements for the 2009 plan year under the Pension Protection Act of 2006 are determined in April of 2009, the Company is not expected to make contributions to the staff pension plan in 2009.  The Company will be required to make a contribution for the 2009 plan year by September 2010.

Effective November 7, 2007, IFMG ceased to be an affiliated employer under the staff pension plan, when IFMG was sold by the Parent. As of that date, the staff pension plan was amended to allow IFMG to continue as a participating employer. Effective December 9, 2008 the staff pension plan was amended to eliminate IFMG as a participating employer.

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

The Company sponsors a postretirement benefit plan for its employees and certain affiliated employees providing certain health, dental and life insurance benefits for retired employees and dependents (the “Other Post Retirement Benefit 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.

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.

On September 29, 2006, the FASB issued SFAS No. 158, which requires recognition of the overfunded or underfunded status of pension and other postretirement benefit plans on the balance sheet.  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.  The Company adopted the balance sheet recognition provisions of SFAS No. 158 at December 31, 2006 and adopted the year end measurement date provisions effective January 1, 2008.  The adoption of the year-end measurement date provisions resulted in a net of tax cumulative-effect decrease of $0.3 million to the Company’s January 1, 2008, other comprehensive income (“OCI”).



 
 
 

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, 2008, 2007 and 2006

10.  RETIREMENT PLANS (CONTINUED)

The following tables set forth the change in the Pension Plans’ and Other Post Retirement Benefit Plan’s projected benefit obligations and assets, as well as information on the plans’ funded status at December 31:

 
Pension Plans
  
Other Post Retirement
Benefit Plan
 
2008
2007
  
2008
2007
Change in projected benefit obligation:
          
Projected benefit obligation at beginning of year
$         262,757 
$        261,380 
  
$         52,229 
$         45,852 
Effect of eliminating early measurement date
1,982 
- 
  
705 
- 
Service cost
3,520 
4,108 
  
1,616 
1,234 
Interest cost
16,617 
15,754 
  
3,332 
2,915 
Actuarial (gain) loss
(3,424)
(11,210)
  
(6,729)
213 
Benefits paid
(10,550)
(8,577)
  
(2,266)
(2,979)
Plan amendments
- 
1,302 
  
- 
- 
Federal subsidy
- 
- 
  
225 
194 
Unfunded APBO as a result of EBG acquisition
- 
- 
  
- 
4,800 
Projected benefit obligation at end of year
$         270,902 
$        262,757 
  
$         49,112 
$         52,229 

 
Pension Plans
  
Other Post Retirement
Benefit Plan
 
2008
2007
  
2008
2007
Change in fair value of plan assets:
          
Fair value of plan assets at beginning of year
$          291,824 
$        269,712 
  
$              - 
$                   - 
Effect of eliminating early measurement date
1,981 
- 
  
- 
- 
Employer contributions
- 
- 
  
2,266 
2,979
Other
350 
(262)
  
- 
- 
Actual return on plan assets
(88,094)
30,951 
  
- 
- 
Benefits paid
(10,550)
(8,577)
  
(2,266)
(2,979)
Fair value of plan assets at end of year
$          195,511 
$        291,824 
  
$              - 
$                   - 

 
Pension Plans
  
Other Post Retirement
Benefit Plan
 
2008
2007
  
2008
2007
Information on the funded status of the plan:
          
Funded status
$          (75,391)
$         29,067 
  
$      (49,112)
$       (52,229)
4th quarter contribution
- 
(710)
  
- 
532 
(Accrued) prepaid benefit cost
$          (75,391)
$         28,357 
  
$      (49,112)
$       (51,697)

The accumulated benefit obligation for the Pension Plans at December 31, 2008 and 2007 was $263.1 million and $253.6 million, 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, 2008, 2007 and 2006

10.  RETIREMENT PLANS (CONTINUED)

The Pension Plans were underfunded at December 31, 2008.  For the year ended December 31, 2007, the UBF plan was underfunded. The following table provides information on the projected benefit obligation, accumulated benefit obligation and fair value of plan assets for pension plans with an accumulated benefit obligation in excess of plan assets as of December 31:

 
Pension Plans
  
Pension Plans
 
2008
  
2007
Projected benefit obligations
$        270,902
  
$        27,277
Accumulated benefit obligation
263,142
  
25,138
Plan assets
195,511
  
-

The staff pension plan and agent’s pension plan were overfunded at December 31, 2007.

Amounts recognized in the Company’s consolidated balance sheets for the Pension Plans and Other Post Retirement Benefit Plan consist of the following, as of December 31:

 
Pension Plans
  
Other Post Retirement
Benefit Plan
 
2008
2007
  
2008
2007
Other assets
$                      - 
$         59,423 
  
$                    - 
$                   - 
Other liabilities
(75,391)
(31,066)
  
(49,112)
(51,697)
 
$           (75,391)
$         28,357 
  
$         (49,112)
$        (51,697)

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

 
Pension Plans
  
Other Post Retirement
Benefit Plan
 
2008
2007
  
2008
2007
Net actuarial loss (gain)
$          86,528 
$        (22,103)
  
$           5,563 
$          13,437 
Prior service cost
4,109 
4,529 
  
(3,890)
(4,551)
Transition asset
(3,589)
(6,206)
  
- 
- 
 
$           87,048 
$        (23,780)
  
$           1,673 
$            8,886 

The following table sets forth the effect on retained earnings and AOCI of eliminating the early measurement date:

 
Pension Plans
2008
  
Other Post Retirement
Benefit Plan
2008
Retained earnings
$     (1,346)
  
$     1,334 
       
Amounts amortized from AOCI:
      
Amortization of actuarial loss (gain)
$          198 
  
$     (229)
Amortization of prior service (cost) credit
(83)
  
132 
Amortization of transition asset
524 
  
- 
Total amortization from AOCI
     $          639 
  
$      (97)


 
 
 

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, 2008, 2007 and 2006

10.  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 Pension Plans and Other Post Retirement Benefit Plan for the years ended December 31:

 
Pension Plans
  
Other Post Retirement Benefit Plan
 
2008
2007
2006
  
2008
2007
2006
Components of net periodic (benefit) cost:
              
Service cost
$     3,520 
$    4,108 
$     6,024 
  
$     1,616 
$   1,234 
$    1,311 
Interest cost
16,617 
15,754 
15,065 
  
3,332 
2,915 
2,967 
Expected return on plan assets
(22,972)
(21,874)
(21,672)
  
- 
- 
- 
Amortization of transition obligation asset
(2,093)
(2,093)
(2,093)
  
- 
- 
- 
Amortization of prior service cost
337 
337 
266 
  
(529)
(529)
(529)
Recognized net actuarial (gain) loss
(792)
(107)
437 
  
916 
912 
1,450 
Net periodic (benefit) cost
$    (5,383)
$   (3,875)
$    (1,973)
  
$     5,335 
$    4,532 
$    5,199 
               
The Company’s share of net periodic (benefit) cost
$    (5,383)
$   (3,875)
$    (1,973)
  
$     4,638 
$    3,910 
$    4,501 

The following table shows changes in the Company’s AOCI related to the Pension Plans and Other Post Retirement Benefit Plan for the following years:

 
Pension Plans
  
Other Post Retirement Benefit Plan
 
2008
2007
2006
  
2008
2007
2006
Net actuarial loss (gain) arising during the year
$  107,641 
$  (20,287)
$   (1,923)
  
$  (6,729)
$       279 
$ 14,070 
Net actuarial gain (loss) recognized during the year
792 
107 
- 
  
(916)
(912)
- 
Prior service cost arising during the year
- 
1,302 
3,564 
  
- 
- 
(5,080)
Prior service cost recognized during the year
(337)
(337)
- 
  
529 
529 
- 
Transition asset recognized during the year
2,093 
2,093 
- 
  
- 
- 
- 
Transition asset arising during the year
- 
- 
(8,299)
  
- 
- 
- 
Change in effect of additional minimum liability
- 
- 
(2,834)
  
- 
- 
- 
Total recognized in AOCI
110,189 
(17,122)
(9,492)
  
(7,116)
(104)
 8,990 
Tax effect
(38,566)
5,993 
3,322 
  
2,491 
36 
(3,147)
Total recognized in AOCI, net of tax
71,623 
(11,129)
(6,170)
  
(4,625)
(68)
5,843 
               
Total recognized in net periodic benefit cost and
other comprehensive income, net of tax
$   66,240 
$  (15,004)
$   (8,143)
  
$        13 
$    3,842 
$ 10,344 

The estimated amounts that will be amortized from AOCI into net periodic benefit costs in 2009 are as follows:

 
Pension Plans
  
Other Post
Retirement
Benefit Plan
Actuarial gain
$          2,470 
  
$            379 
Prior service cost
337 
  
(529)
Transition asset
(2,093)
  
- 
Total
$            714 
  
$           (150)


 
 
 

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, 2008, 2007 and 2006

10.  RETIREMENT PLANS (CONTINUED)

Assumptions

Weighted average assumptions used to determine benefit obligations for the Pension Plans and Other Post Retirement Benefit Plan were as follows:

 
Pension Plans
  
Other Post Retirement Benefit Plan
 
2008
2007
2006
  
2008
2007
2006
Discount rate
6.5%
6.35%
6.0%
  
6.5%
6.35%
6.0%
Rate of compensation increase
3.75%
4.0%
4.0%
  
n/a
n/a
n/a

Weighted average assumptions used to determine net benefit cost for the Pension Plans and Other Post Retirement Benefit Plan were as follows:

 
Pension Plans
  
Other Post Retirement Benefit Plan
 
2008
2007
2006
  
2008
2007
2006
Discount rate
6.35%
6.0%
5.8%
  
6.35%
6.0%
5.8%
Expected long term return on plan assets
8.0%
8.25%
8.75%
  
n/a
n/a
n/a
Rate of compensation increase
4.0%
4.0%
4.0%
  
n/a
n/a
n/a

The Company determines the expected long-term rate of return on plan assets by taking the weighted average return expectations based on the long-term return expectations and investment strategy then adjusted for the impact of rebalancing. The difference between actual and expected returns is recognized as a component of unrecognized gains/losses, which is recognized over the average remaining lifetime of inactive participants or the average remaining service lifetime of active participants in the plan, as provided by accounting standards.

In order to measure the Other Post Retirement Benefit Plan’s obligation for 2008, the Company assumed a 9% annual rate of increase in the per capita cost of covered healthcare benefits.  In addition, medical cost inflation is assumed to be 8.5% in 2009 and assumed to decrease gradually to 5.00% for 2014 and remain at that level thereafter.  Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare 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
$           3,608
  
$        (3,446)
Effect on total of service and interest cost
$              434
  
$           (433)




 
 
 

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, 2008, 2007 and 2006

10.  RETIREMENT PLANS (CONTINUED)

Plan Assets

The asset allocation for the Company’s staff pension plan assets for 2008 measurement and staff pension plan and agents’ plan assets for 2007 measurement, and the target allocation for 2009, by asset category, are as follows:

 
Target Allocation
  
Percentage of Plan Assets
Asset Category
2009
  
2008
2007
Equity Securities
60%
  
54%
65%
Debt Securities
25%
  
30%
26%
Commercial Mortgages
15%
  
16%
9%
Total
100%
  
100%
100%

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.

The objective of the fund is to maximize the rate of return on assets over the long term. Safety of principal, credit quality and diversification are important considerations. Pursuant with this objective the fund will invest in a diversified portfolio of common stocks and fixed income investments. The fund is permitted to invest in derivative securities as long as the total derivatives exposure does not exceed 20% of the fund’s value.

