10-K 1 slus10k.htm FORM 10-K slus10k.htm
 
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended
December 31, 2011
Commission File Numbers: 2-99959, 33-29851, 33-31711, 33-41858, 33-43008, 33-58853, 333-11699, 333-77041, 333-62837, 333-45923, 333-88069, 333-39306, 333-46566, 333-82816, 333-82824, 333-111636, 333-130699, 333-130703, 333-130704, 333-133684, 333-133685, 333-133686, 333-39034, 333-144903-01, 333-144908-01, 333-144911-01, 333-144912-01, 333-155716, 333-155726, 333-155791, 333-155792, 333-155793, 333-155797, 333-156303, 333-156304, 333-156308, 333-160605, 333-160606, 333-160607, 333-169558-01, 333-169559-01, 333-169560-01, and 333-169561-01

SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(Exact name of registrant as specified in its charter)

Delaware
04-2461439
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)

One Sun Life Executive Park, Wellesley Hills, MA
02481
(Address of principal executive offices)
(Zip Code)

(781) 237-6030
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
None
(Title of Class)

Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  £Yes   RNo

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  £Yes   RNo

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  RYes   £No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  þ Yes   ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  R

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer £
Accelerated filer £
Non-accelerated filer R
Smaller Reporting Company £

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  £Yes   RNo

Registrant has no voting or non-voting common equity outstanding held by non-affiliates.

Registrant has 6,437 shares of common stock outstanding as of March 29, 2012, all of which are owned by Sun Life of Canada (U.S.) Holdings, Inc.

THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION I(1)(a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT PERMITTED BY INSTRUCTION I(2).



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2011


Part I
  
Page
       
Item 1.
3
  
       
Item 1A.
6
  
       
Item 1B.
15
  
       
Item 2.
15
  
       
Item 3.
15
  
       
Item 4.
15
  
       
Part II
      
       
Item 5.
16
  
       
Item 6.
16
  
       
Item 7.
16
  
       
Item 7A.
36
  
       
Item 8.
39
  
       
Item 9.
145
  
       
Item 9A.
145
  
       
Item 9B.
146
  
       
Part III
      
       
Item 10.
146
  
       
Item 11.
146
  
       
Item 12.
146
  
       
Item 13.
146
  
       
Item 14.
146
  
       
       
Part IV
      
       
Item 15.
149
  
       



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

PART I

Sun Life Assurance Company of Canada (U.S.) (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”) which in turn is wholly-owned by 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.”

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 business of the Company and its subsidiaries includes a variety of wealth accumulation products, protection products and institutional investment contracts.  These products include individual and group fixed and variable annuities, individual and group variable life insurance, individual universal life insurance, group life, group disability, group dental and group stop loss insurance and funding agreements.

On December 12, 2011, SLF announced the completion of a major strategic review of its businesses.  As a result of this strategic review, SLF announced that it would close its domestic U.S. variable annuity and individual life products to new sales effective December 30, 2011.  The decision to discontinue sales in these lines of business is based on unfavorable product economics which, due to ongoing shifts in capital markets and regulatory requirements, no longer enhance shareholder value.  This decision reflects SLF’s intensified focus on reducing volatility and improving the return on shareholders’ equity by shifting capital to businesses with superior growth, risk and return characteristics.

Existing legal, business and contractual requirements call for the Company to, among other things, continue accepting limited applications for (1) certain private placement variable annuities until mid-2012, and (2) new employees of corporate-owned life insurance (“COLI”) customers.  Subject to these and other existing obligations, the Company has ceased writing all other COLI new business effective January 31, 2012 and all other individual life and annuities new business effective December 31, 2011.  The Company, through its subsidiary, SLNY, will continue to offer group life, group disability, group dental and group stop loss insurance.

The decision to stop selling variable annuity and individual life products in the U.S. will not impact existing customers and their policies.  The Company will continue to provide quality service to its policyholders, while focusing on the profitability, capital efficiency and risk management of its in-force business.  The Company will continue to earn revenue and to provide policyholder benefits on its in-force business.

Of the one-time restructuring costs on a pre-tax basis associated with the discontinuation of these products lines in the U.S., $12.7 million was allocated to the Company.  The restructuring costs related primarily to employee severance and other employee benefits, which are expected to be paid in the form of future cash expenditures, as well as other costs.

Effective December 31, 2009, the Company transferred to Sun Life Financial (U.S.) Services Company, Inc. (“Sun Life Services”), an affiliate, all employee benefit related assets and liabilities, certain fixed assets and software, and all of its employees, with the exception of 28 employees who were transferred to Sun Life Financial Distributors, Inc. (“SLFD”), another affiliate.  Concurrent with this transaction, Sun Life Services assumed the sponsorship of the Company’s retirement and other employee benefit plans.  The impact of this transaction on the Company’s consolidated financial statements is described in Note 3 of the Company’s consolidated financial statements included in Part II, Item 8 of this annual report on Form 10-K.

On December 31, 2009, the Company paid a dividend of all of the issued and outstanding common stock of the Company’s wholly-owned subsidiary, Sun Life Financial (U.S.) Reinsurance Company (“Sun Life Vermont”), to the Parent.  As a result of this transaction, Sun Life Vermont is no longer the Company’s wholly-owned subsidiary and was not included in the Company’s consolidated balance sheet at December 31, 2009.  The full impact of this transaction on the Company’s financial statements is described in Notes 1 and 2 of the Company’s consolidated financial statements included in Part II, Item 8 of this annual report on Form 10-K.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Reinsurance

In the normal course of business, the Company and its subsidiaries reinsure portions of its life insurance, annuity and disability income exposure with both affiliated and unaffiliated companies using traditional indemnity reinsurance agreements.  The Company also reinsures, on a stop-loss basis with unaffiliated companies, the excess minimum death benefit exposure with respect to a portion of the Company’s variable annuity business.  The Company, as the ceding company, remains responsible for that portion of the policies reinsured under each of its existing agreements in the event the reinsurance companies are unable to pay their portion of any reinsured claim.  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.  The Company assumes certain risks for certain group insurance contracts from an affiliate.  The Company also assumes certain risks for certain fixed annuity contracts from an unrelated company.

Reserves

The Company has established and reported liabilities for future contract and policy benefits in accordance with generally accepted accounting principles in the United States of America (“GAAP”) in order to meet its obligations on its outstanding contracts.  Liabilities for variable annuity contracts, variable life insurance and variable universal life insurance policies are considered separate account liabilities and are carried at fair value (the policyholder bears the investment risk).  Liabilities for death benefit and income benefit guarantees provided under variable annuity contracts are considered general account liabilities and are held at an actuarially determined value, equal to a benefit ratio multiplied by the cumulative contract charges earned, plus accrued interest, less contract benefit payments.  Universal life policies, deferred fixed annuity contracts, and funding agreements are classified as general account liabilities, and are carried at account value (the Company bears the investment risk).  Account values of the contracts include deposits plus credited interest, less expenses, mortality fees and withdrawals.  Reserves for individual life, group life, individual payout annuity, group payout annuity, group disability, group dental and group stop loss contracts are based on mortality and morbidity tables in general use in the United States and are computed to equal amounts that, with additions from premiums to be received, and with interest on such reserves compounded annually at assumed rates, will be sufficient to meet the Company’s policy obligations.

Investments

The Company’s consolidated total assets were $48.2 billion at December 31, 2011; 57.0% consisted of separate account assets, 24.2% were invested in bonds and similar securities, 3.5% in mortgage loans and real estate, 1.3% in policy loans, and the remaining 14.0% in cash and other assets.

Competition

The Company is engaged in a business that is highly competitive because of the large number of stock and mutual life insurance companies and other entities marketing insurance products.  Refer to Item 1A for explanation of the risk factors relating to the Company’s competitors.

A.M. Best Company, Inc. has assigned the Company and its subsidiary, SLNY, a financial strength rating of A+ (Superior) with a Stable outlook.  Moody’s Investor Service, Inc. has assigned the Company a financial strength rating of A3 with a Negative outlook.  Fitch Ratings has assigned a financial strength rating of A- (High Credit Quality) with a Negative outlook to SLF and its U.S. life insurance subsidiaries, which include the Company and SLNY.  Standard & Poor’s has assigned the Company and SLNY each a financial strength rating of BBB+ with a Stable outlook.  Refer to Item 1A for further details about the Company’s ratings.

Employees

Effective December 31, 2009, the Company transferred all of its employees to Sun Life Services, with the exception of 28 employees who were transferred to SLFD.

Effective December 31, 2009, the Company and Sun Life Services entered into an administrative services agreement, under which Sun Life Services provides human resources services (e.g., recruiting and maintaining appropriately trained and qualified personnel and equipment necessary for the performance of actuarial, financial, legal, administrative, and other operational support functions) to the Company.  Pursuant to this agreement, the Company reimburses Sun Life Services for the cost of such services, plus an arms-length based profit margin to be agreed upon by the parties.

Prior to December 31, 2009, the Company and Sun Life Assurance Company of Canada (“SLOC”), an affiliate, had an administrative services agreement under which the Company provided to SLOC personnel and similar services as those noted above.  The Company was reimbursed for the cost of these services.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Employees (continued)

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

Regulation and Regulatory Developments

The Company and its insurance subsidiaries are subject to supervision and regulation by the insurance authorities in each jurisdiction in which they transact business.  The laws of the various jurisdictions address such issues as company licensing, overseeing trade practices, licensing agents, approving policy forms, establishing reserve requirements, establishing 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 amount of permitted investments.  On or before March 1st each year, the Company and its insurance subsidiaries file annual statements relating to their operations for the preceding year and their financial position at the end of such year with state insurance regulatory authorities in each jurisdiction where they are licensed.

The annual statements include financial statements and exhibits prepared in conformity with statutory accounting principles, which differ from GAAP.  The laws of the respective state insurance departments require that insurance companies domiciled in the respective state prepare their statutory financial statements in accordance with the National Association of Insurance Commissioners (the “NAIC’”) Accounting Practices and Procedures Manual, version effective March 2011, subject to any deviation prescribed or permitted by the Insurance Commissioner of the respective state.  The books and records of the Company and its insurance subsidiaries are subject to review or examination by their respective state departments of insurance at any time. Examination of their operations is conducted at periodic intervals.

Many states also regulate affiliated groups of insurers, such as the Company and SLOC, under insurance holding company laws.  Under such laws, inter-company transfers of assets and dividend payments involving an insurance company and one or more of its affiliates, among other things, 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 all states, insurers doing business in a given state can be assessed (up to prescribed limits) for policyholder losses incurred by another insolvent insurance company in that state.  However, most of these laws provide that an assessment may be waived or deferred if it would threaten an insurer’s own financial strength and many also permit the deduction of all or a portion of any such assessment from any future premium or similar taxes.  During the twelve month-period ended December 31, 2011, the Company recorded a $9.3 million accrual for guaranteed fund assessment.

The Company's variable annuity contracts and variable life insurance policies are subject to various levels of regulation under federal securities laws administered by the U.S. Securities and Exchange Commission (the “SEC”) and under certain state securities laws. Although the U.S. federal government does not directly regulate the insurance business, federal legislation and administrative policies in several areas affect the insurance business, including pension regulation, age and sex discrimination, investment company regulation, financial services regulation and federal taxation.  For example, the U.S. Congress has, from time to time, considered legislation related to the deferral of taxation on the accretion of value within certain annuities and life insurance products, limitations on antitrust immunity, the alteration of the federal income tax structure and the availability of 401(k) or individual retirement accounts.

Federal financial services reform legislation, The Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), was signed into law in July, 2010.  Until further rulemaking and mandated studies occur as required by the legislation, its full impact on the life insurance industry cannot be determined.  However, there are several aspects of the legislation that could adversely affect the Company's operations.

The Dodd-Frank Act mandates the federal regulation of derivatives markets.  It includes requirements for centralized clearing of certain derivatives and establishes new regulatory authority for the SEC and the U.S. Commodity Futures Trading Commission (the “CFTC”) over derivatives.  It is unclear at this time the extent to which the Company will be subject to clearing and margin requirements.  To the extent that the final regulations apply to the Company, the direct and indirect cost of hedging and related activities undertaken by the Company will increase.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Regulation and Regulatory Developments (continued)

The Dodd-Frank Act establishes a new federal council of financial regulators, the Financial Stability Oversight Council (the “Council”), which is charged with identifying risks to the financial stability of the U.S. financial markets, promoting market discipline, and responding to emerging threats to the stability of the U.S. financial markets.  The Council is empowered to make recommendations to primary financial regulatory agencies regarding the application of new or heightened standards and safeguards for financial activities or practices, and certain participation in such activities, that threaten the stability of the U.S. financial markets.  In addition, the Council is authorized to determine whether an insurance company is systematically significant and to recommend that it should be subject to prudential supervision by the Board of Governors of the Federal Reserve System.

The Dodd-Frank Act also establishes a Federal Insurance Office (the “FIO”) in the U.S. Department of Treasury.  While the FIO was not granted general supervisory authority over the insurance industry, it is authorized, among other things, to monitor and collect data on the insurance industry, recommend changes to the state system of insurance regulation to the U.S. Congress, and pre-empt state insurance laws that conflict with certain international agreements relating to the business of insurance or reinsurance to which the U.S. government is a party.

Many of the requirements of the Dodd-Frank Act are subject to further study and most will be subject to implementing regulations over the course of several years.  Accordingly, the outcome of these matters is uncertain and could result in more stringent capital, liquidity and leverage requirements, increased compliance costs, or otherwise adversely affect the Company's business.

In Revenue Ruling 2007-61, issued on September 25, 2007, the Internal Revenue Service (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.  On May 30, 2010, the IRS issued an Industry Director Directive which makes it clear that IRS interpretations prior to Revenue Ruling 2007-54 should be followed until new regulations are issued. 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, 2011 and 2010, the Company recorded tax benefits of $14.8 million and $11.5 million, respectively, related to the separate account DRD.


The following risk factors are applicable to the Company.  These risk factors could have a significant or material adverse effect on the business, financial condition, operating results or liquidity of the Company.  Further discussion of the risk factors relating to the Company’s businesses, and the accounting and actuarial assumptions and estimates used by the Company in the preparation of its financial statements, is included in Part II, Items 7, 7A and 8 of this annual report on Form 10-K.

Credit Risk

Credit risk is the uncertainty of receiving amounts the Company is owed from its financial counterparties.  The Company is subject to credit risk arising from issuers of securities held in its investment portfolio, including structured securities, reinsurers and derivative counterparties.  Losses may occur when a counterparty fails to make timely payments pursuant to the terms of the underlying contractual arrangement or when the counterparty’s credit rating otherwise deteriorates.

Continued volatility in the capital markets, including deteriorating credit, also may have a significant impact on the value of the fixed income assets in the Company’s investment portfolio.  Events that result in defaults, impairments or downgrades of the securities within the investment portfolio could cause the Company to record realized or unrealized losses and increase its provisions for asset default, adversely impacting earnings.

As part of its diversified investment strategy, the Company invests in foreign issued debts, which includes Europe.  The Company has a total exposure of $92.0 million to non-financial issuers from the stressed European Union (“EU”) countries, including Greece, Ireland, Italy, Portugal and Spain.  The Company does not have any exposure to sovereign debts and financial institutions from these EU countries.  Excluding the United Kingdom, the Company also has total exposure to other EU countries of $421.0 million, which includes $5.0 million and $114.0 million in exposure to sovereign debts and financial institutions, respectively.


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Credit Risk (continued)

The Company purchases reinsurance for certain risks underwritten by its Wealth Management, Individual Protection and Group Protection operating segments.  Reinsurance does not relieve the Company of its direct liability to policyholders and accordingly, the Company bears credit risk with respect to its reinsurers.  Although the Company deals primarily with affiliates and highly-rated external reinsurers, a deterioration in their credit ratings or their insolvency or inability or unwillingness to make payments under the terms of their reinsurance agreement could have an adverse effect on the Company’s profitability and financial position.

Equity Market Risk

Equity risk is the potential for financial loss arising from price changes or volatility in equity markets.  It arises when the market value of assets and liabilities change due to equity market movements, without being offset elsewhere.

Equity market price declines and/or volatility impact both assets and liabilities and, hence, could have an adverse effect on the Company’s business, profitability and capital requirements in several ways.
 
 
The Company derives a portion of its revenue from fee income generated by its insurance and annuity contracts where fee income is levied on account balances that directionally move in line with general equity market levels.  Fee income is assessed as a percentage of assets under management and, therefore, varies directly with the value of such assets.  Adverse fluctuations in the market value of such assets would result in corresponding adverse impacts on the Company’s revenue and net income.  In addition, declining and volatile equity markets may have a negative impact on sales and redemptions (surrenders), resulting in further adverse impacts on the Company’s profitability and financial position.

Various insurance and annuity products contain guarantees which may be triggered upon death, maturity, withdrawal or annuitization, depending on the market performance of the underlying funds.  For example, the Company offers variable annuities with guaranteed minimum death benefits and guaranteed minimum accumulation or withdrawal benefits.  The cost of providing for these guarantees increases under volatile and declining equity market conditions, resulting in negative impacts on net income and capital.  The impact of volatile and declining equity markets could result in the acceleration of the Company’s recognition of certain acquisition expenses, resulting in negative impacts on the Company’s net income.

Real Estate and Private Equity Investment Risk

Real estate risk is the risk of financial loss arising from ownership of, or loans on, real estate property.  Real estate risk may arise from external market conditions, inadequate property analysis, inadequate insurance coverage, inappropriate real estate appraisals, credit of borrowers, or environmental risk exposures.  The timing and amount of income derived from private equity investments is difficult to predict, and therefore investment income from these investments can vary from quarter to quarter.  Fluctuations in the value of these asset types also could adversely impact the Company’s profitability and financial position.

Interest Rate Risk

Interest rate risk is the potential for financial loss arising from changes or volatility in interest rates, including credit spreads, when asset and liability cash flows do not coincide.

Significant changes or volatility in interest rates and credit spreads could have a negative impact on certain of the Company’s insurance and annuity products, and adversely impact the expected pattern of redemptions (surrenders) on existing policies.  Rapid increases in interest rates and/or widening credit spreads may increase the risk that policyholders will surrender their contracts, forcing the Company to liquidate investment assets at a loss and accelerate recognition of certain acquisition expenses.  While the Company’s insurance and annuity products often contain surrender mitigation features, these may not be sufficient to fully offset the adverse impact of the underlying losses on asset sales.  Conversely, rapid declines in interest rates and/or narrowing credit spreads may result in increased asset calls, mortgage prepayments and net reinvestment of positive cash flows at lower yields.  Any of the events outlined above may have an adverse impact on the Company’s profitability and financial position.

Lower interest rates and/or narrowing credit spreads also can cause compression of the net spread between interest earned on the Company’s investments and interest credited to policyholders.  As well, certain products have explicit or implicit interest rate guarantees (in the form of settlement options, minimum guaranteed crediting rates or guaranteed premium rates) and, if investment returns fall below those guarantee levels, the Company may be required to accelerate recognition of certain acquisition expenses and increase actuarial liabilities, negatively affecting the Company’s net income and capital.


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Interest Rate Risk (continued)

A sustained low interest rate environment may adversely impact primary demand for a number of the Company’s core insurance and annuity offerings, requiring a significant repositioning of its product portfolio.  This may contribute to adverse developments in the Company’s revenues and cost trends and, hence, overall profitability.

Widening of credit spreads may have a material impact on the value of fixed income assets, resulting in further depressed market values.  A decrease in the market value of assets due to credit spread widening may lead to losses in the event of the liquidation of assets prior to maturity.  In contrast, credit spread tightening may result in reduced investment income on new purchases of fixed income assets.

The Company also has direct exposure to interest rates and credit spreads from investments supporting other general account liabilities (without interest guarantees).  Lower interest rates and narrowing credit spreads could result in reduced investment income on new fixed income asset purchases.  Conversely, higher interest rates and wider credit spreads could reduce the value of the Company’s existing assets.

The Company uses derivative instruments to reduce its exposure to interest rate risk.  The general availability and cost of these instruments may be adversely impacted by changes in interest rate levels.  In addition, these derivative instruments may themselves expose the Company to other risks such as basis risk (the risk that the derivatives do not exactly replicate the underlying exposure), derivative counterparty credit risk (see Credit Risk section above), model risk and other operational risks.  These factors may adversely impact the net effectiveness, costs and financial viability of maintaining these derivative instruments and therefore adversely impact the Company’s profitability and financial position.

Liquidity Risk

Liquidity risk is the risk of not having sufficient cash available to fund all commitments as they become due.  This includes the risk of being forced to sell assets at depressed prices resulting in realized losses on sale.  The Company’s funding obligations arise in connection with the payment of policyholder benefits, expenses, asset purchases, investment commitments and interest on debt.  The Company’s primary source of funds is cash provided by its operating activities.

Please refer to Part II, Item 7A of this annual report on Form 10-K for further discussion regarding Liquidity Risk.

Capital Adequacy Risk

Capital adequacy risk is the risk that capital is not or will not be sufficient to withstand adverse economic conditions, to maintain financial strength or to allow the Company and its subsidiaries to support ongoing operations and to take advantage of opportunities for expansion.  The Company employs various strategies to manage its capital, including entering into reinsurance transactions with affiliated companies.  The Company may be significantly dependent on SLF and its affiliates to provide additional capital, if required.

Please refer to Part II, Item 7A of this annual report on Form 10-K for further discussion regarding Capital Adequacy Risk.

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. On February 24, 2012, an independent rating agency, Standard and Poor’s, lowered its financial strength ratings of the Company and its subsidiary, SLNY, from A- to BBB+ with a Stable outlook.  On January 26, 2012, another rating agency, Moody’s Investors Service, Inc. announced it had downgraded the insurance financial strength rating of the Company to A3 from Aa3 with a Negative outlook.  On January 20, 2012, Fitch Ratings announced it had downgraded the Company and SLNY from AA- (Very High Credit Quality) to A- (High Credit Quality) with a Negative outlook.  These recent rating actions were based upon SLF’s announcement on December 12, 2011 to close its domestic U.S. variable annuity and individual life products to new sales effective December 30, 2011, as further described in Part I Item 1 of this annual report on Form 10-K.  A.M. Best Company, Inc. has kept the Company’s financial strength rating, A+ (Superior) with a Stable outlook, unchanged during 2011.

A material downgrade in the Company’s financial strength ratings could have an adverse effect on its financial condition and results of operations through loss of sales, higher levels of surrenders, withdrawals and policy terminations, higher reinsurance costs, and termination of derivatives contracts.


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Investment Performance

Investment performance risk is the risk that the Company fails to achieve the desired return objectives on its investment portfolio.  Failure to achieve investment objectives may adversely affect the Company’s investment income on general account investments and thus its overall profitability.

The performance of the Company’s investment portfolio depends in part upon the level of and changes in interest rates, credit spreads, equity prices, real estate values, the performance of the economy in general, the performance of the specific obligors included in the portfolio and other factors that are beyond the Company’s control.  Changes in these factors can adversely affect the Company’s net investment income in any period and such changes could be substantial.

Investment performance, along with achieving and maintaining superior client services, is critical to the success of the Company’s Wealth Management segment.  In addition, poor investment performance by the Company’s Wealth Management segment could adversely affect redemptions and reduce the level of assets under management, potentially adversely impacting the Company’s revenues and profitability.

Mortality and Morbidity

Mortality and morbidity risk is the risk of incurring higher than anticipated mortality and morbidity claim losses.  This risk can arise in connection with an increase in frequency and/or average severity of realized claims.

Mortality and morbidity risk can arise in the normal course of business through random fluctuation in realized experience, through catastrophes, or in association with other risk factors such as product development and pricing or model risk.  Adverse mortality and morbidity experience also could occur through systemic anti-selection, which could arise due to poor plan design, underwriting process failure or through the development of investor-owned and secondary markets for life insurance policies.  The Company is exposed to the catastrophic risk of natural environmental disasters (e.g., earthquakes) and man-made events (e.g., acts of terrorism, military actions, inadvertent introduction of toxic elements into the environment).

These factors could result in a significant increase in mortality and/or morbidity experience above the assumptions used in pricing and valuation of the Company’s products, resulting in a material adverse effect on the Company’s profitability and financial position.

During economic slowdowns, the risk of adverse morbidity experience increases from the impact of the shifting nature of disabilities and cyclical economic outcomes, introducing the potential for adverse financial volatility in the Company’s disability results.

Changes in Legislation and Regulations

The Company is subject to extensive laws and regulations.  These laws and regulations are complex and subject to change.  Moreover, they are administered and enforced by a number of different governmental authorities, including state insurance regulators, state securities administrators, the SEC, and state attorneys general, each of which exercises a degree of interpretive latitude.  Consequently, the Company is subject to the risk that compliance is not sufficient with any particular regulator’s or enforcement authority’s interpretation of the same issue, particularly when compliance is judged in hindsight.  In addition, there is risk that any particular regulator’s or enforcement authority’s interpretation of a legal issue may change over time to the Company’s detriment, or that changes in the overall legal environment, even absent any change of interpretation by any particular regulator or enforcement authority, may cause the Company to change its views regarding the actions management needs to take from a legal risk management perspective.  This could necessitate changes to the Company’s practices that may, in some cases, limit management’s ability to grow and improve the profitability of the Company’s business.

Please refer to Part I, Item 1 of this annual report on Form 10-K for further discussion regarding Regulation and Regulatory Developments.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Legal, Regulatory and Market Conduct Matters

Failure to comply with laws or to conduct the Company’s business consistent with changing regulatory or public expectations could adversely impact the Company’s reputation and may lead to regulatory proceedings, penalties and litigation.  The Company’s business is based on public trust and confidence and any damage to that trust or confidence could cause customers not to buy, or to redeem, the Company’s products.  The Company also faces a significant risk of litigation in the ordinary course of operating its business, including the risk of class action law suits.

Insurance and securities regulatory authorities in certain jurisdictions regularly make inquiries, conduct investigations and administer market conduct examinations with respect to insurers’ compliance with applicable insurance and securities laws and regulations.  These laws and regulations are primarily intended to protect policyholders and generally grant supervisory authorities broad administrative powers.  Changes in these laws and regulations, or in the interpretations thereof, are often made for the benefit of the consumer at the expense of the insurer and thus, could have a material adverse effect on the Company’s business and liquidity.  Compliance with these laws and regulations also is time consuming and personnel-intensive, and changes in these laws and regulations may increase materially the Company’s direct and indirect compliance costs and other expenses of doing business, thus having a material adverse effect on the Company’s business, financial position and results of operations.

Please refer to Part I, Item 1 of this annual report on Form 10-K for further discussion regarding Regulation and Regulatory Developments.

Product Design and Pricing

Product design and pricing risk arises from deviations in assumptions used in the pricing of products as a result of uncertainty concerning future investment yields, mortality and morbidity experience, policyholder behavior, sales levels, mix of business, expenses and taxes.  Although some of the Company’s products permit it to increase premiums or adjust other charges and credits during the life of the policy or contract, the terms of these policies or contracts may not allow for sufficient adjustments to maintain expected profitability.  This could have an adverse effect on the Company’s results of operations.

Products which offer complex features, options and/or guarantees require increasingly complex pricing models, methods and/or assumptions leading to additional levels of uncertainty.  The risk of mis-pricing increases with the number and inherent volatility of assumptions needed to model a product.  Past experience data supplemented with future trend assumptions may be poor predictors of future experience.  Lack of experience data on new products or new customer segments increases the risk that future actual experience will unfold differently from expected assumptions.  External environmental factors may introduce new risk drivers which were unanticipated during the product design stage and have an adverse effect on the financial performance of the product.  Policyholder sophistication and behavior in the future may vary from what was assumed at the time the product was designed, adversely affecting the financial performance of a product.

Reinsurance Markets

As part of its overall risk management strategy, the Company purchases reinsurance for certain risks underwritten by its various insurance businesses.  Reinsurance markets risk is the risk of financial loss due to adverse developments in reinsurance market conditions.  It also includes credit risk in respect of exposures ceded to reinsurance counterparties (see also Credit Risk section above).

Changes in reinsurance market conditions may adversely impact the availability and/or cost of maintaining existing or securing new requisite reinsurance capacity, with adverse impacts on the Company’s profitability.  This also could adversely affect the Company’s willingness and/or ability to maintain certain lines of business in the future.

Reinsurance does not relieve the Company’s insurance businesses of their direct liability to policyholders and accordingly, the Company bears credit risk with respect to its reinsurers.  Although the Company deals primarily with affiliated and highly-rated third-party reinsurers, deterioration in their credit ratings or their insolvency, inability or unwillingness to make payments under the terms of their reinsurance agreement could have an adverse effect on the Company’s profitability and financial position.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Policyholder Behavior

Policy behavior risk is the risk of financial loss due to poor estimation or deterioration in the behavior of policyholders resulting in a higher lapse of policies or exercise of other embedded policy options than originally anticipated in the product design or pricing stage.

Many of the Company’s products include some form of embedded policyholder option.  These could range from simple options relating to surrender/termination to more complex options relating to payment of premiums or embedded options relating to various benefit and coverage provisions.  Changes in the frequency or pattern with which these options are elected (relative to those assumed in the design and pricing of these benefits) could have an adverse impact on the Company’s profitability and financial position.

In addition, the Company’s decision to discontinue the sales of its variable annuity and individual life products, as described in Part I Item 1 of this annual report on Form 10-K, could result in increased surrenders.

Distribution Channels

The inability of the Company to attract and retain intermediaries and agents to distribute the Company’s products could materially impact the Company’s sales and results of operations.

The Company distributes its products through a variety of distribution channels, including brokers, independent agents, broker-dealers, banks, wholesalers and other third-party organizations.  The Company competes with other financial institutions to attract and retain these intermediaries and agents on the basis of its product offerings, compensation, support services and financial position.  The Company’s sales and results of operations could be materially adversely affected if it is unsuccessful in attracting and retaining these intermediaries and agents.

Foreign Currency Exchange Rate Risk

Foreign currency exchange rate risk is the potential for financial loss arising from changes or volatility in foreign currency exchange rates.  It arises from currency mismatches between the Company’s assets and liabilities (inclusive of capital) and from cash flow currency mismatches.  This risk may arise from a variety of sources such as foreign currency transactions and services and investments denominated in foreign currencies.

Please refer to Part II, Item 7A of this annual report on Form 10-K for further discussion regarding Foreign Currency Exchange Risk.

Competition

Competition from financial services companies, including banks, mutual fund companies, financial planners, insurance companies and other providers is intense and could adversely impact the Company’s business.  In addition, the Company’s decision to discontinue the sales of its variable annuity and individual life products, as described in Part I Item 1 of this annual report on Form 10-K, may result in increased competition.

The businesses in which the Company engages are highly competitive, with several factors affecting the Company’s business, including price and yields offered, financial strength ratings, range of product lines and product quality, claims-paying ratings, brand strength and name recognition, investment management performance, historical dividend levels and the ability to provide value-added services to distributors and customers.  In certain markets, some of the Company’s competitors may be superior to the Company on one or more of these factors, such as the strength of distribution arrangements or the ability to offer a broader array of products.

Product development and product life cycles have shortened in many product segments, leading to more intense competition with respect to product features.  This shortened product life cycle increases the Company’s product development and administrative costs and reduces the time frame over which capital expenditures can be recovered.  Regulatory and compliance costs also generally rise with increases in the range and complexity of the Company’s product portfolio.


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Competition (continued)

The Company has many large and well-capitalized competitors with access to significant resources.  Among other things, the competition in these industries throughout the world has resulted in a trend towards the global consolidation of the financial services industry including, in particular, the insurance, banking and investment management sectors.  To the extent that consolidation continues, the Company will increasingly face more competition from large, well-capitalized financial services companies in each jurisdiction in which it operates.  Larger life insurers can sustain profitable growth and provide superior customer service by investing heavily in such fundamental activities as brand equity, product development, technology, risk management and distribution capability.  There can be no assurance that this increasing level of competition will not adversely affect the Company’s businesses.

Many of the Company’s insurance products, particularly those offered by the Group Protection segment, are underwritten annually.  Given this relatively high frequency of renewal activity, this business may be particularly exposed to adverse persistency through market competitive pressures.

Model Risk

Model risk refers to financial or non-financial losses resulting from the use of financial models.  All models are subject to model risk.

The Company makes extensive use of financial models in a wide range of business applications including product development and pricing, capital management, valuation, financial reporting, planning and risk management.

Model risk can arise from many sources including inappropriate methodologies, inappropriate assumptions or parameters, incorrect use of source data, inaccurate or untimely source data, incorrect application and operator errors.  Increasing product complexity due to new features and regulatory expectations is driving more complex models, which may increase the risk of error.  If assumptions are erroneous, or data or calculation errors occur in the models, this could result in a negative impact on the Company’s results of operations and financial position.

Many of the Company’s methods and models for managing risk and exposures are based upon the use of observed historical precedent for financial market behavior, credit experience and insurance risks.  As a result, these methods may not fully predict future risk exposures, which could be significantly greater than the Company’s historical measures indicate.  Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophic occurrence or other matters that are publicly available or otherwise accessible to the Company; however, this information may not always be accurate, complete, current properly evaluated or necessarily indicative of ultimate realized experience.