Cash Flow

The Company does not expect to make contributions to the staff pension plan in 2009. However, the Company will contribute $1.3 million to the UBF plan in 2009.

The Company has estimated the following future benefit payments for the Pension Plans and the future benefit payments and expected federal subsidy for the Other Post Retirement Benefit Plan for the years 2009 through 2018:

     
Other Post Retirement Benefit Plan’s
 
Pension Plans’
Benefits
  
 
Benefits
Expected Federal
Subsidy
2009
$           10,109
  
$           3,128
$           224
2010
10,769
  
3,275
226
2011
11,594
  
3,448
227
2012
12,485
  
3,620
227
2013
13,261
  
3,831
223
2014 to 2018
80,720
  
23,054
982



 
 
 

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, 2008, 2007 and 2006

10.  RETIREMENT PLANS (CONTINUED)

Savings and Investment Plan

The Company sponsors and participates in a savings plan 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.

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 401 (k) 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 Other Post Retirement Benefit 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 2008 employer contributions under the 401(k) Plan for the Company and its affiliates was $22.7 million.  Amounts are allocated to affiliates based on their respective employees’ contributions.  The Company’s portion of the expense was $18.1 million, $16.1 million and $10.8 million for the years ended December 31, 2008, 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, 2008, 2007 and 2006

11. FEDERAL INCOME TAXES

The Company accounts for current and deferred income taxes in the manner prescribed by SFAS No. 109.  A summary of the components of income tax (benefit) expense in the consolidated statements of operations for the years ended December 31 is as follows:

   
2008
  
2007
  
2006
Income tax (benefit) expense:
            
Current
$
(85,841)
$
    (108,526)
$
(5,792)
Deferred
  
(773,142)
  
     84,668 
  
4,180 
             
Total income tax benefit
$
(858,983)
$
  (23,858)
$
(1,612)

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:

   
2008
  
2007
  
2006
             
Expected federal income tax (benefit) expense
$
(1,082,838)
$
407 
$
26,838 
Low income housing credit
  
(4,016)
  
(5,490)
  
(6,225)
Separate account dividend received deduction
  
(18,144)
  
(11,988)
  
(13,090)
Prior year adjustments/settlements
  
(7,279)
  
932 
  
(8,396)
Valuation allowance
  
79,963 
  
- 
  
- 
Goodwill impairment not deductible
  
176,885 
  
- 
  
- 
FIN 48 adjustments/settlements
  
(932)
  
(6,375)
  
- 
Other items
  
(2,628)
  
(1,775)
  
(844)
             
Federal income tax benefit
  
(858,989)
  
(24,289)
  
(1,717)
State income tax expense
  
6 
  
431 
  
105 
             
Total income tax benefit
$
(858,983)
$
(23,858)
$
(1,612)

The net deferred tax asset 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 net deferred tax asset as of December 31 were as follows:

   
2008
    
2007
Deferred tax assets:
          
Actuarial liabilities
$
194,253 
  
$
110,617 
Net operating loss
  
98,958 
    
- 
Investments, net
  
1,331,665 
    
230,416 
Other
  
80,233 
    
- 
   
1,705,109 
    
341,033 
Valuation allowance
  
(79,963)
    
- 
Total deferred tax assets
  
1,625,146 
    
341,033 
           
Deferred tax liabilities:
          
Deferred policy acquisition costs
  
(768,301)
    
(322,461)
Other
  
- 
    
(2,627)
Total deferred tax liabilities
  
(768,301)
    
(325,088)
           
Net deferred tax asset
$
856,845 
  
$
15,945 

 
 
 

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, 2008, 2007 and 2006

11. FEDERAL INCOME TAXES (CONTINUED)

The Company’s net deferred tax asset of $856.8 million at December 31, 2008 is comprised of gross deferred tax assets, gross deferred tax liabilities and a valuation allowance.  The gross deferred tax assets are primarily related to realized and unrealized investment security losses, actuarial liabilities, as well as a current period net operating loss (“NOL”) which, if unutilized, will expire in 2023.

The Company recorded a valuation allowance of $79.9 million in the statement of operations relating to the tax benefits associated with realized investment impairment losses recorded during the third and fourth quarter of 2008.  Management has determined that it is not more likely than not that the losses will be utilized either against prior year capital gains or through the generation of future capital gains within the applicable carry-forward period.

The Company believes that it is more likely than not that the deferred tax assets related to the remaining unrealized investment losses will be realized due to the Company’s intent and ability to hold the related investment securities to recovery of value, whereby a capital loss will not be realized for tax purposes.  Based on the sufficient positive evidence available, specifically existing taxable temporary differences that will reverse in future periods and projected future taxable income, the Company also believes that it is more likely than not that the deferred tax assets for the NOL, tax reserves and other items will be realized.

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 $50.7 million and $63.0 million at December 31, 2008 and December 31, 2007, respectively.  Of the $50.7 million, $6.7 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 $78.3 million of income taxes from deferred tax liabilities to accrued expenses and taxes at December 31, 2008.

The net (decrease) increase in the tax liability for UTBs of $(12.4) million and $8.9 million in the years ended December 31, 2008 and 2007, respectively, resulted from the following:

   
2008
  
2007
Balance at January 1
$
63,043 
$
54,086 
Gross increases related to tax positions in prior years
  
111,473 
  
20,717 
Gross decreases related to tax positions in prior years
  
(90,772)
  
(11,760)
Gross increases related to tax positions in current year
  
- 
  
- 
Settlements
  
(33,065)
  
- 
Close of tax examinations/statutes of limitations
  
- 
  
- 
         
Balance at December 31
$
50,679 
$
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.  During the year ended December 31, 2008 and 2007, the Company recognized $3.4 million and $2.0 million, respectively, in gross interest related to UTBs.  The Company did not accrue 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.


 
 
 

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, 2008, 2007 and 2006

11. FEDERAL INCOME TAXES (CONTINUED)

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 2001 and 2002 tax years.  The Company is currently at the Appeals Division of the IRS (“Appeals”) with respect to that two-year audit cycle.  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. In October 2008, the IRS issued a Revenue Agent’s Report for the Company’s tax years 2003 and 2004. The Company filed a protest and expects that it will be assigned to Appeals in 2009.  While the final outcome of the appeal and ongoing tax examinations is not determinable, the Company has adequate liabilities accrued as prescribed by FIN 48 and does not believe that any adjustments would be material to its financial position.

The Company will file a consolidated return with SLC -U.S. Ops Holdings for the year ended December 31, 2008 as the Company did for the years ended December 31, 2007 and 2006. The Company’s subsidiaries, INDY and Sun Life Vermont were included as part of the consolidation for the year ended December 31, 2007.  For the year ended December 31, 2007 and 2006, SLNY filed stand-alone federal income tax returns.  INDY filed a stand-alone federal income tax return for the year ended December 31, 2006.

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 $113.2 million and $16.2 million in 2008 and 2007, respectively, and made income tax payments of $22.7 million in 2006.


 
 
 

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, 2008, 2007 and 2006

12.  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:

 
2008
  
2007
       
Balance at January 1
$    74,878 
  
$      36,689 
Less reinsurance recoverable
(5,921)
  
(5,906)
Net balance at January 1
68,957 
  
30,783 
Incurred related to:
      
Current year
79,725 
  
96,377 
Prior years
(6,557)
  
(1,805)
Total incurred
73,168 
  
94,572 
Paid losses related to:
      
Current year
(53,615)
  
(47,531)
Prior years
(22,541)
  
(8,867)
Total paid
(76,156)
  
(56,398)
       
Balance at December 31
71,316 
  
74,878 
Less reinsurance recoverable
(5,347)
  
(5,921)
       
Net balance at December 31
$    65,969 
  
$      68,957 

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 $6.6 million and $1.8 million in 2008 and 2007, 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, 2008, 2007 and 2006

13.  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, 2008:

Benefit Type
Account Balance
Net Amount
at Risk 1
Average
Attained Age
Minimum Death
$          12,627,787
$           4,398,559
66.7
Minimum Income
$               189,863
$              130,177
60.8
Minimum Accumulation or
Withdrawal
$            4,961,237
$              857,764
63.0

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

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, 2008, 2007 and 2006

13.  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, 2008:

 
Guaranteed
Minimum
Death Benefit
  
Guaranteed
Minimum
Income Benefit
  
 
 
Total
Balance at January 1, 2008
$              39,673 
  
$           4,817 
  
$          44,490 
           
Benefit Ratio Change /
Assumption Changes
193,678 
  
15,867 
  
209,545 
Incurred guaranteed benefits
19,072 
  
906 
  
19,978 
Paid guaranteed benefits
(58,226)
  
(3,244)
  
(61,470)
Interest
7,451 
  
427 
  
7,878 
           
Balance at December 31, 2008
$             201,648  
  
$             18,773
  
$           220,421

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 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.


 
 
 

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, 2008, 2007 and 2006

13.  LIABILITIES FOR CONTRACT GUARANTEES (CONTINUED)

Guaranteed minimum accumulation benefits (“GMABs”) and withdrawal benefits (“GMWBs”) are considered to be derivatives under SFAS No. 133 and are recorded at fair value through earnings. Prior to the adoption of SFAS No. 157, the fair value of the embedded derivatives was calculated stochastically using risk neutral scenarios over a fifty-year projection.  Policyholder assumptions were based on experience studies and industry standards.  Consistent with the provisions of SFAS No. 157, effective January 1, 2008, the Company began incorporating the following unobservable inputs in its calculation of the embedded derivatives:

Actively-Managed Volatility Adjustments - This component incorporates the basis differential between the observable implied volatilities for each index and the actively-managed funds underlying the variable annuity product.  The adjustment is based on historical actively-managed fund volatilities and historical weighted-average index volatilities.

Credit Standing Adjustment - This component makes an adjustment that market participants would make to reflect the non-performance risk associated with the embedded derivatives.  The adjustment is based on the published credit spread for insurance companies with a rating equal to the rating of the Company.

Behavior Risk Margin - This component adds a margin that market participants would require for the risk that the Company's best estimate policyholder behavior assumptions could differ from actual experience.  This risk margin is determined by taking the difference between the fair value based on adverse policyholder behavior assumptions and the fair value based on best estimate policyholder behavior assumptions, using assumptions the Company believes market participants would use in developing risk margins.

The net balance of GMABs and GMWBs constituted a liability in the amount of $694.2 million and $37.4 million at December 31, 2008 and 2007, respectively.

14. DEFERRED POLICY ACQUISITION COSTS

The changes in DAC for the years ended December 31 were as follows:

 
2008
  
2007
Balance at January 1
$
1,603,397
  
$
1,234,206
Acquisition costs deferred
  
365,918
    
356,087
Amortized to expense during the year
  
893,086
    
(169,799)
Adjustment for unrealized investment losses during the year
  
-
    
182,903
Balance at December 31
$
2,862,401
  
$
1,603,397

See Note 1 for information regarding the deferral and amortization methodologies related to DAC.  The Company tests its DAC asset for future recoverability, and has determined that the asset is not impaired at December 31, 2008.