Longevity

Longevity Risk is the potential for economic loss, accounting loss or volatility in earnings arising from unpredictable mortality improvement, such as a major medical breakthrough extending the human life span.  Longevity risk affects contracts where benefits are based upon the likelihood of survival, such as annuities or pensions.

Many of the Company’s Wealth Management products provide benefits over the policyholder’s lifetime.  Higher than expected ongoing improvements in human life expectancy could therefore increase the ultimate cost of providing these benefits, thereby requiring a strengthening in policyholder liabilities and resulting in reductions in the Company’s net income and capital.




SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Business Continuity

The Company’s businesses are dependent on operational processes and computer and Internet-enabled technology.  This reliance exposes the Company to disruption of its systems by power or other utility outages, fires, floods, severe storms, terrorism and other man-made attacks, natural disasters and other events.  In addition to system disruption, such unanticipated events also can directly affect staff, preventing them from getting to work or from operating business processes.

Although the Company has implemented and periodically tests its business continuity, crisis management and disaster recovery plans, a sustained failure of one or more of the Company’s key business processes or systems could materially and adversely impact the Company’s business and operations and its employees.  In addition, because some of the Company’s business processes are performed by third parties and some of the Company’s systems interface with and are dependent on third-party systems, the Company could experience service interruptions if third-party operations or systems fail or experience interruptions.

Information System Security and Privacy/ System and Control Failure

A serious security breach of the Company’s systems or the information stored, processed or transmitted on these systems could damage the Company’s reputation or result in liability.  The Company may be vulnerable to physical break-ins, computer viruses and other types of malicious software, cyber-attacks, system break-ins by hackers, programming and/or human errors, fraud or similar disruptive problems.  There also is a risk that certain internal controls could fail due to human or system error, which could create and/or exacerbate the consequences from such events.  Such events could have an adverse effect on the Company’s results of operations and reputation.

The Company retains data used for business transactions and financial reporting, as well as personal information about its customers in its computer and other record retention systems.  It also provides customers with on-line access to certain products and services.  Although the Company has implemented extensive security measures to safeguard the confidentiality, integrity and availability of information, it is not possible to fully eliminate security and privacy risk.

The Company periodically needs to update or change its systems to meet business needs.  Although every reasonable precaution is taken to ensure these changes succeed, it is not possible to fully eliminate the risk of business disruption.  Some of these changes or upgrades are extremely complex and there is a chance that an undetected technical flaw may be present that, when implemented, stops or disrupts the Company’s critical information technology systems or business applications.

Dependence on Third-Party Relationships

Dependence on third-party relationships is the risk that third-parties (e.g., key service providers, entities to which the Company has outsourced certain functions) do not provide the contracted service at the cost and quality levels expected.

The Company contracts for services with a wide range of third-party service providers and has outsourced certain business and information technology functions to third parties in various jurisdictions.  An interruption in the Company’s continuing relationship with certain third parties, the impairment of their reputation or creditworthiness, or their failure to provide contracted services could materially and adversely affect the Company’s ability to market or service its products.  There can be no assurance that the Company would be able to find alternate sources for these outsourcing arrangements in a timely manner.




SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Attracting and Retaining Talent

Attracting, retaining and maintaining the engagement of qualified employees, including executives, sales representatives and employees with business critical skills is challenging in the current economic environment.  The Company’s ability to achieve its business objectives, including operational, financial and growth goals could be adversely affected if Sun Life Services is unable to attract, retain and engage qualified employees, sales representatives and executives.

Environmental Risk

Environmental risk is the potential for financial or reputation loss arising from an adverse environmental event (e.g., a toxic spills) and may arise from the Company’s direct ownership of property, or from loans, bonds or equity securities in which the Company has invested.

The Company’s reputation and, hence, ability to successfully build its business and brand, may be adversely affected if the Company, a tenant or a mortgagor contravenes, or is perceived to have contravened environmental laws or regulations or accepted environmental practice.

In addition, the Company’s financial performance may be adversely affected if it does not adequately prepare for the potential direct or indirect negative economic impacts of climate change which may affect the Company.  Potential economic impacts of climate change include:

 
Ø
Business losses and disruptions caused by climate change resulting from extreme weather, rising sea levels, heat waves, severe storms, wildfires, floods and droughts and the resulting disruption to water, air and food supplies;

 
Ø
Implications of the development of a legal and regulatory framework to address climate change, such as potential disruption or increased cost of oil-dependent transportation, increased fuel and electricity costs and costs associated with new building requirements; and

 
Ø
Health risks and increased mortality resulting from pollution and climate change and its impact on water and food supplies and the distribution of organism-borne, food-borne and waterborne infectious diseases.

Interaction of Risks

The risk factors outlined above may occur independently or in various combinations.  Certain loss events may give rise to multiple risks occurring simultaneously or in relatively rapid succession.  For example, a major global pandemic could have a material adverse impact on the Company’s mortality and claims experience.  Such an event also may trigger adverse global capital markets developments, including a downturn in equity market levels and interest rates, increased volatility and credit deterioration.  Operational risks also could arise due to rising employee absenteeism and potential disruptions in third-party service arrangements.

While a number of the factors outlined above reference certain risk inter-dependencies and relationships between risk categories or factors, they do not represent a complete inventory.  It should be noted that these inter-dependencies and relationships will continue to develop and change over time, and their combined adverse impact on the Company’s profitability and financial position could be significantly greater than the sum of their individual impacts.




SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)


Not applicable.

Item 2. Properties.

The Company’s home office consists of four office buildings located in Wellesley Hills, Massachusetts.  The Company owns this facility and leases it to SLOC under a renewable lease, with terms not exceeding five years.  The home office of SLNY consists of office space in New York, New York, and is leased from an unrelated party.


The Company and its subsidiaries are parties to threatened or pending legal proceedings, including ordinary routine litigation incidental to their business, both as a defendant and as a plaintiff.  While it is not possible to estimate the resolution of these proceedings, management believes, based upon currently available information, that the ultimate resolution of these matters will not be materially adverse to the Company's financial position, results of operations or cash flows.


Not applicable.




SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

PART II


The Company is a direct wholly-owned subsidiary of the Parent and there is no market for its common stock.  The Company paid a return of capital to the parent of $300.0 million during the year ended December 31, 2011.  The Company did not pay any dividend or return of capital to the Parent during the year ended December 31, 2010.  The Company distributed all of the issued and outstanding common stock of Sun Life Vermont in the form of a dividend to the Parent on December 31, 2009.  There are legal limitations governing the extent to which the Company may pay dividends as discussed in Note 18 of the Company’s consolidated financial statements presented in Part II, Item 8 of this annual report on Form 10-K.


Omitted pursuant to Instruction I(2)(a) to Form 10-K.  Please refer to Part II, Item 7 of this annual report on Form 10-K for management’s narrative analysis of results of operations.


Pursuant to Instruction I (2)(a) to Form 10-K, the Company elects to omit Management’s Discussion and Analysis of Financial Position and Results of Operations.  Below is management’s narrative analysis of the Company’s results of operations explaining the reasons of material changes in the Company’s consolidated statements of operations between the years ended December 31, 2011 and December 31, 2010.

Cautionary Statement

The Private Securities Litigation Reform Act of 1995 defines forward-looking statements as statements not based on historical fact and provides a safe harbor for such statements.  This discussion may include forward-looking statements by the Company.  These statements may relate to such topics as product sales, volume growth, market share, market and interest rate risk, and financial goals.  It is important to understand that such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those that the statements anticipate, including but not limited to the risks discussed in Part I, Item 1A of this annual report on Form 10-K.


CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared in accordance with GAAP, which require the Company to make estimates and assumptions.  The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity.  Further details related to the Company’s accounting policies are described in the notes to the consolidated financial statements, which can be found in Part II, Item 8 of this annual report on Form 10-K.

Deferred Policy Acquisition Costs and Sales Inducement Asset

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 deposit-type contracts, primarily deferred annuity and universal life (“UL”) 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.

Sales inducement asset (“SIA”) represents amounts that are credited to policyholder account balances related to the enhanced or bonus crediting rates that the Company offers on certain of its annuity products.  The costs associated with offering the enhanced or bonus crediting rates are capitalized and amortized over the expected life of the related contracts in proportion to the estimated gross profits.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

CRITICAL ACCOUNTING POLICIES (CONTINUED)

Value of Business and Customer Renewals Acquired

The value of business acquired (“VOBA”) represents the actuarially determined present value of projected future gross profits from in-force policies from acquired businesses.  VOBA is amortized in proportion to the projected emergence of profits or premium income over the estimated life of the purchased block of business or the period to the first renewal of the transferred business.

The value of customer renewals acquired (“VOCRA”) represents the actuarially determined present value of projected future profits arising from the existing in-force business to the next policy renewal date.  VOCRA 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.

Investments – Derivatives

The Company uses derivative financial instruments for risk management purposes to economically hedge against specific interest rate risk, to economically hedge guaranteed benefits in its variable products, to alter investment 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 equity market conditions.  The primary types of derivatives held by the Company include interest rate and foreign currency swap agreements, swaptions, call/put options, foreign currency forwards and futures.  The Company also records derivatives for certain guaranteed benefits embedded in variable and fixed indexed annuity products at fair value.  The Company does not employ hedge accounting treatment.  The Company believes that these derivatives provide economic hedges against the risks noted and the cost of formally documenting the effectiveness of the fair value of the hedged assets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, “Derivatives and Hedging,” is not justified.  As a result, the unrealized gains and losses are recognized immediately as derivative income or loss.  Changes in the level of interest rates or equity markets will cause the value of these derivatives to change.  Since a portion of the liabilities that are being hedged are not carried at fair value, the changes in the fair value of the derivatives will cause fluctuation in the reported earnings from period to period as foreign currency exchange rates, equity markets and interest rate change.

The Company issues annuity contracts, guaranteed investment contracts (“GICs”) and certain funding agreements that contain derivative instruments that are embedded in the contract.  Upon issuing the contract, the embedded derivative is separated from the host contract (annuity or GIC) and is carried at fair value.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

CRITICAL ACCOUNTING POLICIES (CONTINUED)

Fair Value Measurement

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between knowledgeable, unrelated willing parties at the measurement date, using inputs, including assumptions and estimates, a market participant would utilize.  Due to these assumptions and estimates, the amount that may be realized in a true sale may differ significantly from the estimated fair value.  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, including third-party pricing services, independent broker quotes, and pricing models.

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 and the lowest priority to unobservable inputs.  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 following table presents the fair value of assets and liabilities, as categorized in the Company’s fair value hierarchy as of December 31, 2011 (in 000’s):

 
 
Total Fair Value
 
Percentage of
Total Fair
Value
Assets
 
 
 
 
 
Quoted prices in active markets for identical assets or liabilities (“Level 1”)
$
 24,183,222 
 
58.6%
 
Measured using observable inputs (“Level 2”)
 
 16,306,434 
 
39.6 
 
Measured using unobservable inputs (“Level 3”)
 
 758,830 
 
1.8 
Total assets measured at fair value on a recurring basis
$
 41,248,486 
 
100.0%
 
 
 
 
 
 
Liabilities
 
 
 
 
 
Level 1
$
 57,103 
 
3.1%
 
Level 2
 
 369,106 
 
19.9 
 
Level 3
 
 1,426,035 
 
77.0 
Total liabilities measured at fair value on a recurring basis
$
 1,852,244 
 
100.0%

The following table presents the fair value of assets and liabilities, as categorized in the Company’s fair value hierarchy as of December 31, 2010 (in 000’s):

 
 
Total Fair Value
 
Percentage of
Total Fair
Value
Assets
 
 
 
 
 
Level 1
$
 25,132,229 
 
57.9%
 
Level 2
 
 17,530,772 
 
40.3 
 
Level 3
 
 784,086 
 
1.8 
Total assets measured at fair value on a recurring basis
$
 43,447,087 
 
100.0%
 
 
 
 
 
 
Liabilities
 
 
 
 
 
Level 1
$
 62,817 
 
10.5%
 
Level 2
 
 374,364 
 
62.6 
 
Level 3
 
 161,243 
 
26.9 
Total liabilities measured at fair value on a recurring basis
$
 598,424 
 
100.0%






SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

CRITICAL ACCOUNTING POLICIES (CONTINUED)

Fair Value Measurement (continued)

The following table presents the fair value of Level 3 assets and liabilities as a percentage of total assets and liabilities measured at fair value as of December 31, 2011 (in 000’s):

 
 
Level 3
 
Total Fair Value
 
Percentage of
Total Fair Value
Assets
 
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities
$
 9,000 
 
$
 1,402,525 
 
0.6%
 
Trading fixed maturity securities
 
 358,910 
 
 
 10,280,536 
 
3.5   
 
Derivative investments - receivable and other assets
 
 14,445 
 
 
 1,433,132 
 
1.0   
 
Separate account assets
 
 376,475 
 
 
 28,132,293 
 
1.3   
Total assets measured at fair value on a recurring basis
$
 758,830 
 
$
 41,248,486 
 
1.8%
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Other policy liabilities
$
 1,408,312 
 
$
 1,516,277 
 
92.9%
 
Derivative instruments - payable and other liabilities
 
 17,723 
 
 
 335,967 
 
5.3   
Total liabilities measured at fair value on a recurring basis
$
 1,426,035 
 
$
 1,852,244 
 
77%

The following table presents the fair value of Level 3 assets and liabilities as a percentage of total assets and liabilities measured at fair value as of December 31, 2010 (in 000’s):

 
 
 
Level 3
 
 
Total Fair Value
 
Percentage of
Total Fair Value
Assets
 
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities
$
 3,193 
 
$
 1,495,923 
 
0.2%
 
Trading fixed maturity securities
 
 409,188 
 
 
 11,467,118 
 
3.6   
 
Derivative investments - receivable and other assets
 
 22,128 
 
 
 1,789,479 
 
1.2   
 
Separate account assets
 
 349,577 
 
 
 28,694,567 
 
1.2   
Total assets measured at fair value on a recurring basis
$
 784,086 
 
$
 43,447,087 
 
1.8%
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
Other policy liabilities
$
 133,902 
 
$
 175,174 
 
76.4%
 
Derivative instruments - payable and other liabilities
 
 27,341 
 
 
 423,250 
 
6.5   
Total liabilities measured at fair value on a recurring basis
$
 161,243 
 
$
 598,424 
 
26.9%





SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

CRITICAL ACCOUNTING POLICIES (CONTINUED)

Fair Value Measurement (continued)

With regard to the assets included in Level 3, the Company’s fixed maturity securities are made up primarily of asset-backed securities (“ABS”) including collateralized debt obligations, residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), foreign government and agency securities and corporate securities.  During the year ended December 31, 2011, the Company transferred approximately $171.7 million and $(164.7) million of assets into and (out) of Level 3.  The $164.7 million of assets that were transferred out of Level 3 was primarily due to improvements in the level of observability of inputs used to price certain trading fixed maturity securities and fixed income investments.  Approximately $22.3 million of the market gains included in earnings for the twelve-month period ended December 31, 2011 were primarily related to RMBS and foreign government & agency securities which were classified as held-for-trading and were measured using significant unobservable inputs.  Approximately $60.8 million of the market gains included in earnings for the twelve-month period ended December 31, 2010 were primarily related to ABS, RMBS, CMBS and corporate securities which were classified as held-for-trading and were measured using significant unobservable inputs.

Fair Value of Financial Instruments

In the normal course of business, the Company enters into transactions involving various types of financial instruments.  These instruments involve credit risk and may also be subject to risk of loss due to interest rate fluctuation.  The Company monitors each financial instrument individually and, when appropriate, obtains collateral or other security to minimize losses.

Derivative Financial Instruments

In determining the fair value of the Company’s derivative financial instruments, including swaps and options, the Company considers counterparty credit risk, as well as its own credit risk.  In order to mitigate credit risk exposure, the Company transacts with counterparties that have a similar rating as the Company, prices its derivative liabilities based on its own credit rating, and generally holds collateral support agreements to limit its net derivative exposure with each counterparty.

The Company also uses credit valuation adjustments (“CVAs”) to properly reflect the component of fair value of certain derivative instruments that arises from default risk.  CVAs are based on a methodology that primarily uses published credit default swap spreads as a key input in determining an implied level of expected loss over the total life of the derivative contact.  When this information is not available, the Company also may utilize credit spreads implied from published bond yields or published cumulative default experience data adjusted for current trends.  CVAs may be calculated based on the credit risk of counterparties for asset positions or the Company’s own credit risk for liability positions.  The CVAs also take into account contractual factors designed to reduce the Company’s credit exposure to each counterparty, such as collateral and legal rights of offset.

The derivative instrument receivable included in Level 3 relates to certain equity cliquet options.  At December 31, 2011 and 2010, the value of these options was $5.2 million and $13.8 million, respectively.  The derivative instrument payable included in Level 3 relates to the Company’s agreement with Credit and Repackaged Securities Limited Series 2006-10 Trust (the “CARS Trust”) (see Note 4 of the Company’s consolidated financial statements included in Part II, Item 8 of this annual report on Form 10-K for a discussion of the CARS Trust).  At December 31, 2011 and 2010, the value of the derivative instrument payable held in Level 3 was $17.7 million and $27.3 million, respectively.  Approximately $9.6 million and $7.0 million of the market gains included in earnings for the years ended December 31, 2011 and 2010, respectively, were related to Level 3 derivative instruments, which were measured using significant unobservable inputs.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

CRITICAL ACCOUNTING POLICIES (CONTINUED)

Fair Value Measurement (continued)

Embedded Derivatives

The Company also holds derivatives which are embedded in its insurance contracts.  The Company includes 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 and fixed index annuity products.  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 A- rated corporate bonds, which have ratings that are equivalent 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 calculating 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 that the Company believes market participants would use in developing risk margins.

At December 31, 2011 and 2010, the value of embedded derivative liabilities held in Level 3 was $1,408.3 million and $133.9 million, respectively.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

CRITICAL ACCOUNTING POLICIES (CONTINUED)

Fair Value of Financial Instruments (continued)

Fixed Maturity Securities

The Company determines the fair value of its fixed maturity securities using three primary pricing methods:  third-party pricing services, non-binding broker quotes and pricing models.  Prices are first sought from third-party pricing services; the remaining unpriced securities are priced using one of the remaining two methods.  The Company generally does not adjust quotes or prices obtained from brokers or pricing services.  Due to a general lack of transparency in the process that brokers use to develop prices, most valuations that are based on broker prices are classified as Level 3.

The following table presents the fair value of fixed maturity securities by pricing source and the categorization in the Company’s fair value hierarchy as of December 31, 2011 (in 000’s).

 
Level 1
Level 2
Level 3
Total
Percentage of
Total Fair
Value
Priced via third-party pricing services
$ 710,396
$ 9,550,071
$ 20,392 
$ 10,280,859 
88.0%
Priced via independent broker quotes
 -
 -
231,051 
231,051 
2.0    
Priced via pricing models
 -
1,054,684
116,467 
1,171,151 
10.0    
Total
$ 710,396
$ 10,604,755
$ 367,910 
$ 11,683,061 
100.0%

The following table presents the fair value of fixed maturity securities by pricing source and the categorization in the Company’s fair value hierarchy as of December 31, 2010 (in 000’s).
 
 
Level 1
Level 2
Level 3
Total
Percentage of
Total Fair
Value
Priced via third-party pricing services
$ 1,113,169
$ 10,295,325 
$ 55,254 
$ 11,463,748 
88.4%
Priced via independent broker quotes
 - 
 - 
 287,037 
 287,037 
2.2    
Priced via pricing models
 - 
 1,142,166 
 70,090 
 1,212,256 
9.4    
Total
$ 1,113,169
$ 11,437,491 
$ 412,381 
$ 12,963,041 
100.0%

Third-party pricing services typically derive 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 models to develop a security price based on future expected cash flows discounted at an estimated market rate using collateral performance and vintages.  In some circumstances, third-party pricing services may price certain securities via independent broker quotes which utilize inputs that may be difficult to corroborate with observable market-based data.  In accordance with FASB ASC Topic 820, the Company has analyzed the third-party pricing services’ valuation methodologies and related inputs, and also has evaluated the various types of securities in its investment portfolio to determine an appropriate FASB ASC Topic 820 fair value hierarchy level based upon trading activity and the observability of market inputs.

Structured securities, such as ABS, RMBS and CMBS, are priced using third-party pricing services, a fair value model or independent broker quotations.  ABS and RMBS are priced using models and independent broker quotations.  CMBS securities are priced using the last sale price of the day or a broker quote, if no sales were transacted that day.  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, RMBS and CMBS.  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.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

CRITICAL ACCOUNTING POLICIES (CONTINUED)

Fair Value of Financial Instruments (continued)

Fixed Maturity Securities (continued)

At December 31, 2011, $263.0 million of structured securities classified as ABS, RMBS and CMBS, were classified as Level 3, representing 71.5% of the Company’s total Level 3 fixed maturity securities and 15.3% of the total structured securities at December 31, 2011.

At December 31, 2010, $263.8 million of structured securities were classified as Level 3, representing 64.0% of the Company’s total Level 3 fixed maturity securities and 12.0% of the total structured securities at December 31, 2010.

For privately-placed fixed maturity securities, fair values are estimated using a fair value model, which takes into account credit spreads for a variety of public and private securities of similar credit risk, maturity, prepayment and liquidity characteristics.  A portion of privately placed fixed maturity securities are also priced using market prices or dealer quotes.  The Company’s ability to liquidate positions in privately-placed fixed securities could be impacted to a significant degree by the lack of an actively traded market.  Although the Company believes that its estimates reasonably reflect the fair value of those instruments, its key assumptions about risk-free interest rates, risk premiums, performance of underlying collateral (if any) and other factors may not reflect those of an active market.

The Company’s fixed maturity securities are classified as either trading or as available-for-sale.  The changes in fair value of trading securities are recorded as a component of net investment income.  The changes in fair value of available-for-sale securities are recorded in other comprehensive income.  Securities which the Company has elected to measure at fair value under FASB ASC Topic 825, “Financial Instruments,” are classified as trading securities.  Although classified as trading securities, the Company’s intent is  not to sell these securities in the near term.

The Company validates the prices obtained from its third-party pricing services quarterly through a variety of methods, including subjecting prices to a tolerance range based on market conditions.  The Company performs further testing on those securities whose prices do not fall within the pre-established tolerance range.  This testing includes looking at specific market events that may affect pricing or obtaining additional information or new prices from a third-party pricing service.  In addition, 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 for each security, or obtains additional broker quotes to corroborate the current market price.  At December 31, 2011, the Company found no material variances between the prices received from third-party pricing sources and the results of its testing.

The Company discontinues the accrual of income on its holdings for issuers that are in default. Investment income would have increased by $2.1 million and $4.6 million for the years ended December 31, 2011 and 2010, respectively, if these holdings were performing.  As of December 31, 2011 and 2010, the fair market value of holdings for issuers in default was $19.6 million and $53.9 million, respectively.

Other-Than-Temporary Impairments on Available-for-Sale Fixed Maturity Securities

The Company's accounting policy for impairment requires recognition of other-than-temporary impairment (“OTTI”) write-downs in accordance with FASB ASC Topic 320 “Fair Value Measurement and Disclosure.”  An OTTI loss is recognized and recorded as a charge to earnings for the full amount of the impairment (the difference between the current carrying amount and fair value of the security) if the Company intends to sell, or if it is more likely than not that it will be required to sell, the impaired security prior to recovery of its cost basis.  Otherwise, losses on securities which are other-than-temporarily impaired are separated into two categories, namely, credit loss and non-credit loss.  The credit loss portion is charged to net realized investment gains (losses) in the consolidated statements of operations, while the non-credit loss is charged to other comprehensive income.  When an unrealized loss on a fixed maturity is considered temporary, the Company continues to record the unrealized loss in other comprehensive income and not in earnings.  Please refer to Note 1 and Note 4 of the Company’s consolidated financial statements included in Part II, Item 8 of this annual report on Form 10-K for further discussion of the Company’s recognition and disclosure of OTTI loss.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

CRITICAL ACCOUNTING POLICIES (CONTINUED)

Policy Liabilities and Accruals

The Company’s policy liabilities include amounts reserved for future policy benefits payable upon contingent events as well as liabilities for unpaid claims due as of the statement date.  Such liabilities are established in amounts adequate to meet the estimated future obligations of policies in force.  Policy liabilities also are comprised of:

 
Ø
Reserves held for annuity contracts including group pension and payout annuity payments are calculated using the best-estimate interest and decrement assumptions;

 
Ø
Reserves held for product guarantees on variable annuity products, such as guaranteed minimum death benefits, are equal to a benefit ratio multiplied by the cumulative contract charges earned, plus accrued interest, less contract benefit payments;

 
Ø
Reserves for UL contracts which are held for the coverage of guaranteed benefits (such as riders, conversions from group policies and benefits provided under market conduct settlements) that are greater than the policy account value; and

 
Ø
Reserves held for group life and health contracts are calculated using standard actuarial methods recognized by the American Academy of Actuaries.

Contractholder deposit funds consist of policy values that accrue to the holders of UL-type contracts and investment-related products such as deferred annuities, single premium whole life (“SPWL”) policies, GICs, funding agreements and embedded derivatives related to certain annuity contracts and reinsurance 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.

Income Taxes

The Company accounts for current and deferred income taxes and recognizes reserves for income taxes in accordance with FASB ASC Topic 740, “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 actuarial liabilities, policy acquisition expenses, unrealized gains and losses on investments, and net operating loss (“NOL”) carryforwards, as well as capital loss carryforwards.

In evaluating the Company’s ability to recover deferred tax assets, the Company considers all available positive and negative evidence including reversals of deferred tax liabilities (taxable temporary differences), projected future taxable income, tax planning strategies and recent financial operations.  In projecting future taxable income and sources of capital gains, the Company utilizes historical and current operating results and incorporates assumptions including the amount of future federal and state pre-tax operating income, the reversal of temporary differences, and the implementation of prudent and feasible tax planning strategies.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULTS OF OPERATIONS

The twelve-month period ended December 31, 2011 as compared to the twelve-month period ended December 31, 2010:

Net Income

The Company’s net (loss) income was $(103.1) million and $134.3 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  The significant changes are discussed below.

REVENUES

Total revenues were $524.9 million and $1,914.2 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  Changes in the components of total revenues are discussed below:

Premium and annuity considerations - were $137.4 million and $136.2 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.

Net investment income - was $727.6 million and $1,390.2 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  Investment income, excluding the mark-to-market of the trading portfolio, net realized losses related to trading securities, partnership income and ceded investment income, was $607.7 million and $861.4 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  The decrease of $253.7 million during 2011, as compared to 2010, was the result of lower average investment yields which decreased investment income by $134.6 million, as well as lower average invested assets which decreased investment income by $119.1 million.

Investment income related to the mark-to-market of the trading portfolio, net realized losses and limited partnership income was $94.9 million and $604.6 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  The Company recorded $186.6 million of investment income during the twelve-month period ended December 31, 2011, as compared to $674.2 million during the twelve-month period ended December 31, 2010, related to changes in the market value of the trading portfolio during the respective periods.  The $487.6 million decrease in unrealized gains was primarily attributable to increased sales of trading fixed maturity securities during the twelve-month period ended December 31, 2011, as compared to the same period in 2010, resulting in a over $1.0 billion decrease in the Company’s trading portfolio.  The increase in sales of trading fixed maturity securities in 2011 was primarily due to the need for cash to pay off certain of the Company’s notes that matured during the year and to pay a return of capital to the Parent.  The impact of increased sales was partially offset by an increase in unrealized gains related to a decrease in U.S. Treasury rates in 2011 as compared to 2010.  The Company also recognized $(94.6) million and $(67.3) million of realized losses during the twelve-month periods ended December 31, 2011 and 2010, respectively.  The $(27.3) million increase in realized losses was primarily due to a losses recognized on the sale of bonds from the trading portfolio, offset by lower write-downs recognized during the twelve-month period ended December 31, 2011, as compared to same period in 2010.  The $487.6 million change in the trading portfolio was slightly offset by a $5.2 million increase in the fair value of the Company’s limited partnership investments in 2011, as compared to 2010.

Investment income on funds-withheld reinsurance portfolios is included as a component of net investment income in the Company’s consolidated statements of operations.  The Company ceded net investment (loss) income of $(25.2) million and $75.6 million for the twelve-month periods ended December 31, 2011 and 2010, respectively, in connection with the funds-withheld reinsurance agreements between the Company and certain of its affiliates related to the Company’s SPWL and certain of its UL policies.  The $(25.2) million net investment loss ceded during the twelve-month period ended December 31, 2011 includes a $113.3 million decrease in net investment income ceded due to an interest rate adjustment on certain of the Company’s SPWL policy loan balances processed during the period.  The adjustment did not have any impact on net investment income, net of reinsurance, reported in the Company’s consolidated statement of operations because the SPWL block is 100% reinsured by SLOC on a funds-withheld basis.  For further details of this adjustment, refer to Note 8 of the Company’s consolidated financial statements, presented in Part II, Item 8 of this annual report on Form 10-K.


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

Net derivative loss - was $(988.1) million and $(149.3) million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  The Company’s realized and unrealized gains and losses by derivative type for the twelve-month periods ended December 31 consisted of the following (in 000’s):

 
2011 
 
2010 
 
 
 
 
 
 
Interest rate contracts
$
270,885 
 
$
(122,712)
Foreign currency contracts
 
(50,493)
 
 
(16,206)
Equity contracts
 
(58,110)
 
 
(26,734)
Credit contracts
 
9,619 
 
 
7,008 
Futures contracts
 
122,649 
 
 
(217,428)
Embedded derivatives
 
(1,282,620)
 
 
226,782 
Net derivative loss
$
(988,070)
 
$
(149,290)

The $(838.8) million increase in net derivative loss for the twelve-month period ended December 31, 2011, as compared to the same period in 2010, was primarily due to a $(1,509.4) million increase in net unrealized losses related to embedded derivatives and a $(65.7) million increase in losses related to foreign currency and equity contracts.  These changes were partially offset by a $340.1 million increase in gains related to futures contracts and a $393.6 million increase in net unrealized gains related to interest rate contracts in 2011 relative to 2010.

The $(1,509.4) million increase in embedded derivatives net unrealized losses was primarily due to an increase in the fair value liability for guaranteed minimum accumulation benefits (“GMAB”) and guaranteed minimum withdrawal benefits (“GMWB”) on certain of the Company’s variable annuity products during the twelve-month period ended December 31, 2011, as compared to decrease in the fair value of the GMAB and GMWB liabilities during the same period in 2010.  The increase in the liability for GMAB and GMWB during the twelve-month period ended December 31, 2011 resulted from updates to projected benefits primarily related to changes in interest rates, an increase in market volatility and assumption changes.  The decrease in the GMAB and GMWB liabilities during the twelve-month period ended December 31, 2010 was primarily due to an increase in equity markets and lower market volatility during the period.

Out of the $(65.7) million losses related to foreign currency and equity contracts, $(34.3) million relates to foreign currency contracts.  The foreign currency loss was primarily due to changes in fair value of the Company’s European Medium Term Note structured product which was a GIC that matured in 2011.  The remaining $(31.4) million loss related to equity contracts which was primarily due to changes in fair value of equity options held and the expiration of out-of-the-money equity options.

The $340.1 million increase in net derivative gains in futures contracts for the twelve-month period ended December 31, 2011 primarily related to the Company’s short exposure to the change in equity markets.  Certain equity markets decreased during the year ended December 31, 2011, which resulted in an increase in net gains during the period.  However, equity markets increased during the same period in 2010 resulting in losses for the twelve-month period ended December 31, 2010.  The Company’s derivative instruments portfolio includes short future positions to hedge against potential adverse movements in the stock market.  For discussion of the Company’s short contracts, refer to Note 4 of the Company’s consolidated financial statements presented in Part II, Item 8 of this annual report on Form 10-K.

The $393.6 million increase in net unrealized gains related to interest rate contracts for the twelve-month period ended December 31, 2011 was primarily due to changes in the fair value of interest rate swaps resulting from changes in notional amounts, duration and the overall swap curve.  The increase in the fair value of interest rate swap agreements for the twelve-month period ended December 31, 2011, as compared to the twelve-month period ended December 31, 2010, was primarily the result of the downward shift in applicable interest rates.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

Net realized investment gains, excluding impairment losses on available-for-sale securities - were $39.6 million and $27.0 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  The $39.6 million realized gains during the twelve-month period ended December 31, 2011 were primarily attributable to a $65.3 million realized gains on sales of available-for-sale fixed maturity securities, offset by a $(23.1) million loss primarily related to impairment charges on certain of the Company’s mortgage loan assets and a $(2.6) million loss due to net provisions for estimated losses on mortgage loans.  The $27.0 million realized gains during the twelve-month period ended December 31, 2010 were primarily attributable to $37.4 million gain on sales of available-for-sale fixed maturity securities, offset by an $(11.0) million loss related to net provisions for estimated losses on mortgage loans.

Fee and other income – were $608.4 million and $511.0 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  Fee and other income consist primarily of mortality and expense charges, rider fees, surrender charges and other income.  Mortality and expense charges and rider fees are based on the market values of the assets in the separate accounts supporting the contract.  Mortality and expense charges and rider fees combined were $425.5 million and $385.2 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  Variable product fees represented 1.55% and 1.56% of the average variable annuity separate account balances for the twelve-month periods ended December 31, 2011 and 2010, respectively.  Average separate account assets were $27.4 billion and $24.7 billion for the twelve-month periods ended December 31, 2011 and 2010, respectively.