 
 
 

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, 2008, 2007 and 2006

15. VALUE OF BUSINESS AND CUSTOMER RENEWALS ACQUIRED

The changes in VOBA and VOCRA for the years ended December 31 were as follows:

 
2008
  
2007
Balance at January 1
$
51,806
  
$
47,744 
Amount capitalized due to acquisition of new business
  
-
    
23,854 
Amortized to expense during the year
  
128,019
    
(19,322)
Adjustment for unrealized investment gains during the year
  
-
    
(470)
Balance at December 31
$
179,825
  
$
51,806 

Additions to VOBA and VOCRA for the year ended December 31, 2007, were a result of the SLHIC to SLNY asset transfer, as described in Note 2.  VOBA transferred was $7.6 million and the value of customer renewals transferred was $16.2 million. Decreased actual gross profits in 2008 contributed to negative amortization and an increase to the VOBA asset.  The Company tests its VOBA asset for future recoverability, and has determined that the asset is not impaired at December 31, 2008.

16. 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 the 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, 2008, 2007 and 2006

16. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Operations
For the year ended December 31, 2008

 
SLUS
as Parent
  
SLNY
  
Other
Subs
  
Elimination
  
Consolidated
Company
                             
Revenues
                            
                             
Premiums and annuity considerations
$
16,066 
  
$
106,667 
  
$
- 
  
$
- 
  
$
122,733 
Net investment (loss) income (1)
  
(1,862,501)
    
(112,508)
    
185,174 
    
- 
    
(1,789,835)
Net derivative loss (2)
  
(573,399)
    
(32,059)
    
(266,086)
    
- 
    
(871,544)
Net realized investment losses
  
(21,852)
    
(10,986)
    
(5,403)
    
- 
    
(38,241)
Fee and other income
  
436,075 
    
9,681 
    
118,997 
    
- 
    
564,753 
   
(2,005,611)
    
(39,205)
    
32,682 
    
- 
    
(2,012,134)
Total revenues
                            
                             
Benefits and Expenses
                            
                             
Interest credited
  
483,769 
    
45,129 
    
32,728 
    
- 
    
561,626 
Interest expense
  
60,887 
    
(602)
    
46,492 
    
- 
    
106,777 
Policyowner benefits
  
306,404 
    
80,789 
    
56,324 
    
- 
    
443,517 
Amortization of DAC, VOBA and VOCRA (3)
  
(963,422)
    
(82,218)
    
24,614 
    
- 
    
(1,021,026)
Goodwill impairment
  
658,051 
    
37,788 
    
5,611 
    
- 
    
701,450 
Other operating expenses
  
214,654 
    
44,725 
    
29,967 
    
- 
    
289,346 
                             
Total benefits and expenses
  
760,343 
    
125,611 
    
195,736 
    
- 
    
1,081,690 
                             
Loss before income tax benefit
  
(2,765,954)
    
(164,816)
    
(163,054)
    
- 
    
(3,093,824)
                             
Income tax benefit expense
  
(772,699)
    
(41,418)
    
(44,866)
    
- 
    
(858,983)
Equity in the net loss of subsidiaries
  
(241,586)
    
- 
    
- 
    
241,586 
    
- 
                             
Net loss
$
(2,234,841)
  
$
(123,398)
  
$
(118,188)
  
$
241,568 
  
$
(2,234,841)

(1)
SLUS’, SLNY’s and Other Subs’ net investment (loss) income includes a decrease in market value of $2,448.8 million, $154.9 million and $159.2 million, respectively, for the year ended December 31, 2008, related to the Company’s trading securities.
(2)
SLUS’ and SLNY’s net derivative loss for the year ended December 31, 2008 includes $165.8 million and $0.3 million, respectively, of income related to the Company’s adoption of SFAS No. 157, which is further discussed in Note 5.
(3)
SLUS’ and SLNY’s amortization of DAC, VOBA, and VOCRA for year ended December 31, 2008 includes $3.0 million and $0.2 million, respectively, of expenses related to the Company’s adoption of SFAS No. 157, which is further discussed in Note 5.



 
 
 

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, 2008, 2007 and 2006

16. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Operations
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 (1)
  
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, VOBA and VOCRA
  
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 

(1)
SLUS’ and Other Subs’ net investment income includes a (decrease) increase in market value of $(89.2) million and $0.8 million, respectively, for the year ended December 31, 2007 related to the Company’s trading securities.




 
 
 

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, 2008, 2007 and 2006

16. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Operations
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)
  
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 DAC, VOBA and VOCRA
  
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 (benefit) 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 


(1)
SLUS’ net investment income includes a decrease in market value of $15.2 million for the year ended December 31, 2006 related to the Company’s trading securities



 
 
 

 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 except per share data)

For the years ended December 31, 2008, 2007 and 2006

16. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Balance Sheets at December 31, 2008

 
SLUS
as Parent
  
SLNY
  
Other
Subs
  
Elimination
  
Consolidated
Company
ASSETS
                            
                             
Investments
                            
Available-for-sale fixed maturities at fair value
$
476,180 
  
$
148,124 
  
$
49,716 
  
$
- 
  
$
674,020 
Trading fixed maturities at fair value
  
9,639,477 
    
988,809 
    
1,133,860 
    
- 
    
11,762,146 
Investment in subsidiaries
  
450,444 
    
- 
    
- 
    
(450,444)
    
- 
Mortgage loans
  
1,911,114 
    
171,889 
    
- 
    
- 
    
2,083,003 
Derivative instruments – receivable
  
727,103 
    
- 
    
- 
    
- 
    
727,103 
Limited partnerships
  
78,289 
    
- 
    
- 
    
- 
    
78,289 
Real estate
  
157,403 
    
- 
    
44,067 
    
- 
    
201,470 
Policy loans
  
704,548 
    
156 
    
24,703 
    
- 
    
729,407 
Other invested assets
  
206,902 
    
4,529 
    
- 
    
- 
    
211,431 
Cash and cash equivalents
  
1,202,336 
    
377,958 
    
43,855 
    
- 
    
1,624,149 
Total investments and cash
  
15,553,796 
    
1,691,465 
    
1,296,201 
    
(450,444)
    
18,091,018 
                             
Accrued investment income
  
250,170 
    
15,226 
    
17,168 
    
- 
    
282,564 
Deferred policy acquisition costs
  
2,555,042 
    
233,401 
    
73,958 
    
- 
    
2,862,401 
Value of business and customer renewals acquired
  
169,083 
    
10,742 
    
- 
    
- 
    
179,825 
Net deferred tax asset
  
910,344 
    
22,627 
    
- 
    
(76,126)
    
856,845 
Goodwill
  
- 
    
7,299 
    
-  
    
- 
    
7,299 
Receivable for investments sold
  
6,743 
    
430 
    
375 
    
- 
    
7,548 
Reinsurance receivable
  
1,872,687 
    
82,976 
    
1,120,952 
    
- 
    
3,076,615 
Other assets
  
200,218 
    
20,835 
    
1,787 
    
- 
    
222,840 
Separate account assets
  
19,797,280 
    
690,524 
    
43,920 
    
- 
    
20,531,724 
                             
Total assets
$
41,315,363 
  
$
2,775,525 
  
$
2,554,361 
  
$
(526,570)
  
$
46,118,679 
                             
LIABILITIES
                            
                             
Contractholder deposit funds and other policy liabilities
$
15,351,097 
  
$
1,348,109 
  
$
846,515 
  
$
- 
  
$
17,545,721 
Future contract and policy benefits
  
847,228 
    
93,975 
    
73,485 
    
- 
    
1,014,688 
Payable for investments purchased
  
212,788 
    
150,160 
    
565 
    
- 
    
363,513 
Accrued expenses and taxes
  
81,362 
    
(21,325)
    
58,634 
    
- 
    
118,671 
 Deferred tax liability
  
- 
    
- 
    
76,126 
    
(76,126)
    
- 
Debt payable to affiliates
  
883,000 
    
- 
    
1,115,000 
    
- 
    
1,998,000 
Reinsurance payable to affiliate
  
1,509,989 
    
140,832 
    
- 
    
- 
    
1,650,821 
Derivative instruments – payable
  
1,327,126 
    
- 
    
167,215 
    
- 
    
1,494,341 
Other liabilities
  
510,238 
    
44,597 
    
51,110 
    
- 
    
605,945 
Separate account liabilities
  
19,797,280 
    
690,524 
    
43,920 
    
- 
    
20,531,724 
                             
Total liabilities
  
40,520,108 
    
2,446,872 
    
2,432,570 
    
(76,126)
    
45,323,424 
                             
STOCKHOLDER’S EQUITY
                            
                             
Common stock
$
6,437 
  
$
2,100 
  
$
2,542 
  
$
(4,642)
  
$
6,437 
Additional paid-in capital
  
2,872,242 
    
389,963 
    
209,749 
    
(599,712)
    
2,872,242 
Accumulated other comprehensive loss
  
(129,884)
    
(20,008)
    
(3,626)
    
23,634 
    
(129,884)
Accumulated deficit
  
(1,953,540)
    
(43,402)
    
(86,874)
    
130,276 
    
(1,953,540)
                             
Total stockholder’s equity
  
795,255 
    
328,653 
    
121,791 
    
(450,444)
    
795,255  
                             
Total liabilities and stockholder’s equity
$
41,315,363 
  
$
2,775,525 
  
$
2,554,361 
  
$
(526,570) 
  
$
46,118,679 

 
 
 

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 except in share data)

For the years ended December 31, 2008, 2007 and 2006

16. 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, $1,000 par value
$
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 (Accumulated deficit)
  
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, 2008, 2007 and 2006

16. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Cash Flow
For the year ended December 31, 2008

 
SLUS
as Parent
  
SLNY
  
Other
Subs
  
Elimination
  
Consolidated
Company
                             
Cash Flows From Operating Activities:
                            
Net loss from operations
$
(2,234,841)
  
$
(123,398)
  
$
(118,188)
  
$
241,586 
  
$
(2,234,841)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
                            
Net amortization of premiums on investments
  
27,009 
    
2,663 
    
(1,301)
    
- 
    
28,371 
Amortization of DAC, VOBA and VOCRA
  
(963,422)
    
(82,218)
    
24,614 
    
- 
    
(1,021,026)
Depreciation and amortization
  
5,478 
    
311 
    
922 
    
- 
    
6,711 
Net loss on derivatives
  
522,838 
    
32,059 
    
257,820 
    
- 
    
812,717 
Net realized losses on available-for-sale
investments
  
21,852 
    
10,986 
    
5,403 
    
- 
    
38,241 
Changes in fair value of trading investments
  
2,448,822 
    
154,926 
    
159,145 
    
- 
    
2,762,893 
Net realized losses on trading investments
  
324,369 
    
30,622 
    
25,978 
    
- 
    
380,969 
Net change in unrealized and undistributed losses
in private equity limited partnerships
  
(9,796)
    
- 
    
- 
    
- 
    
(9,796)
Interest credited to contractholder deposits
  
483,769 
    
45,129 
    
32,728 
    
- 
    
561,626 
Goodwill impairment
  
658,051 
    
37,788 
    
5,611 
    
- 
    
701,450 
Investment in subsidiaries
  
241,586 
    
- 
    
- 
    
(241,586)
    
- 
Deferred federal income taxes
  
(680,276)
    
(15,318)
    
(77,549)
    
- 
    
(773,143)
Changes in assets and liabilities:
                            
Additions to DAC, VOBA and VOCRA
  
(254,761)
    
(27,648)
    
(83,277)
    
- 
    
(365,686)
Accrued investment income
  
18,562 
    
19 
    
(10,782)
    
- 
    
7,799 
Net reinsurance receivable/payable
  
145,172 
    
66,699 
    
(472,731)
    