Surrender charges represent revenues earned on the early withdrawal of fixed, fixed index, variable annuity, UL and variable universal life (“VUL”) policyholder balances.  Surrender charges on fixed, fixed index and variable annuities, UL and VUL surrenders generally are assessed at declining rates applied to policyholder surrenders during the first four to ten years of the contract.  Total surrender charges were $17.7 million and $16.2 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.

Other income represents fees charged for the cost of insurance, investment advisory services, asset participation fees, benefit fees and administrative service fees.  Other income was $165.2 million and $109.6 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  The $55.6 million increase in 2011, as compared to 2010, was primarily due to a $42.9 million increase in benefit fees and administrative services fees from affiliates, a $6.6 million increase in income related to a smaller increase in unearned revenue liabilities in 2011, as compared to 2010, and a $6.2 million increase in cost of insurance fees.  The increase in benefit fees was attributable to an increase in the sale of certain variable annuity products with optional living benefit features.  These benefit fees are based on benefits not the market value of the related assets.

BENEFITS AND EXPENSES

Total benefits and expenses were $708.7 million and $1,708.7 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  The decrease of $1.0 billion was primarily due to the following:

Interest credited - to policyholders was $424.2 million and $401.8 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  The increase of $22.4 million was primarily due to an increase in capitalized interest, net of SIA amortization expense related to certain fixed annuity products, which increased interest credited by $54.8 million, and a higher average crediting rate which increased interest credited by $31.3 million.  This increase was partially offset by lower average policyholder balances, which decreased interest credited by $63.7 million.

The Company’s interest credited for the twelve-month period ended December 31, 2011 decreased by $113.3 million due to policy reinstatements and an interest rate adjustment on certain of the Company’s SPWL policy loan balances during the period.  The adjustment did not have any impact on interest credited, net of reinsurance, reported in the Company’s consolidated statement of operations as the SPWL block is 100% reinsured by SLOC on a funds-withheld basis.  For further details of this adjustment, refer to Note 8 of the Company’s consolidated financial statements, presented in Part II, Item 8 of this annual report on Form 10-K.

Interest expense - was $47.2 million and $51.8 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  The $4.6 million decrease was primarily due to a decrease in interest expense related to unrecognized tax benefits during the twelve-month period ended December 31, 2011, as compared to the twelve-month period ended December 31, 2010 along with the maturity and payment of certain of the Company’s demand notes to affiliates in 2011.  For further details on the maturity and payment of the demand notes, refer to Note 3 of the Company’s consolidated financial statements, presented in Part II, Item 8 of this annual report on Form 10-K.


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

Policyowner benefits - were $134.4 million and $239.8 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  The $105.4 million decrease in 2011 as compared to 2010, was primarily due to a $122.9 million decrease in SIA amortization and deferrals related to certain variable annuity products and a $10.2 million decrease in annuity payments, offset by a $22.0 million increase in benefits related to an increase in liabilities for group pension and annuities in payout phase, and a $6.0 million increase related to health benefits.  The decrease in SIA amortization was primarily due to a decrease in actual gross profits attributable to an increase in the fair value of GMAB and GMWB liabilities during the twelve-month period ended December 31, 2011, as compared to the same period in 2010.  The increase in group pension and annuity payout liabilities was primarily due to loss recognition associated with lower yields on the underlying assets.

Amortization of DAC - DAC relates to the costs of acquiring new business, which vary with and are primarily related to the production of new business.  Such acquisition costs include commissions, costs of policy issuance and underwriting, and selling expenses.  DAC amortization expense was $(276.3) million and $663.2 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  The $(939.5) million change in amortization expense during the twelve-month period ended December 31, 2011, as compared to the twelve-month period ended December 31, 2010, was primarily attributable to a $(1,295.3) million decrease in amortization expense, net of interest on the DAC asset and a $(99.4) million decrease in loss recognition charges, partially offset by a $455.2 million increase in unlocking adjustments.

The $(1,295.3) million decrease in current period amortization expense net of interest was primarily due to a decrease in actual gross profits in 2011 relative to 2010.  The decrease in actual gross profits during the twelve-month period ended December 31, 2011 primarily related to an increase in the liabilities held for guaranteed minimum benefits on certain variable annuity products, resulting in negative amortization expense.  The increase in the guaranteed minimum benefit reserves was primarily attributable to the change in interest rates and assumption changes during the twelve-month period ended December 31, 2011.  During the twelve-month period ended December 31, 2010, actual gross profits increased primarily due to an increase in the fair value of fixed maturity securities held in the trading portfolio which was partially offset by a smaller increase in guaranteed minimum benefit reserves, resulting in positive amortization expense.

The Company tests its DAC asset for loss recognition on a quarterly basis.  The test is performed by comparing the GAAP liability, net of DAC, to the present value of future expected gross profits or gross premium reserves.  As a result of the test, the Company recorded loss recognition charges of $18.3 million and $117.7 million to amortization expense in the Wealth Management segment for the years ended December 31, 2011 and 2010, respectively.

These decreases were offset by a $455.2 million increase in unlocking adjustments due primarily to updates to profitability projections resulting from actual changes to in-force policies and assumption changes related to certain fixed annuity products gross profit valuations.  At December 31, 2011, the total present value of the gross profit for the largest cohort of the Company’s fixed annuities was negative resulting in a $487.2 million decrease in DAC asset during the twelve-month period ended December 31, 2011.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

Amortization of VOBA and VOCRA - relates to the actuarially-determined value of in-force business from the Company’s acquisition of Keyport Life Insurance Company (“Keyport”) and agreements between Sun Life and Health Insurance Company (U.S.) (“SLHIC”), an affiliate, and SLNY, under which SLNY agreed to assume direct responsibility for all sales and administration of existing and new business issued by SLHIC in New York (collectively the “SLHIC to SLNY asset transfer”).  This amount is amortized in proportion to the projected emergence of profits or premium income over the estimated lives of the underlying contracts.  Amortization was $28.9 million and $33.9 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  The $5.0 million decrease was primarily due to a $28.1 million decrease in current year amortization, net of interest on VOBA assets for certain fixed annuity products, offset by a $23.1 million increase in unlocking adjustments during the twelve-month period ended December 31, 2011, as compared to same period in 2010.

The Company tests its VOBA and VOCRA assets for future recoverability and has determined that the asset was not impaired at December 31, 2011 and 2010.

Other operating expenses - were $350.3 million and $318.2 million for the twelve-month periods ended December 31, 2011 and 2010, respectively. The $32.1 million change in 2011, as compared to 2010, was primarily due to a $10.4 million increase in non-deferrable commission expense related to a decrease in ceded commission expense on certain UL policies and a $18.2 million increase in other operating expenses primarily due to severance and other restructuring costs related to the discontinued sales of the Company’s variable annuity and individual life products, as well as an accrual recorded in 2011 for certain guarantee fund assessments.  The remaining $3.5 million was attributable to an increase in premium taxes.  Refer to Part, I Item 1 of this annual report on Form 10-K for further discussion regarding the Company’s decision to discontinue the sale of variable annuity and individual life products.

Income tax (benefit) expense - was $(80.7) million and $71.2 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  The effective tax rates for the same periods were 43.9% and 34.7%, respectively. The effective tax rate for the year ended December 31, 2011 differs from the U.S. federal statutory tax rate of 35% primarily due to tax benefits from the separate account DRD, tax credits and true-up adjustments for prior years.  The effective tax rate for the year ended December 31, 2010 differs from the U.S. federal statutory tax rate of 35% primarily due to tax benefits from the separate account DRD and tax credits offset by true-up adjustments for prior years.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

Results of Operations by Segment

The Company’s net (loss) income from operations reflects the operations of its four business segments: Wealth Management, Individual Protection, Group Protection and Corporate.

The following provides a summary of net income from operations by segment.

Wealth Management Segment

The Wealth Management segment consists of retirement-oriented annuity products that provide fixed, indexed or variable returns to policyholders.  Annuities are insurance products designed to offer individuals protection against the risk of outliving their financial assets during retirement.  Annuities offer a tax-deferred means of accumulating savings for retirement needs and provide a source of income in the payout period.  The Company earns spread income from fixed and indexed annuities; variable annuities primarily produce fee income.  This segment also markets funding agreements to both related and unrelated third parties.

The segment’s principal products are described below for the years ended December 31, 2011 and 2010:

Variable Annuities - Variable annuities offer a selection of underlying investment alternatives that may satisfy a variety of policyholder risk/return objectives.  Under a variable annuity, the policyholder has the opportunity to select separate account investment options (consisting of underlying mutual funds), which pass the investment risk directly to the policyholder in return for the potential of higher returns.  Variable annuities also include guaranteed fixed interest options and benefits.  The Company has several different variable annuity products that offer various separate account investment choices, depending on the product, and guaranteed fixed interest options.  Effective December 30, 2011, the Company discontinued the sales of its variable annuity products.  Refer to Part I, Item 1 of this annual report on Form 10-K for further details.

Fixed Annuities - Fixed annuity products are primarily single premium deferred annuities (“SPDA”).  An SPDA policyholder typically makes a single premium payment at the time of issuance.  The Company obligates itself to credit interest to the policyholder's account at a rate that is guaranteed for an initial term and is reset annually thereafter for certain of the Company’s annuity products, subject to a guaranteed minimum rate.  Effective January 1, 2010, the Company discontinued the sale of certain of its fixed annuity products.

Fixed Index Annuities - Fixed index annuities credit interest to the policyholder using a formula based upon the positive change in value of a specified equity index.  The Company’s fixed index annuity products calculate interest earnings using the S&P 500 Index.  The Company’s fixed index products also provide a guarantee of principal (less withdrawals) at the end of the term or surrender charge period.  Effective January 1, 2010, the Company discontinued the sale of certain of its fixed index annuity products.

Institutional Investment Contracts - Institutional investment contracts are funding agreements issued to institutional investors or to entities that in turn issue promissory notes to unrelated third parties.  These contracts may contain any of a number of features including variable or fixed interest rates and fixed index options, and may be denominated in foreign currencies.

The Company uses derivative instruments to manage the risks inherent in the contract options of many of these products.

In 1997, the Company discontinued the marketing of group pension products in the United States.  Although these products are not currently sold in the U.S., the Company administers an in-force block of U.S. group retirement business.  A significant portion of these pension contracts are non-surrenderable, resulting in limited liquidity exposure to the Company.

The Company issued floating rate funding agreements to its affiliates, Sun Life Financial Global Funding III, L.L.C. (“LLC III”), Sun Life Financial Global Funding II, L.L.C. (“LLC II”), and Sun Life Financial Global Funding, L.L.C. (“LLC”).  The floating rate funding agreements issued to LLC matured on July 6, 2010, and the floating rate funding agreements issued to LLC II matured on July 6, 2011.  The impact of these funding agreements and the detail of payments to LLC and LLC II are described in Note 3 of the Company’s consolidated financial statements presented in Part II, Item 8 of this annual report on Form 10-K.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

Wealth Management Segment (continued)

Other - The Wealth Management segment manages a closed block of SPWL insurance policies, a retirement-oriented tax-advantaged life insurance product.  The Company discontinued sales of the SPWL product in response to certain tax law changes in the 1980s.  The Company had SPWL policyholder balances of $1.3 billion and $1.5 billion of at December 31, 2011 and 2010.  This entire block of business is reinsured on a funds-withheld, coinsurance basis with SLOC.  The impact of the SPWL reinsurance agreement on the Company’s financial statements is discussed in Note 8 of the Company’s consolidated financial statements presented in Part II, Item 8 of this annual report on Form 10-K.

The Company marketed its annuity products through an affiliated wholesale distribution organization, SLFD, and through a variety of unaffiliated retail and wholesale organizations, including securities brokers, financial institutions, insurance agents and financial advisers.

The Company has an agreement with the CARS Trust, whereby the Company is the sole beneficiary of the CARS Trust.  The Company has consolidated the CARS Trust in accordance with ASC Topic 810, “Consolidation,” and reports the trust in the Wealth Management segment.  The impact of this agreement on the Company’s financial statements is discussed in Note 4 of the Company’s consolidated financial statements presented in Part II, Item 8 of this annual report on Form 10-K.

The following is a summary of operations for the Wealth Management segment for the years ended December 31, (in 000’s):

 
2011 
 
2010 
 
 
 
 
 
 
Total revenues
$
 312,953 
 
$
 1,760,979 
Total benefits and expenses
 
 491,572 
 
 
 1,514,754 
(Loss) income before income  tax (benefit) expense
 
 (178,619)
 
 
 246,225 
 
 
 
 
 
 
Net (loss) income
$
 (98,818)
 
$
 162,975 
 
 
 
 
 
 
Separate account assets
$
 20,221,425 
 
$
 19,685,774 
General account assets
 
 17,688,786 
 
 
 19,453,702 
Total assets
$
 37,910,211 
 
$
 39,139,476 


The Wealth Management segment had pre-tax (loss) income of $(178.6) million and $246.2 million for the years ended December 31, 2011 and 2010, respectively.  The significant changes are discussed below.

Total revenues were $313.0 million and $1,761.0 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  The $1,448.0 million change was primarily due to decreases of $817.4 million in net derivative income, $711.0 million in net investment income and $12.6 million in net realized investment gains in 2011, as compared to 2010.  These decreases were offset by an $88.8 million increase in fee and other income, and a $4.2 million increase in premiums and annuity considerations.

The $817.4 million decrease in net derivative income in 2011, as compared to 2010, primarily related to a $(1,472.9) million increase in net unrealized losses related to embedded derivatives due to an increase in the fair value of GMAB and GMWB liabilities and a $(65.7) million increase in losses related to foreign currency and equity contracts, offset by $719.2 million in gains related to futures contracts and interest rate contracts in 2011 relative to 2010.  The gains in futures related to the Wealth Management segment’s short exposure to the change in equity markets in 2011, as compared to 2010.  The gains in interest rate contracts were primarily due to changes in the fair value of interest rate swaps resulting from changes in notional amounts, duration and the overall swap curve.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

Wealth Management Segment (continued)

The decrease of $711.0 million in net investment income resulted primarily from a $520.5 million decrease in the fair market value of fixed maturity securities in the Wealth Management segment’s trading portfolio in 2011, as compared to 2010.  This decrease in the fair market value was primarily due to increased sales of trading fixed maturity securities during the twelve-month period ended December 31, 2011, as compared to the same period in 2010, resulting in an approximately $1.0 billion decrease in the Wealth Management segment’s trading portfolio.  The decrease in net investment income also resulted from lower average investment yields and invested assets which decreased investment income by $271.3 million in 2011, as compared to 2010.  These decreases were partially offset by a $98.4 million increase in investment income related to a decrease in net investment ceded during the twelve-month period ended December 31, 2011, as compared to 2010.  The net investment income ceded during twelve-month period ended December 31, 2011 includes an interest rate adjustment on certain of the Company’s SPWL policy loan balances during the period.

The decrease of $12.6 million in net realized investment gain during the twelve-month period ended December 31, 2011, as compared to the same period in 2010, was primarily due to impairment charges on certain of the Wealth Management segment’s mortgage loan assets.

The $88.8 million increase in fee and other income was primarily due to increases in mortality and expense charges, rider fees and 12b-1 fees which related to an increase in the average variable annuity separate account balances during the twelve-month period ended December 31, 2011, as compared to the twelve-month period ended December 31, 2010.  The increase was also due to increased benefit fees attributable to an increase in the sales of certain variable annuity products with optional living benefit features.

Total benefits and expenses were $491.6 million and $1,514.8 million for the twelve-month periods ended December 31, 2011 and 2010, respectively.  The decrease of $1,023.2 million was primarily due to decreases of $936.0 million and $114.0 million related to DAC and VOBA amortization expense and policyowner benefits, respectively, offset by increases of $19.6 million, $4.1 million and $3.1 million related to interest credited, interest expense and other operating expenses, respectively.

The $936.0 million decrease in DAC and VOBA amortization was attributable to a $1,422.6 million decrease in amortization expense and interest.  The change in amortization expense was primarily due to a decrease in actual gross profits during the twelve-month period ended December 31, 2011, as compared to the twelve-month period ended December 31, 2010.  The decline in gross profits was primarily due to an increase in liabilities held for guaranteed minimum benefits on certain variable annuity products, resulting in negative amortization expense.  The amortization expense and interest also includes a $99.5 million decrease related to loss recognition expense.  In addition, the decrease in amortization expense was offset by a $486.6 million increase in unlocking adjustments due primarily to updates to profitability projections resulting from actual changes to in-force policies and assumption changes related to the gross profit valuation for certain fixed annuity products.  At December 31, 2011, the total present value of the gross profit for the largest cohort of the Company’s fixed annuities was negative resulting in a $487.9 million decrease in DAC asset during the twelve-month period ended December 31, 2011.

The $114.0 million decrease in policyowner benefits for the twelve-month period ended December 31, 2011, as compared to 2010, was primarily due to decreases of $122.9 million in SIA amortization and deferrals related to certain variable annuity products and $10.2 million in annuity payments.  These decreases were offset by a $15.1 million increase in reserves and a $3.8 million increase in death benefits.

The $19.6 million increase in interest credited was primarily the result of an increase in capitalized interest, net of SIA amortization expense, related to certain fixed annuity products, which increased interest credited by $54.8 million, and a higher average crediting rate, which increased interest credited by $32.8 million.  These increases were offset by a lower average policyholder balances which decreased interest credited by $68.0 million.  The interest credited for the twelve-month period ended December 31, 2011 includes an adjustment related to certain of the Company’s SPWL policy loan balances.  The adjustment did not have any impact on interest credited, net of reinsurance, due to the 100% funds-withheld reinsurance agreement with SLOC.

The $4.1 million increase in interest expense related to assets allocated to the Wealth Management segment during the twelve-month period ended December 31, 2011, relative to the same period in 2010.

The $3.1 million increase in other operating expenses was primarily due to a $9.4 million increase in non-deferrable commission expense which was attributable to an increase in sales in certain variable annuity products, offset by a decrease of $6.2 million in other operating expenses.


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

Individual Protection Segment

The Individual Protection segment consists of individual UL and variable life insurance products, including VUL, corporate-owned life insurance (“COLI”) and bank-owned life insurance (“BOLI”).  UL products allow for flexible premiums and feature an investment return to policyholders at a specified rate declared by the Company.  VUL products allow for flexible premiums and variable rates of investment return; the policyholder directs how the cash value is invested and bears the investment risk.  Effective December 30, 2011, the Company discontinued the sale of its individual life products.  Effective January 31, 2012, the Company ceased issuing new COLI products.  Refer to Part I, Item 1 of this annual report on Form 10-K for further details.

The Company maintains reinsurance agreements with affiliates, including agreements with Sun Life Reinsurance (Barbados) No. 3 Corp (“BarbCo 3”), an affiliate, and SLOC.  In its agreement with BarbCo 3, the Company cedes all of the risks associated with certain in-force corporate and bank-owned VUL and private placement VUL policies on a combination coinsurance, coinsurance with funds-withheld and a modified coinsurance basis.  Future new business also will be reinsured under this agreement.  In addition, the Company’s subsidiary, SLNY, has a reinsurance agreement with SLOC under which SLOC will fund so-called “AXXX” reserves attributable to certain UL policies sold by SLNY.  Under this agreement, SLNY cedes, and SLOC assumes, on a funds-withheld 90% coinsurance basis certain in-force policies.  Future new business also will be reinsured under this agreement.

The following provides a summary of operations for the Individual Protection segment for the years ended December 31 (in 000's):

 
2011 
 
2010 
 
 
 
 
 
 
Total revenues
$
 78,961 
 
$
 66,425 
Total benefits and expenses
 
 89,404 
 
 
 68,585 
Loss before income tax benefit
 
 (10,443)
 
 
 (2,160)
 
 
 
 
 
 
Net loss
$
 (6,558)
 
$
 (1,204)
 
 
 
 
 
 
Separate account assets
$
 7,262,365 
 
$
 7,194,647 
General account assets
 
 2,278,730 
 
 
 2,067,064 
Total assets
$
 9,541,095 
 
$
 9,261,711 

Total revenues were $79.0 million and $66.4 million for the years ended December 31, 2011 and 2010, respectively.  The $12.6 million increase in total revenues was primarily caused by increases of $36.2 million in net investment income and $13.6 million in fees and other income, offset by decreases of $36.5 million in embedded derivative income and $0.7 million in net realized investment gains.

The increase of $36.2 million in net investment income resulted primarily from a $31.8 million increase in the fair market value of fixed maturity securities in the trading portfolio in 2011, as compared to 2010.  The increase in the fair market value of these securities was primarily due to a decrease in U.S. Treasury rates, as well as an increase in the Individual Protection segment’s trading portfolio due to purchases

The decrease of $36.5 million in embedded derivative income primarily resulted from the change in the fair value of the embedded derivative liability in 2011 as compared to 2010, related to certain VUL and UL products that the Company reinsured to certain affiliates.  Refer to Note 8 of the Company’s consolidated financial statements included in Part II, Item 8 of this annual report on Form 10-K for further discussion of the impact of the reinsurance agreements noted above on the Individual Protection segment.

Total benefits and expenses were $89.4 million and $68.6 million for the years ended December 31, 2011 and 2010, respectively.  The $20.8 million increase in benefits and expenses resulted from increases in other operating expenses, policyowner benefits and interest credited of $20.7 million, $5.5 million and $2.8 million, respectively, offset by a decrease in DAC amortization of $8.2 million.

The $20.7 million increase in other operating expenses resulted primarily from an $11.8 million decrease in ceded commission expense associated with certain reinsured UL and VUL products and an $8.0 million increase in premium tax and operating expenses.  The $8.2 million decrease in DAC amortization was primarily due decrease in unlocking adjustments in 2011 as compared to 2010.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

Group Protection Segment

The Group Protection segment offers group life insurance, group stop loss insurance, group dental and group short-term and long-term disability insurance products primarily to small and mid-size employers.  This segment operates only in the State of New York through the Company’s subsidiary, SLNY.

The Company maintains, through SLNY, a reinsurance agreement with SLHIC pursuant to which SLNY assumes the net risks associated with substantially all of the existing and future new business issued by SLHIC in New York.  In addition, SLNY and SLHIC are parties to a renewal rights agreement under which SLNY has exclusive rights to renew SLHIC in-force business assumed under the reinsurance agreement.

The following provides a summary of operations for the Group Protection segment for the years ended December 31 (in 000’s):

 
2011 
 
2010 
 
 
 
 
 
 
Total revenues
$
 124,677 
 
$
 127,104 
Total benefits and expenses
 
 106,912 
 
 
 106,346 
Income before income tax expense
 
 17,765 
 
 
 20,758 
 
 
 
 
 
 
Net income
$
 11,579 
 
$
 13,508 
 
 
 
 
 
 
General account assets
$
 182,603 
 
$
 181,482 

The Group Protection segment had pre-tax income of $17.8 million and $20.8 million for year ended December 31, 2011 and 2010, respectively.  Total revenues for the year ended December 31, 2011 decreased by $2.4 million, as compared to the year ended December 31, 2010.  The decrease in revenues resulted mainly from a decrease of $3.0 million in premiums, offset by an increase of $0.6 million in net investment income.

Total benefits and expenses for the year ended December 31, 2011 increased by $0.6 million in comparison to the year ended December 31, 2010.  The increase in benefits and expenses resulted primarily from an increase of $3.3 million in policyowner benefits, offset by decreases in other operating expenses, interest expense and VOCRA amortization expense of $1.9 million, $0.5 million and $0.3 million, respectively.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED

Corporate Segment

The Corporate segment consists of the unallocated capital of the Company, its debt financing and items not otherwise attributable to the other segments.  The Company maintains the Corporate segment to provide for the capital needs of the three other segments and to engage in other financing related activities.  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.

The following provides a summary of operations for the Corporate segment for the years ended December 31, (in 000’s):

 
2011 
 
2010 
 
 
 
 
 
 
Total revenues
$
 8,305 
 
$
 (40,320)
Total benefits and expenses
 
 20,826 
 
 
 19,018 
Loss before income tax benefit
 
 (12,521)
 
 
 (59,338)
 
 
 
 
 
 
Net loss
$
 (9,320)
 
$
 (41,005)
 
 
 
 
 
 
General account assets
$
 589,641 
 
$
 652,467 

The Corporate segment had a pre-tax loss of $12.5 million and $59.3 million for the years ended December 31, 2011 and 2010, respectively.  The $46.8 million decrease in pre-tax loss was attributable to an increase in total revenues of $48.6 million, offset by an increase in total benefits and expenses of $1.8 million.

The $48.6 million increase in total revenues in 2011, as compared to 2010, was primarily due to increases of $26.0 million, $15.1 million and $11.7 million in net realized investment gains, derivative income and net investment income, respectively, offset by a decrease of $5.0 million in fee and other income.  The increase of $26.0 million in net realized investment gains resulted primarily from dispositions of available-for-sale fixed maturity securities.  The increase of $15.1 million in derivative income related to the change in fair value of certain foreign currency contracts.  The increase of $11.7 million in net investment income was primarily a result of the change in the allocation of net investment income to the operating segments and higher earnings on limited partnership investments.

The increase of $1.8 million in total benefits and expenses was due to an increase in other operating expenses of $10.2 million, offset by an $8.4 million decrease in interest expense.  The increase of $10.2 million in other operating expenses resulted primarily from severance and other restructuring costs, as well as an accrual recorded in 2011 for certain guarantee fund assessments.  The decrease of $8.4 million in interest expense resulted primarily from an increase in the allocation of interest expense to the operating segments and a decrease in interest expense related to unrecognized tax benefits during the twelve-month period ended December 31, 2011, as compared to the same period in 2010.




SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)


This discussion covers market risk associated with investment portfolios that support the Company’s general account liabilities. This discussion does not cover market risk associated with those investment portfolios that support separate account products.  For those products, the policyholder, rather than the Company, assumes market risk.

General

The assets of the general account are available to support general account liabilities.  For purposes of managing these assets in relation to these liabilities, the Company segments these assets by product or by groups of products.  The Company manages each segment’s assets based on an investment policy statement that it has established for that segment.  The policy statement covers the segment’s liability characteristics and liquidity requirements, provides cash flow estimates, and sets targets for asset mix, duration and quality. Each quarter, investment and business unit managers review these policies to ensure that the policies remain appropriate, taking into account each segment’s liability characteristics.  The Company’s general account is primarily exposed to the following market risks:  credit risk, interest rate risk, equity risk and foreign currency exchange risk.

Investment Credit Risk

Credit risk relates to the uncertainty of an obligor’s continued ability to make timely payments in accordance with the contractual terms of the instrument or contract.  The Company is exposed to some credit risk within its investment portfolio through its derivative counterparties and reinsurers.  Derivative counterparty credit risk is measured as the amount owed to the Company, based upon current market conditions and potential payment obligations between the Company and its counterparties.  The Company also is exposed to credit spread risk related to security market price and cash flows associated with changes in credit spreads.

The Company’s management believes that its stringent investment management standards and practices have resulted in high-quality portfolios that have the effect of limiting credit risk.  Credit risks associated with fixed income investments are managed by the Company in aggregate using detailed credit and underwriting policies, specific diversification requirements, comprehensive due diligence and ongoing credit analysis, aggregate counterparty exposure, and asset sector and industry concentration limits.  Credit risks associated with derivative financial instruments, including swaps, options and futures, are managed through consideration of counterparty credit risk, as well as the Company’s own credit risk.  In order to mitigate credit risk exposure, the Company transacts with counterparties that have a similar rating as the Company, prices its derivative liabilities based on its own credit rating, and generally holds collateral service agreements for its net derivative exposure with each counterparty.  Credit risk policies are subject to regular review and approval by senior management and by the Company’s board of directors.  The Company also manages credit risk through established investment policies which address the quality of obligors and counterparties, credit concentration limits, diversification requirements and acceptable risk levels under expected and stressed scenarios.  These policies also are regularly reviewed and approved by senior management and by the Company’s board of directors.

In addition, as a matter of investment policy, the Company manages interest rate risk, equity risk and foreign currency exchange risk, within tolerance bands.  The asset liability management discipline within the Company is a collaborative effort comprised of staff from the investments, asset liability management, and finance functions, as well as the business units.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Interest rate risk

The Company’s fixed interest rate liabilities are primarily supported by well-diversified portfolios of fixed interest investments.  They also are supported by holdings of real estate and floating rate notes.  All of these interest-bearing investments can include publicly-issued and privately-placed bonds and commercial mortgage loans.  Public bonds can include Treasury bonds, corporate bonds and money market instruments.  The Company’s fixed income portfolios also hold securitized assets, including CMO, CMBS and ABS.  These securities are subject to the same standards applied to other portfolio investments, including relative value criteria and diversification guidelines.  As a result of commercial mortgage securitization transactions involving assets formerly owned by the Company, the Company has retained subordinated interest certificates and interest-only certificates.

Changes in the level of domestic interest rates affect the market value of fixed interest assets and liabilities.  Segments whose liabilities mainly arise from the sale of products containing interest rate guarantees for certain terms are sensitive to changes in interest rates.  In these segments, the Company uses ‘‘immunization’’ strategies, which are specifically designed to minimize loss from wide fluctuations in interest rates.  The Company supports these strategies using analytical and modeling software acquired from outside vendors.

Significant features of the Company’s immunization models include:
 
 
Ø
An economic or market value basis for both assets and liabilities;
 
Ø
An option pricing methodology;
 
Ø
The use of effective duration and convexity to measure interest rate sensitivity; and
 
Ø
The use of key rate durations to estimate interest rate exposure at different points of the yield curve and to estimate the exposure to non-parallel shifts in the yield curve.

The Company’s Interest Rate Risk Committee meets monthly.  After reviewing duration analyses, market conditions and forecasts, the committee develops specific asset management strategies for its interest-sensitive portfolios.  These strategies may involve managing to achieve small intentional mismatches, either in terms of total effective duration or for certain key rate durations, between liabilities and related assets of particular segments.  The Company manages these mismatches to a narrow tolerance.

Asset strategies may include the use of interest rate futures, options or swaps to adjust the duration profiles for particular portfolios.  All derivative transactions are conducted under written operating guidelines and are marked-to-market.  Total positions and exposures are reported to the Company’s board of directors on a quarterly basis.  The counterparties are highly-rated financial institutions and are highly diversified.

The Company performed a sensitivity analysis on these interest-sensitive liabilities and investments at December 31, 2011.  The analysis showed that if there were an immediate decrease of 100 basis points in interest rates, the fair value of net assets and liabilities would increase $17.2 million.

By comparison, fixed interest liabilities and investments held in the Company’s general account and non-unitized separate accounts at December 31, 2010 were tested for sensitivity to interest rates.  The analysis showed that if there were an immediate decrease of 100 basis points in interest rates, the fair value of net assets and liabilities would decrease by $31.4 million.

The Company produced these estimates using financial models.  Since these models reflect assumptions about the future, they contain an element of uncertainty.  For example, the models contain assumptions about future policyholder behavior and asset cash flows. Actual policyholder behavior and asset cash flows could differ from what the models show.  As a result, the models’ estimates of duration and market values may not reflect what actually would occur.  The models are further limited by the fact that they do not provide for the possibility that management action could be taken to mitigate adverse results.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Equity and foreign currency exchange risk

The Company utilizes put options on the S&P 500 Index and futures on the S&P 500 and other indices to hedge against stock market exposure inherent in the guaranteed minimum death and living benefit features contained within some of its variable annuity products.  At December 31, 2011 and 2010, the fair value of the put options was $11.8 million and $3.7 million, respectively.  The Company performed a sensitivity analysis on the effect of market changes and determined that a 10% increase in the market would decrease the market value of the options by $5.6 million and $2.5 million at December 31, 2011 and 2010, respectively.  A decrease in the market of 10% would increase the market value of the options by $6.8 million at both December 31, 2011 and 2010.

At December 31, 2011 and 2010, the market value of the equity futures units that the Company held was $10.7 million and $1.6 million, respectively.  The Company performed a sensitivity analysis on the effect of market changes and determined that a 10% increase in the market would have resulted in a realized loss in the futures position of $254.6 million and $167.0 million at December 31, 2011 and 2010, respectively.  A decrease in the market of 10% would have resulted in a realized gain in the futures position of $254.6 million and $167.0 million at December 31, 2011 and 2010, respectively.

At both December 31, 2011 and 2010, the Company had $2.1 billion and $2.4 billion, respectively, in fixed index annuity liabilities that provide customers with contractually guaranteed participation in the price appreciation of the S&P 500 Index.  The Company purchases S&P 500 Index options and futures to hedge the risk associated with the price appreciation component of its fixed index annuity liabilities.

The Company manages the equity risk inherent in its assets relative to the equity risk inherent in its fixed index annuity liabilities by conducting detailed computer simulations that model its S&P 500 Index derivatives and its fixed index annuity liabilities under stress-test scenarios in which both the index level and the index option implied volatility are varied through a wide range.  Implied volatility is a value derived from standard option valuation models representing an implicit forecast of the standard deviation of the returns on the underlying asset over the life of the option or future.  The fair values of S&P 500 Index linked securities, derivatives and annuities are produced using standard derivative valuation techniques.  The derivative portfolios are constructed to maintain acceptable interest margins under a variety of possible future S&P 500 Index levels and option or future cost environments.  In order to achieve this objective and limit its exposure to equity price risk, the Company measures and manages these exposures using methods based on the fair value of assets and the price appreciation component of related liabilities.  The Company uses derivatives, including futures, options and total return swaps, to hedge its net exposure to fluctuations in the S&P 500 Index.

Based upon the information and assumptions that the Company used in its stress-test scenarios at December 31, 2011 and 2010, management estimates that if the S&P 500 Index increases by 10%, the net fair value of its assets and liabilities described above would increase by approximately $5.6 million and $1.3 million, respectively.  Likewise, at December 31, 2011 and 2010, if the S&P 500 Index decreases by 10%, management estimates that the net fair value of its assets and liabilities will decrease net assets by approximately $2.9 million and $3.7 million, respectively.

The simulations do not consider the effects of other changes in market conditions that could accompany changes in the equity option and futures markets, including the effects of changes in implied dividend yields, interest rates and fixed index annuity policy surrenders.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Capital Management & Liquidity Risk

The Company ensures that adequate capital is maintained to support the risk associated with its businesses.  In addition, the Company provides an appropriate level of risk management over capital adequacy risk, which is defined as the risk that capital is not or will not be sufficient to withstand adverse economic conditions, to maintain financial strength or to allow the Company to take advantage of opportunities for expansion.  The approach to managing capital has been developed to ensure that an appropriate balance is maintained between the internal assessment of capital required and the requirements of regulators and rating agencies.

The NAIC, the U.S. standard-setting and regulatory support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories, has established standards for minimum capitalization requirements based on risk-based capital formulas for life insurance companies, which establish 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.  Furthermore, declining equity markets may result in an increase in required capital for regulatory purposes.  However, management believes that the Company’s strong underlying business franchise, capital management capabilities and capital contributions from the Parent will allow for adequate capital to satisfy regulatory requirements.  During the year ended December 31, 2010, the Company received capital contributions totaling $400.0 million from the Parent to ensure that the Company continues to satisfy regulatory capital requirements.  During the year ended December 31, 2011, the Company paid a return of capital to the parent of $300.0 million, while still maintaining adequate regulatory capital.

Liquidity risk is the risk that the Company will not be able to fund all cash outflow commitments as they fall due.  The Company generally maintains a conservative liquidity position that exceeds all the liabilities payable on demand.  The Company’s asset-liability management allows it to maintain its financial position by ensuring that sufficient liquid assets are available to cover its potential funding requirements.  The Company invests in various types of assets with a view of matching them with its liabilities of various durations.  To further strengthen its liquidity position, the Company actively manages and monitors its capital and asset levels, the diversification and credit quality of its investments, and cash forecasts and actual amounts against established targets.  The Company also maintains liquidity contingency plans for the management of liquidity in the event of a liquidity crisis.

The Company’s primary source of funds is cash provided by operating activities.  These funds are used primarily to pay policy benefits, claims, commissions, operating expenses and interest expenses.  Cash flows generated from operating activities are generally invested to support future payment requirements, including the payment of policy benefits and other expenses.  The Company also receives funds from time to time through borrowing from affiliated companies or capital contributions from its Parent.

Through effective cash management and capital planning, the Company ensures that it is sufficiently funded and maintains adequate liquidity to meet its obligations.  At December 31, 2011, the Company, through its operational cash flows and various sources of liquidity (e.g., capital contributions from the Parent) had sufficient liquidity to meet all of its obligations.


Financial statements in the form required by Regulation S-X are set forth below.




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,

 
 
2011 
 
2010 
 
2009 
 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
 
Premiums and annuity considerations (Note 8)
 
$
137,420 
 
$
136,175 
 
$
134,246 
Net investment income (1)  (Note 7)
 
 
727,628 
 
 
1,390,210 
 
 
2,582,307 
Net derivative loss (Note 4)
 
 
(988,070)
 
 
(149,290)
 
 
(39,902)
Net realized investment gains (losses), excluding
impairment losses on available-for-sale securities (Note 6)
 
 
39,578 
 
 
26,951 
 
 
(36,675)
Other-than-temporary impairment losses (2)  (Note 4)
 
 
(71)
 
 
(885)
 
 
(4,834)
Fee and other income (Note 8)
 
 
608,411 
 
 
511,027 
 
 
385,836 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
 
524,896 
 
 
1,914,188 
 
 
3,020,978 
 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
 
Interest credited (Note 8)
 
 
424,208 
 
 
401,848 
 
 
385,768 
Interest expense
 
 
47,170 
 
 
51,789 
 
 
39,780 
Policyowner benefits (Note 8)
 
 
134,412 
 
 
239,794 
 
 
110,439 
Amortization of deferred policy acquisition costs and
value of business and customer renewals acquired
 
 
(247,401)
 
 
697,102 
 
 
1,024,661 
Other operating expenses (Note 8)
 
 
350,325 
 
 
318,170 
 
 
248,156 
 
 
 
 
 
 
 
 
 
 
Total benefits and expenses
 
 
708,714 
 
 
1,708,703 
 
 
1,808,804 
 
 
 
 
 
 
 
 
 
 
(Loss) income from continuing operations before income
tax (benefit) expense
 
 
(183,818)
 
 
205,485 
 
 
1,212,174 
Income tax (benefit) expense (Note 10)
 
 
(80,701)
 
 
71,211 
 
 
335,649 
 
 
 
 
 
 
 
 
 
 
Net (loss) income from continuing operations
 
 
(103,117)
 
 
134,274 
 
 
876,525 
 
 
 
 
 
 
 
 
 
 
Income from discontinued operations, net of tax
 
 
 
 
 
 
 
 
 
(Note 2)
 
 
- 
 
 
 - 
 
 
104,971 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(103,117)
 
$
134,274 
 
$
981,496 

(1)
Net investment income includes an increase in market value of trading investments of $186.6 million, $674.2 million and $2,086.7 million for the years ended December 31, 2011, 2010 and 2009, respectively.
(2)
 The $0.1 million, $0.9 million and $4.8 million other-than-temporary impairment (“OTTI”) losses for years ended December 31, 2011, 2010 and 2009, respectively, represent solely credit losses.  The Company incurred no non-credit OTTI losses during the years ended December 31, 2011, 2010 and 2009 as such, no non-credit OTTI losses were recognized in other comprehensive income for these periods.



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, 2011
 
 
December 31, 2010
Investments
 
 
 
 
 
Available-for-sale fixed maturity securities, at fair value (amortized cost of
$1,339,960 and $1,422,951 in 2011 and 2010, respectively) (Note 4)
$
1,402,525 
 
$
1,495,923 
Trading fixed maturity securities, at fair value (amortized cost of $10,336,058
and $11,710,416 in 2011 and 2010, respectively) (Note 4)
 
10,280,536 
 
 
11,467,118 
Mortgage loans (Note 4)
 
1,457,356 
 
 
1,737,528 
Derivative instruments – receivable (Note 4)
 
422,404 
 
 
198,064 
Limited partnerships
 
34,088 
 
 
41,622 
Real estate (Note 4)
 
223,814 
 
 
214,665 
Policy loans
 
603,371 
 
 
717,408 
Other invested assets
 
37,075 
 
 
27,456 
Short-term investments
 
105,895 
 
 
832,739 
Cash and cash equivalents
 
872,064 
 
 
736,323 
Total investments and cash
 
15,439,128 
 
 
17,468,846 
 
 
 
 
 
 
Accrued investment income
 
169,761 
 
 
188,786 
Deferred policy acquisition costs and sales inducement asset (Note 13)
 
2,206,886 
 
 
1,682,559 
Value of business and customer renewals acquired (Note 14)
 
106,087 
 
 
134,985 
Net deferred tax asset (Note 10)
 
448,376 
 
 
394,297 
Goodwill (Note 1)
 
7,299 
 
 
7,299 
Receivable for investments sold
 
5,092 
 
 
5,328 
Reinsurance receivable
 
2,237,806 
 
 
2,347,086 
Other assets (Note 1)
 
119,325 
 
 
125,529 
Separate account assets (Note 1)
 
27,483,790 
 
 
26,880,421 
 
 
 
 
 
 
Total assets
$
48,223,550 
 
$
49,235,136 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
Contractholder deposit funds and other policy liabilities
$
13,626,525 
 
$
14,593,228 
Future contract and policy benefits
 
910,032 
 
 
849,514 
Payable for investments purchased
 
730 
 
 
44,827 
Accrued expenses and taxes
 
49,867 
 
 
52,628 
Debt payable to affiliates (Note 3)
 
683,000 
 
 
783,000 
Reinsurance payable
 
2,100,124 
 
 
2,231,835 
Derivative instruments – payable (Note 4)
 
287,074 
 
 
362,023 
Other liabilities
 
339,641 
 
 
285,056 
Separate account liabilities
 
27,483,790 
 
 
26,880,421 
 
 
 
 
 
 
Total liabilities
 
45,480,783 
 
 
46,082,532 
 
 
 
 
 
 
Commitments and contingencies (Note 20)
 
 
 
 
 
 
 
 
 
 
 
STOCKHOLDER’S EQUITY
 
 
 
 
 
 
 
 
 
 
 
Common stock, $1,000 par value – 10,000 shares authorized; 6,437 shares
issued and outstanding in 2011 and 2010
 
6,437 
 
 
6,437 
Additional paid-in capital
 
3,629,228 
 
 
3,928,246 
Accumulated other comprehensive income (Note 19)
 
38,851 
 
 
46,553 
Accumulated deficit
 
(931,749)
 
 
(828,632)
 
 
 
 
 
 
Total stockholder’s equity
 
2,742,767 
 
 
3,152,604 
 
 
 
 
 
 
Total liabilities and stockholder’s equity
$
48,223,550 
 
$
49,235,136 

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 (LOSS) INCOME
(in thousands)
For the Years Ended December 31,



 
 
2011 
 
 
2010 
 
 
2009 
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(103,117)
 
$
134,274 
 
$
981,496 
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Change in unrealized holding gains on available- for-
sale securities, net of tax (1)
 
33,493 
 
 
34,459 
 
 
113,278 
Reclassification adjustment for OTTI losses, net of tax (2)
 
1,111 
 
 
938 
 
 
202 
Change in pension and other postretirement plan
adjustments, net of tax (3)
 
-
 
 
 - 
 
 
10,231 
Reclassification adjustments of net realized investment  
losses into net income (gains) losses (4)
 
(42,306)
 
 
(24,088)
 
 
3,117 
Other comprehensive (loss) income
 
(7,702)
 
 
11,309 
 
 
126,828 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income
$
(110,819)
 
$
145,583 
 
$
1,108,324 

 
(1)
Net of tax (expense) of $(18.0) million, $(18.6) million and $(60.1) million for the years ended December 31, 2011, 2010 and 2009, respectively.
 
(2)
Represents an adjustment to OTTI losses due to the sale of other-than-temporarily impaired available-for-sale fixed maturity securities.
 
(3)
Net of tax (expense) of $(5.5) million for the year ended December 31, 2009.
 
(4)
Net of tax benefits (expense) of $22.8 million, $13.0 million and $(1.7) million for the years ended December 31, 2011, 2010 and 2009, 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 CHANGES IN STOCKHOLDER’S EQUITY
(in thousands)
For the Years Ended December 31,

 
Common
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
(Loss) Income
(1)
 
  Accumulated
Deficit
 
Total
Stockholder’s
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2008
$
 6,437 
 
$
 2,872,242 
 
$
 (129,884)
 
$
 (1,953,540)
 
$
 795,255 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cumulative effect of accounting
changes related to the adoption of
FASB ASC Topic 320, net of tax (2)
 
 - 
 
 
 - 
 
 
 (9,138)
 
 
 9,138 
 
 
 - 
Net income
 
 - 
 
 
 - 
 
 
 - 
 
 
 981,496 
 
 
 981,496 
Tax benefit from stock options
 
 - 
 
 
 185 
 
 
 - 
 
 
 - 
 
 
 185 
Capital contribution from Parent
 
 - 
 
 
 748,652 
 
 
 - 
 
 
 - 
 
 
 748,652 
Net liabilities transferred to affiliate
(Note 3)
 
 - 
 
 
 1,467 
 
 
 47,438 
 
 
 - 
 
 
 48,905 
Dividend to Parent (Notes 1 and 2)
 
 - 
 
 
 (94,869)
 
 
 - 
 
 
 - 
 
 
 (94,869)
Other comprehensive income
 
 - 
 
 
 - 
 
 
 126,828 
 
 
 - 
 
 
 126,828 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2009
 
 6,437 
 
 
 3,527,677 
 
 
 35,244 
 
 
 (962,906)
 
 
 2,606,452 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 - 
 
 
 - 
 
 
 - 
 
 
 134,274 
 
 
 134,274 
Tax benefit from stock options
 
 - 
 
 
 569 
 
 
 - 
 
 
 - 
 
 
 569 
Capital contribution from Parent
 
 - 
 
 
 400,000 
 
 
 - 
 
 
 - 
 
 
 400,000 
Other comprehensive income
 
 - 
 
 
 - 
 
 
 11,309 
 
 
 - 
 
 
 11,309 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2010
 
 6,437 
 
 
 3,928,246 
 
 
 46,553 
 
 
 (828,632)
 
 
 3,152,604 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
 - 
 
 
 - 
 
 
 - 
 
 
 (103,117)
 
 
 (103,117)
Tax benefit from stock options
 
 - 
 
 
 982 
 
 
 - 
 
 
 - 
 
 
 982 
Return of capital to Parent (Note 3)
 
 - 
 
 
 (300,000)
 
 
 - 
 
 
- 
 
 
 (300,000)
Other comprehensive loss
 
 - 
 
 
 - 
 
 
 (7,702)
 
 
 - 
 
 
 (7,702)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
 6,437 
 
$
 3,629,228 
 
$
 38,851 
 
$
 (931,749)
 
$
 2,742,767 

 
(1)
As of December 31, 2011, the total amount of after tax non-credit OTTI losses recorded in the Company’s accumulated other comprehensive income was $6.9 million.
 
(2)
Financial Accounting Standards Board (“FASB”), Accounting Standards Codification (“ASC”) Topic 320, “Investments-Debt and Equity Securities.”










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,

 
 
2011 
 
 
2010 
 
 
2009 
 
 
 
 
 
 
 
 
 
Cash Flows From Operating Activities:
 
 
 
 
 
 
 
 
Net (loss) income from operations
$
(103,117)
 
$
134,274 
 
$
981,496 
 
 
 
 
 
 
 
 
 
Adjustments to reconcile net (loss) income to net cash provided
by operating activities:
 
 
 
 
 
 
 
 
Net amortization (accretion) of premiums on investments
 
47,608 
 
 
30,562 
 
 
(689)
Amortization of deferred policy acquisition costs, and value of
business and customer renewals acquired
 
(247,401)
 
 
697,102 
 
 
1,024,661 
Depreciation and amortization
 
10,012 
 
 
5,683 
 
 
5,535 
Net loss (gain) on derivatives
 
960,978 
 
 
41,483 
 
 
(96,041)
Net realized (gains) losses and OTTI credit losses on available-for-
sale investments
 
(39,507)
 
 
(26,066)
 
 
41,509 
Net increase in fair value of trading investments
 
(186,566)
 
 
(674,223)
 
 
(2,086,740)
Net realized losses on trading investments
 
94,640 
 
 
67,277 
 
 
367,337 
Undistributed (income) loss on private equity limited partnerships
 
(2,883)
 
 
2,339 
 
 
9,207 
Interest credited to contractholder deposits
 
424,208 
 
 
401,848 
 
 
385,768 
Goodwill impairment
 
-
 
 
-
 
 
- 
Deferred federal income taxes
 
(49,932)
 
 
149,377 
 
 
295,608 
Changes in assets and liabilities:
 
 
 
 
 
 
 
 
Additions to deferred policy acquisition costs, sales inducement
asset and value of business and customer renewals acquired
 
(225,114)
 
 
(184,995)
 
 
(346,900)
Accrued investment income
 
19,025 
 
 
41,805 
 
 
36,736 
Net change in reinsurance receivable/payable
 
69,511 
 
 
129,907 
 
 
209,637 
Future contract and policy benefits
 
60,518 
 
 
33,876 
 
 
(125,992)
Other, net
 
(32,132) 
 
 
17,031 
 
 
(243,369)
Adjustments related to discontinued operations
 
-
 
 
- 
 
 
(288,018)
Net cash provided by operating activities
 
799,848 
 
 
867,280 
 
 
169,745 
 
 
 
 
 
 
 
 
 
Cash Flows From Investing Activities:
 
 
 
 
 
 
 
 
Sales, maturities and repayments of:
 
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities
 
708,951 
 
 
498,087 
 
 
113,478 
Trading fixed maturity securities
 
3,136,456 
 
 
4,170,750 
 
 
2,097,054 
Mortgage loans
 
253,599 
 
 
249,283 
 
 
143,493 
Real estate
 
812 
 
 
-
 
 
- 
Other invested assets (1)
 
115,650 
 
 
(315,643)
 
 
(207,548)
Purchases of:
 
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities
 
(561,142)
 
 
(771,747)
 
 
(347,139)
Trading fixed maturity securities
 
(1,948,459)
 
 
(3,946,548)
 
 
(867,310)
Mortgage loans
 
(15,045)
 
 
(101,668)
 
 
(17,518)
Real estate
 
(4,739)
 
 
(4,874)
 
 
(4,702)
Other invested assets (2)
 
(71,270)
 
 
(64,998)
 
 
(106,277)
Net change in other investments
 
-
 
 
- 
 
 
(183,512)
Net change in policy loans
 
6,879 
 
 
5,182 
 
 
6,817 
Net change in short-term investments
 
726,844 
 
 
434,572 
 
 
(722,821)
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) investing activities
$
2,348,536 
 
$
152,396 
 
$
(95,985)

Continued on next page

 
(1) Includes $95.1 million, $(371.9) million and $(345.2) million related to settlements of derivative instruments during the years ended December 31, 2011, 2010 and 2009, respectively.
 
(2) Includes $(62.0) million, $(62.0) million and $(92.1) million related to acquisitions of derivative instruments during the years ended December 31, 2011, 2010 and 2009, 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 CASH FLOWS
(in thousands)
For the Years Ended December 31,

 
 
2011 
 
 
2010 
 
 
2009 
 
 
 
 
 
 
 
 
 
Cash Flows From Financing Activities:
 
 
 
 
 
 
 
 
Additions to contractholder deposit funds
$
1,029,870 
 
$
1,217,014 
 
$
2,795,939 
Withdrawals from contractholder deposit funds
 
(3,631,161)
 
 
(3,606,335)
 
 
(3,011,499)
Repayment of debt
 
(100,000)
 
 
(100,000)
 
 
 - 
Debt proceeds
 
- 
 
 
 - 
 
 
200,000 
Capital contribution from Parent
 
 - 
 
 
 400,000 
 
 
 748,652 
Return of capital to Parent
 
 (300,000)
 
 
 - 
 
 
 - 
Other, net
 
 (11,352)
 
 
 1,760 
 
 
 (27,312)
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by financing activities
 
 (3,012,643)
 
 
 (2,087,561)
 
 
 705,780 
 
 
 
 
 
 
 
 
 
Net change in cash and cash equivalents
 
 135,741 
 
 
 (1,067,885)
 
 
 779,540 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, beginning of year
 
 736,323 
 
 
 1,804,208 
 
 
 1,024,668 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, end of year
$
 872,064 
 
$
 736,323 
 
$
 1,804,208 
 
 
 
 
 
 
 
 
 
Supplemental Cash Flow Information:
 
 
 
 
 
 
 
 
Interest paid
$
 44,272 
 
$
 45,389 
 
$
 47,151 
Income taxes (refunded) paid
$
 (21,041)
 
$
 (107,063)
 
$
 21,144 

Supplemental schedule of non-cash investing and financing activities

The Company exchanged $111.8 million of fixed maturity securities and converted $16.0 million of fixed maturity securities to equity securities during the year ended December 31, 2011.  Equity securities are reported in the Company’s balance sheets as part of other invested assets.  Mortgage foreclosures resulted in a reclassification of $9.0 million from mortgage loans to real estate during the year-ended December 31, 2011.  Refer to Note 8 for details of a $107.2 million non-cash adjustment to policy loans during the year ended December 31, 2011.

On December 31, 2009, the Company paid a dividend of all of the issued and outstanding common stock of the Company’s wholly-owned subsidiary, Sun Life Financial (U.S.) Reinsurance Company (“Sun Life Vermont”), to the Company’s sole shareholder, Sun Life of Canada (U.S.) Holdings, Inc. (the “Parent”).  This dividend is discussed more fully in Note 2.  As a result of the dividend, the Company’s total assets decreased by $2,658.1 million and total liabilities decreased by $2,563.2 million in a non-cash transaction.









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, 2011, 2010 and 2009

1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

GENERAL

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

The Company and its subsidiaries offer a variety of wealth accumulation products, protection products and institutional investment contracts.  These products include individual and group fixed and variable annuities, individual and group variable life insurance, individual universal life insurance, group life, group disability, group dental and group stop loss insurance and funding agreements.  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.

On December 12, 2011, SLF announced the completion of a major strategic review of its businesses.  As a result of this strategic review, SLF announced that it would close its domestic U.S. variable annuity and individual life products to new sales effective December 30, 2011.  The decision to discontinue sales in these lines of business is based on unfavorable product economics which, due to ongoing shifts in capital markets and regulatory requirements, no longer enhance shareholder value.  This decision reflects SLF’s intensified focus on reducing volatility and improving the return on shareholders’ equity by shifting capital to businesses with superior growth, risk and return characteristics.

Existing legal, business and contractual requirements call for the Company to, among other things, continue accepting limited applications for (1) certain private placement variable annuities until mid-2012, and (2) new employees of corporate-owned life insurance (“COLI”) customers.  Subject to these and other existing obligations, the Company has ceased writing all other COLI new business effective January 31, 2012 and all other individual life and annuities new business effective December 30, 2011.

The decision to stop selling variable annuity and individual life products in the U.S. will not impact existing customers and their policies.  The Company will continue to provide quality service to its policyholders, while focusing on the profitability, capital efficiency and risk management of its in-force business.  The Company will continue to earn revenue and to provide policyholder benefits on its in-force business.

Of the one-time restructuring costs on a pre-tax basis associated with the discontinuation of these products lines in the U.S., $12.7 million was allocated to the Company.  The restructuring costs related primarily to employee severance and other employee benefits, which are expected to be paid in the form of future cash expenditures, as well as other costs.

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, 2011, the Company directly or indirectly owned all of the outstanding shares 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 (“ILAC”), a Rhode Island life insurance company that sold variable and whole life insurance products; Clarendon Insurance Agency, Inc., a registered broker-dealer; SLF Private Placement Investment Company I, LLC; 7101 France Avenue Manager, LLC; Sun MetroNorth, LLC; SLNY Private Placement Investment Company I, LLC; and SL Investment DELRE Holdings 2009-1, LLC.

The Company’s consolidated financial statements also include a variable interest entity (“VIE”) that the Company is required to consolidate.  Refer to Note 4 for further information about VIEs.

All inter-company transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.


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

For the Years Ended December 31, 2011, 2010 and 2009

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

BASIS OF PRESENTATION (CONTINUED)

On December 30, 2009, Sun Life Vermont, which was a subsidiary of the Company at the time, paid a $100.0 million cash dividend to the Company.  On December 31, 2009, the Company paid a dividend of all of the issued and outstanding common stock of Sun Life Vermont to the Parent.  As a result of this transaction, Sun Life Vermont is no longer the Company’s wholly-owned subsidiary.  At December 31, 2009, Sun Life Vermont’s total assets and liabilities were $2,658.1 million and $2,563.2 million, respectively.  Sun Life Vermont’s net income for the year ended December 31, 2009 was $105.0 million.  As a result of this dividend transaction, the net income and changes in cash flows from the operating activities of Sun Life Vermont for the year ended December 31, 2009 are presented as discontinued operations in these consolidated financial statements.

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”) including sales inducement asset (“SIA”), value of business acquired (“VOBA”), value of customer renewals acquired (“VOCRA”), liabilities for future contract and policyholder benefits, unearned revenue reserves, accruals, other-than-temporary impairments of investments, allowance for loan loss, valuation allowance on deferred tax assets and provision for income taxes.  Actual results could differ from those estimates.

OUT-OF-PERIOD ADJUSTMENTS

During the year ended December 31, 2011, upon settlement of certain note obligations, the Company recognized $35.4 million of adjustments to contract liabilities that were not previously recorded.  These adjustments should have been recorded during prior years.  Prior periods have not been adjusted as the previously unrecognized amounts were not deemed to be material under Staff Accounting Bulletin (“SAB”) No. 99, “Materiality,” and SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in the Current Year Financial Statements.”

FINANCIAL INSTRUMENTS

In the normal course of business, the Company enters into transactions involving various types of financial instruments, including cash equivalents, short-term investments, 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, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Cash, cash equivalents and short-term investments are highly liquid securities.  The Company’s cash equivalents primarily include cash, commercial paper and money market investments which have an original term to maturity of less than three months.  Short-term investments include debt instruments with a term to maturity exceeding three months, but less than one year on the date of acquisition.  Cash equivalents and short-term investments are held at amortized cost, which approximates fair value.



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

For the Years Ended December 31, 2011, 2010 and 2009

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

INVESTMENTS

Fixed Maturity Securities

The Company accounts for its investments in accordance with FASB ASC Topic 320.  At the time of purchase, fixed maturity securities are classified as either trading or available-for-sale.  Securities, for which the Company has elected to measure at fair value under FASB ASC Topic 825, “Financial Instruments,” 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 trading criterion are classified as available-for-sale.  Included with 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.

The Company determines the fair value of its publicly-traded fixed maturity securities using three primary pricing methods: third-party pricing services, non-binding broker quotes and pricing models.  Prices are first sought from third party pricing services; the remaining unpriced securities are priced using one of the remaining two 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 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 asset-backed securities (“ABS”) including collateralized debt obligations, residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”) are priced using a fair value model or independent broker quotations.  CMBS securities are priced using the last sale price of the day or a broker quote, if no sales were transacted that day.  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, RMBS and CMBS.  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 maturity securities, fair values are determined using a discounted cash flow model which includes estimates that take into account credit spreads for publicly-traded securities of similar credit risk, maturity, prepayment and liquidity characteristics.  A portion of privately-placed fixed maturity securities also are 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.


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, 2011, 2010 and 2009

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

INVESTMENTS (continued)

Fixed Maturity Securities (continued)

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.  In addition, on the quarterly basis, the Company performs quantitative and qualitative analysis that includes back testing of recent trades, review of key assumptions such as spreads, duration, and 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 own testing.

Please refer to Note 5 of the Company’s consolidated financial statements for further discussion of the Company’s fair value measurements.

As required by FASB ASC Topic 320, the Company recognizes an OTTI loss and records a charge to earnings for the full amount of the impairment based on the difference between the amortized cost and fair value of the security, if the Company intends to sell, or if it is more likely than not that it will be required to sell, the impaired security prior to recovery of its cost basis.  Otherwise, losses on securities which are other-than-temporarily impaired are separated into two categories:  credit loss and non-credit loss.  The credit loss portion is charged to the consolidated statements of operations, while the non-credit loss is charged to other comprehensive income.  When an unrealized loss on a fixed maturity is considered temporary, the Company continues to record the unrealized loss in other comprehensive income and not in earnings.

Structured securities, typically those rated single A or below, are subject to certain provisions in FASB ASC Topic 325, “Investments–Other.”  These provisions require the Company to periodically update its best estimate of cash flows over the life of the security.  In the event that fair value is less than the carrying amount and there has been an adverse change in the expected cash flows, then an impairment charge, based on the difference between amortized cost and the present value of the expected cash flows discounted at the current effective rate, is recorded to income.

Please refer to Note 4 of the Company’s consolidated financial statements for further discussion of the Company’s recognition and disclosure of OTTI loss.

The Company discontinues the accrual of income on its holdings for issuers that are in default.  The Company’s net investment income would have increased by $2.1 million and $4.6 million for the year ended December 31, 2011 and 2010, respectively, if these holdings were performing.  As of December 31, 2011 and 2010, the fair market value of holdings for issuers in default was $19.6 million and $53.9 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, 2011, 2010 and 2009

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

INVESTMENTS (CONTINUED)

Mortgage Loans and Real Estate

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 cost using the effective interest rate method, net of provisions for estimated losses.  Purchases and sales of mortgage loans are recognized or derecognized in the Company’s balance sheet on the loans’ trade dates, which are the dates that the Company commits to purchase or sell the loan.  Transaction costs on mortgage loans are capitalized on initial recognition and are recognized in the Company’s statement of operations using the effective interest method.  Mortgage loans, which primarily include 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 regularly assesses the value of the collateral.

A mortgage loan is considered impaired when it is probable that the principal or interest is not collectible in accordance with the contractual terms of the loan. When a mortgage loan is classified as impaired, allowances for credit losses are established to adjust the carrying value of the loan to its net recoverable amount. The allowance for credit losses are estimated using the present value of expected cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, if the loan is collateral dependent.  A specific allowance for loan loss is established for an impaired loan if the present value of expected cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral less cost to sell, is less than the recorded amount of the loan.  The full extent of impairment in the mortgage portfolio cannot be assessed solely by reviewing these loans individually.  A general allowance for loan loss is established based on an assessment of past loss experience on groups of loans with similar characteristics and current economic conditions.  While management believes that it uses the best information available to establish the loan loss allowances, future adjustments may become necessary if economic conditions differ from the assumptions used in calculating them.

Interest income is recognized on impaired mortgage loans when the collection of contractually specified future cash flows is probable, in which case cash receipts are recorded in accordance with the effective interest rate method.  Interest income is not recognized on impaired mortgage loans and these mortgage loans are placed on non-accrual status when the collection of contractually specified future cash flows is not probable, in which case cash receipts are applied, firstly against the carrying value of the loan, then against the provision, and then to income.  The accrual of interest resumes when the collection of contractually specified future cash flows becomes probable based on certain facts and circumstances.

Changes in allowances for losses and write-off of specific mortgages are recorded as net realized gain or loss in the Company’s statements of operations.  Once the conditions causing impairment improve and future payments are reasonably assured, allowances are reduced and the mortgages are no longer classified as impaired.  However, the mortgage loan continues to be classified as impaired if the original terms of the contract have been restructured, resulting in the Company providing an economic concession to the borrower.

If the conditions causing impairment do not improve and future payments remain unassured, the Company typically derecognizes the asset through disposition or foreclosure.  Uncollectible collateral-dependent loans are written off through allowances for losses at the time of disposition or foreclosure.

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 depreciated cost.  Depreciation of buildings and improvements is calculated using the straight-line method over the estimated useful life of the asset.  Real estate investments held for sale are primarily acquired through foreclosure of mortgage loans for which the carrying amount is established as the fair value less cost to sell at the foreclosure date.  Real estate investments held- for-sale are measured at the lower of their carrying amount or fair value less costs to sell.  Real estate investments are diversified by property type and geographic area throughout the United States.


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, 2011, 2010 and 2009

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

INVESTMENTS (CONTINUED)

Derivative instruments

The Company uses derivative financial instruments including swaps, swaptions, 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 or loss.

Policy loans and other

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.

Realized gains and losses

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.  Changes in the provision for estimated losses on mortgage loans and real estate are included in net realized investment gains and losses.

Investment income

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 assets related to certain funds-withheld reinsurance agreements.  These assets are primarily comprised of fixed maturity securities, mortgage loans, policy loans, equity securities, derivative instruments, related accrued income and cash and cash equivalents and are accounted for consistent with the policies described above.  Investment income on assets within funds-withheld reinsurance portfolios is included as a component of net investment income in the Company’s consolidated statements of operations.

Please refer to Note 7 of the Company’s consolidated financial statements for further discussion of the Company’s net investment income.


DEFERRED POLICY ACQUISITION COSTS AND SALES INDUCMENT ASSET

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 deposit-type contracts, primarily deferred annuity, universal life (“UL”) and guaranteed investment contracts (“GICs”) are deferred and amortized with interest based on the proportion of actual gross profits to the present value of all 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.

SIA represents amounts that are credited to policyholder account balances related to the enhanced or bonus crediting rates that the Company offers on certain of its annuity products.  The costs associated with offering the enhanced or bonus crediting rates are capitalized and amortized over the expected life of the related contracts in proportion to the estimated gross profits.


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, 2011, 2010 and 2009

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

DEFERRED POLICY ACQUISITION COSTS AND SALES INDUCMENT ASSET (CONTINUED)

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 and are updated on a more frequent basis if required.  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.  Assumptions affecting the computation of estimated future gross profits include, but are not limited to, recent investment and policyholder experience, expectations of future performance and policyholder behavior, changes in interest rates, capital market growth rates, and account maintenance expense.