- 
    
(260,860)
Future contract and policy benefits
  
140,571 
    
898 
    
49,555 
    
- 
    
191,024 
Dividends received from subsidiaries
  
- 
    
- 
    
- 
    
- 
    
- 
Other, net
  
29,356 
    
122,486 
    
101,318 
    
- 
    
253,160 
                             
Net cash provided by (used in) operating activities
  
924,339 
    
256,004 
    
(100,734)
    
- 
    
1,079,609 
                             
Cash Flows From Investing Activities:
                            
Sales, maturities and repayments of:
                            
Available-for-sale fixed maturities
  
89,468 
    
6,440 
    
5,849 
    
- 
    
101,757 
Trading fixed maturities
  
1,469,669 
    
194,980 
    
143,849 
    
- 
    
1,808,498 
Mortgage loans
  
258,736 
    
15,202 
    
20,672 
    
- 
    
294,610 
Real estate
  
1,141 
    
- 
    
- 
    
- 
    
1,141 
Other invested assets
  
629,692 
    
64,482 
    
(2,017)
    
- 
    
692,157 
Purchases of:
                            
Available-for-sale fixed maturities
  
(107,709)
    
(14,027)
    
(7,738)
    
- 
    
(129,474)
Trading fixed maturities
  
(1,005,670)
    
(258,714)
    
(910,759)
  
- 
    
(2,175,143)
Mortgage loans
  
(23,285)
    
(16,650)
    
(19,000)
    
- 
    
(58,935)
Real estate
  
(5,055)
    
- 
    
(359)
    
- 
    
(5,414)
Other invested assets
  
(122,447)
    
- 
    
- 
    
- 
    
(122,447)
Net change in other investments
  
(285,810)
    
(64,154)
    
- 
    
- 
    
(349,964)
Net change in policy loans
  
(18,449)
    
(38)
    
1,713 
    
- 
    
(16,774)
                             
Net cash provided by (used in) investing activities
$
880,281 
  
$
(72,479)
  
$
(767,790)
  
$
- 
  
$
40,012 

 
 
 

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, 2008, 2007 and 2006

16. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Cash Flow (continued)
For the year ended December 31, 2008

 
SLUS
as Parent
  
SLNY
  
Other
Subs
  
Elimination
  
Consolidated
Company
                             
Cash Flows From Financing Activities:
                            
Additions to contractholder deposit funds
$
1,744,752 
  
$
330,909 
  
$
114,438 
  
$
- 
  
$
2,190,099 
Withdrawals from contractholder deposit funds
  
(3,262,864)
    
(348,243)
    
(5,351)
    
- 
    
(3,616,458)
Additional capital contribution to subsidiaries
  
(150,000)
    
- 
    
- 
    
150,000 
    
- 
Debt proceeds
  
60,000 
    
- 
    
115,000 
    
- 
    
175,000 
Repayments of debt
  
(122,000)
    
- 
    
- 
    
- 
    
(122,000)
Capital contribution from parent
  
725,000 
    
150,000 
    
- 
    
(150,000)
    
725,000 
Other, net
  
(12,666)
    
(4,134)
    
(14)
    
- 
    
(16,814)
                             
Net cash used in financing activities
  
(1,017,778)
    
128,532 
    
224,073 
    
- 
    
(665,173)
                             
Net change in cash and cash equivalents
  
786,842 
    
312,057 
    
(644,451)
    
- 
    
454,448 
                             
Cash and cash equivalents, beginning of period
  
415,494 
    
65,901 
    
688,306 
    
- 
    
1,169,701 
                             
Cash and cash equivalents, end of period
$
1,202,336 
  
$
377,958 
  
$
43,855 
  
$
- 
  
$
1,624,149 



 
 
 

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, 2008, 2007 and 2006

16. 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:
                            
Net amortization of premiums on investments
  
38,661 
    
1,782 
    
225 
    
- 
    
40,668 
Amortization of DAC, VOBA and VOCRA
  
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, VOBA and VOCRA 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)
                             
Net cash provided by operating activities
  
669,925 
    
89,463 
    
79,603
    
(63,995)
    
774,996 
                             
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
Trading fixed maturities
  
608,231
    
-
    
120,402
    
-
    
728,633
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)
Trading fixed maturities
  
(132,891)
    
-
    
(696,578)
    
-
    
(829,469)
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)
Early redemption premium
  
- 
    
- 
    
25,578
    
- 
    
25,578
Net change in other investing activities
  
(365,012)
    
3,231 
    
- 
    
- 
    
(361,781)
Net change in policy loans
  
(13,546)
    
21 
    
10,518
    
- 
    
(3,007)
                             
Net cash provided by investing activities
$
2,152,936 
  
$
123,004 
  
$
124,913
  
$
- 
  
$
2,400,853 

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, 2008, 2007 and 2006

16. 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)
Debt proceeds
  
- 
    
- 
    
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, 2008, 2007 and 2006

16. 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
provided by operating activities:
                            
Net amortization of premiums on investments
  
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:
                            
DAC 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 
                             
Net cash provided by operating activities
  
889,757
    
68,861 
    
7,837 
    
(8,000)
    
958,455
                             
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
Trading fixed maturities
  
2,172,797
    
-
    
-
    
-
    
2,172,797
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)
Trading fixed maturities
  
(4,038,950)
    
-
    
-
    
-
    
(4,038,950)
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 (used in) provided by investing activities
$
(656,333) 
  
$
191,610 
  
$
2,379 
  
$
- 
  
$
(462,344) 

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, 2008, 2007 and 2006

16. 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)
Debt proceeds
  
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 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, 2008, 2007 and 2006

17. SEGMENT INFORMATION

As described below, the Company conducts business primarily 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, including allocated capital, 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.

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, group long-term disability, group short-term disability, group dental and group stop loss insurance products 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, its 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, 2008, 2007 and 2006

17. SEGMENT INFORMATION (CONTINUED)

The following amounts pertain to the various business segments:

 
Year ended December 31, 2008
    
                   
 
Wealth
  
Individual
  
Group
        
 
Management
  
Protection
  
 Protection
  
Corporate
  
Totals
                   
Total revenues
$    (2,207,978)
  
$      113,357 
  
$   102,827 
  
$  (20,340)
  
$ (2,012,134)
Total expenditures
645,665 
  
301,604 
  
111,097 
  
23,324 
  
1,081,690 
Loss before income tax
benefit
(2,853,643)
  
(188,247)
  
(8,270)
  
(43,664)
  
(3,093,824)
                   
Net loss
(2,017,095)
  
(122,220)
  
(5,335)
  
(90,191)
  
(2,234,841)
                   
Total assets
$    33,357,432 
  
$   12,154,968 
  
$   164,123 
  
$ 442,156 
  
$ 46,118,679 
                   
 
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



 
 
 

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, 2008, 2007 and 2006

18.  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 year ended December 31, 2008, the Company followed one permitted practice relating to the treatment of its deferred tax assets.  For the years ended December 31, 2007 and 2006, 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 (loss) income were as follows:

 
Unaudited for the Years ended December 31,
 
 
2008
 
2007
 
2006
       
Statutory capital and surplus
$     1,949,215 
$       1,790,457 
$      1,610,425
Statutory net (loss) income
$   (1,431,516)
(913,114)
123,305



 
 
 

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, 2008, 2007 and 2006

19. 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, states in which the Company and its insurance company subsidiaries are domiciled, 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 $126.7 million in 2009 without prior approval from the Delaware Commissioner of Insurance.

In 2008 and 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.

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 2009 without prior approval from the New York Commissioner of Insurance.  No dividends were paid by SLNY during 2008, 2007 or 2006.

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 $2.8 million in 2009 without prior approval from the Rhode Island Commissioner of Insurance.  No dividends were paid by INDY during 2008, 2007 or 2006.

The Company’s Vermont domestic insurance company subsidiary, Sun Life Vermont, is permitted to pay dividends only to the extent that such dividends or distributions would not jeopardize its ability to fulfill its respective obligations pursuant to the reinsurance agreement with SLOC or any related transaction.  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 2008 and 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, 2008, 2007 and 2006

20. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME

The components of accumulated other comprehensive (loss) income as of December 31, were as follows:

 
2008
  
2007
  
2006
Unrealized (losses) gains on available-for-sale
securities
$     (111,099)
  
$     (317,402)
  
$         38,400 
Changes in reserves due to unrealized losses on
available-for-sale securities
- 
  
(26,702)
  
(9,346)
Unrealized (losses) gains on pension and other
postretirement plan adjustments
(88,721)
  
14,894 
  
(2,332)
Changes in DAC due to unrealized losses
(gains) on available-for-sale securities
- 
  
189,687
  
(2,719)
Changes in VOBA due to unrealized gains on
available-for-sale securities
- 
  
- 
  
470 
Tax effect and other
69,936 
  
47,120 
  
(10,443)
           
Accumulated other comprehensive (loss)
income
$    (129,884)
  
$     (92,403)
  
$          14,030 

21. 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 2007-61 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 years ended December 31, 2008 and 2007, the financial statements reflect benefits of $24.5 million and $12.0 million, respectively, 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 position, 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, 2008, 2007 and 2006

21. 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 five years. As of December 31, 2008, minimum future lease payments under such leases were as follows:

   
2009
$             301
2010
49
2011
-
Total
350

Total rental expense for the years ended December 31, 2008, 2007 and 2006 was $8.2 million, $9.4 million and $7.6 million, respectively.

The Company has two noncancelable sublease agreements that expire on June 30, 2009 and December 31, 2009.  As of December 31, 2008, the minimum future lease payment under the sublease agreements was $0.1 million.

22. SUBSEQUENT EVENTS

Effective January 1, 2009, the Company is required to prospectively adopt Statement of Statutory Accounting Principles (“SSAP”) No. 98, “Treatment of Cash Flows When Quantifying Changes in Valuation and Impairments, an Amendment of SSAP No. 43 - Loan-backed and Structured Securities.”  The Company anticipates that the effect of adopting SSAP No. 98 will decrease its statutory surplus between $150.0 million and $200.0 million.  After adoption, the Company expects its statutory surplus will continue to exceed minimum company action level requirements.

In January 2009, the Company undertook an action to reduce the Company’s cost structure and staffing levels due to the current economic environment.  The Company severed 143 employees and incurred $2.1 million in expenses in connection with this initiative.

In 2009, the Company received capital contributions totaling $623.7 million from the Parent.

After receiving regulatory approval, on February 11, 2009, the Company entered into a reinsurance agreement effective January 1, 2009 with Sun Life Reinsurance (Barbados) No. 3 Corp (“BarbCo 3”), an affiliate, to cede all of the risks associated with certain in-force corporate owned variable universal life and private placement variable universal life policies on a combination coinsurance, coinsurance with funds withheld basis and a modified coinsurance basis.  Future new business will also be ceded under this agreement.

BarbCo 3 paid an initial ceding commission to the Company of $41.5 million on February 11, 2009 and will pay a percentage of first year and single premiums as an ongoing ceding commission on a quarterly basis.  The funds withheld payable to BarbCo 3 and related reinsurance receivable at the inception of the transaction are $247.9 million and $329.2 million, respectively.


 
 
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Participants of Sun Life of Canada (U.S.) Variable Account D and the Board of Directors of Sun Life Assurance Company of Canada (U.S.) (the “Sponsor”):

We have audited the accompanying statements of assets and liabilities of MFS Capital Appreciation Portfolio Sub-Account, MFS Government Securities Portfolio Sub-Account, MFS High Yield Portfolio Sub-Account, MFS Money Market Portfolio Sub-Account, MFS Bond Fund A Sub-Account, MFS Massachusetts Investors Growth Stock Fund A Sub-Account, MFS Massachusetts Investors Trust Fund A Sub-Account, and MFS Total Return Fund A Sub-Account of Sun Life of Canada (U.S.) Variable Account D (collectively the "Sub-Accounts"), as of December 31, 2008, 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, 2008, by correspondence with the asset managers.  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, 2008, 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 24, 2009


 
 
 


SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
(A Separate Account of Sun Life Assurance Company of Canada (U.S.))

STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2008


Assets
  
Shares
  
Cost
  
Value
Investments at fair value:
                
MFS Variable Insurance Trust II
                
Capital Appreciation Portfolio Sub-Account (CAS)
  
420,321
  
$
8,319,405
  
$
5,993,779
Government Securities Portfolio Sub-Account (GSS)
  
183,110
    
2,350,918
    
2,422,543
High Yield Portfolio Sub-Account (HYS)
  
267,853
    
1,786,508
    
1,135,696
Money Market Portfolio Sub-Account (MMS)
  
1,234,385
    
1,234,385
    
1,234,386
MFS Bond Portfolio A Sub-Account (MFB)*
  
53,774
    
675,809
    
565,163
Massachusetts Investors Growth Stock Portfolio A Sub-Account (MIG)*
  
124,841
    
1,614,114
    
1,198,469
Massachusetts Investors Trust Portfolio Sub-Account (MIT)*
  
189,708
    
3,188,372
    
2,617,968
Total Return Portfolio Sub-Account (MTR)*
  
136,247
    
2,140,484
    
1,558,670
                 
Total investments
        
21,309,995
    
16,726,674
                 
Total assets
      
$
21,309,995
  
$
16,726,674
                 
Liabilities
                
Payable to sponsor
            
$
14,390
                 
Total liabilities
            
$
14,390
                 
                 
* Investments are made in Class A shares of the Fund.
                





















The accompanying notes are an integral part of these financial statements.


 
 
 


SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
(A Separate Account of Sun Life Assurance Company of Canada (U.S.))

STATEMENT OF ASSETS AND LIABILITIES (CONTINUED)
DECEMBER 31, 2008


 
Applicable to Owners of
  
Reserve for
      
 
Deferred Variable Annuity Contracts
  
Variable
      
Net Assets
Units
  
Value
  
Annuities
  
Total
CAS
  
188,836
  
$
5,957,319
  
$
26,730
  
$
5,984,049
GSS
  
75,022
    
2,418,541
    
1,863
    
2,420,404
HYS
  
47,353
    
1,135,348
    
968
    
1,136,316
MMS
  
63,564
    
1,233,294
    
1,385
    
1,234,679
MFB
  
19,903
    
565,163
    
-
    
565,163
MIG
  
30,071
    
1,198,469
    
-
    
1,198,469
MIT
  
63,738
    
2,614,534
    
-
    
2,614,534
MTR
  
34,861
    
1,558,670
    
-
    
1,558,670
Total net assets
      
$
16,681,338
  
$
30,946
  
$
16,712,284


























The accompanying notes are an integral part of these financial statements.

 
 
 


SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
(A Separate Account of Sun Life Assurance Company of Canada (U.S.))

STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2008

   
CAS
  
GSS
    
HYS
   
Sub-Account
  
Sub-Account
    
Sub-Account
Income:
                        
Dividend income
  
$
45,167
    
$
145,363
    
$
148,298
  
                         
Expenses:
                        
Mortality and expense risk charges
    
(105,337
)
    
(30,810
)
    
(19,133
)
Net investment (loss) income
  
$
(60,170
)
  
$
114,553
    
$
129,165
  
                         
Net realized and change in unrealized (losses) gains:
                        
Net realized losses on sale of shares
  
$
(391,799
)
  
$
(29,488
)
  
$
(37,238
)
Realized gain distributions
    
-
      
-
      
-
  
Net realized losses
  
$
(391,799
)
  
$
(29,488
)
  
$
(37,238
)
                         
Net change in unrealized appreciation/depreciation
  
$
(3,484,555
)
  
$
94,096
    
$
(601,589
)
                         
Net realized and unrealized (losses) gains
  
$
(3,876,354
)
  
$
64,608
    
$
(638,827
)
                         
(Decrease) increase in net assets from operations
  
$
(3,936,524
)
  
$
179,161
    
$
(509,662
)
                         
   
MMS
  
MFB
    
MIG
   
Sub-Account
  
Sub-Account
    
Sub-Account
Income:
                        
Dividend income
  
$
28,336
    
$
35,851
    
$
8,143
  
                         
Expenses:
                        
Mortality and expense risk charges
    
(16,154
)
    
(7,090
)
    
(20,658
)
Net investment income (loss)
  
$
12,182
    
$
28,761
    
$
(12,515
)
                         
Net realized and change in unrealized losses:
                        
Net realized (losses) gains on sale of shares
  
$
-
    
$
(10,138
)
  
$
47,056
  
Realized gain distributions
    
-
      
-
      
-
  
Net realized (losses) gains
  
$
-
    
$
(10,138
)
  
$
47,056
  
                         
Net change in unrealized appreciation/depreciation
  
$
(5
)
  
$
(89,789
)
  
$
(785,741
)
                         
Net realized and change in unrealized losses
  
$
(5
)
  
$
(99,927
)
  
$
(738,685
)
                         
Increase (decrease) in net assets from operations
  
$
12,177
    
$
(71,166
)
  
$
(751,200
)
                         
                         
                         










The accompanying notes are an integral part of these financial statements.


 
 
 


SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
(A Separate Account of Sun Life Assurance Company of Canada (U.S.))

STATEMENT OF OPERATIONS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 2008

   
MIT
  
MTR
   
Sub-Account
  
Sub-Account
Income:
            
Dividend income
  
$
50,157
  
$
64,685
             
Expenses:
            
Mortality and expense risk charges
    
(46,423)
    
(26,944)
Net investment income
  
$
3,734
  
$
37,741
             
Net realized and change in unrealized losses:
            
Net realized gains (losses) on sale of shares
  
$
52,130
  
$
(77,640)
Realized gain distributions
    
51,940
    
-
Net realized gains (losses)
  
$
104,070
  
$
(77,640)
             
Net change in unrealized appreciation/depreciation
  
$
(1,622,423)
  
$
(503,857)
             
Net realized and change in unrealized losses
  
$
(1,518,353)
  
$
(581,497)
             
Decrease in net assets from operations
  
$
(1,514,619)
  
$
(543,756)


























The accompanying notes are an integral part of these financial statements.


 
 
 


SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
(A Separate Account of Sun Life Assurance Company of Canada (U.S.))

STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

   
CAS
  
GSS
   
Sub-Account
  
Sub-Account
   
Year Ended
  
Year Ended
  
Year Ended
  
Year Ended
   
December 31,
  
December 31,
  
December 31,
  
December 31,
   
2008
  
2007
  
2008
  
2007
Operations:
                                
Net investment (loss) income
  
$
(60,170
)
  
$
(124,573
)
  
$
114,553
    
$
115,586
  
Net realized losses
    
(391,799
)
    
(223,898
)
    
(29,488
)
    
(30,716
)
Net change in unrealized appreciation/depreciation
    
(3,484,555
)
    
1,593,066
      
94,096
      
84,520
  
(Decrease) increase in net assets from operations
  
$
(3,936,524
)
  
$
1,244,595
    
$
179,161
    
$
169,390
  
                                 
Contract Owner Transactions:
                                
Accumulation Activity:
                                
Purchase payments received
  
$
238,445
    
$
356,453
    
$
38,380
    
$
69,293
  
Net transfers between Sub-Accounts
                                
and/or fixed accumulation account
    
(230,213
)
    
(83,111
)
    
81,313
      
1,751
  
Withdrawals, surrenders, annuitizations
                                
and contract charges
    
(1,687,672
)
    
(3,823,588
)
    
(651,329
)
    
(639,631
)
Net accumulation activity
  
$
(1,679,440
)
  
$
(3,550,246
)
  
$
(531,636
)
  
$
(568,587
)
                                 
Annuitization Activity:
                                
Annuitizations
  
$
-
    
$
-
    
$
-
    
$
-
  
Annuity payments and contract charges
    
(6,688
)
    
(7,664
)
    
(358
)
    
(351
)
Transfers between Sub-Accounts, net
    
-
      
-
      
-
      
-
  
Adjustments to annuity reserves
    
1,090
      
(1,310
)
    
(49
)
    
(20
)
Net annuitization activity
  
$
(5,598
)
  
$
(8,974
)
  
$
(407
)
  
$
(371
)
Decrease in net assets from
                                
contract owner transactions
  
$
(1,685,038
)
  
$
(3,559,220
)
  
$
(532,043
)
  
$
(568,958
)
                                 
Decrease in net assets
  
$
(5,621,562
)
  
$
(2,314,625
)
  
$
(352,882
)
  
$
(399,568
)
                                 
Net assets at beginning of year
  
$
11,605,611
    
$
13,920,236
    
$
2,773,286
    
$
3,172,854
  
Net assets at end of year
  
$
5,984,049
    
$
11,605,611
    
$
2,420,404
    
$
2,773,286
  
                                 
Unit Transactions:
                                
Beginning of year
    
227,231
      
298,228
      
92,222
      
111,967
  
Purchased
    
5,281
      
7,812
      
1,324
      
2,896
  
Transferred between Sub-Accounts
                                
and fixed account
    
(6,064
)
    
(2,234
)
    
2,573
      
(442
)
Withdrawn, surrendered, and annuitized
    
(37,612
)
    
(76,575
)
    
(21,097
)
    
(22,199
)
End of year
    
188,836
      
227,231
      
75,022
      
92,222
  
                                 










The accompanying notes are an integral part of these financial statements.


 
 
 


SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
(A Separate Account of Sun Life Assurance Company of Canada (U.S.))

STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

   
HYS
  
MMS
   
Sub-Account
  
Sub-Account
  
   
Year Ended
  
Year Ended
  
Year Ended
  
Year Ended
   
December 31,
  
December 31,
  
December 31,
  
December 31,
   
2008
  
2007
  
2008
  
2007
Operations:
                                
Net investment income
  
$
129,165
    
$
124,210
    
$
12,182
    
$
51,468
  
Net realized (losses) gains
    
(37,238
)
    
6,020
      
-
      
(6
)
Net change in unrealized appreciation/depreciation
    
(601,589
)
    
(115,664
)
    
(5
)
    
6
  
(Decrease) increase in net assets from operations
  
$
(509,662
)
  
$
14,566
    
$
12,177
    
$
51,468
  
                                 
Contract Owner Transactions:
                                
Accumulation Activity:
                                
Purchase payments received
  
$
22,546
    
$
85,036
    
$
63,729
    
$
94,002
  
Net transfers between Sub-Accounts
                                
and/or fixed accumulation account
    
(32,597
)
    
17,818
      
149,101
      
482,443
  
Withdrawals, surrenders, annuitizations
                                
and contract charges
    
(267,951
)
    
(203,244
)
    
(619,189
)
    
(233,196
)
Net accumulation activity
  
$
(278,002
)
  
$
(100,390
)
  
$
(406,359
)
  
$
343,249
  
                                 
Annuitization Activity:
                                
Annuitizations
  
$
-
    
$
-
    
$
-
    
$
-
  
Annuity payments and contract charges
    
(274
)
    
(312
)
    
(183
)
    
(185
)
Transfers between Sub-Accounts, net
    
-
      
-
      
-
      
-
  
Adjustments to annuity reserves
    
(229
)
    
142
      
47
      
44
  
Net annuitization activity
  
$
(503
)
  
$
(170
)
  
$
(136
)
  
$
(141
)
(Decrease) increase in net assets from
                                
contract owner transactions
  
$
(278,505
)
  
$
(100,560
)
  
$
(406,495
)
  
$
343,108
  
                                 
(Decrease) increase in net assets
  
$
(788,167
)
  
$
(85,994
)
  
$
(394,318
)
  
$
394,576
  
                                 
Net assets at beginning of year
  
$
1,924,483
    
$
2,010,477
    
$
1,628,997
    
$
1,234,421
  
Net assets at end of year
  
$
1,136,316
    
$
1,924,483
    
$
1,234,679
    
$
1,628,997
  
                                 
Unit Transactions:
                                
Beginning of year
    
55,868
      
58,915
      
85,399
      
66,315
  
Purchased
    
706
      
2,529
      
3,321
      
5,057
  
Transferred between Sub-Accounts
                                
and fixed account
    
(950
)
    
407
      
7,575
      
26,427
  
Withdrawn, surrendered, and annuitized
    
(8,271
)
    
(5,983
)
    
(32,731
)
    
(12,400
)
End of year
    
47,353
      
55,868
      
63,564
      
85,399
  
                                 











The accompanying notes are an integral part of these financial statements.