DAC amortization is reviewed regularly and adjusted retrospectively through the current period operations when the Company calculates the actual profits or losses and revises its estimate of future gross profits to be realized from deposit-type contracts, including realized and unrealized gains and losses from investments.  The Company also tests its DAC asset and SIA for loss recognition on a quarterly basis.  The test is performed by comparing the GAAP liability, net of DAC and SIA, to the present value of future expected gross profits or gross premium reserves.  The Company’s DAC asset and SIA at December 31, 2011 and 2010 failed the loss recognition test for certain annuity products and the Company, therefore, wrote down DAC asset and the SIA by $21.0 million and $126.0 million during the years ended December 31, 2011 and 2010, respectively.  Please refer to Note 13 of the Company’s consolidated financial statements for the Company’s DAC asset and SIA roll-forward.

The DAC asset under GAAP cannot exceed accumulated deferrals, plus interest.  At December 31, 2009, the Company reached the cap for its DAC asset and SIA related to certain fixed and fixed index annuity products and reported the DAC asset for these products at historical accumulated deferrals with interest.  At December 31, 2010, the Company’s SIA related to certain fixed and fixed index annuity remained at historical accumulated deferral with interest.  However, the Company’s DAC related to certain fixed annuities was below the cap and regular amortization was recorded during the year.  At December 31, 2011, the Company’s DAC asset and SIA were below the cap and regular amortization was recorded during the year.

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

VALUE OF BUSINESS AND CUSTOMER RENEWALS ACQUIRED

VOBA represents the actuarially determined present value of projected future gross profits from the Keyport Life Insurance Company (“Keyport”) in-force policies on November 1, 2001, the date of the Company’s acquisition of Keyport.  Prior to December 31, 2009, the Company’s VOBA also included the present value of projected future gross profits from the in-force policies that were transferred to SLNY, based on a series of agreements between SLNY and Sun Life and Health Insurance Company (U.S.) (“SLHIC”), an affiliate, (the “SLHIC to SLNY asset transfer”).  VOBA related to Keyport is amortized in proportion to the projected emergence of profits over the estimated life of the purchased block of business; VOBA related to the SLHIC to SLNY asset transfer was amortized in proportion to the projected premium income over the period to the first renewal of the transferred business.  As of December 31, 2009, VOBA related to the SLHIC to SLNY asset transfer was fully amortized.

VOCRA represents a portion of the assets that were transferred to SLNY under the SLHIC to SLNY asset transfer.  VOCRA is the actuarially determined present value of projected future profits arising from the existing in-force business at May 31, 2007 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.  The Company tests its VOCRA asset for impairment on an annual basis.  During the year ended December 31, 2009, the Company determined that its VOCRA asset was impaired and recorded an impairment charge of $2.6 million.  Please refer to Note 14 of the Company’s consolidated financial statements for the Company’s combined VOBA and VOCRA roll-forward.

Although recovery of VOBA 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 could be reduced in the near term, however, 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, 2011, 2010 and 2009

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

OTHER ASSETS

The Company’s other assets are comprised primarily of receivables from affiliates, outstanding premiums and intangible assets.  Intangible assets consist of state insurance licenses that are not subject to amortization and the value of distribution.  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.

Prior to December 31, 2009, the Company’s other asset also included property, equipment, leasehold improvements and capitalized software costs.  As described in Note 3, effective December 31, 2009, the Company transferred certain property, equipment, leasehold improvements and capitalized software costs to Sun Life Financial (U.S.) Services Company, Inc. (“Sun Life Services”), an affiliate.  Depreciation and amortization expenses related to these assets were $1.3 million for year ended December 31, 2009.

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 in-force policies.


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, 2011, 2010 and 2009

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 (“GMDB”).  Reserves for pension and payout annuity contracts are calculated using the best-estimate interest and decrement assumptions.  The Company periodically reviews its policies for loss recognition based upon management’s best estimates.  During the year ended December 31, 2011 and 2010, the Company recorded $49.3 million and $29.2 million, respectively, of adjustments to reserves related to loss recognition.
 
 
Reserves for GMDB and guaranteed minimum income benefits (“GMIB”) are calculated according to the methodology prescribed by the American Institute of Certified Public Accountants (“AICPA”) which is included in FASB ASC Topic 944 “Financial Services- Insurance,” 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 UL 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 reported 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 UL-type contracts and investment-related products such as deferred annuities, single premium whole life (“SPWL”) policies, 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.

INCOME TAXES

The Company accounts for current and deferred income taxes and recognizes reserves for income tax contingencies in accordance with FASB ASC Topic 740, “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.  Valuation allowances on deferred tax assets are estimated based upon the Company’s assessment of the realizability of such amounts.  Please refer to Note 10 of the Company’s consolidated financial statements for further discussion of the Company’s income taxes.


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, 2011, 2010 and 2009

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 UL-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 UL-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.

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 the following:

 
Ø
The fees that the Company receives, which are assessed periodically and recognized as revenue when assessed; and

 
Ø
The activity related to the GMDB, GMIB, guaranteed minimum accumulation benefit (“GMAB”) and guaranteed minimum withdrawal benefit (“GMWB”), which is reflected in the Company’s consolidated financial statements.

 
Ø
The dividends-received-deduction (“DRD”) which is included in the Company’s income tax (benefit) expense, is calculated based upon the separate account assets held in connection with variable annuity contracts.



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

For the Years Ended December 31, 2011, 2010 and 2009

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

ACCOUNTING PRONOUNCEMENTS

New and Adopted Accounting Pronouncements

In April 2011, the FASB issued Accounting Standard Update (“ASU”) 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” which clarifies when a loan modification or restructuring is considered a troubled debt restructuring (“TDR”).  In evaluating whether a restructuring constitutes a TDR a creditor must use judgment to determine whether the following exist:

 
1.
The borrower is experiencing financial difficulties, and
 
2.
The lender has granted a concession to the borrower.

ASU 2011-02 amends FASB ASC Topic 310 “Receivables,” to include financial difficulty indicators (such as debtor default, debtor bankruptcy or concerns about the future as a going concern) that the lender should consider in determining whether a borrower is experiencing financial difficulties.  The amendments also clarify that a borrower could be experiencing financial difficulties even though the borrower is not currently in payment default but default is probable in the foreseeable future.

ASU 2011-02 provides guidance on whether the lender has granted a concession to the borrower and notes that:

 
·
A borrower’s inability to access funds at a market rate for a new loan with similar risk characteristics as the modified loan indicates that the modification was executed at a below-market rate and therefore may indicate that a concession was granted.
 
·
A temporary or permanent increase in the contractual interest rate as a result of restructuring does not preclude the restructuring from being considered a concession because the rate may still be below market.
 
·
A restructuring that results in an insignificant delay in contractual cash flow is not considered to be a concession.

The amendments in ASU 2011-02 are effective for the first interim or annual period beginning on or after June 15, 2011.  These amendments are to be applied retrospectively to modifications occurring on or after the beginning of the annual period of adoption.  The Company adopted ASU 2011-2 on July 1, 2011 and the TDR disclosure requirements are included in Note 4 of these consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805):  Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force).”  The amendments of ASU 2010-29 provide guidance to clarify the acquisition date that should be used for reporting the pro forma financial information disclosures when comparative financial statements are presented.  ASU 2010-29 requires a public entity that presents comparative financial statements to disclose revenue and earnings of the combined entity as if the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period.  The amendments also require the supplemental proforma disclosure to include a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly related to the business combination. The Company adopted ASU 2010-29 on January 1, 2011 and will apply this guidance to future business combinations.



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, 2011, 2010 and 2009

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

ACCOUNTING PRONOUNCEMENTS (CONTINUED)

New and Adopted Accounting Pronouncements (Continued)

In December 2010, the FASB issued ASU 2010-28 “Intangibles–Goodwill and Other (Topic 350):  When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force).”  The amendments of ASU 2010-28 require reporting units with zero or negative carrying amounts to perform Step 2 of goodwill impairment test if it is more likely than not that a goodwill impairment exists and to consider adverse qualitative factors when performing the impairment test.  The Company adopted ASU 2010-28 on January 1, 2011, and the adoption did not have a significant impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310): Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which amends FASB ASC Topic 310 to enhance disclosures and to provide financial statement users with greater transparency about an entity’s allowance for credit losses and the credit quality of its financing receivables.  The amendments require an entity to provide a greater level of disaggregated information about the credit quality of the entity’s financing receivables and allowance for credit losses.  ASU 2010-20 also requires an entity to disclose credit quality indicators, the aging of past due information and the modification of its financing receivables.  The amendments in ASU 2010-20 that relate to disclosures as of the end of a reporting period are effective for interim and annual reporting periods ending on or after December 15, 2010.  However, the disclosure about activity that occurs during a reporting period are effective for interim and annual reporting periods beginning on or after December 15, 2010. Comparative disclosures are required for reporting periods ending after initial adoption.  The Company adopted ASU 2010-20 on December 31, 2010.  The enhanced disclosures required by ASU 2010-20 are included in Note 4 of the Company’s consolidated financial statements.

In April 2010, the FASB issued ASU 2010-18, “Receivables (Topic 310):  Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset–a consensus of the FASB Emerging Issues Task Force,” which amends FASB ASC Topic 310.  The amendments were made to eliminate diversity in practice in accounting for loans that undergo troubled debt restructuring for those loans that have been included in a pool of loans.  Under ASU 2010-18, debt modifications that were made for distressed loans included in a pool of loans do not trigger the criteria needed to allow for such loans to be accounted for separately outside of the pool.  Upon initial adoption, an entity may make a one-time election to terminate accounting for loans as a pool.  The election may be made on a pool-by-pool basis and does not prevent the entity from using pool accounting for loans that will be acquired in the future.  The amendments in ASU 2010-18 are effective for the first fiscal quarter ending on or after July 15, 2010.  Early adoption is permitted.  The Company adopted ASU 2010-18 on September 30, 2010 and such adoption did not have a material impact on the Company’s consolidated financial statements.

In April 2010, the FASB issued ASU 2010-15, “Financial Services–Insurance (Topic 944):  How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments–a consensus of the FASB Emerging Issues Task Force,” to provide guidance regarding accounting for investment funds determined to be VIEs.  Under this guidance, an insurance entity would not be required to consolidate a voting-interest investment fund when it holds the majority of the voting interests of the fund through its separate accounts.  In addition, an insurance entity would not consider the interests held through separate accounts for the benefit of policyholders in the insurer’s evaluation of its controlling interest in a VIE, unless the separate account contract holder is a related party.  The guidance is effective, on a retrospective basis, for fiscal years and interim periods within those fiscal years, beginning after December 15, 2010.  The Company adopted ASU 2010-15 on January 1, 2011 and the adoption did not have a significant impact on the Company’s 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, 2011, 2010 and 2009

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

ACCOUNTING PRONOUNCEMENTS (CONTINUED)

New and Adopted Accounting Pronouncements (Continued)

In March 2010, the FASB issued ASU 2010-11, “Derivatives and Hedging (Topic 815):  Scope Exception Related to Embedded Credit Derivatives,” which provides amendments to FASB ASC Topic 815, “Derivatives and Hedging,” to clarify the embedded credit derivative scope exception included therein.  The amendments address how to determine which embedded credit derivative features are considered to be embedded derivatives that should not be analyzed for potential bifurcation and separate accounting under ASC Topic 815.  Under ASU 2010-11, only the embedded credit derivative feature created by subordination between financial instruments is not subject to the bifurcation requirements of ASC Topic 815.  However, other embedded credit derivative features would be subject to analysis for potential bifurcation even if their effects are allocated to interests in tranches of securitized financial instruments in accordance with those subordination provisions.  The following circumstances would not qualify for the scope exception and are subject to the application of ASC Topic 815 requiring the embedded derivatives to be analyzed for potential bifurcation:

 
Ø
An embedded derivative feature relating to another type of risk (including another type of credit risk) is present in the securitized financial instrument.
 
Ø
The holder of an interest in a tranche of securitized financial instruments is exposed to the possibility of being required to make potential future payments because the possibility of those future payments is not created by subordination.
 
Ø
The holder owns an interest in a single-tranche securitization vehicle; therefore, the subordination of one tranche to another is not relevant.

The amendments in ASU 2010-11 are effective for the first fiscal quarter beginning after June 15, 2010.  Early adoption is permitted.  The Company adopted ASU 2010-11 on July 1, 2010 and such adoption did not have a material impact on the Company’s consolidated financial statements.

In February 2010, the FASB issued ASU 2010-09, “Subsequent Events (Topic 855):  Amendments to Certain Recognition and Disclosure Requirements” which removes the requirement for U.S. Securities and Exchange Commission (“SEC”) filers to disclose the date through which subsequent events have been evaluated.  ASU No. 2010-09 is effective upon issuance.  Events that have occurred subsequent to December 31, 2011 have been evaluated by the Company’s management in accordance with ASU 2010-09.

In January 2010, the FASB issued ASU 2010-06, “Fair Value Measurement and Disclosures (Topic 820):  Improving Disclosures about Fair Value Measurements,” which provides amendments to FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” to provide more robust disclosures about the following:

 
Ø
The different classes of assets and liabilities measured at fair value;
 
Ø
The valuation techniques and inputs used;
 
Ø
The transfers between Levels 1, 2, and 3; and
 
Ø
The activity in Level 3 fair value measurements.

Certain new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 31, 2009.  Disclosures about purchases, sales, issuances and settlements in the roll-forward of activities in Level 3 are effective for fiscal years beginning after December 15, 2010.  The Company adopted ASU 2010-06 on January 1, 2010.  The enhanced disclosures required by ASU 2010-06 for the periods beginning after December 31, 2009 are included in Note 5 of the Company’s 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, 2011, 2010 and 2009

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

ACCOUNTING PRONOUNCEMENTS (CONTINUED)

New and Adopted Accounting Pronouncements (continued)

On January 1, 2010, the Company adopted the provisions of FASB ASC Topic 860, “Transfers and Servicing,” which were issued in June 2009.  These provisions amend and expand disclosures about the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement in transferred financial assets.  FASB ASC Topic 860 amends previously issued derecognition accounting and disclosure guidance and eliminates the exemption from consolidation for qualifying special purpose entities (“QSPEs”); it also requires a transferor to evaluate all existing QSPEs to determine whether they must be consolidated in accordance with the provisions of FASB ASC Topic 860.  This guidance is effective for financial asset transfers occurring in fiscal years and interim periods beginning after November 15, 2009.  The adoption did not have a material impact on the Company’s consolidated financial statements.

On January 1, 2010, the Company adopted the provisions of FASB ASC Topic 810, “Consolidation,” which were issued in June 2009.  This guidance amends previously issued consolidation guidance which affects all entities currently within the scope of FASB ASC Topic 810, including QSPEs, as the concept of these entities was eliminated by FASB ASC Topic 860.  This guidance is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2009.  The adoption did not have a material impact on the Company’s consolidated financial statements.

The Company adopted the provisions of FASB ASC Topic 320, which were issued in April 2009.  This guidance amends the guidance for OTTI of debt securities and changes the presentation of OTTI in the financial statements.   If the Company intends to sell, or if it is more likely than not that it will be required to sell, an impaired security prior to recovery of its cost basis, the security is to be considered other-than-temporarily impaired and the full amount of impairment must be charged to earnings.  Otherwise, losses on securities which are other-than-temporarily impaired are separated into two categories, the portion of loss which is considered credit loss (“credit loss”) and the portion of loss which is due to other factors (“non-credit loss”).  The credit loss portion is charged to earnings, while the non-credit loss is charged to other comprehensive income.  When an unrealized loss on a fixed maturity is considered temporary, the Company continues to record the unrealized loss in other comprehensive income and not in earnings.  This guidance also expands and increases the frequency of existing disclosures about OTTI of debt and equity securities.  The Company adopted the above-noted aspects of FASB ASC Topic 320 on April 1, 2009.  Upon adoption, a cumulative effect adjustment, net of taxes, of $9.1 million was recorded to decrease accumulated other comprehensive income with a corresponding increase to retained earnings (accumulated deficit) for the non-credit component of previously impaired securities that the Company neither intends to sell, nor is it more likely than not that the Company will be required to sell, before recovery of amortized cost.  The enhanced disclosures required by FASB ASC Topic 320 are included in Note 4 of the Company’s 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, 2011, 2010 and 2009

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

ACCOUNTING PRONOUNCEMENTS (CONTINUED)

Accounting Standards Not Yet Adopted

In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220):  Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05,” which allows for the deferral of certain presentation requirements about reclassifications of items out of accumulated other income originally included in ASU 2011-05, “Comprehensive Income (Topic 220):  Presentation of Comprehensive Income.”  The amendments are being made to allow FASB time to reconsider it requirements of entities to present on the face of their financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented.  The amendments are effective at the same time as the amendments in ASU 2011-05 so that entities will not be required to comply with the presentation requirements in ASU 2011-05 that ASU 2011-12 is deferring.  All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements.  The amendments in ASU 2011-12 are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company will adopt ASU 2011-12 on March 31, 2012 and does not expect its requirements to significantly impact the Company’s consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210):  Disclosures about Offsetting Assets and Liabilities,” which requires an entity to disclose information about offsetting assets and liabilities and related arrangements included in its financial statements.  Offsetting (netting) assets and liabilities is an important aspect of presentation in financial statements.  The differences in the offsetting requirements in GAAP and International Financial Reporting Standards (“IFRS”) account for a significant difference in the amounts presented in statements of financial position prepared in accordance with GAAP and in the amounts presented in those statements prepared in accordance with IFRS for certain institutions.  This difference reduces the comparability of statements of financial position.  As a result, users of financial statements requested that the differences should be addressed expeditiously.  In response to those requests, the FASB and the International Accounting Standards Board are issuing joint requirements that will enhance current disclosures.  Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement.  This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements.  The objective of this disclosure is to facilitate comparison between those entities that prepare their financial statements on the basis of GAAP and those entities that prepare their financial statements on the basis of IFRS.  The amendments in ASU 2011-11 are effective, on a retrospective basis, for fiscal years and interim periods within those fiscal years beginning after December 31, 2012.  The Company will adopt ASU 2011-11 on March 31, 2013 and is accessing the impact of this adoption.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220):  Presentation of Comprehensive Income,” which revises the manner in which entities present comprehensive income in their financial statements. The amendments in ASU 2011-05 require entities to present components of comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements.  Under the two-statement approach, the first statement (i.e., the statement of net income) must present total net income and its components followed consecutively by the statement of comprehensive income which should include total other comprehensive income and its components.  Under either method, entities must display adjustments for items that are classified from other comprehensive income to net income in both statements of net income and comprehensive income.  ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income.  The amendments in ASU 2011-05 are effective, on a retrospective basis, for fiscal years and interim periods within those fiscal years beginning after December 15, 2011.  The Company will adopt ASU 2011-05 on March 31, 2012 and does not expect its requirements to significantly impact the Company’s 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, 2011, 2010 and 2009

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

ACCOUNTING PRONOUNCEMENTS (CONTINUED)

Accounting Standards Not Yet Adopted (continued)

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820):  Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and IFRSs,” which changes the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements.  Some of the amendments clarify the FASB’s intent about the application of existing fair value measurement requirements, while other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  Many of the requirements in this update are not meant to result in a change in application of the requirements of FASB ASC Topic 820, “Fair Value Measurement,” but to improve upon an entity’s consistency in application across jurisdictions to ensure that GAAP and IFRS fair value measurement and disclosure requirements are described in the same way.  The amendments in ASU 2011-04 are effective, on a retrospective basis, for fiscal years and interim periods within those fiscal years beginning after December 15, 2011.  The Company will adopt ASU 2011-04 on January 1, 2012 and does not expect its requirements to significantly impact the Company’s consolidated financial statements.

In October 2010, the FASB issued ASU 2010-26, “Financial Services–Insurance (Topic 944):  Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (a consensus of the FASB Emerging Issues Task Force),” which amends FASB ASC Topic 944, “Financial Services–Insurance,” to modify the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts.  The amendments specify that only incremental costs of successful contract acquisition that result directly from and are essential to the contract transactions can be capitalized as deferred acquisition costs.  The incremental direct costs are those costs that would not have been incurred by the insurance entity if the contract transactions did not occur.  The amendments in ASU 2010-26 are effective for interim periods and fiscal years beginning after December 15, 2011.  The Company will adopt ASU 2010-20 on January 1, 2012 and does not expect the adoption of ASU 2010-20 to have a significant impact on its consolidated financial statements.

2. MERGERS, ACQUISITIONS AND DISPOSITIONS

On December 31, 2009, the Company paid a dividend of all of Sun Life Vermont’s issued and outstanding common stock, and net assets totaling $94.9 million to the Parent.  As a result of this transaction, Sun Life Vermont is no longer the Company’s wholly-owned subsidiary.  The following table represents a summary of the results of operations for Sun Life Vermont which are included in discontinued operations:

 
 
Year ended
December 31,
2009
 
 
 
 
Total revenue
 
$
191,965 
Total benefits and expenses
 
 
46,304 
 Income before income tax expense
 
 
145,661 
Income tax expense
 
 
40,690 
 
 
 
 
Net income
 
$
104,971 

The Company transferred all of Sun Life Vermont’s assets and liabilities at their carrying value to the Parent and therefore no gain or loss resulted from this dividend.  Sun Life Vermont was previously reported as component of the Individual Protection segment.



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, 2011, 2010 and 2009

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES

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.  Below is a summary of transactions with           non-consolidated affiliates.

Reinsurance Related Transactions

As more fully described in Note 8 to the Company’s consolidated financial statements, the Company and its subsidiary, SLNY, are party to several reinsurance transactions with Sun Life Assurance Company of Canada (“SLOC”) and other affiliates.  Reinsurance premiums with related parties are based on market rates.

On February 11, 2009, the Company received regulatory approval and entered into a reinsurance agreement with Sun Life Reinsurance (Barbados) No. 3 Corp (“BarbCo 3”) an affiliate, to cede all of the risks associated with certain in-force corporate and bank-owned variable universal life, and private placement variable universal life policies on a combination coinsurance, coinsurance with funds-withheld, and a modified coinsurance basis.  The reinsurance agreement covered in-force policies on the effective date and new sales through December 31, 2009.  Effective January 1, 2010, the Company and BarbCo 3 amended the reinsurance agreement.  Refer to Note 8 for additional information regarding the amendment and the impact of this agreement on the Company’s consolidated financial statements.

Capital Transactions

The Company did not receive any capital contribution from the Parent during the year ended December 31, 2011.  During the year ended December 31, 2010, the Company received capital contributions totaling $400.0 million from the Parent.  The cash contributions were recorded as additional paid-in capital and were made to ensure that the Company continues to exceed certain regulatory capital requirements established by the National Association of Insurance Commissioners (“NAIC”).  The NAIC has established standards for minimum capitalization requirements based on risk-based capital formulas for life insurance companies.  The risk-based capital formulas for life insurance companies establish 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.

Effective December 31, 2009, the Company distributed all of Sun Life Vermont’s issued and outstanding common stock and net assets totaling $94.9 million in the form of a dividend to the Parent.  The Company paid a return of capital of $300.0 million to the Parent during the year ended December 31, 2011.  The Company did not declare or pay any cash dividends or return of capital to the Parent during the year ended December 31, 2010 or 2009.



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, 2011, 2010 and 2009

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Debt Transactions

On November 8, 2007, a long-term financing arrangement was established with a financial institution (the “Lender”) that enables Sun Life Vermont, a subsidiary of the Company prior to December 31, 2009, to fund a portion of its obligations under its reinsurance agreement with SLOC.  Under this arrangement, at inception of the agreement, Sun Life Vermont issued an initial floating rate surplus note of $1 billion (the “Surplus Note”) to a special-purpose entity, Structured Asset Repackage Company, 2007- SUNAXXX LLC (“SUNAXXX”), affiliated with the Lender.  Pursuant to this arrangement, Sun Life Vermont exercised its option to issue additional Surplus Notes of $200.0 million and $115.0 million in 2009 and 2008, respectively, to SUNAXXX.  At December 31, 2009, the value of the Surplus Note was $1.3 billion.  Pursuant to an agreement between the Lender and the Company’s indirect parent, Sun Life Assurance Company of Canada – U.S. Operations Holdings, Inc. (“SLC - U.S. Ops Holdings”), U.S. Ops Holdings bears the ultimate obligation to repay the Lender and, as such, consolidates SUNAXXX in accordance with FASB ASC Topic 810.  Sun Life Vermont agreed to reimburse U.S. Ops Holdings for certain costs incurred in connection with the issuance of the Surplus Note.  Sun Life Vermont incurred interest expense of $21.7 million for the year ended December 31, 2009, which is included in the Company’s consolidated statements of operations as a component of income from discontinued operations, net of tax.

At December 31, 2011 and 2010, the Company had an $18.0 million promissory note that was initially issued to Sun Life (Hungary) Group Financing Limited Company (“Sun Life (Hungary) LLC”), an affiliate, for which the Company pays interest semi-annually.  On June 2, 2011, Sun Life (Hungary) LLC sold the $18.0 of promissory note to SLOC.  With the exception of the change in lenders, this transaction did not have any impact on the terms of the promissory note.  Effective June 2, 2011, the Company began paying the related interest to SLOC.  Related to this note, the Company incurred interest expense of $1.0 million for each of the years ended December 31, 2011, 2010 and 2009.

At December 31, 2011 and 2010, the Company had $565.0 million of surplus notes payable to Sun Life Financial (U.S.) Finance, Inc., an affiliate.  The Company expensed $42.6 million for interest on these surplus notes for each of the years ended December 31, 2011, 2010 and 2009.



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, 2011, 2010 and 2009

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Institutional Investments Contracts

On September 12, 2006, the Company issued two floating rate funding agreements totaling $900.0 million to Sun Life Financial Global Funding III, L.L.C. (“LLC III”), an affiliate, which will mature on October 6, 2013.  On April 7, 2008, the Company issued an additional floating rate funding agreement totaling $5.8 million to LLC III.  On December 1, 2011, the Company paid $5.8 million to LLC III due to the maturity of the funding agreement issued to LLC III.  Total interest credited for these funding agreements was $5.9 million, $6.2 million, and $11.2 million for the years ended December 31, 2011, 2010 and 2009, respectively.  The Company also issued a $100.0 million floating rate demand note payable to LLC III on September 19, 2006.  The Company expensed $0.7 million, $0.7 million, and $1.3 million for the years ended December 31, 2011, 2010 and 2009, respectively, for interest on this demand note.

The Company has an interest rate swap agreement with LLC III with an aggregate notional amount of $900.0 million that effectively converts the floating rate payment obligations under the funding agreements to fixed rate obligations.

On May 17, 2006, the Company issued a floating rate funding agreement of $900.0 million to Sun Life Financial Global Funding II, L.L.C. (“LLC II”), an affiliate.  On April 7, 2008, the Company issued an additional floating rate funding agreement totaling $7.5 million to LLC II.  On July 1 and July 19, 2011, the Company paid $901.3 million and $7.5 million, respectively, to LLC II due to the maturity of the funding agreements that the Company issued to LLC II.  The payments included $1.3 million in accrued interest.   Total interest credited for these funding agreements was $2.6 million, $5.4 million, and $10.5 million for the years ended December 31, 2011, 2010 and 2009, respectively.

The Company also issued a $100.0 million floating rate demand note payable to LLC II on May 24, 2006.  On July 19, 2011, the Company paid off the $100.0 million demand note that was due to LLC II.  The Company expensed $0.3 million, $0.6 million, and $1.2 million for the years ended December 31, 2011, 2010 and 2009, respectively, for interest on this demand note.

The Company also had an interest rate swap agreement with LLC II with an aggregate notional amount of $900.0 million that effectively converted the floating rate payment obligations under the funding agreements to fixed rate obligations.  This interest swap agreement expired on July 6, 2011 due to the maturity of the underlying floating rate funding agreement with LLC II.

On June 3, 2005 and June 29, 2005, the Company issued two floating rate funding agreements totaling $900 million to Sun Life Financial Global Funding, L.L.C. (“LLC”), an affiliate.  On April 7, 2008, the Company issued an additional floating rate funding agreement totaling $10 million to LLC.  On July 1 and July 8, 2010, the Company paid $900.0 million and $10.0 million, respectively, to the LLC due to the maturity of these funding agreements.  Total interest credited for these funding agreements was $2.9 million and $11.3 million for the years ended December 31, 2010 and 2009, respectively.  On August 6, 2010, the Company paid $100.1 million to LLC, including $0.1 million in interest due to settle a $100.0 million floating rate demand note payable.  The Company expensed $0.5 million and $1.3 million for the years ended December 31, 2010 and 2009, respectively, for interest on this demand note.

The Company had an interest rate swap agreement with LLC with an aggregate notional amount of $900.0 million that effectively converts the floating rate payment obligations under the funding agreements to fixed rate obligations.  The related $900.0 million interest rate swap agreement expired on July 6, 2010 due to the maturity of the underlying floating rate funding agreements with LLC.

The account values related to these funding agreements issued to LLC III and LLC II are reported in the Company’s consolidated balance sheets as a component of contractholder deposits funds and other policy liabilities.



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, 2011, 2010 and 2009

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

The following table lists the details of notes due to affiliates at December 31, 2011:

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 
Sun Life Assurance Company of Canada
Promissory
5.710%
06/30/2012
 
18,000 
 
1,028 
Sun Life Financial Global Funding III, L.L.C.
Demand
LIBOR + 0.35%
10/06/2013
 
100,000 
 
664 
 
 
 
 
  $
683,000 
$
44,275 

The following table lists the details of notes due to affiliates at December 31, 2010:

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 
Sun Life (Hungary) Group Financing Limited Company
Promissory
5.710%
06/30/2012
 
18,000 
 
1,028 
Sun Life Financial Global Funding II, L.L.C.
Demand
LIBOR + 0.26%
07/06/2011
 
100,000 
 
611 
Sun Life Financial Global Funding III, L.L.C.
Demand
LIBOR + 0.35%
10/06/2013
 
100,000 
 
703 
 
 
 
 
  $
783,000 
$
44,925 




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, 2011, 2010 and 2009

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Administrative Service Agreements, Rent and Other

Effective December 31, 2009, the Company transferred all of its employees to Sun Life Services with the exception of 28 employees who were transferred to Sun Life Financial Distributors, Inc. (“SLFD”), another affiliate.  The tax benefit associated with SLF stock options that had been granted to employees of the Company prior to the employee transfer, is recognized by the Company in stockholder’s equity when these options vest.   Neither Sun Life Services nor SLFD are included in the accompanying consolidated financial statements.  Concurrent with this transaction, Sun Life Services assumed the sponsorship of the Company’s retirement plans, as discussed in Note 9 to the Company’s consolidated financial statements.  As a result of this transaction, the Company transferred to Sun Life Services the plan assets and liabilities, the associated deferred tax asset, and certain property, equipment and software, as summarized in the following table:

Assets:
 
 
Cash
$
32,298 
Property and equipment
 
9,545 
Software and other
 
58,877 
Deferred tax asset
 
25,543 
Total assets
$
126,263 
 
 
 
Liabilities:
 
 
Pension liabilities
$
109,512 
Long term incentives
 
16,923 
Other liabilities
 
48,733 
Total liabilities
$
175,168 

In accordance with FASB ASC Topic 845, “Nonmonetary Transactions,” all assets and liabilities were transferred at book value and no gain or loss was recognized in the Company’s consolidated statement of operations.  The difference between the book value of the transferred assets and liabilities of $48.9 million, net of tax, was recorded by the Company as other comprehensive income and paid-in-capital.  Prior to the transfer, this difference between the book value of the transferred assets and liabilities was recorded in the Company’s consolidated balance sheet as a component of accumulated other comprehensive income.

Pursuant to an administrative services agreement between the Company and Sun Life Services which was effective December 31, 2009, Sun Life Services provides human resources services (e.g., recruiting and maintaining appropriately trained and qualified personnel and equipment necessary for the performance of actuarial, financial, legal, administrative and other operational support functions) to the Company.  The Company reimburses Sun Life Services for the cost of such services, plus, with respect to certain of those services, pays an arms-length based profit margin to be agreed upon by the parties.  Total payments under this agreement were $110.0 million and $117.6 million for the years ended December 31, 2011 and 2010, respectively.

As discussed in Note 1, SLF made the decision to close its domestic U.S. variable annuity and individual life products to new sales after completing a major strategic review of its businesses.  As a result of this decision and the related severance of certain Sun Life Services’ employees, Sun Life Services allocated $12.2 million in expenses to the Company, which is a portion of the related restructuring costs on a pre-tax basis.  The costs allocated to the Company represent primarily employee severance and other employee benefits of $10.2 million, as well as other costs of $2.0 million.

As described in Note 9, the Company participates in a pension plan and other retirement plans sponsored by Sun Life Services.

The transfer of fixed assets from the Company to Sun Life Services discussed above, along with the administrative services agreement, resulted in a sale-leaseback transaction.  The Company recorded a deposit liability for $17.1 million which represents the cost of certain of the assets transferred.  The Company will amortize the liability over the remaining useful life of the transferred assets, which was estimated to be seven years.  As of December 31, 2011, the remaining deposit liability was $11.4 million.



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

For the Years Ended December 31, 2011, 2010 and 2009

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Administrative Service Agreements, Rent and Other (continued)

Effective December 31, 2009, Sun Life Services and SLOC entered into an administrative services agreement under which Sun Life Services provides to SLOC, as requested, personnel and certain services.  Prior to December 31, 2009, the Company had an administrative services agreement with SLOC under which the Company provided personnel and certain services to SLOC, as requested.  Pursuant to the agreement with SLOC, the Company recorded reimbursements of $336.0 million for the year ended December 31, 2009, as a reduction to other operating expenses.  Effective December 31, 2009, the Company no longer provides personnel services to SLOC and SLOC no longer reimburses the Company for such services.