 
 
 


SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
(A Separate Account of Sun Life Assurance Company of Canada (U.S.))

STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

   
MFB
  
MIG
   
Sub-Account
  
Sub-Account
   
Year Ended
  
Year Ended
  
Year Ended
  
Year Ended
   
December 31,
  
December 31,
  
December 31,
  
December 31,
   
2008
  
2007
  
2008
  
2007
Operations:
                                
Net investment income (loss)
  
$
28,761
    
$
27,595
    
$
(12,515
)
  
$
(14,926
)
Net realized (losses) gains
    
(10,138
)
    
(1,777
)
    
47,056
      
63,931
  
Net change in unrealized appreciation/depreciation
    
(89,789
)
    
(10,797
)
    
(785,741
)
    
116,837
  
(Decrease) increase in net assets from operations
  
$
(71,166
)
  
$
15,021
    
$
(751,200
)
  
$
165,842
  
                                 
Contract Owner Transactions:
                                
Accumulation Activity:
                                
Purchase payments received
  
$
58,357
    
$
49,658
    
$
63,692
    
$
78,125
  
Net transfers between Sub-Accounts
                                
and/or fixed accumulation account
    
(16,568
)
    
-
      
(35,715
)
    
705,290
  
Withdrawals, surrenders, annuitizations
                                
and contract charges
    
(65,394
)
    
(45,992
)
    
(175,368
)
    
(307,127
)
Net accumulation activity
  
$
(23,605
)
  
$
3,666
    
$
(147,391
)
  
$
476,288
  
                                 
Annuitization Activity:
                                
Annuitizations
  
$
-
    
$
-
    
$
-
    
$
-
  
Annuity payments and contract charges
    
-
      
-
      
-
      
-
  
Transfers between Sub-Accounts, net
    
-
      
-
      
-
      
-
  
Adjustments to annuity reserves
    
-
      
-
      
-
      
-
  
Net annuitization activity
  
$
-
    
$
-
    
$
-
    
$
-
  
(Decrease) increase in net assets from
                                
contract owner transactions
  
$
(23,605
)
  
$
3,666
    
$
(147,391
)
  
$
476,288
  
                                 
(Decrease) increase in net assets
  
$
(94,771
)
  
$
18,687
    
$
(898,591
)
  
$
642,130
  
                                 
Net assets at beginning of year
  
$
659,934
    
$
641,247
    
$
2,097,060
    
$
1,454,930
  
Net assets at end of year
  
$
565,163
    
$
659,934
    
$
1,198,469
    
$
2,097,060
  
                                 
Unit Transactions:
                                
Beginning of year
    
20,686
      
20,603
      
32,823
      
25,174
  
Purchased
    
1,877
      
1,556
      
1,247
      
1,265
  
Transferred between Sub-Accounts
                                
and fixed account
    
(601
)
    
-
      
(621
)
    
11,365
  
Withdrawn, surrendered, and annuitized
    
(2,059
)
    
(1,473
)
    
(3,378
)
    
(4,981
)
End of year
    
19,903
      
20,686
      
30,071
      
32,823
  
                                 











The accompanying notes are an integral part of these financial statements.


 
 
 


SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
(A Separate Account of Sun Life Assurance Company of Canada (U.S.))

STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007

   
MIT
  
MTR
   
Sub-Account
  
Sub-Account
   
Year Ended
  
Year Ended
  
Year Ended
  
Year Ended
   
December 31,
  
December 31,
  
December 31,
  
December 31,
   
2008
  
2007
  
2008
  
2007
Operations:
                                
Net investment income (loss)
  
$
3,734
    
$
(36,782
)
  
$
37,741
    
$
52,165
  
Net realized gains (losses)
    
104,070
      
613,598
      
(77,640
)
    
514,505
  
Net change in unrealized appreciation/depreciation
    
(1,622,423
)
    
(87,128
)
    
(503,857
)
    
(418,796
)
(Decrease) increase in net assets from operations
  
$
(1,514,619
)
  
$
489,688
    
$
(543,756
)
  
$
147,874
  
                                 
Contract Owner Transactions:
                                
Accumulation Activity:
                                
Purchase payments received
  
$
216,702
    
$
228,255
    
$
35,070
    
$
103,402
  
Net transfers between Sub-Accounts
                                
and/or fixed accumulation account
    
(26,398
)
    
(540,061
)
    
(93,349
)
    
(132,344
)
Withdrawals, surrenders, annuitizations
                                
and contract charges
    
(996,584
)
    
(861,908
)
    
(842,19
)
    
(1,517,024
)
Net accumulation activity
  
$
(806,280
)
  
$
(1,173,714
)
  
$
(900,476
)
  
$
(1,545,966
)
                                 
Annuitization Activity:
                                
Annuitizations
  
$
-
    
$
-
    
$
-
    
$
-
  
Annuity payments and contract charges
    
-
      
-
      
-
      
-
  
Transfers between Sub-Accounts, net
    
-
      
-
      
-
      
-
  
Adjustments to annuity reserves
    
1,675
      
(488
)
    
-
      
-
  
Net annuitization activity
  
$
1,675
    
$
(488
)
  
$
-
    
$
-
  
Decrease in net assets from
                                
contract owner transactions
  
$
(804,605
)
  
$
(1,174,202
)
  
$
(900,476
)
  
$
(1,545,966
)
                                 
Decrease in net assets
  
$
(2,319,224
)
  
$
(684,514
)
  
$
(1,444,232
)
  
$
(1,398,092
)
                                 
Net assets at beginning of year
  
$
4,933,758
    
$
5,618,272
    
$
3,002,902
    
$
4,400,994
  
Net assets at end of year
  
$
2,614,534
    
$
4,933,758
    
$
1,558,670
    
$
3,002,902
  
                                 
Unit Transactions:
                                
Beginning of year
    
80,003
      
99,851
      
51,112
      
77,976
  
Purchased
    
3,988
      
3,820
      
668
      
1,781
  
Transferred between Sub-Accounts
                                
and fixed account
    
(381
)
    
(8,916
)
    
(1,784
)
    
(2,280
)
Withdrawn, surrendered, and annuitized
    
(19,872
)
    
(14,752
)
    
(15,135
)
    
(26,365
)
End of year
    
63,738
      
80,003
      
34,861
      
51,112
  
                                 










The accompanying notes are an integral part of these financial statements.


 
 
 


SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
(A Separate Account of Sun Life Assurance Company of Canada (U.S.))

NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2008


1. BUSINESS AND ORGANIZATION

Sun Life of Canada (U.S.) Variable Account D (the “Variable Account”) is a separate account of Sun Life Assurance Company of Canada (U.S.) (the “Sponsor”) and was established on August 20, 1985 as a funding vehicle for the variable portion of group fixed and variable annuity contracts issued by the Sponsor.  The Variable Account is registered with the Securities and Exchange Commission under the Investment Company Act of 1940, as amended, as a unit investment trust existing in accordance with the regulations of the Delaware Insurance Department.

The assets of the Variable Account are divided into Sub-Accounts. Each Sub-Account is invested in shares of a specific mutual fund, or series thereof, selected by contract owners from available mutual funds (the “Funds”) registered under the Investment Company Act of 1940, as amended.

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.  Assets applicable to the Variable Account are not chargeable with liabilities arising out of any other business the Sponsor may conduct.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General
The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).  The preparation of financial statements in conformity with GAAP requires the Sponsor’s management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from these estimates.

Investment Valuation and Transactions
Investments made in mutual funds are valued at their closing net asset value each business day. Transactions are recorded on a trade date basis.  Realized gains and losses on sales of investments are determined on the first in, first out basis.  Dividend income and realized gain distributions are reinvested in additional fund shares and recognized on the ex-dividend date.

Transfers
Transfers between Sub-Accounts requested by contract participants are recorded in the new Sub-Account upon receipt of the redemption proceeds at the net asset value at the time of receipt.  In addition, transfers can be made between the Sub-Accounts and the Fixed Account.  The Fixed Account is part of the general account of the Sponsor in which purchase payments or contract values may be allocated or transferred.

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 (the “Code”). Under existing federal income tax law, investment income and realized gain distributions 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 periodically review 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.



 
 
 


SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
(A Separate Account of Sun Life Assurance Company of Canada (U.S.))

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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” (“FIN 48”).  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 Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and expands disclosures about fair value measurements. SFAS No. 157 does not change existing guidance as to whether or not an instrument is carried at fair value.  On January 1, 2008, the Variable Account adopted SFAS No. 157 and applied the provisions of the statement prospectively to assets and liabilities measured and disclosed at fair value.

In October 2008, the FASB issued Staff Position (“FSP”) No. FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”. FSP No. FAS 157-3 clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in the determination of the fair value of a financial asset when the market for that asset is not active. FSP No. FAS 157-3 was effective upon issuance and did not have an impact on the Variable Account’s financial statements.

3. RELATED PARTY TRANSACTIONS

Massachusetts Financial Services Company, an affiliate of the Sponsor, is the investment adviser to the Funds and charges a management fee at an annual rate ranging from 0.50% to 0.75% of the Funds’ average daily net assets.

4. CONTRACT CHARGES

Mortality and expense risk charges
Charges for mortality and expense risks are based on the value of the Sub-Account and are deducted from the Variable Account at the end of each valuation period to cover the risks assumed by the Sponsor. The deductions are transferred periodically to the Sponsor. The rate of this deduction varies, based on total purchase payments credited to all participants’ accounts under a contract as follows:

       
Mortality and
       
Expense Risk
Level
  
Purchase Payments
  
Charge
1
  
up to $250,000
  
1.30%
2
  
$250,000 to $1,499,999
  
1.25%
3
  
$1,500,000 to $4,999,999
  
1.10%
4
  
$5,000,000 and over
  
0.95%



 
 
 


SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
(A Separate Account of Sun Life Assurance Company of Canada (U.S.))

4. CONTRACT CHARGES (CONTINUED)

Administration charges
Each year on the account anniversary, an account administration fee (“Account Fee”) is deducted from the participant’s account to reimburse the Sponsor for certain administrative expenses.  The amount varies from $12 to $25 and is based on total purchase payments credited to all contract owners’ accounts under contract.  After the annuity commencement date, the Account Fee is deducted pro rata from each variable annuity payment made during the year.