The Company continues to provide certain services to SLOC under an administrative services agreement.  Pursuant to this agreement, the Company recorded reimbursements of $99.3 million and $99.1 million for the years ended December 31, 2011 and 2010, respectively.

The Company has administrative services agreements with SLOC under which SLOC provides, as requested, certain services on a cost-reimbursement basis.  Pursuant to the agreements with SLOC, the Company recorded expenses of $14.5 million, $13.0 million and $8.9 million for the years ended December 31, 2011, 2010 and 2009, respectively.

The Company has an administrative services 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 businesses.  Expenses under this agreement amounted to approximately $19.3 million, $18.0 million and $15.5 million for the years ended December 31, 2011, 2010 and 2009, respectively.  In addition, SLISC allocated $0.1 million of severance costs to the Company.  These severance costs relate to the decision to discontinue the Company’s variable annuity and individual life products.

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 $22.6 million, $23.5 million and $24.2 million for the years ended December 31, 2011, 2010 and 2009, respectively.  In addition, SLISIL allocated $0.4 million of severance costs to the Company.  These severance costs relate to the decision to discontinue the Company’s variable annuity and individual life products.

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 were approximately $12.7 million, $13.0 million and $8.9 million for the years ended December 31, 2011, 2010 and 2009, respectively.

The Company has an administrative services agreement with Sun Capital Advisers LLC (“SCA”), an affiliate and 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 $16.6 million, $13.0 million and $4.3 million for the years ended December 31, 2011, 2010 and 2009, respectively.  The Company paid $20.6 million, $21.4 million and $18.2 million for the years ended December 31, 2011, 2010 and 2009, respectively, in investment management services fees to SCA.

The Company paid distribution fees to SLFD of $38.7 million, $41.4 million and $45.4 million, during the years ended December 31, 2011, 2010 and 2009, respectively.

The Company leases office space to SLOC under lease agreements with terms expiring on December 31, 2014 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 $12.1 million, $12.1 million and $10.1 million for the years ended December 31, 2011, 2010 and 2009, respectively.  Rental income is reported as a component of net investment income on the Company’s consolidated statements 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, 2011, 2010 and 2009

3. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Administrative service agreements, rent and other (continued)

During the year ended December 31, 2009, the Company sold certain limited partnership investments to SLOC with a book value of $16.9 million and a fair market value of $22.4 million.  The Company recorded a pre-tax gain on the sales of $5.5 million for the year ended December 31, 2009.

During the year ended December 31, 2009, the Company purchased $395.7 million of available-for-sale fixed-rate bonds from Sun Life Investments LLC at fair value.  The Company paid cash for the bonds.

During the year ended December 31, 2010, the Company sold mortgage loans to SLOC with a book value of $85.6 million and a fair market value of $93.4 million and recognized a pre-tax gain of $7.8 million as a result.  During the year ended December 31, 2010, the Company also purchased $52.2 million of mortgage loans from SLOC at fair value.  The Company did not purchase or sell any mortgage loans from SLOC during the years ended December 31, 2011 and 2009.

SLNY has a series of agreements with SLHIC, through which substantially all of the New York issued business of SLHIC was transferred to SLNY.  As part of these agreements, SLNY received certain intangible assets totaling $31.3 million.  These assets included the value of distribution acquired, VOBA, and VOCRA.  The value of distribution acquired of $7.5 million is being amortized on a straight-line basis over its projected economic life of 25 years.  The amortization expense for the value of distribution acquired was $0.3 million for each of the years ended December 31, 2011, 2010 and 2009.

VOBA of $7.6 million is subject to amortization based upon expected premium income over the period from acquisition to the first customer renewal, which is generally not more than two years.  VOBA was fully amortized as of December 31, 2009.  VOCRA 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 VOBA and VOCRA for the years ended December 31 as follows:

 
2011 
 
2010 
 
2009 
 
 
 
 
 
 
 
 
 
VOBA
$
- 
 
$
- 
 
$
913 
VOCRA
$
1,022 
 
$
1,327 
 
$
4,063 

At December 31, 2009, the Company determined that the VOCRA asset was impaired and recorded an impairment charge of $2.6 million which is included in VOCRA amortization expense.  The impairment charge was allocated to the Group Protection segment.

The Company settles with its affiliates payments related to the administrative service agreements, rent and other on a monthly basis.  At December 31, 2011 and 2010, the Company’s net receivable due from affiliated companies was $21.4 million and $32.5 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, 2011, 2010 and 2009

4. INVESTMENTS

FIXED MATURITY SECURITIES

The amortized cost and fair value of fixed maturity securities held at December 31, 2011 were as follows:

Available-for-sale fixed maturity securities
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Temporary
Losses
 
OTTI Losses
(1)
 
Fair Value
Non-corporate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
55 
 
$
 - 
 
$
 - 
 
$
 - 
 
$
55 
Residential mortgage-backed securities
 
24,340 
 
 
2,203 
 
 
-
 
 
 - 
 
 
26,543 
Commercial mortgage-backed securities
 
9,643 
 
 
286 
 
 
(1,017)
 
 
 - 
 
 
8,912 
U.S. states and political subdivision securities
 
214 
 
 
7 
 
 
- 
 
 
 - 
 
 
221 
U.S. treasury and agency securities
 
375,751 
 
 
6,818 
 
 
- 
 
 
 - 
 
 
382,569 
Total non-corporate securities
 
410,003 
 
 
9,314 
 
 
(1,017)
 
 
 - 
 
 
418,300 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
929,957 
 
 
79,479 
 
 
(14,616)
 
 
 (10,595)
 
 
984,225 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total available-for-sale fixed maturity securities
$
1,339,960 
 
$
88,793 
 
$
(15,633)
 
$
 (10,595)
 
$
1,402,525 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading fixed maturity securities
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
 
Fair Value
 
 
 
Non-corporate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
423,464 
 
$
7,951 
 
$
(139,163)
 
$
292,252 
 
 
 
Residential mortgage-backed securities
 
868,588 
 
 
13,857 
 
 
(169,250)
 
 
713,195 
 
 
 
Commercial mortgage-backed securities
 
785,912 
 
 
32,750 
 
 
(135,644)
 
 
683,018 
 
 
 
Foreign government & agency securities
 
97,404 
 
 
19,194 
 
 
-
 
 
116,598 
 
 
 
U.S. states and political subdivision securities
 
486 
 
 
41 
 
 
-
 
 
527 
 
 
 
U.S. treasury and agency securities
 
323,298 
 
 
13,705 
 
 
(49)
 
 
336,954 
 
 
 
Total non-corporate securities
 
2,499,152 
 
 
87,498 
 
 
(444,106)
 
 
2,142,544 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
7,836,906 
 
 
436,622 
 
 
(135,536)
 
 
8,137,992 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total trading fixed maturity securities
$
10,336,058 
 
$
524,120 
 
$
(579,642)
 
$
10,280,536 
 
 
 

 
(1) Represents the pre-tax non-credit OTTI loss recorded as a component of accumulated other comprehensive income (“AOCI”) for assets still held at the reporting date.  Recoveries of $9.3 million are shown within gross unrealized gains and the
     remainder as gross unrealized temporary losses.



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

For the Years Ended December 31, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

FIXED MATURITY SECURITIES (CONTINUED)

The amortized cost and fair value of fixed maturity securities held at December 31, 2010 were as follows:

Available-for-sale fixed maturity securities
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Temporary
Losses
 
OTTI Losses
(1)
 
Fair Value
Non-corporate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
694 
 
$
27 
 
$
(6)
 
$
    -
 
$
715 
Residential mortgage-backed securities
 
32,263 
 
 
2,351 
 
 
-
 
 
-
 
 
34,614 
Commercial mortgage-backed securities
 
15,952 
 
 
522 
 
 
(1,424)
 
 
-
 
 
15,050 
Foreign government & agency securities
 
506 
 
 
57 
 
 
-
 
 
-
 
 
563 
U.S. states and political subdivision securities
 
217 
 
 
- 
 
 
(3)
 
 
-
 
 
214 
U.S. treasury and agency securities
 
371,704 
 
 
4,500 
 
 
(971)
 
 
-
 
 
375,233 
Total non-corporate securities
 
421,336 
 
 
7,457 
 
 
(2,404)
 
 
-
 
 
426,389 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
1,001,615 
 
 
82,490 
 
 
(2,267)
 
 
(12,304)
 
 
1,069,534 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total available-for-sale fixed maturity securities
$
1,422,951 
 
$
89,947 
 
$
(4,671)
 
$
(12,304)
 
$
1,495,923 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading fixed maturity securities
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
 
 
Non-corporate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
544,106 
 
$
10,104 
 
$
(142,230)
 
$
411,980 
 
 
 
Residential mortgage-backed securities
 
1,184,184 
 
 
17,259 
 
 
(278,650)
 
 
922,793 
 
 
 
Commercial mortgage-backed securities
 
917,650 
 
 
42,368 
 
 
(140,823)
 
 
819,195 
 
 
 
Foreign government & agency securities
 
122,537 
 
 
8,239 
 
 
-
 
 
130,776 
 
 
 
U.S. states and political subdivision securities
 
605 
 
 
8 
 
 
-
 
 
613 
 
 
 
U.S. treasury and agency securities
 
745,460 
 
 
3,037 
 
 
(878)
 
 
747,619 
 
 
 
Total non-corporate securities
 
3,514,542 
 
 
81,015 
 
 
(562,581)
 
 
3,032,976 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
8,195,874 
 
 
368,893 
 
 
(130,625)
 
 
8,434,142 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total trading fixed maturity securities
$
11,710,416 
 
$
449,908 
 
$
(693,206)
 
$
11,467,118 
 
 
 

 
(1) Represents the pre-tax non-credit OTTI loss recorded as a component of AOCI for assets still held at the reporting date.



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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

FIXED MATURITY SECURITIES (CONTINUED)

The amortized cost and estimated fair value by maturity periods for fixed maturity securities held at December 31, 2011 are shown below.  Actual maturities may differ from contractual maturities on structured securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 
Amortized
Cost
 
Fair Value
Maturities of available-for-sale fixed securities:
 
 
 
 
 
 
Due in one year or less
$
211,945 
 
$
212,744 
 
Due after one year through five years
 
438,320 
 
 
455,056 
 
Due after five years through ten years
 
137,332 
 
 
141,194 
 
Due after ten years
 
518,325 
 
 
558,021 
 
Subtotal – Maturities of available-for-sale fixed securities
 
1,305,922 
 
 
1,367,015 
ABS, RMBS and CMBS securities (1)
 
34,038 
 
 
35,510 
 
Total available-for-sale fixed securities
$
1,339,960 
 
$
1,402,525 
 
 
 
 
 
 
 
Maturities of trading fixed securities:
 
 
 
 
 
 
Due in one year or less
$
652,353 
 
$
662,374 
 
Due after one year through five years
 
4,163,381 
 
 
4,328,570 
 
Due after five years through ten years
 
1,858,860 
 
 
1,982,358 
 
Due after ten years
 
1,583,500 
 
 
1,618,769 
 
Subtotal – Maturities of trading fixed securities
 
8,258,094 
 
 
8,592,071 
ABS, RMBS and CMBS securities (1)
 
2,077,964 
 
 
1,688,465 
 
Total trading fixed securities
$
10,336,058 
 
$
10,280,536 

 (1)
ABS, RMBS and CMBS are shown separately in the table as these securities are not due at a single maturity.

Gross gains of $119.3 million, $172.6 million and $50.0 million and gross losses of $51.3 million, $40.9 million and $57.5 million were realized on fixed maturity securities for the years ended December 31, 2011, 2010 and 2009, respectively.

Fixed maturity securities with an amortized cost of approximately $11.8 million and $12.3 million at December 31, 2011 and 2010, respectively, were on deposit with federal and state governmental authorities, as required by law.

As of December 31, 2011 and 2010, 92.3% and 92.4%, respectively, of the Company's fixed maturity securities were investment grade.  Investment grade securities are those that are rated "BBB" or better by a nationally recognized statistical rating organization.  Securities that are not rated by a nationally recognized statistical rating organization are assigned ratings based on the Company's internally prepared credit evaluations.



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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

FIXED MATURITY SECURITIES (CONTINUED)

Unrealized Losses

The following table shows the fair value and gross unrealized losses, which includes temporary unrealized losses and the portion of non-credit OTTI losses recognized in AOCI, of the Company’s available-for-sale fixed maturity investments, aggregated by investment category and length of time that the individual securities had been in an unrealized loss position at December 31, 2011.

 
Less Than Twelve Months
 
Twelve Months Or More
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value
Gross
Unrealized
Losses
 
Fair Value
Gross
Unrealized
Losses
 
Fair Value
Gross
Unrealized
Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-corporate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
 - 
$
 - 
 
$
 - 
$
 - 
 
$
 - 
$
 - 
Residential mortgage-backed securities
 
 12 
 
-
 
 
 21 
 
-
 
 
 33 
 
-
Commercial mortgage-backed securities
 
 447 
 
 (50)
 
 
 2,131 
 
 (967)
 
 
 2,578 
 
 (1,017)
U.S. states and political subdivision securities
 
 - 
 
 - 
 
 
-
 
-
 
 
 - 
 
 - 
U.S. treasury and agency securities
 
 - 
 
 - 
 
 
-
 
-
 
 
 - 
 
 - 
Total non-corporate securities
 
 459 
 
 (50)
 
 
 2,152 
 
 (967)
 
 
 2,611 
 
 (1,017)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
 120,623 
 
 (8,049)
 
 
 38,498 
 
 (7,831)
 
 
 159,121 
 
 (15,880)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Total
$
 121,082 
$
 (8,099)
 
$
 40,650 
$
 (8,798)
 
$
 161,732 
$
 (16,897)

The following table shows the fair value and gross unrealized losses, which includes temporary unrealized losses and the portion of non-credit OTTI losses recognized in AOCI, of the Company’s available-for-sale fixed maturity investments, aggregated by investment category and length of time that the individual securities had been in an unrealized loss position at December 31, 2010.

 
Less Than Twelve Months
 
Twelve Months Or More
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair Value
Gross
Unrealized
Losses
 
Fair Value
Gross
Unrealized
Losses
 
Fair Value
Gross
Unrealized
Losses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-corporate securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
 - 
$
 - 
 
$
 11 
$
 (6)
 
$
 11 
$
 (6)
Residential mortgage-backed securities
 
 26 
 
 - 
 
 
 - 
 
 - 
 
 
 26 
 
 - 
Commercial mortgage-backed securities
 
 - 
 
 - 
 
 
 2,534 
 
 (1,424)
 
 
 2,534 
 
 (1,424)
Foreign government & agency securities
 
 - 
 
 - 
 
 
 - 
 
 - 
 
 
 - 
 
 - 
U.S. states and political subdivision securities
 
 214 
 
 (3)
 
 
 - 
 
 - 
 
 
 214 
 
 (3)
U.S. treasury and agency securities
 
 23,636 
 
 (971)
 
 
 - 
 
 - 
 
 
 23,636 
 
 (971)
Total non-corporate securities
 
 23,876 
 
 (974)
 
 
 2,545 
 
 (1,430)
 
 
 26,421 
 
 (2,404)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
 187,916 
 
 (5,211)
 
 
 91,154 
 
 (9,360)
 
 
 279,070 
 
 (14,571)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Total
$
 211,792 
$
 (6,185)
 
$
 93,699 
$
 (10,790)
 
$
 305,491 
$
 (16,975)



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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

UNREALIZED LOSSES (CONTINUED)

The following table provides the number of securities of the Company’s available-for-sale fixed maturity securities with gross unrealized losses and a portion of non-credit OTTI losses recognized in AOCI aggregated by investment category, at December 31, 2011 (not in thousands):

 
Number of
Securities Less
Than Twelve
Months
Number of
Securities Twelve
Months or More
Total Number
of Securities
 
 
 
 
Non-corporate securities:
 
 
 
Asset-backed securities
-
 - 
 - 
Residential mortgage-backed securities
 3 
 1 
 4 
Commercial mortgage-backed securities
 1 
 4 
 5 
Foreign government & agency securities
-
-
-
U.S. states and political subdivisions securities
-
-
 - 
U.S. treasury and agency securities
-
-
 - 
Total non-corporate securities
 4 
 5 
 9 
 
 
 
 
Corporate securities
 33 
 15 
 48 
 
 
 
 
 Total
 37 
 20 
 57 


The following table provides the number of securities of the Company’s available-for-sale fixed maturity securities with gross unrealized losses and a portion of non-credit OTTI losses recognized in AOCI aggregated by investment category, at December 31, 2010 (not in thousands):

 
Number of
Securities Less
Than Twelve
Months
Number of
Securities Twelve
Months or More
Total Number of
Securities
 
 
 
 
Non-corporate securities:
 
 
 
Asset-backed securities
 - 
 1 
 1 
Residential mortgage-backed securities
 1 
 - 
 1 
Commercial mortgage-backed securities
 - 
 5 
 5 
Foreign government & agency securities
 - 
 - 
 - 
U.S. states and political subdivisions securities
 1 
 - 
 1 
U.S. treasury and agency securities
 2 
 - 
 2 
Total non-corporate securities
 4 
 6 
 10 
 
 
 
 
Corporate securities
 72 
 35 
 107 
 
 
 
 
 Total
 76 
 41 
 117 





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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

OTHER-THAN-TEMPORARY IMPAIRMENT

Beginning on April 1, 2009, the Company presents and discloses OTTI in accordance with FASB ASC Topic 320.  Securities whose fair value is less than their carrying amount are considered to be impaired and are evaluated for potential OTTI.  If the Company intends to sell, or if it is more likely than not that it will be required to sell an impaired security prior to recovery of its cost basis, the security is considered other-than-temporarily impaired and the Company records a charge to earnings for the full amount of impairment based on the difference between the amortized cost and fair value of the security.  Otherwise, losses on securities which are other-than-temporarily impaired are separated into two categories:  credit loss and non-credit loss.  The credit loss portion is charged to net realized investment gains (losses) in the consolidated statements of operations, while the non-credit loss is charged to other comprehensive income.  When an unrealized loss on an available-for-sale fixed maturity is considered temporary, the Company continues to record the unrealized loss in other comprehensive income and not in earnings.

To compute the credit loss component of OTTI for corporate bonds on the date of transition (i.e., April 1, 2009), both historical default (by rating) data, used as a proxy for the probability of default, and loss given default (by issuer) projections were applied to the par amount of the bond.  For corporate bonds post-transition, the present value of future cash flows using the book yield is used to determine the credit component of OTTI.  If the present value of the cash flow is less than the security’s amortized cost, the difference is recorded as a credit loss.  The difference between the estimates of the credit related loss and the overall OTTI is the non-credit-related component.

As a result of the adoption of FASB ASC Topic 320, a cumulative effect adjustment, net of tax, of $9.1 million was recorded to decrease accumulated other comprehensive income with a corresponding increase to retained earnings (accumulated deficit) for the non-credit loss component of previously impaired securities that the Company neither intends to sell, nor is it more likely than not that the Company will be required to sell, before recovery of amortized cost.

For those securities where the Company does not have the intent to sell and it is not more likely than not that the Company will be required to sell, the Company employs a portfolio monitoring process to identify securities that are other-than-temporarily impaired.  The Company utilizes a Credit Committee, comprised of investment and finance professionals, which meets at least quarterly to review individual issues or issuers that are of concern.  In determining whether a security is other-than-temporarily-impaired, the Credit Committee considers the factors described below.  The process involves a quarterly screening of all impaired securities.

Discrete credit events, such as a ratings downgrade, also are 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.  In making these evaluations, the Credit Committee exercises considerable judgment.  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 Company’s amortized cost will be recovered through timely collection of all contractually specified cash flows, but that changes in issuer-specific facts and circumstances require monitoring on a quarterly basis.  No OTTI charge is recorded in the Company’s consolidated statements of operations for unrealized loss on securities related to these issuers.

“Watch List”- Management has concluded that the Company’s amortized cost will be recovered through timely collection of all contractually specified cash flows, 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.  No OTTI charge is recorded in the Company’s consolidated statements of operations for unrealized losses on securities related to these issuers.



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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

OTHER-THAN-TEMPORARY IMPAIRMENT (CONTINUED)

“Impaired List”- This list includes securities that the Company has the intent to sell or more likely than not will be required to sell.  In addition, it includes those securities that management has concluded that the Company’s amortized cost will not be recovered due to expected delays or shortfalls in contractually specified cash flows.  For these investments, an OTTI charge is recorded or the security is sold and a realized loss is recorded as a charge to income.  Credit OTTI losses are recorded in the Company’s consolidated statement of operations and non-credit OTTI losses are recorded in other comprehensive income.

Structured securities, those rated single A or below in particular, are subject to certain provisions in FASB ASC Topic 325, “Investments–Other.”  These provisions require the Company to periodically update its best estimate of cash flows over the life of the security.  In the event that the fair value is less than the carrying amount and there has been an adverse change in the expected cash flows (as measured by comparing the original expected cash flows to the current expectation of cash flows, both discounted at the current effective rate), then an impairment charge is recorded to income.  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.  Losses incurred on the respective portfolios are based on expected loss models, not incurred loss models.  Expected cash flows include assumptions about key systematic risks and loan-specific information.

There are inherent risks and uncertainties in management’s evaluation of securities for OTTI.  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 OTTI.

For securities that are assessed to have incurred a credit loss, the amount of credit loss is calculated based upon the cash flows that the Company expects to collect given an assessment of the relevant facts and circumstances for the issuer and specific bond issue.  Such factors include the financial condition, credit quality, and the near-term prospects of the issuer, as well as the issuer's relative liquidity, among other factors.



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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

OTHER-THAN-TEMPORARY IMPAIRMENT (CONTINUED)

The Company recorded credit OTTI losses in its consolidated statement of operations totaling $0.1 million and $0.9 million for the years ended December 31, 2011 and 2010, respectively on its available-for-sale fixed maturity securities.  The $0.1 million OTTI credit loss recorded during the year ended December 31, 2011 was concentrated in structured securities issued by sponsored securitization vehicles.  This impairment was driven primarily by the adverse financial condition of the issuer.  The $0.9 million OTTI credit loss recorded during the year ended December 31, 2010 was concentrated in corporate debt of a foreign issuer.  This impairment was driven primarily by the adverse financial conditions of the issuer.

The following tables roll forward the amount of credit losses recognized in earnings on debt securities, for which a portion of the OTTI also was recognized in other comprehensive income:

 
 
Year ended
December 31,
2011
 
 
 
Beginning balance, at January 1, 2011
$
5,847 
Add: Credit losses on OTTI not previously recognized
 
 71 
Less: Credit losses on securities sold
 
 (5,756)
Other
 
 3,341 
Ending balance, at December 31, 2011
$
3,503 
 
 
 
 
 
 
 
 
Year ended
December 31,
2010
 
 
 
Beginning balance, at January 1, 2010
$
9,148 
Add: Credit losses on OTTI not previously recognized
 
 885 
Less: Credit losses on securities sold
 
 (2,528)
Less: Increases in cash flows expected on previously
 
 
impaired securities
 
(1,658)
Ending balance, at December 31, 2010
$
5,847 







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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

Variable Interest Entities

The Company is involved with various special purpose entities and other entities that are deemed to be VIEs primarily as a collateral manager and as an investor through normal investment activities or as a means of accessing capital.  A VIE is an entity that either has investors that lack certain essential characteristics of a controlling financial interest or lacks sufficient funds to finance its own activities without financial support provided by other entities.

The Company performs ongoing qualitative assessments of its VIEs under FASB ASC Topic 810, to determine whether it has a controlling financial interest in the VIE and, therefore, is the primary beneficiary. The Company is deemed to have a controlling financial interest when it has both the ability to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.  The Company consolidates the VIE in its consolidated financial statements if it determines that it is the VIEs primary beneficiary.

Consolidated VIEs

At December 31, 2011, the Company had an interest in one significant VIE, Credit and Repackaged Securities Limited Series 2006-10 Trust (the “CARS Trust”), for which consolidation is required under FASB ASC Topic 810.

The Company has an agreement with the CARS Trust.  Pursuant to this agreement, the Company purchased a funded note from the CARS Trust which, through a credit default swap entered into by the CARS Trust, is exposed to the credit performance of a portfolio of corporate reference entities.  The Company entered into this agreement for yield enhancement related to the fee earned on the credit default swap which adds to the return earned on the funded note.

The CARS Trust is a structured investment vehicle for which the Company provides investment management services and holds securities issued by the trust.  Creditors have no recourse against the Company in the event of default by the CARS Trust, nor does the Company have any implied or unfunded commitments to the CARS Trust.  The Company's financial or other support provided to the CARS Trust is limited to its investment management services and original investment.  The following table presents the carrying value of assets and liabilities and the maximum exposure to loss relating to the CARS Trust.

 
 
December 31,
2011
 
 
December 31,
2010
 
 
 
 
 
 
Assets
$
 20,077 
 
$
 36,324 
Liabilities
 
 17,723 
 
 
 27,341 
Maximum exposure to loss
 
 20,928 
 
 
 37,400 



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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

Consolidated VIEs (continued)

As the sole beneficiary of the CARS Trust, while having a controlling financial interest in the investment vehicle, the Company is required to consolidate the entity under FASB ASC Topic 810.  As a result of the consolidation, the Company has recorded in its consolidated balance sheets, investment grade corporate debt securities and 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.  In the event that the CARS Trust is 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.  Under the credit default swap, the CARS Trust made a payment of $16.5 million during the twelve-month period ended December 31, 2011; no payment was made during the year ended December 31, 2010.  As of December 31, 2011, the cumulative payments that the CARS Trust has made under the credit default swap is $34.1 million, leaving $20.9 million as the maximum future payments that it could be required to make.  The carrying amount of the assets in this VIE is included in trading fixed maturity securities and the carrying amount of the liabilities in this VIE is included in the derivative instruments-payable in the Company’s consolidated balance sheets.

Non-Consolidated VIEs

At December 31, 2011, other than the CARS Trust, the Company had no interest in VIEs for which consolidation is required under FASB ASC Topic 810.

In addition, through normal investment activities, the Company makes passive investments in various issues by VIEs.  These investments are included in trading and available-for-sale fixed maturity securities, limited partnerships and other invested assets in the Company's consolidated financial statements.  The Company has not provided financial or other support with respect to these investments other than its original investments.  For these investments, the Company has determined it is not the primary beneficiary due to the size of its investment relative to other issues, the level of credit subordination which reduces its obligation to absorb losses or its right to receive benefits, and/or its inability to direct the activities that most significantly impact the economic performance of the VIEs.  The Company's maximum exposure to loss on these investments is limited to the amount of its investment.



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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

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.

The carrying value of the Company’s mortgage loans and real estate investments, net of applicable allowances and accumulated depreciation, was as follows:

 
 
December 31,
 
 
2011 
 
2010 
 
 
 
 
 
Total mortgage loans
$
1,457,356 
$
1,737,528 
 
 
 
 
 
Real estate:
 
 
 
 
 
Held for production of income
 
223,814 
 
214,665 
Total real estate
$
223,814 
$
214,665 
 
 
 
 
 
Total mortgage loans and real estate
$
1,681,170 
$
1,952,193 

Accumulated depreciation on real estate was $50.9 million and $45.6 million at December 31, 2011 and 2010, 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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

MORTGAGE LOANS AND REAL ESTATE (CONTINUED)

A loan is considered impaired when it is probable that the principal or interest is not collectible in accordance with the contractual terms of the loan.  The allowance for credit losses is estimated using the present value of expected cash flows discounted at the loan’s effective interest rate or the fair value of the collateral, if the loan is collateral dependent.  A specific allowance for loan loss is established for an impaired loan if the present value of expected cash flows discounted at the loan’s effective interest rate, or the fair value of the loan collateral, less cost to sell, is less than the recorded amount of the loan.  A general allowance for loan loss is established based on an assessment of past loss experience on groups of loans with similar characteristics and current economic conditions.  While management believes that it uses the best information available to establish the allowances, future adjustments may become necessary if economic conditions differ from the assumptions used in calculating them.

Delinquency status is determined based upon the occurrence of a missed contract payment.  The following table set forth an age analysis of past due loans in the Company’s mortgage loan portfolio at December 31.

 
 
 
Gross Carrying Value
 
 
2011 
2010 
 
 
 
 
 
 
Past due:
 
 
 
 
 
Between 30 and 59 days
$
4,075 
$
16,607 
 
Between 60 and 89 days
 
5,043 
 
12,333 
 
90 days or more
 
14,403 
 
19,310 
Total past due
 
23,521 
 
48,250 
Current (1)
 
1,490,236 
 
1,743,060 
Balance, at December 31
$
1,513,757 
$
1,791,310 
Past due 90 days or more and still
accruing interest
$
- 
$
- 

The Company’s allowance for mortgage loan losses at December 31 was as follow:

 
Allowance for Loan Loss
 
 
2011 
 
2010 
 
 
 
 
 
General allowance
$
17,767 
$
23,662 
Specific allowance
 
38,634 
 
30,120 
Total
$
56,401 
$
53,782 

 
(1)
Included in the $1,490.2 million and $1,743.1 million of the Company’s mortgage loans in current status at December 31, 2011 and 2010, were $153.1 million and $165.6 million, respectively, of mortgage loans that are impaired, but not past due.



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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

MORTGAGE LOANS AND REAL ESTATE (CONTINUED)

The Company individually evaluates all its mortgage loans for impairment and records a specific provision for those deemed impaired.  The Company also collectively evaluates most of its mortgage loans (excluding those for which a specific allowance was recorded) for impairment.  At December 31, 2011, the Company individually and collectively evaluated loans with a gross carrying value of $1,513.8 million and $1,396.1 million, respectively.  At December 31, 2010, the Company individually and collectively evaluated loans with a gross carrying value of $1,791.3 million and $1,706.0 million, respectively.

The credit quality indicator for the Company’s mortgage loans is an internal risk rated measure based on the borrowers’ ability to pay and the value of the underlying collateral.  The internal risk rating is related to an increasing likelihood of loss, with a low quality rating representing the category in which a loss is first expected.  The following table shows the gross carrying value of the Company’s mortgage loans disaggregated by credit quality indicator at December 31:

 
2011 
 
2010 
 
 
 
 
 
 
Insured
$
 - 
 
$
 - 
High
 
263,398 
 
 
394,288 
Standard
 
416,847 
 
 
544,243 
Satisfactory
 
354,359 
 
 
333,086 
Low quality
 
479,153 
 
 
519,693 
Total
$
1,513,757 
 
$
1,791,310 

The following tables show the gross carrying value of impaired mortgage loans and related allowances at:

 
December 31, 2011
 
 
With no
allowance
recorded
 
 
With an
allowance
recorded
 
 
Total
Gross carrying value
$
53,922 
 
$
117,701 
 
$
171,623 
Unpaid principal balance
 
55,380 
 
 
122,806 
 
 
178,186 
Related allowance
 
-
 
 
38,634 
 
 
38,634 
Average recorded investment
 
95,694 
 
 
95,408 
 
 
191,102 
Interest income recognized
$
4,563 
 
$
- 
 
$
4,563 
 
 
 
 
 
 
 
 
 
 
December 31, 2010
 
 
With no
allowance
recorded
 
 
With an
allowance
recorded
 
 
Total
Gross carrying value
$
119,323 
 
$
85,281 
 
$
204,604 
Unpaid principal balance
 
120,417 
 
 
88,625 
 
 
209,042 
Related allowance
 
- 
 
 
30,120 
 
 
30,120 
Average recorded investment
 
113,701 
 
 
86,575 
 
 
200,276 
Interest income recognized
$
5,899 
 
$
- 
 
$
5,899 

Included in the $171.6 million and $204.6 million of impaired mortgage loans at December 31, 2011 and 2010, were $53.9 million and $119.3 million, respectively, of impaired loans that did not have an allowance for loan loss because the fair value of the collateral or the expected future cash flows exceeded the carrying value of the loans.



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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

MORTGAGE LOANS AND REAL ESTATE (CONTINUED)

The average investment in impaired mortgage loans before an allowance for loan loss and the related interest income and cash receipts for interest on impaired mortgage loans for the years ended December 31 were as follows:

 
2011 
 
2010 
 
2009 
 
 
 
 
 
 
 
 
 
Average investment
$
191,102 
 
$
200,276 
 
$
121,500 
Interest income
$
4,563 
 
$
5,899 
 
$
897 
Cash receipts on interest
$
4,069 
 
$
5,899 
 
$
897 

The gross carrying value of the Company’s mortgage loans on nonaccrual status was $138.9 million and $114.7 million at December 31, 2011 and 2010, respectively.