Surrender charges
The Sponsor does not deduct a sales charge from purchase payments. However, a surrender charge (contingent deferred sales charge) may be deducted to cover certain expenses relating to the sale of the contract. In no event shall the aggregate surrender charges exceed 6% of the purchase payments made under the contract.

For the year ended December 31, 2008, the Sponsor received the following amounts related to the above mentioned Account Fee and surrender charges. These charges are reflected in the ‘‘Withdrawals, surrenders, annuitizations and contract charges’’ line of the Statements of Changes in Net Assets for each Sub-Account.

 
Account Fee
  
Surrender Charges
CAS
$
7,998
  
$
4,223
GSS
  
2,556
    
477
HYS
  
1,479
    
243
MMS
  
2,110
    
907
MFB
  
469
    
454
MIG
  
839
    
478
MIT
  
1,746
    
1,014
MTR
  
1,177
    
473

A deduction, when applicable, is made for premium taxes or similar state or local taxes.  It is currently the policy of the Sponsor to deduct the taxes from the amount applied to provide an annuity at the time annuity payments commence. However, the Sponsor reserves the right to deduct such taxes when incurred.

5. RESERVE FOR VARIABLE ANNUITIES

Reserve for variable annuities represents the actuarial present value of future contract benefits for those contract holders who are in the payout phase of their contract and who chose the variable payout option.  Annuity reserves are calculated using the 1983 Individual Annuitant Mortality Table and an assumed interest rate of 4% per year. Required adjustments to the reserves are accomplished by transfers to or from the Sponsor.

6.  INVESTMENT PURCHASES AND SALES

The cost of purchases and proceeds from sales of investments for the year ended December 31, 2008 were as follows:

 
Purchases
  
Sales
CAS
$
560,549
  
$
2,306,847
GSS
  
361,311
    
778,752
HYS
  
268,445
    
417,556
MMS
  
227,186
    
621,552
MFB
  
87,254
    
82,098
MIG
  
69,856
    
229,762
MIT
  
311,022
    
1,061,628
MTR
  
107,153
    
969,888




 
 
 


SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
(A Separate Account of Sun Life Assurance Company of Canada (U.S.))

7.  FAIR VALUE MEASUREMENTS

The following section applies the SFAS No. 157 fair value hierarchy and disclosure requirements to the Variable Account’s financial instruments that are 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 Variable Account 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.

In compliance with SFAS No. 157, the Variable Account has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into the three level hierarchy described above.  If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

The adoption did not have a material impact on the results of the Variable Account. As of December 31, 2008, the Funds of the Variable Account are identical to public mutual funds, but are only available to the contract holders of the Variable Account.  The inputs used to price the Funds are observable and are identical to mutual funds readily tradable in public markets and represent Level 1 assets under the SFAS No. 157 hierarchy levels. There were no Level 2 or 3 investments in the Variable Account.

Fair Value Hierarchy

The following table presents the Variable Account’s categories for its assets measured at fair value on a recurring basis as of December 31, 2008:

                         
   
Level 1
  
Level 2
  
Level 3
  
Total
Assets
                        
Investment in MFS Variable Insurance Trust II
  
$
16,726,674
  
$
-
  
$
-
  
$
16,726,674
Total assets measured at fair value on a recurring basis
  
$
16,726,674
  
$
-
  
$
-
  
$
16,726,674

8.  FINANCIAL HIGHLIGHTS

The summary of units outstanding, unit values (some of  which may be rounded), net assets, investment income ratio, expense ratios (excluding expenses of the underlying funds) and the total return, for each of the five years in the period ended December 31, is as follows:

   
At December 31
  
For year ended December 31
                         
Investment
                          
       
Unit Value
        
Income
  
Expense Ratio
  
Total Return
   
Units
  
Lowest to Highest
  
Net Assets
  
Ratio1
  
Lowest to Highest2
  
Lowest to Highest 3
CAS
                                                      
2008
  
188,836
  
$
30.9732
to
$
33.5030
  
$
5,984,049
  
0.50
%
  
0.95
%
to
1.25
%
  
(37.81
)%
  
to
(37.62
)%
2007
  
227,231
    
49.8003
to
  
53.7877
    
11,605,611
  
0.20
    
0.95
  
to
1.25
    
9.76
    
to
10.09
  
2006
  
298,228
    
45.3724
to
  
48.9324
    
13,920,236
  
0.20
    
0.95
  
to
1.25
    
5.06
    
to
5.37
  
2005
  
377,202
    
43.1865
to
  
46.5062
    
16,727,013
  
0.61
    
0.95
  
to
1.25
    
(0.33
)
  
to
(0.03
)
2004
  
479,343
    
43.3276
to
  
46.5892
    
21,270,067
  
0.06
    
0.95
  
to
1.30
    
9.66
    
to
9.97
  



 
 
 


SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
(A Separate Account of Sun Life Assurance Company of Canada (U.S.))

8. FINANCIAL HIGHLIGHTS (CONTINUED)

   
At December 31
  
For year ended December 31
                         
Investment
                          
       
Unit Value
        
Income
  
Expense Ratio
  
Total Return
   
Units
  
Lowest to Highest
  
Net Assets
  
Ratio1
  
Lowest to Highest2
  
Lowest to Highest3
GSS
                                                      
2008
  
75,022
  
$
32.0142
to
  
32.3531
  
$
2,420,404
  
5.62
%
  
0.95
%
to
1.25
%
  
7.20
%
  
to
7.52
%
2007
  
92,222
    
29.8190
to
  
30.1794
    
2,773,286
  
5.05
    
0.95
  
to
1.25
    
5.85
    
to
6.16
  
2006
  
111,967
    
28.1294
to
  
28.5119
    
3,172,854
  
5.02
    
0.95
  
to
1.25
    
2.41
    
to
2.71
  
2005
  
139,978
    
27.3870
to
  
27.8413
    
3,878,684
  
4.85
    
0.95
  
to
1.25
    
1.04
    
to
1.34
  
2004
  
177,703
    
27.0241
to
  
27.5538
    
4,876,066
  
5.62
    
0.95
  
to
1.30
    
2.48
    
to
2.78
  
HYS
                                                      
2008
  
47,353
    
22.8215
to
  
24.2282
    
1,136,316
  
9.28
    
0.95
  
to
1.25
    
(30.53
)
  
to
(30.33
)
2007
  
55,868
    
32.7554
to
  
34.8781
    
1,924,483
  
7.37
    
0.95
  
to
1.25
    
0.66
    
to
0.96
  
2006
  
58,915
    
32.4431
to
  
34.6488
    
2,010,477
  
8.26
    
0.95
  
to
1.25
    
9.03
    
to
9.36
  
2005
  
69,583
    
29.6673
to
  
31.7782
    
2,176,899
  
8.84
    
0.95
  
to
1.25
    
0.94
    
to
1.23
  
2004
  
103,758
    
29.3054
to
  
31.4835
    
3,226,284
  
7.64
    
0.95
  
to
1.30
    
8.19
    
to
8.51
  
MMS
                                                      
2008
  
63,564
    
18.6228
to
  
19.7213
    
1,234,679
  
2.10
    
0.95
%
to
1.25
    
0.77
    
to
1.07
  
2007
  
85,399
    
18.4249
to
  
19.5699
    
1,628,997
  
4.74
    
0.95
  
to
1.25
    
3.55
    
to
3.86
  
2006
  
66,315
    
17.7405
to
  
18.8993
    
1,234,421
  
4.44
    
0.95
  
to
1.25
    
3.31
    
to
3.61
  
2005
  
68,774
    
17.1219
to
  
18.2944
    
1,239,174
  
2.65
    
0.95
  
to
1.25
    
1.46
    
to
1.76
  
2004
  
90,347
    
16.8265
to
  
18.0320
    
1,591,249
  
0.78
    
0.95
  
to
1.30
    
(0.42
)
  
to
(0.13
)
MFB
                                                      
2008
  
19,903
    
27.7845
to
  
28.5900
    
565,163
  
5.73
    
1.10
  
to
1.25
    
(11.14
)
  
to
(10.87
)
2007
  
20,686
    
26.9691
to
  
32.1262
    
659,934
  
5.44
    
1.10
  
to
1.25
    
2.26
    
to
2.57
  
2006
  
20,603
    
26.2933
to
  
31.3680
    
641,247
  
5.37
    
1.10
  
to
1.25
    
3.65
    
to
3.96
  
2005
  
19,801
    
25.2919
to
  
30.2181
    
594,001
  
6.00
    
1.10
  
to
1.25
    
0.46
    
to
0.76
  
2004
  
20,541
    
25.1007
to
  
30.0340
    
699,298
  
6.07
    
0.95
  
to
1.30
    
4.77
    
to
5.09
  
MIG
                                                      
2008
  
30,071
    
39.2132
to
  
44.0646
    
1,198,469
  
0.48
    
1.10
  
to
1.25
    
(37.74
)
  
to
(37.55
)
2007
  
32,823
    
62.9800
to
  
70.6664
    
2,097,060
  
0.42
    
1.10
  
to
1.25
    
10.12
    
to
10.45
  
2006
  
25,174
    
33.4880
to
  
64.0760
    
1,454,930
  
-
    
0.95
  
to
1.25
    
6.15
    
to
6.47
  
2005
  
32,818
    
31.4536
to
  
60.2726
    
1,784,547
  
-
    
0.95
  
to
1.25
    
2.60
    
to
2.91
  
2004
  
42,959
    
30.5644
to
  
58.6556
    
2,274,881
  
0.37
    
0.95
  
to
1.30
    
8.27
    
to
8.60
  
MIT
                                                      
2008
  
63,738
    
31.2493
to
  
41.5672
    
2,614,534
  
1.25
    
0.95
  
to
1.25
    
(33.62
)
  
to
(33.42
)
2007
  
80,003
    
46.9340
to
  
62.5240
    
4,933,758
  
0.51
    
0.95
  
to
1.25
    
9.19
    
to
9.51
  
2006
  
99,851
    
42.8570
to
  
57.1781
    
5,618,272
  
0.82
    
0.95
  
to
1.25
    
11.81
    
to
12.14
  
2005
  
119,525
    
38.2182
to
  
51.0648
    
6,005,770
  
0.37
    
0.95
  
to
1.25
    
5.97
    
to
6.29
  
2004
  
131,432
    
35.9581
to
  
48.1162
    
6,105,974
  
0.91
    
0.95
  
to
1.30
    
10.13
    
to
10.46
  




 
 
 


SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
(A Separate Account of Sun Life Assurance Company of Canada (U.S.))


8. FINANCIAL HIGHLIGHTS (CONTINUED)

   
At December 31
  
For year ended December 31
                         
Investment
                          
       
Unit Value
        
Income
  
Expense Ratio
  
Total Return
   
Units
  
Lowest to Highest
  
Net Assets
  
Ratio1
  
Lowest to Highest2
  
Lowest to Highest3
MTR
                                                      
2008
  
34,861
  
$
32.6212
to
  
45.3302
  
$
1,558,670
  
2.89
%
  
0.95
%
to
1.25
%
  
(23.59
)%
  
to
(23.36
)%
2007
  
51,112
    
42.5656
to
  
59.3254
    
3,002,902
  
2.57
    
0.95
  
to
1.25
    
3.67
    
to
3.98
  
2006
  
77,976
    
40.9371
to
  
57.2261
    
4,400,994
  
2.72
    
0.95
  
to
1.25
    
10.40
    
to
10.72
  
2005
  
94,401
    
36.9720
to
  
51.8365
    
4,834,358
  
2.66
    
0.95
  
to
1.25
    
2.02
    
to
2.32
  
2004
  
115,212
    
36.1320
to
  
50.8089
    
5,625,796
  
2.47
    
0.95
  
to
1.30
    
10.00
    
to
10.33
  


1 Represents the dividends, excluding distributions of capital gains, received by the Sub-Account from the underlying mutual fund, net of management fees assessed by the fund manager, divided by the average net assets. The ratio excludes 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 fund in which the Sub-Accounts invest.