The activity in the allowance for loan loss was as follows:

 
 
2011 
 
 
2010 
 
 
2009 
 
 
 
 
 
 
 
 
 
Balance at January 1
$
53,782 
 
$
42,782 
 
$
3,000 
Provision for allowance
 
34,641 
 
 
26,742 
 
 
40,050 
Charge-offs
 
(19,790)
 
 
(6,892)
 
 
-
Recoveries
 
(12,232)
 
 
(8,850)
 
 
(268)
Balance at December 31
$
56,401 
 
$
53,782 
 
$
42,782 

Troubled Debt Restructurings

The Company may modify the terms of a loan by adjusting the interest rate, extending the maturity date or both.  The Company evaluates each restructuring of debt and considers it a TDR if, for economic or legal reasons related to the debtor's financial difficulties, it grants a concession to the borrower that it would not otherwise consider.  Specifically, the Company's evaluation of each restructuring includes an assessment of the indicators of impairment to determine if the debtor is exhibiting financial difficulties and an assessment of market lending activity to determine if the debtor can obtain funds from other sources at market interest rates at or near those for nontroubled debts.  Those restructurings where financial difficulties are present and alternative sources of funding are not available or prohibitively expensive to the borrower are considered TDR.

Upon adoption of the amendments in ASU 2011-02, the Company reassessed all restructured loans that occurred on or after January 1, 2011, the beginning of its fiscal year, for identification as TDRs.  Adoption of the ASU 2011-02 had no impact on the number of restructured loans that are considered TDRs.

All TDRs identified by the Company are commercial mortgage loans modified by granting concessions to borrowers where, as a result of the restructuring, the Company does not expect to collect all amounts due, including interest accrued at the original contract rate.



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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

MORTGAGE LOANS AND REAL ESTATE (CONTINUED)

Troubled Debt Restructuring (continued)

Modifications are factored into the determination of the allowance for credit losses by including adjustments to the outstanding recorded investment.  The financial effect of a TDR is not recognized when the Company expects to collect cash flows at, or above, the original contract rate.  For the year ended December 31, 2011, no financial effect from TDRs was recognized.  The following table provides information about the Company’s loans that were modified and how they were modified as a TDR during the year ended:

 
 
 
 
 
 
 
 
 
 
 
 December 31, 2011
 
 
No. (1)
 
Pre-modification
recorded
investment
 
Post-
modification
recorded
investment
 
 
 
 
 
 
 
 
 
Adjusted interest rate
 
1 
 
$
 2,834 
 
$
 2,834 
Extended maturity date
 
1 
 
 
 8,970 
 
 
 8,970 
Combined rate and maturity
 
5 
 
 
 15,368 
 
 
 15,368 
Total
 
7 
 
$
 27,172 
 
$
 27,172 

(1) Represents the number of contracts that were modified and considered as TDR. The number of contracts is not in thousands.

Defaults are factored into the determination of the allowance for credit losses by indicating that, as a result of the default, the Company does not expect to collect all amounts due per the modified terms.  The following table shows the number and value of TDRs within the previous twelve months for which there was a payment default during the year ended (the number of contracts is not in thousands):

 
 
December 31, 2011
 
 
 
 
Number of contracts
 
 
 1 
Recorded investment amount
 
$
 2,053 




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

For the Years Ended December 31, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

MORTGAGE LOANS AND REAL ESTATE (CONTINUED)

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

 
2011 
 
2010 
Property Type:
 
 
 
 
 
Office building
$
499,405 
 
$
599,930 
Retail
 
684,051 
 
 
748,345 
Industrial/warehouse
 
207,820 
 
 
242,413 
Apartment
 
46,226 
 
 
54,364 
Other
 
300,069 
 
 
360,923 
Allowance for loan losses
 
(56,401)
 
 
(53,782)
Total
$
1,681,170 
 
$
1,952,193 

 
2011 
 
2010 
Geographic region:
 
 
 
 
 
California
$
77,879 
 
$
85,853 
Florida
 
193,068 
 
 
200,056 
Georgia
 
62,802 
 
 
69,173 
Massachusetts
 
103,983 
 
 
112,128 
Missouri
 
48,325 
 
 
52,218 
New York
 
201,835 
 
 
247,154 
Ohio
 
104,074 
 
 
125,454 
Pennsylvania
 
80,641 
 
 
98,251 
Texas
 
265,705 
 
 
303,336 
Washington
 
52,718 
 
 
65,708 
Other (1)
 
546,541 
 
 
646,644 
Allowance for loan losses
 
(56,401)
 
 
(53,782)
Total
$
1,681,170 
 
$
1,952,193 

 
(1) Includes the states in which the value of the Company’s mortgage loans and real estate investments was below $50.0 million at December 31, 2011 and 2010, respectively.

At December 31, 2011, scheduled mortgage loan maturities were as follows:

2012
$
60,993 
2013
 
106,420 
2014
 
145,960 
2015
 
173,654 
2016
 
223,720 
Thereafter
 
764,376 
General allowance
 
(17,767)
Total
$
1,457,356 

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.


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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

LEVERAGED LEASES AND LIMITED PARTNERSHIPS

The Company was 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.  The master lessee had the option to purchase the equipment at the expiration of the lease term.  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 Company did not have the ability to direct the activities that most significantly impact the economic performance of the VIE, nor did it have the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE.  Therefore, the Company did not consolidate this trust in its consolidated financial statements.  The balance of the purchase price was furnished by third-party long-term debt financing, collateralized by the equipment, and was non-recourse to the Company.  The leveraged lease investment was included as a part of other invested assets in the Company’s consolidated balance sheet at December 31, 2009.

On June 1, 2010, the master lessee elected to exercise a fixed price purchase option to purchase the equipment and the Company received $22.6 million in cash for its investment in the VIE and realized a $3.4 million gain in its consolidated statement of operations.

The Company had no leveraged lease investments at December 31, 2011 and 2010.

The Company had outstanding commitments to fund limited partnerships of approximately $11.8 million and $12.6 million at December 31, 2011 and 2010, 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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company uses derivative financial instruments for risk management purposes to hedge against specific risks related to interest rates, foreign currency exchange rates, and equity market conditions, as well as to alter exposure arising from mismatches between assets and liabilities.  Derivative instruments are recorded in the consolidated balance sheets at fair value and are presented as assets or liabilities.

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 FASB ASC Topic 815 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 net derivative income or loss.

Credit enhancement, such as collateral, is used to improve the credit risk of longer-term derivative contracts.

It is common, and the Company’s preferred practice, for the parties to execute a Credit Support Annex (“CSA”) in conjunction with the International Swaps and Derivatives Association Master Agreement. Under a CSA, collateral is exchanged between the parties to mitigate the market contingent counterparty risk inherent in outstanding positions.

The primary types of derivatives held by the Company include interest rate and foreign currency swap agreements, swaptions, futures, listed and over-the counter (“OTC”) equity options, foreign currency forwards and embedded derivatives, as described below.

Interest Rate and Foreign Currency Swap Agreements

As a component of its investment strategy, the Company utilizes swap agreements.  Swap agreements are agreements to exchange with a counterparty a series of cash flow payments at pre-determined intervals, based upon or calculated by reference to changes in specified interest rates (fixed or floating) or foreign currency exchange rates.  Typically, no cash is exchanged at the outset of the contract and no principal payments are made by either party, except on certain foreign currency exchange swaps.  A single net payment is usually made by one counterparty at pre-determined dates.  The net payment is recorded as a component of net derivative loss in the Company’s consolidated statement of operations.

Interest rate swaps are generally used to manage the sensitivity of the duration gap between assets and liabilities to interest rate changes or to manage the exposure to product guarantees sensitive to movements in equity market and interest rate levels related to life insurance contracts, fixed index annuities and variable annuities.

Foreign currency swaps are utilized as an economic hedge against changes in foreign currencies associated with certain non-U.S. dollar denominated cash flows.

The Company has an agreement with the CARS Trust whereby the Company is the sole beneficiary of the CARS Trust.  Please refer to Note 4 of the Company’s consolidated financial statements for additional information regarding the CARS Trust.

Swaptions

The Company utilizes payer swaptions to hedge exposure to interest rate risk, typically on product guarantees.  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 settle or 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.  At December 31, 2011, the Company did not have any position in swaptions.



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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED)

Futures

Equity, interest rate and foreign exchange futures contracts, both long and short, are entered into for purposes of hedging liabilities on fixed index and variable annuity products containing guaranteed minimum death benefit and guaranteed minimum living benefit features, with cash flows based on changes in equity indices, interest rates or foreign exchange rates.  On the trade date, an initial cash margin is deposited as required by the relevant stock exchange.  Cash is subsequently exchanged daily to settle the variation margin or daily fluctuations in the underlying index.

Listed and OTC Equity Options

In addition to short futures, the Company also utilizes listed put options on major indices to hedge against stock market exposure inherent in the guaranteed minimum death benefit and living benefit features of the Company's variable annuities.  Listed options are traded on the stock exchange similar to futures.  Unlike futures, however, an up-front premium is paid to or received from the counterparty, instead of depositing an initial cash margin with the Exchange.  The Company also purchases listed and OTC call options on major indices to economically hedge its obligations under certain fixed annuity contracts, as well as enhance income on the underlying assets.  On the trade date, an initial cash margin is exchanged for listed options.  Daily cash is exchanged to settle the daily variation margin.

Foreign Currency Forwards

A foreign currency forward is an agreement between two parties to buy and sell currencies at the current market rate, for settlement at a specified future date.  Foreign currency forwards are utilized as an economic hedge against changes in foreign currencies associated with certain non-U.S. dollar denominated cash flows.

The following is a summary of the Company’s derivative positions (excluding embedded derivatives) at:

 
December 31, 2011
December 31, 2010
 
Number of
Contracts
(2)
 
Principal
Notional
Number of
Contracts
(2)
 
Principal
Notional
 
 
 
 
 
 
 
Interest rate contracts
 78 
 $
5,496,000 
 71 
 $
5,793,500 
Foreign currency contracts
 16 
 
69,507 
 43 
 
393,609 
Equity contracts
 11,216 
 
1,949,878 
 13,704 
 
2,373,741 
Credit contracts
 1 
 
20,928 
 1 
 
37,400 
Futures contracts (1)
 (34,187)
 
4,747,764 
 (25,699)
 
2,918,839 
Total
 
 $
12,284,077 
 
 $
11,517,089 

 
(1)  Futures contracts include interest rate, equity price and foreign currency exchange risks. The negative amount represents the Company’s net short position including (45,084) contracts and (33,683) contracts in short position and 10,897 contracts and
    7,984 contracts in long position at December 31, 2011 and 2010, respectively.
      (2)  Not 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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED)

With the exception of embedded derivatives, all derivatives are carried at fair value in derivative instruments – receivable or derivative instruments – payable in the Company’s consolidated balance sheets.  Embedded derivatives related to reinsurance agreements and annuity contracts are carried at fair value in contractholder deposit funds and other policy liabilities in the Company’s consolidated balance sheets.  The following is a summary of the Company’s derivative asset and liability positions by primary risk exposure.

 
At December 31, 2011
At December 31, 2010
 
Asset
Derivatives
Fair Value (a)
Liability
Derivatives
Fair Value (a)
Asset
Derivatives
Fair Value (a)
Liability
Derivatives
Fair Value (a)
 
 
 
 
 
 
 
 
 
Interest rate contracts
$
362,753 
$
257,719 
$
97,060 
$
329,214 
Foreign currency contracts
 
577 
 
3,422 
 
32,504 
 
3,878 
Equity contracts
 
46,944 
 
-
 
59,397 
 
-
Credit contracts
 
-
 
17,723 
 
-
 
27,341 
Futures contracts
 
12,130 
 
8,210 
 
9,103 
 
1,590 
Total derivative instruments
 
422,404 
 
287,074 
 
198,064 
 
362,023 
Embedded derivatives (b)
 
-
 
1,516,277 
 
2,896 
 
178,069 
Total
$
422,404 
$
1,803,351 
$
200,960 
$
540,092 

(a)
Amounts are presented without consideration of cross-transaction netting and collateral.
(b)
Embedded derivatives expose the Company to a combination of credit, interest rate and equity price risks.

All realized and unrealized derivative gains and losses are recorded in net derivative loss in the Company’s consolidated statements of operations.  The following is a summary of the Company’s realized and unrealized gains (losses) by derivative type for the years ended December 31:

 
 
2011 
 
2010 
 
2009 
 
 
 
 
 
 
 
Interest rate contracts
$
270,885 
$
(122,712)
$
143,402 
Foreign currency contracts
 
(50,493)
 
(16,206)
 
(12,116)
Equity contracts
 
(58,110)
 
(26,734)
 
(71,865)
Credit contracts
 
9,619 
 
7,008 
 
(9,855)
Futures contracts
 
122,649 
 
(217,428)
 
(328,595)
Embedded derivatives
 
(1,282,620)
 
226,782 
 
239,127 
Net derivative loss from continuing operations
$
(988,070)
$
(149,290)
$
(39,902)
Net derivative income from discontinued operations
$
- 
$
- 
$
216,956 



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, 2011, 2010 and 2009

4. INVESTMENTS (CONTINUED)

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (CONTINUED)

Concentration of Credit Risk

Credit risk relates to the uncertainty of an obligor’s continued ability to make timely payments in accordance with the contractual terms of the instrument or contract.  With derivative instruments, the Company is primarily exposed to credit risk through its counterparty relationships.  The Company primarily manages credit risk through policies which address the quality of counterparties, contractual requirements for transacting with counterparties and collateral support agreements, and limitations on counterparty concentrations.  Exposures by counterparty and counterparty credit ratings are monitored closely.  All of the contracts are held with counterparties rated A- or higher.  As of December 31, 2011, the Company’s liability positions were linked to a total of 5 affiliated and unaffiliated counterparties, of which the largest single unaffiliated counterparty payable, net of collateral, had credit exposure of $17.7 million to the Company.  As of December 31, 2011, the Company’s asset positions were linked to a total of 11 affiliated and unaffiliated counterparties, of which the largest single unaffiliated counterparty receivable, net of collateral, had credit exposure of $3.9 million.

Credit-related Contingent Features

All derivative transactions are covered under standardized contractual agreements with counterparties, all of which include credit-related contingent features. These standardized agreements include language related to the failure to pay or deliver on an obligation, bankruptcy and additional termination events, such as a credit rating falling below a stipulated level . These triggers generally result in early terminations after a grace period.

Certain counterparty relationships also may include supplementary agreements with additional triggers related to credit downgrades of the Company or its counterparty.  If the Company’s credit rating were to fall below the stipulated level, this could result in a reduction of minimum thresholds in collateral agreements or full overnight collateralization.  These impacts can frequently be mitigated, however, through re-negotiation of contractual terms.

The aggregate value of all derivative instruments with credit risk-related contingent features that were in a liability position at December 31, 2011 and 2010 was $287.1 million and $362.0 million, respectively.  At December 31, 2011, the Company was fully collateralized, substantially mitigating credit risk.

In the event of an early termination, the Company might be required to accelerate payments to counterparties, up to the current value of its net liability positions, after considering the impacts of netting at default.  If payments cannot be exchanged simultaneously at early termination, funds also will be held in escrow to facilitate settlement.  If an early termination was triggered on December 31, 2011, the Company would be expected to settle a net obligation of $79.1 million.

If counterparties are unable to meet accelerated payment obligations, the Company may also be exposed to uncollectible net asset positions, after considering the impact of netting at default.

At December 31, 2011, the Company pledged $289.6 million in U.S. Treasury securities as collateral to counterparties.  At December 31, 2011, counterparties pledged to the Company $245.1 million in collateral comprised of cash and U.S. Treasury securities.

Embedded Derivatives

The Company performs a quarterly analysis of its new contracts, agreements and financial instruments for embedded derivatives.  No embedded derivatives required bifurcation from financial assets.  However, the Company issues certain annuity contracts and enters into reinsurance agreements that contain derivatives embedded in the contract.  Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract or reinsurance agreement) and is carried at fair value.  Please refer to Note 8 of the Company’s consolidated financial statements for further information regarding derivatives embedded in reinsurance contracts; refer to Note 12 for further information regarding derivatives embedded in annuity contracts.



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

For the Years Ended December 31, 2011, 2010 and 2009

5. FAIR VALUE MEASUREMENT

Fair value is defined 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 Company has categorized its financial instruments that are carried at fair value into a three-level hierarchy based on the priority of the inputs to the valuation technique.  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.

On April 1, 2009, the FASB issued additional guidance on estimating fair value when the volume and level of activity for the asset or liability have significantly decreased, as well as guidance on identifying circumstances indicating that a transaction is not orderly.  The Company reviewed its pricing sources and methodologies and has concluded that its various pricing sources and methodologies are in compliance with this guidance.  During the year ended December 31, 2011, there were no changes to these valuation techniques and the related inputs.


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, 2011, 2010 and 2009

5. FAIR VALUE MEASUREMENT (CONTINUED)

Financial assets and liabilities recorded at fair value in the Company’s consolidated 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, and
 
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 ABS including collateralized debt obligations, RMBS, CMBS, certain corporate debt, certain private equity investments and certain derivatives, including derivatives embedded in reinsurance contracts.

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 assumptions about what a market participant would use in pricing the asset or liability.

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



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

For the Years Ended December 31, 2011, 2010 and 2009

5. FAIR VALUE MEASUREMENT (CONTINUED)

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, 2011:

 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
 
$
 - 
 
$
 55 
 
$
 - 
 
$
 55 
 
Residential mortgage-backed securities
 
 
 - 
 
 
 26,543 
 
 
 - 
 
 
 26,543 
 
Commercial mortgage-backed securities
 
 
 - 
 
 
 6,781 
 
 
 2,131 
 
 
 8,912 
 
Foreign government & agency securities
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 - 
 
U.S. states and political subdivision securities
 
 
 - 
 
 
 221 
 
 
 - 
 
 
 221 
 
U.S. treasury and agency securities
 
 
 382,569 
 
 
 - 
 
 
 - 
 
 
 382,569 
 
Corporate securities
 
 
 - 
 
 
 977,356 
 
 
 6,869 
 
 
 984,225 
Total available-for-sale fixed maturity securities
 
 
 382,569 
 
 
 1,010,956 
 
 
 9,000 
 
 
 1,402,525 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
 
 
 - 
 
 
 215,343 
 
 
 76,909 
 
 
 292,252 
 
Residential mortgage-backed securities
 
 
 - 
 
 
 593,066 
 
 
 120,129 
 
 
 713,195 
 
Commercial mortgage-backed securities
 
 
 - 
 
 
 619,180 
 
 
 63,838 
 
 
 683,018 
 
Foreign government & agency securities
 
 
 - 
 
 
 96,205 
 
 
 20,393 
 
 
 116,598 
 
U.S. states and political subdivision securities
 
 
 - 
 
 
 527 
 
 
 - 
 
 
 527 
 
U.S. treasury and agency securities
 
 
 327,827 
 
 
 7,199 
 
 
 1,928 
 
 
 336,954 
 
Corporate securities
 
 
 - 
 
 
 8,062,279 
 
 
 75,713 
 
 
 8,137,992 
Total trading fixed maturity securities
 
 
 327,827 
 
 
 9,593,799 
 
 
 358,910 
 
 
 10,280,536 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments - receivable:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 - 
 
 
 362,753 
 
 
 - 
 
 
 362,753 
 
Foreign currency contracts
 
 
 - 
 
 
 577 
 
 
 - 
 
 
 577 
 
Equity contracts
 
 
 24,499 
 
 
 17,252 
 
 
 5,193 
 
 
 46,944 
 
Futures contracts
 
 
 12,130 
 
 
 - 
 
 
 - 
 
 
 12,130 
Total derivative instruments - receivable
 
 
 36,629 
 
 
 380,582 
 
 
 5,193 
 
 
 422,404 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other invested assets (1)
 
 
 1,896 
 
 
 21,621 
 
 
 9,252 
 
 
 32,769 
Short-term investments
 
 
 105,895 
 
 
 - 
 
 
 - 
 
 
 105,895 
Cash and cash equivalents
 
 
 872,064 
 
 
 - 
 
 
 - 
 
 
 872,064 
Total investments and cash
 
 
 1,726,880 
 
 
 11,006,958 
 
 
 382,355 
 
 
 13,116,193 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Separate account assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual fund investments
 
 
 21,668,110 
 
 
 - 
 
 
 - 
 
 
 21,668,110 
 
Equity investments
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 - 
 
Fixed income investments
 
 
 785,438 
 
 
 5,236,487 
 
 
 16,012 
 
 
 6,037,937 
 
Alternative investments
 
 
 4,122 
 
 
 62,989 
 
 
 360,463 
 
 
 427,574 
 
Other investments
 
 
 (1,328)
 
 
 - 
 
 
 - 
 
 
 (1,328)
Total separate account assets (2) (3)
 
 
 22,456,342 
 
 
 5,299,476 
 
 
 376,475 
 
 
 28,132,293 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets measured at fair value on a recurring
basis
 
$
 24,183,222 
 
$
 16,306,434 
 
$
 758,830 
 
$
 41,248,486 

(1)   Excludes $4.3 million of other invested assets that are not subject to FASB ASC Topic 820.
(2)  Pursuant to the conditions set forth in FASB ASC Topic 944, the value of separate account liabilities is set to equal the fair value of the separate account assets.
(3)  Excludes $648.5 million, primarily related to investment purchases payable, net of investment sales receivable, that are not subject to FASB ASC Topic 820.



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, 2011, 2010 and 2009

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, 2011:

 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other policy liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Guaranteed minimum withdrawal benefit liability
 
$
 - 
 
$
 - 
 
$
 1,071,126 
 
$
 1,071,126 
 
Guaranteed minimum accumulation benefit liability
 
 
 - 
 
 
 - 
 
 
 215,598 
 
 
 215,598 
 
Derivatives embedded in reinsurance contracts
 
 
 - 
 
 
 107,965 
 
 
 5,193 
 
 
 113,158 
 
Derivatives embedded in fixed index annuities
 
 
 - 
 
 
 - 
 
 
 116,395 
 
 
 116,395 
Total other policy liabilities (1)
 
 
 - 
 
 
 107,965 
 
 
 1,408,312 
 
 
 1,516,277 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments – payable:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 - 
 
 
 257,719 
 
 
 - 
 
 
 257,719 
 
Foreign currency contracts
 
 
 - 
 
 
 3,422 
 
 
 - 
 
 
 3,422 
 
Credit contracts
 
 
 - 
 
 
 - 
 
 
 17,723 
 
 
 17,723 
 
Futures contracts
 
 
 8,210 
 
 
 - 
 
 
 - 
 
 
 8,210 
Total derivative instruments – payable
 
 
 8,210 
 
 
 261,141 
 
 
 17,723 
 
 
 287,074 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank overdrafts (2)
 
 
 48,893 
 
 
 - 
 
 
 - 
 
 
 48,893 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities measured at fair value on a recurring basis
 
$
 57,103 
 
$
 369,106 
 
$
 1,426,035 
 
$
 1,852,244 

 
(1) The balances are included within the contractholder deposits funds and other policy liabilities in the Company’s consolidated balance sheets.
 
(2) Bank overdrafts are included within other liabilities in the Company’s consolidated balance sheet.


Assets Measured at Fair Value on a Nonrecurring Basis

The following table presents the Company’s categories for its assets measured at fair value on a nonrecurring basis at December 31, 2011:

 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
 
Total Loss
Asset
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage loans
$
 - 
 
$
 - 
 
$
 79,067 
 
$
 79,067 
 
$
 (38,634)

At December 31, 2011, the Company determined that certain mortgage loans were impaired and as a practical expedient, measured the impairment using the fair value of the related collateral.  The fair value of the collateral was based on real estate valuations.



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, 2011, 2010 and 2009

5. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table presents the Company’s categories for its assets measured at fair value on a recurring basis as of December 31, 2010:

 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
 
$
 - 
 
$
 704 
 
$
 11 
 
$
 715 
 
Residential mortgage-backed securities
 
 
 - 
 
 
 34,614 
 
 
 - 
 
 
 34,614 
 
Commercial mortgage-backed securities
 
 
 - 
 
 
 13,003 
 
 
 2,047 
 
 
 15,050 
 
Foreign government & agency securities
 
 
 - 
 
 
 563 
 
 
 - 
 
 
 563 
 
U.S. states and political subdivision securities
 
 
 - 
 
 
 214 
 
 
 - 
 
 
 214 
 
U.S. treasury and agency securities
 
 
 375,233 
 
 
 - 
 
 
 - 
 
 
 375,233 
 
Corporate securities
 
 
 - 
 
 
 1,068,399 
 
 
 1,135 
 
 
 1,069,534 
Total available-for-sale fixed maturity securities
 
 
 375,233 
 
 
 1,117,497 
 
 
 3,193 
 
 
 1,495,923 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
 
 
 - 
 
 
 321,129 
 
 
 90,851 
 
 
 411,980 
 
Residential mortgage-backed securities
 
 
 - 
 
 
 834,074 
 
 
 88,719 
 
 
 922,793 
 
Commercial mortgage-backed securities
 
 
 - 
 
 
 737,024 
 
 
 82,171 
 
 
 819,195 
 
Foreign government & agency securities
 
 
 - 
 
 
 116,986 
 
 
 13,790 
 
 
 130,776 
 
U.S. states and political subdivision securities
 
 
 - 
 
 
 613 
 
 
 - 
 
 
 613 
 
U.S. treasury and agency securities
 
 
 737,936 
 
 
 8,582 
 
 
 1,101 
 
 
 747,619 
 
Corporate securities
 
 
 - 
 
 
 8,301,586 
 
 
 132,556 
 
 
 8,434,142 
Total trading fixed maturity securities
 
 
 737,936 
 
 
 10,319,994 
 
 
 409,188 
 
 
 11,467,118 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments - receivable:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 - 
 
 
 97,060 
 
 
 - 
 
 
 97,060 
 
Foreign currency contracts
 
 
 - 
 
 
 32,504 
 
 
 - 
 
 
 32,504 
 
Equity contracts
 
 
 14,873 
 
 
 30,739 
 
 
 13,785 
 
 
 59,397 
 
Futures contracts
 
 
 9,103 
 
 
 - 
 
 
 - 
 
 
 9,103 
Total derivative instruments - receivable
 
 
 23,976 
 
 
 160,303 
 
 
 13,785 
 
 
 198,064 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other invested assets (1)
 
 
 2,890 
 
 
 11,120 
 
 
 8,343 
 
 
 22,353 
Short-term investments
 
 
 832,739 
 
 
 - 
 
 
 - 
 
 
 832,739 
Cash and cash equivalents
 
 
 736,323 
 
 
 - 
 
 
 - 
 
 
 736,323 
Total investments and cash
 
 
 2,709,097 
 
 
 11,608,914 
 
 
 434,509 
 
 
 14,752,520 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Separate account assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual fund investments
 
 
 21,892,209 
 
 
 30,517 
 
 
 - 
 
 
 21,922,726 
 
Equity investments
 
 
 188,216 
 
 
 277 
 
 
 - 
 
 
 188,493 
 
Fixed income investments
 
 
 317,713 
 
 
 5,812,900 
 
 
 56,323 
 
 
 6,186,936 
 
Alternative investments
 
 
 24,094 
 
 
 78,164 
 
 
 293,254 
 
 
 395,512 
 
Other investments
 
 
 900 
 
 
 - 
 
 
 - 
 
 
 900 
Total separate account assets (2) (3)
 
 
 22,423,132 
 
 
 5,921,858 
 
 
 349,577 
 
 
 28,694,567 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets measured at fair value on a recurring basis
 
$
 25,132,229 
 
$
 17,530,772 
 
$
 784,086 
 
$
 43,447,087 

(1)
Excludes $5.1 million of other invested assets that are not subject to FASB ASC Topic 820.
(2)
Pursuant to the conditions set forth in FASB ASC Topic 944, the value of separate account liabilities is set to equal the fair value of the separate account assets.
(3)
Excludes $1,814.1 million, primarily related to investment purchases payable, net of investment sales receivable, that are not subject to FASB ASC Topic 820.


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, 2011, 2010 and 2009

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, 2010:

 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other policy liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Guaranteed minimum withdrawal benefit liability
 
$
 - 
 
$
 - 
 
$
 2,245 
 
$
 2,245 
 
Guaranteed minimum accumulation benefit liability
 
 
 - 
 
 
 - 
 
 
 49 
 
 
 49 
 
Derivatives embedded in reinsurance contracts
 
 
 - 
 
 
 41,272 
 
 
 - 
 
 
 41,272 
 
Derivatives embedded in fixed index annuities
 
 
 - 
 
 
 - 
 
 
 131,608 
 
 
131,608 
Total other policy liabilities (1)
 
 
 - 
 
 
 41,272 
 
 
 133,902 
 
 
 175,174 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments – payable:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 
 - 
 
 
 329,214 
 
 
 - 
 
 
 329,214 
 
Foreign currency contracts
 
 
 - 
 
 
 3,878 
 
 
 - 
 
 
 3,878 
 
Credit contracts
 
 
 - 
 
 
 - 
 
 
 27,341 
 
 
 27,341 
 
Futures contracts
 
 
 1,590 
 
 
 - 
 
 
 - 
 
 
1,590 
Total derivative instruments – payable
 
 
 1,590 
 
 
 333,092 
 
 
 27,341 
 
 
 362,023 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank overdrafts (2)
 
 
 61,227 
 
 
 - 
 
 
 - 
 
 
61,227 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities measured at fair value on a recurring basis
 
$
 62,817 
 
$
 374,364 
 
$
 161,243 
 
$
 598,424 

 
(1) The balances are included within the contractholder deposits funds and other policy liabilities in the Company’s consolidated balance sheets.
 
(2) Bank overdrafts are included within other liabilities in the Company’s consolidated balance sheet.



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, 2011, 2010 and 2009

5. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The methods and assumptions that the Company uses in determining the estimated fair value of its financial instruments that are measured at fair value on a recurring basis are summarized below:

Fixed maturity securities:  The Company determines the fair value of its publicly-traded fixed maturity securities using three primary pricing methods: third-party pricing services, non-binding broker quotes and pricing models.  Prices are first sought from third-party pricing services; the remaining unpriced securities are priced using one of the remaining two 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 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 ABS, RMBS and CMBS, are priced using third-party pricing services, a fair value model or independent broker quotations.  CMBS securities are priced using the last sale price of the day or a broker quote, if no sales were transacted that day.  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, RMBS and CMBS.  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 maturity securities, fair values are estimated using models 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 maturity securities also are priced using market prices or broker quotes.

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.

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.  The Company uses credit valuation adjustments (“CVAs”) to properly reflect the component of fair value of certain derivative instruments that arise from default risk.  CVAs are based on a methodology that primarily uses published credit default swap spreads as a key input in determining an implied level of expected loss over the total life of the derivative contract.  When this information is not available, the Company also may utilize credit spreads implied from published bond yields or published cumulative default experience data adjusted for current trends.  CVAs may be calculated based on the credit risk of counterparties for asset positions or the Company's own credit risk for liability positions.  The CVAs also take into account contractual factors designed to reduce the Company’s credit exposure to each counterparty, such as collateral and legal rights of offset.

Other invested assets:  This financial instrument primarily consists of equity securities.  The fair value of the Company’s equity securities is first based on quoted market prices.  Similar to fixed maturity securities, the Company uses pricing services and broker quotes to price the equity securities for which the quoted market price is not available.

Cash, cash equivalents and short-term investments:  The carrying value for cash, cash equivalents and short-term investments approximates fair value due to the short-term nature and liquidity of the balances.

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, 2011, 2010 and 2009

5. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

Other policy liabilities:  The fair values of S&P 500 Index and other equity-linked embedded derivatives are produced using standard derivative valuation techniques.  GMAB and GMWB are considered to be derivatives under FASB ASC Topic 815 and are included in contractholder deposit funds and other policy liabilities in the Company’s consolidated balance sheets.  Consistent with the provisions of FASB ASC Topic 820, the Company incorporates 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.