2 Ratio represents the annualized contract expenses of the Sub-Account, consisting primarily of mortality and expense charges. The ratio includes 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 Ratio represents the total return for the year indicated and reflects a deduction only for expenses assessed through the daily unit value calculation.  The total return does not include any expenses assessed through the redemption of units; inclusion of these expenses in the calculation would result in reduction in the total return presented.  The total return is calculated for the year indicated.

9. TAX DIVERSIFICATION REQUIREMENTS

Under the provisions of Section 817(h) of 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 in 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.




 
 
 

PART C
OTHER INFORMATION

Item 24. FINANCIAL STATEMENTS AND EXHIBITS

 
(a)
The following Financial Statements are included in the Registration Statement:
     
   
A.
Condensed Financial Information – Accumulation Unit Values (Part A)
       
   
B.
Financial Statements of the Depositor (Part B)
       
     
Audited:
       
     
1.
Consolidated Statements of Income, Years Ended December 31, 2008, 2007 and 2006;
     
2.
Consolidated Balance Sheets, December 31, 2008 and 2007,
     
3.
Consolidated Statements of Comprehensive Income, Years Ended December 31, 2008, 2007 and 2006;
     
4.
Consolidated Statements of Stockholder's Equity, years Ended December 31, 2008, 2007 and 2006;
     
5.
Consolidated Statements of Cash Flows, Years Ended December 31, 2008, 2007 and 2006;
     
6.
Notes to Consolidated Financial Statements; and
     
7.
Report of Independent Registered Public Accounting Firm
         
   
C.
Financial Statements of the Registrant (Part B)
       
     
1.
Statement of Assets and Liabilities, December 31, 2008;
     
2.
Statement of Operations, Year Ended December 31, 2008;
     
3.
Statement of Charges in Net Assets, Years Ended December 31, 2008 and December 31, 2007;
     
4.
Notes to Financial Statements; and
     
5.
Report of Independent Registered Public Accounting Firm

 
(b)
The following Exhibits are incorporated in the Registration Statement by reference unless otherwise indicated:

 
(1)
Resolution of Board of Directors of the depositor dated March 31, 1982 authorizing the establishment of the Registrant (Incorporated herein by reference to Post-Effective Amendment No. 16 to the Registration Statement on Form N-4, File No. 2-99958, filed on April 17, 1998);
     
 
(2)
Not Applicable;
     
 
(3)(a)
Marketing Services Agreement between the depositor, Sun Life of Canada (U.S.) Distributors, Inc., and Clarendon Insurance Agency, Inc. (Incorporated herein 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 January 16, 1998);
     
 
(3)(b)(i)
Principal Underwriter’s Agreement by and between Sun Life Assurance Company of Canada (U.S.) and Clarendon Insurance Agency, Inc. (Incorporated herein by reference to Post-Effective Amendment No. 16 to the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4 (File No. 333-83364) filed on or about April 27, 2009);
     
 
(3)(b)(ii)
Amendment to Principal Underwriter’s Agreement by and between Sun Life Assurance Company of Canada (U.S.) and Clarendon Insurance Agency, Inc. (Incorporated herein by reference to Post-Effective Amendment No. 16 to the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4 (File No. 333-83364) filed on or about April 27, 2009);
     
 
(3)(c)(i)
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 January 16, 1998);
     
 
(3)(c)(ii)
Specimen Broker-Dealer Supervisory and Service Agreement (Incorporated herein 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 January 16, 1998);
     
 
(3)(c)(iii)
Specimen 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 January 16, 1998);
     
 
(4)
Specimen Flexible Payment Deferred Combination Variable and Fixed Group Annuity Contract (Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Registration Statement Sun Life of Canada (U.S.) Variable Account F on Form N-4, File No. 333-37907, filed on January 16, 1998);
     
 
(5)
Specimen Application used with the annuity contract filed as Exhibit (4) (Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Registration Statement Sun Life of Canada (U.S.) Variable Account F on Form N-4, File No. 333-37907, filed on January 16, 1998);
     
 
(6)
Certificate of Incorporation and By-laws of the Depositor (Incorporated herein by reference to the Depositor's Annual Report on Form 10-K, File No. 333-82824, filed on March 29, 2004);
     
 
(7)
Not Applicable;
     
 
(8)
Amended and Restated Participation Agreement by and among MFS/Sun Life Services Trust, Sun Life Assurance Company of Canada (U.S.), Sun Life Insurance and Annuity Company of New York, and Massachusetts Financial Services Company (Incorporated herein by reference to Post-Effective Amendment No. 3 to the Registration Statement of Sun Life (N.Y.) Variable Account C on Form N-4, File No. 333-107983, filed on May 28, 2004);
     
 
(9)
Opinion and Consent of Counsel as to legality of securities being registered and Consent to its use (Incorporated herein by reference to Post-Effective Amendment No. 24 to the Registration Statement on Form N-4, File No. 002-99958, filed on May 2, 2005);
     
 
(10)(a)
Consent of Independent Registered Public Accounting Firm;*
     
 
(10)(b)
Representation of Counsel pursuant to Rule 485(b);*
     
 
(11)
Financial Statement Schedules I and VI (Incorporated herein by reference to the Depositor's Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed on March 30, 2009);
     
 
(12)
Not Applicable;
     
 
(13)
Not Applicable;
     
 
(14)
Not Applicable;
     
 
(15)(a)
Powers of Attorney;*
     
 
(15)(b)
Resolution of the Board of Directors of the depositor dated March 26, 2008, authorizing the use of powers of attorney for Officer signatures (Incorporated herein by reference to Post-Effective Amendment No. 32 to the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4, File No. 333-112506, filed on February 27, 2009);
     
 
(16)
Organizational Chart (Incorporated herein by reference to Post-Effective Amendment No. 32 to the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4, File No. 333-83516, filed on February 27, 2009).

* Filed herewith

Item 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR

Name and Principal
Business Address*
Positions and Offices
With Depositor

Jon A. Boscia
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park
Wellesley Hills, MA 02481
Director and Chairman
Scott M. Davis
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park
Wellesley Hills, MA  02481
Senior Vice President and General Counsel and
Director
Ronald H. Friesen
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park
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
Toronto, Ontario Canada  M5H 1J9
Director
Terrence J. Mullen
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park
Wellesley Hills, MA  02481
Director
Westley V. Thompson
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park
Wellesley Hills, MA 02481
President, SLF U.S., and Director
James M.A. Anderson
Sun Life Assurance Company of Canada
150 King Street West
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
Wellesley Hills, MA 02481
Assistant Vice President and Senior Counsel and
Secretary
Priscilla S. Brown
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park
Wellesley Hills, MA 02481
Senior Vice President and Head of U.S. Marketing
Keith Gubbay
Sun Life Assurance Company of Canada  (U.S.)
One Sun Life Executive Park
Wellesley Hills, MA  02481
Senior Vice President and Chief Actuary
Maura E. Slattery Machold
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park
Wellesley Hills, MA 02481
Vice President, Human Resources
Janet Whitehouse
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park
Wellesley Hills, MA  02481
Senior Vice President and General Manager,
Individual Life Insurance
John R. Wright
Sun Life Assurance Company of Canada (U.S.)
One Sun Life Executive Park
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 Inc.

The organization chart of Sun Life Financial is incorporated by reference to Post-Effective Amendment No. 32 to the Registration Statement on Form N-4 of Sun Life of Canada (U.S.) Variable Account F, File No. 333-83516, filed February 27, 2009.

None of the companies listed in such Exhibit 16 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:

As of March 31, 2009 there were 4,545 qualified and 67 non-qualified Contracts issued by the Registrant.

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.), as amended March 19, 2004 (a copy of which was filed as Exhibit 3.2 to Depositor’s Form 10-K, File No. 333-82824, filed on March 29, 2004) provides for the indemnification of directors, officers and employees of Sun Life Assurance Company of Canada (U.S.).

Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of Sun Life Assurance Company of Canada (U.S.) pursuant to the certificate of incorporation, by-laws, or otherwise, Sun Life (U.S.) has been 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, 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, unless in the opinion of their counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by them is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

Item 29. PRINCIPAL UNDERWRITERS

(a) Clarendon Insurance Agency, Inc., 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, E, F, G, I, and K, Keyport Variable Account A, 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, 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.

Name and Principal
Position and Offices
Business Address*
with Underwriter
   
James J. Cahill
President
Scott M. Davis
Director
Ronald H. Friesen
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

(b) Inapplicable.

Item 30. LOCATION OF ACCOUNTS AND RECORDS

Accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 and the Rules promulgated thereunder are maintained by Sun Life Assurance Company of Canada (U.S.), in whole or in part, at its executive office at One Sun Life Executive Park, Wellesley Hills, Massachusetts 02481, or at the offices of Clarendon Insurance Agency, Inc., One Sun Life Executive Park, 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 Contract, 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 the 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 of Securities Act Rule 485(b) for effectiveness of this Post-Effective Amendment to the Registration Statement and has caused this Post-Effective Amendment to the Registration Statement to be signed on its behalf, in the Town of Wellesley Hills, and Commonwealth of Massachusetts on this 27th day of April, 2009.

 
SUN LIFE OF CANADA (U.S.) VARIABLE ACCOUNT D
 
(Registrant)
   
 
SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
 
(Depositor)
   
 
By: /s/ Westley V. Thompson*
 
Westley V. Thompson
 
President, SLF U.S.


*By:
/s/ Sandra M. DaDalt
 
Sandra M. DaDalt
 
Assistant Vice President and Senior Counsel

As required by the Securities Act of 1933, this Post-Effective Amendment to the Registration Statement has been signed by the following persons in the capacities with the Depositor, Sun Life Assurance Company of Canada (U.S.), and on the dates indicated.

SIGNATURE
TITLE
DATE
     
     
/s/ Westley V. Thompson*
President, SLF U.S. and Director
April 27, 2009
Westley V. Thompson
(Principal Executive Officer)
  
     
     
/s/ Ronald H. Friesen*
Senior Vice President and Chief Financial Officer
April 27, 2009
Ronald H. Friesen
and Treasurer and Director
  
 
(Principal Financial Officer)
  
     
     
/s/ Douglas C. Miller*
Vice President and Controller
April 27, 2009
Douglas C. Miller
(Principal Accounting Officer)
  
     
     
*By: /s/ Sandra M. DaDalt
Attorney-in-Fact for:
April 27, 2009
Sandra M. DaDalt
Jon A. Boscia, Director
  
 
Scott M. Davis, Director
  
 
Richard P. McKenney, Director
  
 
Terrence J. Mullen, 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 Post-Effective Amendment No. 32 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 27, 2009. Powers of attorney are included as Exhibit 15(a).



 
 
 

EXHIBIT INDEX


   
   
10(a)
Consent of Independent Registered Public Accounting Firm
   
10(b)
Representation of Counsel pursuant to Rule 485(b)
   
15(a)
Powers of Attorney