Other liabilities:  This financial instrument consists of bank overdraft balances which are due to issued checks and transmitted wires that were not cashed and processed in the Company’s bank accounts at the end of the reporting period.  Similar to cash, the carrying value for other liabilities approximates fair value due to the 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, 2011, 2010 and 2009

5. FAIR VALUE MEASUREMENT (CONTINUED)

The following table shows a reconciliation of the beginning and ending balances for assets which are categorized as Level 3 for the
 year ended December 31, 2011:

 
 
 
 Total realized and
unrealized gains (losses)
 
 
 
 
 
 
 
 
Assets
Beginning
balance
Included
in earnings
Included
in OCI
Purchases
Sales
Issuances
Settlements
Transfers
into  level
3
Transfers
out of level
3
Ending
balance
Change in
unrealized
gains
(losses) (2)
Available-for-sale fixed maturity
securities:
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
$ 11
$ (16)
$ 5
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$ -
 
Residential mortgage-backed
securities
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 
Commercial mortgage-backed
securities
 2,047 
 (362)
 446 
 - 
 - 
 - 
 - 
 - 
 - 
 2,131 
 - 
 
Foreign government & agency
securities
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 
U.S. states and political subdivision
securities
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 
U.S. treasury and agency securities
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 
Corporate securities
 1,135 
 1,636 
 (1,653)
 - 
 - 
 - 
 - 
 6,360 
 (609)
 6,869 
 - 
Total available-for-sale fixed maturity
securities
 3,193 
 1,258 
 (1,202)
 - 
 - 
 - 
 - 
 6,360 
 (609)
 9,000 
 - 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
 90,851 
 (4,497)
 - 
 - 
 - 
 - 
 (5,534)
 14,639 
 (18,550)
 76,909 
 (2,925)
 
Residential mortgage-backed
securities
 88,719 
 3,586 
 - 
 - 
 - 
 - 
 (44,230)
 99,785 
 (27,731)
 120,129 
 16,101 
 
Commercial mortgage-backed
securities
 82,171 
 (1,391)
 - 
 - 
 - 
 - 
 (21,896)
 4,954 
 - 
 63,838 
 168 
 
Foreign government & agency
securities
 13,790 
 6,603 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 20,393 
 8,292 
 
U.S. states and political subdivision
securities
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 
U.S. treasury and agency securities
 1,101 
 47 
 - 
 - 
 - 
 - 
 (431)
 2,312 
 (1,101)
 1,928 
 42 
 
Corporate securities
 132,556 
 3,602 
 - 
 - 
 (7,984)
 - 
 (9,419)
 32,343 
 (75,385)
 75,713 
 588 
Total trading fixed maturity securities
 409,188 
 7,950 
 - 
 - 
 (7,984)
 - 
 (81,510)
 154,033 
 (122,767)
 358,910 
 22,266 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments – receivable:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 
Foreign currency contracts
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 
Equity contracts
 13,785 
 (4,102)
 - 
 9,295 
 - 
 - 
 (13,785)
 - 
 - 
 5,193 
 (4,102)
 
Futures contracts
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
Total derivative instruments– receivable
 13,785 
 (4,102)
 - 
 9,295 
 - 
 - 
 (13,785)
 - 
 - 
 5,193 
 (4,102)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other invested assets
 8,343 
 (4)
 - 
 8,859 
 (296)
 - 
 - 
 - 
 (7,650)
 9,252 
 196 
Short-term investments
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
Cash and cash equivalents
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
Total investments and cash
 434,509 
 5,102 
 (1,202)
 18,154 
 (8,280)
 - 
 (95,295)
 160,393 
 (131,026)
 382,355 
 18,360 
 
 
 
 
 
 
 
 
 
 
 
 
 
Separate account assets:
 
 
 
 
 
 
 
 
 
 
 
 
Mutual fund investments
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 
Equity investments
 - 
 - 
 - 
 - 
 (49)
 - 
 - 
 49 
 - 
 - 
 - 
 
Fixed income investments
 56,323 
 (432)
 - 
 523,188 
 (530,132)
 - 
 (7,327)
 8,096 
 (33,704)
 16,012 
 (515)
 
Alternative investments
 293,254 
 411 
 - 
 207,717 
 (124,666)
 - 
 (19,453)
 3,200 
 - 
 360,463 
 (5,874)
 
Other investments
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
Total separate account assets (1)
 349,577 
 (21)
 - 
 730,905 
 (654,847)
 - 
 (26,780)
 11,345 
 (33,704)
 376,475 
 (6,389)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets measured at fair value on
 
 
 
 
 
 
 
 
 
 
 
a recurring basis
$ 784,086
$ 5,081
$ (1,202)
$ 749,059
$ (663,127)
$ -
$ (122,075)
$ 171,738
$ (164,730)
$ 758,830
$ 11,971

 
(1) The realized/unrealized gains and 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) Included in earnings relating to instruments still held at the reporting date.



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, 2011, 2010 and 2009

5. FAIR VALUE MEASUREMENT (CONTINUED)

The following table shows a reconciliation of the beginning and ending balances for liabilities which are categorized as Level 3 for the
 year ended December 31, 2011:

 
 
 
  Total realized and
unrealized (gains) losses
 
 
 
 
 
 
 
 
Liabilities
Beginning
balance
Included
in earnings
Included
in OCI
Purchases
Sales
Issuances
Settlements
Transfers
into  level
3
Transfers
out of level 3
Ending
balance
Change in
unrealized
(gains)
losses (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
Other policy liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Guaranteed minimum withdrawal benefit
liability
$ 2,245
$ 1,068,881
$ -
$ -
$ -
$ -
$ -
$ -
$ -
$1,071,126
$ 930,740
 
Guaranteed minimum accumulation benefit
liability
 49 
 215,549 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 215,598 
 182,268 
 
Derivatives embedded in reinsurance
contracts
 - 
 (5,923)
 - 
 29,753 
 - 
 - 
 (18,637)
 - 
 - 
 5,193 
 (5,923)
 
Derivatives embedded in fixed index
annuities
 131,608 
 (15,213)
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 116,395 
 69,921 
Total other policy liabilities (1)
 133,902 
 1,263,294 
 - 
 29,753 
 - 
 - 
 (18,637)
 - 
 - 
 1,408,312 
 1,177,006 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments – payable:
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 
Foreign currency contracts
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 
Credit contracts
 27,341 
 (9,618)
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 17,723 
 (9,619)
 
Futures contracts
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
Total derivative instruments – payable
 27,341 
 (9,618)
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 17,723 
 (9,619)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
Bank overdrafts
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities measured at fair value on a
recurring basis
$ 161,243
$ 1,253,676
$ -
$ 29,753
$ -
$ -
$ (18,637)
$ -
$ -
$1,426,035
$ 1,167,387

 
(1) The balances are included within the contractholder deposits funds and other policy liabilities in the Company’s consolidated balance sheets.
 
(2) Included in earnings relating to instruments still held at the reporting date.

Gains and losses related to Level 3 assets and liabilities, included in the Company’s consolidated statements of operations for the
 year ended December 31, 2011, are reported as follows:

 
Total gains (losses)
included in earnings
Change in unrealized
gains (losses) related
to assets and
liabilities still held  at
the reporting date
Net investment income
$
7,946 
$
22,462 
Net derivative loss
 
(1,257,778)
 
(1,171,489)
Net realized investment gains, excluding impairment losses
on available-for-sale securities
 
1,258 
 
-
Net losses
$
(1,248,574)
$
(1,149,027)



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, 2011, 2010 and 2009

5. FAIR VALUE MEASUREMENT (CONTINUED)

The following table shows a reconciliation of the beginning and ending balances for assets which are categorized as Level 3 for the year ended December 31, 2010:

 
 
 
Total realized and unrealized
gains (losses)
 
 
 
 
Assets
Beginning
balance
Included in
earnings
Included in other
comprehensive income
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
Available-for-sale fixed maturity  securities:
 
 
 
 
 
 
 
 
Asset-backed securities
$ 37
$ (40)
$ 14
$ -
$ -
$ 11
$ -
 
Residential mortgage-backed securities
 - 
-
-
-
 - 
-
-
 
Commercial mortgage-backed
 
 
 
 
 
 
 
 
securities
1,930 
(472)
589 
-
-
2,047 
-
 
Foreign government & agency
 
 
 
 
 
 
 
 
securities
-
-
-
-
-
-
-
 
U.S. states and political subdivision
-
-
-
-
-
-
-
 
securities
-
-
-
-
-
-
-
 
U.S. treasury and agency securities
 
 
 
-
 
 
 
 
Corporate securities
 7,936 
 (23)
 53 
 (6,831)
 - 
 1,135 
-
Total available-for-sale fixed maturity securities
 9,903 
 (535)
 656 
 (6,831)
-
 3,193 
 - 
 
 
 
 
 
 
 
 
 
Trading fixed maturity securities:
 
 
 
 
 
 
 
 
Asset-backed securities
111,650 
26,351 
-
(38,060)
(9,090)
90,851 
28,061 
 
Residential mortgage-backed securities
154,551 
11,159 
-
(34,087)
(42,904)
88,719 
24,255 
 
Commercial mortgage-backed
 
 
 
 
 
 
 
 
securities
14,084 
1,833 
-
66,950 
(696)
82,171 
3,334 
 
Foreign government & agency
 
 
 
 
 
 
 
 
securities
15,323 
(1,533)
-
-
-
13,790 
65 
 
U.S. states and political subdivision
 
 
 
 
 
 
 
 
securities
- 
-
-
-
-
-
- 
 
U.S. treasury and agency securities
- 
(13)
-
(232)
1,346 
1,101 
21 
 
Corporate securities
107,886 
4,805 
-
(11,997)
31,862 
132,556 
5,111 
Total trading fixed maturity securities
403,494 
42,602 
-
(17,426)
(19,482)
409,188 
60,847 
 
 
 
 
 
 
 
 
 
Derivative instruments – receivable:
 
 
 
 
 
 
 
 
Interest rate contracts
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 
Foreign currency contracts
 - 
 - 
 - 
 - 
 - 
 - 
 - 
 
Equity contracts
 8,821 
 - 
 - 
 4,964 
 - 
 13,785 
 - 
 
Futures contracts
 - 
 - 
 - 
 - 
 - 
 - 
 - 
Total derivative instruments– receivable
 8,821 
 - 
 - 
 4,964 
 - 
 13,785 
 - 
 
 
 
 
 
 
 
 
 
Other invested assets
 - 
 (50)
 900 
 7,493 
 - 
 8,343 
(50)
Short-term investments
 - 
 - 
 - 
 - 
 - 
 - 
- 
Cash and cash equivalents
 - 
 - 
 - 
 - 
 - 
 - 
- 
Total investments and cash
422,218 
42,017 
1,556 
(11,800)
(19,482)
434,509 
60,797 
 
 
 
 
 
 
 
 
 
Separate account assets:
 
 
 
 
 
 
 
 
Mutual fund investments
 - 
 - 
 - 
 - 
 - 
 - 
- 
 
Equity investments
 7 
 - 
 - 
 (7)
 - 
 - 
- 
 
Fixed income investments
 276,530 
 (11,998)
 - 
 (91,989)
 (116,220)
 56,323 
(4,607)
 
Alternative investments
 267,196 
 12,671 
 - 
 30,021 
 (16,634)
 293,254 
12,341 
 
Other investments
 4,108 
 - 
 - 
 - 
 (4,108)
 - 
- 
 
Total separate account assets (1)
547,841 
673 
- 
(61,975)
(136,962)
349,577 
7,734 
 
 
 
 
 
 
 
 
 
Total assets measured at fair value on
 
 
 
 
 
 
 
a recurring basis
$ 970,059
$ 42,690
$ 1,556
$ (73,775)
$ (156,444)
$ 784,086
$ 68,531

(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)
Transfers in and/or (out) of Level 3 during the year ended December 31, 2010 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, 2011, 2010 and 2009

5. FAIR VALUE MEASUREMENT (CONTINUED)

The following table shows a reconciliation of the beginning and ending balances for liabilities which are categorized as Level 3 for the year ended December 31, 2010:

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total realized and unrealized
 (gains) losses
 
 
 
 
 
 
 
  
Liabilities
Beginning
balance
Included in
earnings
Included in other
comprehensive
income
 
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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other policy liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Guaranteed minimum withdrawal
benefit liability
$ 168,786
 
$ (319,563)
 
$ -
 
$ 153,022
 
$ -
 
$ 2,245
 
$ (314,652)
 
Guaranteed minimum accumulation
benefit liability
 81,669 
 
 (104,831)
 
 - 
 
 23,211 
 
 - 
 
 49 
 
 (103,091)
 
Derivatives embedded in reinsurance
contracts
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
Derivatives embedded in fixed index
annuities
 140,966 
 
 (13,153)
 
 - 
 
 3,795 
 
 - 
 
 131,608 
 
 20,397 
Total other policy liabilities (1)
 391,421 
 
 (437,547)
 
 - 
 
 180,028 
 
 - 
 
 133,902 
 
 (397,346)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments – payable:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
Foreign currency contracts
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
Credit contracts
 34,349 
 
 (7,008)
 
 - 
 
 - 
 
 - 
 
 27,341 
 
 (7,008)
 
Futures contracts
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
Total derivative instruments – payable
 34,349 
 
 (7,008)
 
 - 
 
 - 
 
 - 
 
 27,341 
 
 (7,008)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Bank overdrafts
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities measured at fair value on
a recurring basis
$ 425,770
 
$ (444,555)
 
$ -
 
$ 180,028
 
$ -
 
$ 161,243
 
$ (404,354)

 
(1) The balances are included within the contractholder deposit funds and other policy liabilities in the Company consolidated balance sheets.

Gains and losses related to Level 3 assets and liabilities, included in the Company’s consolidated statements of operations for the year ended December 31, 2010, are reported as follows:

 
 
Total gains
(losses) included
in earnings
 
Change in
unrealized gains
related to assets
and liabilities still
held  at the
reporting date
Net investment income
$
 42,552 
$
 60,797 
Net derivative gains
 
 444,555 
 
 404,354 
Net realized investment losses, excluding impairment
 
 
 
 
losses on available-for-sale securities
 
 (535)
 
 - 
Net gains
$
 486,572 
$
 465,151 



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, 2011, 2010 and 2009

5. FAIR VALUE MEASUREMENT (CONTINUED)

The Company determines transfers between levels based on the fair value of each security as of the beginning of the reporting period.

During the year ended December 31, 2011, the Company transferred the following assets into (out of) Levels 1, 2 and 3:

 
 
Level 1 Transfers
Level 2 Transfers
Level 3 Transfers
 
 
Into
(Out of)
Into
(Out of)
Into
(Out of)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
-
$
-
$
-
$
-
$
-
$
-
 
Residential mortgage-backed securities
 
-
 
-
 
-
 
-
 
-
 
-
 
Commercial mortgage-backed securities
 
-
 
-
 
-
 
-
 
-
 
-
 
Foreign government & agency securities
 
-
 
-
 
-
 
-
 
-
 
-
 
U.S. states and political subdivision securities
 
-
 
-
 
-
 
-
 
-
 
-
 
U.S. treasury and agency securities
 
-
 
-
 
-
 
-
 
-
 
-
 
Corporate securities
 
-
 
-
 
609 
 
(6,360)
 
6,360 
 
(609)
Total available-for-sale fixed maturity securities
 
-
 
-
 
609 
 
(6,360)
 
6,360 
 
(609)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
 
-
 
-
 
18,550 
 
(14,639)
 
14,639 
 
(18,550)
 
Residential mortgage-backed securities
 
-
 
-
 
27,731 
 
(99,785)
 
99,785 
 
(27,731)
 
Commercial mortgage-backed securities
 
-
 
-
 
- 
 
(4,954)
 
4,954 
 
- 
 
Foreign government & agency securities
 
-
 
-
 
-
 
-
 
-
 
-
 
U.S. states and political subdivision securities
 
-
 
-
 
-
 
-
 
-
 
-
 
U.S. treasury and agency securities
 
-
 
(2,312)
 
1,101 
 
-
 
2,312 
 
(1,101)
 
Corporate securities
 
-
 
-
 
75,385 
 
(32,343)
 
32,343 
 
(75,385)
Total trading fixed maturity securities
 
-
 
(2,312)
 
122,767 
 
(151,721)
 
154,033 
 
(122,767)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments- receivable:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
-
 
-
 
-
 
-
 
-
 
-
 
Foreign currency contracts
 
-
 
-
 
-
 
-
 
-
 
-
 
Equity contracts
 
-
 
-
 
-
 
-
 
-
 
-
 
Credit contracts
 
-
 
-
 
-
 
-
 
-
 
-
 
Futures
 
-
 
-
 
-
 
-
 
-
 
-
Total derivative instruments-receivable
 
-
 
-
 
-
 
-
 
-
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
    Other invested assets
 
 - 
 
 - 
 
 7,650 
 
 - 
 
 - 
 
 (7,650)
    Short-term investments
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
    Cash and cash equivalents
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
Total investments and cash
 
 - 
 
 (2,312)
 
 131,026 
 
 (158,081)
 
 160,393 
 
 (131,026)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Separate account assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual fund investments
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
Equity investments
 
 - 
 
 - 
 
 - 
 
 (49)
 
 49 
 
 - 
 
Fixed income investments
 
 - 
 
 - 
 
 33,704 
 
 (8,096)
 
 8,096 
 
 (33,704)
 
Alternative investments
 
 - 
 
 - 
 
 - 
 
 (3,200)
 
 3,200 
 
 - 
 
Other investments
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
Total separate account assets
 
 - 
 
 - 
 
 33,704 
 
 (11,345)
 
 11,345 
 
 (33,704)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets measured at fair value on a
 
 
 
 
 
 
 
 
 
 
 
 
 recurring basis
$
 - 
$
 (2,312)
$
 164,730 
$
 (169,426)
$
 171,738 
$
 (164,730)

The Company did not change the categorization of its financial instruments during the year ended December 31, 2011.  The transfers into (out of) Level 2 and Level 3 were primarily due to changes in the level of observability of inputs used to price these 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, 2011, 2010 and 2009

5. FAIR VALUE MEASUREMENT (CONTINUED)

The Company determines transfers between levels based on the fair value of each security as of the beginning of the reporting period.

During the year ended December 31, 2010, the Company transferred the following assets into (out of) Levels 1, 2 and 3:

 
 
 
Level 1 Transfers
 
Level 2 Transfers
 
Level 3 Transfers
 
 
 
Into
 
(Out of)
 
Into
 
(Out of)
 
Into
 
(Out of)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
 - 
$
 - 
$
 - 
$
 - 
$
 - 
$
 - 
 
Residential mortgage-backed securities
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
Commercial mortgage-backed securities
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
Foreign government & agency securities
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
U.S. states and political subdivision securities
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
U.S. treasury and agency securities
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
Corporate securities
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
Total available-for-sale fixed maturity securities
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trading fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securities
 
 - 
 
 - 
 
 44,458 
 
 (35,368)
 
 35,368 
 
 (44,458)
 
Residential mortgage-backed securities
 
 - 
 
 - 
 
 79,192 
 
 (36,288)
 
 36,288 
 
 (79,192)
 
Commercial mortgage-backed securities
 
 - 
 
 - 
 
 696 
 
 - 
 
 - 
 
 (696)
 
Foreign government & agency securities
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
U.S. states and political subdivision securities
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
U.S. treasury and agency securities
 
 - 
 
 (1,346)
 
 - 
 
 - 
 
 1,346 
 
 - 
 
Corporate securities
 
 - 
 
 - 
 
 32,579 
 
 (64,441)
 
 64,441 
 
 (32,579)
Total trading fixed maturity securities
 
 - 
 
 (1,346)
 
 156,925 
 
 (136,097)
 
 137,443 
 
 (156,925)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments- receivable:
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
Foreign currency contracts
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
Equity contracts
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
Credit contracts
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
Futures contracts
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
Total derivative instruments-receivable
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Separate account assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mutual fund investments
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
Equity investments
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
 - 
 
Fixed income investments
 
 - 
 
 - 
 
 116,220 
 
 - 
 
 - 
 
 (116,220)
 
Alternative investments
 
 14,221 
 
 - 
 
 2,968 
 
 (555)
 
 555 
 
 (17,189)
 
Other investments
 
 4,108 
 
 - 
 
 - 
 
 - 
 
 - 
 
 (4,108)
Total separate account assets
 
 18,329 
 
 - 
 
 119,188 
 
 (555)
 
 555 
 
 (137,517)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets measured at fair value on a
 
 
 
 
 
 
 
 
 
 
 
 
 recurring basis
$
 18,329 
$
 (1,346)
$
 276,113 
$
 (136,652)
$
 137,998 
$
 (294,442)

The Company did not change the categorization of its financial instruments during the year ended December 31, 2010.  The transfers into (out of) Level 2 and Level 3 were primarily due to changes in the level of observability of inputs used to price these 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, 2011, 2010 and 2009

5. FAIR VALUE MEASUREMENT (CONTINUED)

Financial Instruments Not Considered at Fair Value

FASB ASC Topic 825 requires disclosure of the fair value of certain financial instruments including those that are not carried at fair value. FASB ASC Topic 825 also 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 value and estimated fair value of the Company’s financial instruments that are not carried at fair value at:

 
 
 
December 31, 2011
 
December 31, 2010
 
 
Carrying
Estimated
 
Carrying
Estimated
 
 
Amount
Fair Value
 
Amount
Fair Value
 
 
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
Mortgage loans
$
1,457,356 
$
1,588,473 
 
$
1,737,528 
$
1,811,567 
 
Policy loans
$
603,371 
$
651,876 
 
$
717,408 
$
859,668 
 
 
 
 
 
 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
Contractholder deposit funds and other policy liabilities
$
9,503,446 
$
9,183,946 
 
$
11,944,058 
$
11,490,525 
 
Debt payable to affiliates
$
683,000 
$
683,503 
 
$
783,000 
$
783,000 

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

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

Mortgage loans:  The fair values of mortgage 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.

Policy loans:  The fair value of policy loans is determined by estimating future policy loan cash flows and discounting the cash flows at a current market interest rate.

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 (e.g., 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.

Debt payable to affiliates:  The fair value of notes payable and other borrowings is based on future cash flows discounted at the stated interest rate, considering all appropriate terms of the related agreements.  Due to certain provisions included in such agreements, whereby the issuer of most of the notes has the ability to call the notes at par with appropriate approvals, the fair value is equal to par value.  The note, whose issuer does not have the ability to call at par, is reported at fair value.



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

For the Years Ended December 31, 2011, 2010 and 2009

6. NET REALIZED INVESTMENT GAINS (LOSSES)

The Company’s net realized investment gains (losses) on available-for-sale fixed maturity securities and other investments, excluding OTTI losses, consisted of the following for the years ended December 31:

 
2011 
2010 
2009 
 
 
 
 
 
 
 
Fixed maturity securities
$
62,361 
$
34,409 
$
2,912 
Mortgage loans
 
(25,573)
 
(10,327)
 
(43,148)
Real estate
 
(24)
 
2 
 
- 
Other invested assets
 
(136)
 
(170)
 
1,289 
Sales of previously impaired assets
 
2,950 
 
3,037 
 
2,272 
 
 
 
 
 
 
 
Net realized investment gains (losses) from   continuing operations
$
39,578 
$
26,951 
$
(36,675)
Net realized investment gains from discontinued     operations
$
- 
$
- 
$
- 

7. NET INVESTMENT INCOME

The Company’s net investment income consisted of the following for the years ended December 31:

 
2011 
2010 
2009 
Trading fixed maturity securities:
 
 
 
 
 
 
 
Interest and other income
$
613,479 
$
713,960 
$
822,599 
 
Change in fair value and net realized gains
 
91,919 
 
606,946 
 
1,736,975 
Mortgage loans
 
91,920 
 
108,555 
 
121,531 
Real estate
 
8,455 
 
8,645 
 
7,735 
Policy loans
 
(88,548)
 
45,054 
 
44,862 
Income ceded under funds withheld reinsurance
 
25,213 
 
(75,643)
 
(139,168)
Other
 
5,916 
 
4,150 
 
3,948 
Gross investment income
 
748,354 
 
1,411,667 
 
2,598,482 
Less: Investment expenses
 
20,726 
 
21,457 
 
16,175 
Net investment income from continuing operations
$
727,628 
$
1,390,210 
$
2,582,307 
Net investment loss from discontinued operations
$
 - 
$
 - 
$
 (24,956)

Ceded investment income on funds-withheld reinsurance portfolios is included as a component of net investment income and is accounted for consistent with the policies discussed in Note 1 of the Company’s consolidated financial statements.  Net investment income ceded and interest earned on policy loans during the year ended December 31, 2011 were decreased by a $113.3 million prior-year adjustment related to the interest rate on policy loans.  Refer to the Wealth Management section in Note 8 to the Company’s consolidated financial statements for further discussion of this adjustment.  The ceded investment income relates to the funds-withheld reinsurance agreements between the Company and certain affiliates, which is further discussed in Note 8 to the Company’s 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, 2011, 2010 and 2009

8. REINSURANCE

Reinsurance ceded contracts do not relieve the Company from its obligations to its 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 agreements in the consolidated statements of operations were as follows:

 
For the Years Ended December 31,
 
2011 
 
2010 
 
2009 
 
 
 
 
 
 
 
 
 
Revenues:
 
 
 
 
 
 
 
 
Premiums and annuity considerations:
 
 
 
 
 
 
 
 
 
Direct
$
109,569 
 
$
94,869 
 
$
86,671 
 
Assumed
 
36,169 
 
 
47,616 
 
 
52,856 
 
Ceded
 
(8,318)
 
 
(6,310)
 
 
(5,281)
Net premiums and annuity considerations from continuing operations
$
137,420 
 
$
136,175 
 
$
134,246 
Net premiums and annuity considerations related to discontinued operations
$
-
 
$
-
 
$
-
 
 
 
 
 
 
 
 
 
 
Net investment income:
 
 
 
 
 
 
 
Direct
$
702,415 
 
$
1,465,853 
 
$
2,721,475 
 
Assumed
 
-
 
 
-
 
 
-
 
Ceded (1)
 
25,213 
 
 
(75,643)
 
 
(139,168)
Net investment income from continuing operations
$
727,628 
 
$
1,390,210 
 
$
2,582,307 
Net investment loss related to discontinued operations
$
-
 
$
- 
 
$
(24,956)
 
 
 
 
 
 
 
 
 
 
Fee and other income:
 
 
 
 
 
 
 
Direct
$
743,866 
 
$
676,670 
 
$
581,868 
 
Assumed
 
10 
 
 
-
 
 
-
 
Ceded
 
(135,465)
 
 
(165,643)
 
 
(196,032)
Net fee and other income from continuing operations
$
608,411 
 
$
511,027 
 
$
385,836 
Net fee and other income related to discontinued operations
$
-
 
$
- 
 
$
(49,947)

(1)  Investment income earned (direct) and ceded during the year ended December 31, 2011 includes a decrease of $113.3 million due to an interest rate adjustment.  This adjustment did not have any impact on net investment income.  Refer to the Wealth
     Management section of this Note 8 for further details.





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, 2011, 2010 and 2009

8. REINSURANCE (CONTINUED)

 
For the Years Ended December 31,
 
2011 
 
2010 
 
2009 
 
 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
 
Interest credited:
 
 
 
 
 
 
 
 
 
Direct
$
386,809 
 
$
491,090 
 
$
472,275 
 
Assumed
 
6,260 
 
 
6,879 
 
 
7,801 
 
Ceded (2)
 
31,139 
 
 
(96,121)
 
 
(94,308)
Net interest credited from continuing operations
$
424,208 
 
$
401,848 
 
$
385,768 
Net interest credited related to discontinued operations
$
-
 
$
- 
 
$
34,216 
 
 
 
 
 
 
 
 
 
Policyowner benefits:
 
 
 
 
 
 
 
Direct
$
236,232 
 
$
409,907 
 
$
265,021 
 
Assumed
 
22,915 
 
 
26,189 
 
 
38,313 
 
Ceded
 
(124,735)
 
 
(196,302)
 
 
(192,895)
Net policyowner benefits from continuing operations
$
134,412 
 
$
239,794 
 
$
110,439 
Net policyowner benefits related to discontinued operations
$
-
 
$
- 
 
$
13,267 
 
 
 
 
 
 
 
 
 
Other operating expenses:
 
 
 
 
 
 
 
Direct
$
355,928 
 
$
333,850 
 
$
282,502 
 
Assumed
 
3,314 
 
 
5,079 
 
 
6,129 
 
Ceded
 
(8,917)
 
 
(20,759)
 
 
(40,475)
Net other operating expenses from continuing operations
$
350,325 
 
$
318,170 
 
$
248,156 
Net other operating expenses related to discontinued operations
$
-
 
$
- 
 
$
10,436 

(2) Interest credited ceded during the year ended December 31, 2011 includes a $113.3 million interest rate adjustment decreasing ceded interest credited.  Refer to the Wealth Management section of this Note 8 for further details.


A brief discussion of the Company’s significant reinsurance agreements by business segment follows.  Refer to Note 16 for additional information regarding the Company’s business 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, 2011, 2010 and 2009

8. REINSURANCE (CONTINUED)

Wealth Management Segment

The Wealth Management segment manages a closed block of SPWL insurance policies, a retirement-oriented tax-advantaged life insurance product.  The Company discontinued sales of the SPWL product in response to certain tax law changes in the 1980s.  The Company had SPWL policyholder balances of $1.3 billion and $1.5 billion at December 31, 2011 and 2010, respectively.  This entire block of business is reinsured on a funds-withheld coinsurance basis with SLOC, an affiliate.  Pursuant to this agreement, the Company held the following assets and liabilities at December 31:

 
2011 
 
2010 
Assets
 
 
 
 
 
Reinsurance receivables
$
1,312,989 
 
$
1,466,247 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
Contractholder deposit funds and other policy liabilities
 
1,342,628 
 
 
1,478,459 
Future contract and policy benefits
 
2,160 
 
 
1,823 
Reinsurance payable
$
1,410,748 
 
$
1,555,336 

The funds-withheld assets of $1.4 billion and $1.6 billion at December 31, 2011 and  2010, respectively, are comprised of fixed maturity securities, mortgage loans, policy loans, derivative instruments, and cash and cash equivalents that are managed by the Company.  The fair value of the embedded derivative increased contractholder deposit funds and other policy liabilities by $31.8 million and $14.0 million at December 31, 2011 and 2010, respectively.  The change in the fair value of this embedded derivative decreased derivative income by $17.8 million, $24.6 million, and $120.0 million for the years ended December 31, 2011, 2010 and 2009, respectively.

By reinsuring the SPWL product, the Company increased (decreased) net investment income by $48.5 million, $(49.9) million and $(126.6) million for the years ended December 31, 2011, 2010 and 2009, respectively.  The Company also increased (decreased) interest credited by $55.4 million, $(71.5) million and $(73.9) million for the years ended December 31, 2011, 2010 and 2009, respectively.

The net investment income ceded for the year ended December 31, 2011 was decreased by $113.3 million due to an interest rate adjustment processed during the year.  The interest credited ceded for year ended December 31, 2011 was decreased by $113.3 million due to policy reinstatements and interest rate adjustments processed during the year.  The adjustment was recorded to correct the Company’s prior year policy loan balances that were overstated by $113.3 million due to inaccurate interest rates applied to certain SPWL policies’ loan balances.  The adjustment did not have any impact on the interest credited and net investment income, net of reinsurances, reported in the Company’s consolidated statement of operations due to the 100% funds-withheld reinsurance agreement with SLOC noted above.  The adjustment also resulted in a $113.3 million decrease in policy loans, contractholder deposit funds and other policy liabilities, reinsurance receivable, and reinsurance payable in the Company’s consolidated balance sheet at December 31, 2011.



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, 2011, 2010 and 2009

8. REINSURANCE (CONTINUED)

Individual Protection Segment

The following are the Company’s significant reinsurance agreements that impact the Individual Protection segment.

On February 11, 2009, the Company received regulatory approval and entered into a reinsurance agreement with BarbCo 3, an affiliate, to cede all of the risks associated with certain in-force corporate and bank-owned variable universal life and private placement variable universal life policies on a combination coinsurance, coinsurance with funds-withheld and a modified coinsurance basis.

Effective January 1, 2010, the Company and BarbCo 3 amended the agreement to include coverage of certain corporate and bank-owned variable universal life and private placement variable universal life insurance cases sold between December 31, 2009 and March 31, 2010, inclusive.  Reinsurance coverage continued for all cases sold prior to April 1, 2010.  However, cases sold on or after April 1, 2010 have not been reinsured.  This amendment also enabled the Company to discontinue reinsuring a portion of the covered business that was previously reinsured on a modified coinsurance basis, effective April 1, 2010.  The discontinuance of the business reinsured on a modified coinsurance basis did not have a material impact on the Company’s consolidated financial statements.

At the inception of the transaction, BarbCo 3 paid an initial ceding commission to the Company of $41.5 million and the Company recorded a reinsurance payable and related reinsurance receivable of $370.7 million and $329.2 million, respectively.  The reinsurance payable included a funds-withheld liability of $247.9 million and a deferred gain of $122.8 million.  Pursuant to this agreement, the Company held the following assets and liabilities at:

 
December 31,
 
December 31,
 
2011 
 
2010 
Assets
 
 
 
 
 
Reinsurance receivable
$
451,397 
 
$
419,684 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
Contractholder deposit funds and other policy liabilities
 
507,606 
 
 
465,035 
Reinsurance payable
$
429,914 
 
$
432,160 

Reinsurance payable includes a funds-withheld liability of $324.3 million and $326.9 million at December 31, 2011 and 2010, respectively, and a deferred gain of $105.6 million and $105.3 million at December 31, 2011 and 2010, respectively.  The funds-withheld assets are managed by the Company and comprised of fixed maturity securities, policy loans, equity securities, cash and cash equivalents and related accrued income, totaling $332.5 million and $357.2 million at December 31, 2011 and 2010, respectively.  The funds-withheld coinsurance agreement gives rise to an embedded derivative which is required to be separated from the host reinsurance contract.  At December 31, 2011 and 2010, the fair value of the embedded derivative increased contractholder deposit funds and other policy liabilities by $34.1 million and $24.1 million, respectively.

The change in fair value of the embedded derivative (decreased) increased derivative income by $(10.0) million and $2.2 million for the years ended December 31, 2011 and 2010, respectively.  In addition, during the years ended December 31, 2011 and 2010, the reinsurance agreement reduced revenues by $53.2 million and $24.3 million, respectively, and decreased expenses by $31.3 million and $56.2 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, 2011, 2010 and 2009

8. REINSURANCE (CONTINUED)

Individual Protection Segment (continued)

The Company’s subsidiary, SLNY, has a funds-withheld reinsurance agreement with SLOC under which SLOC funds a portion of the statutory reserves (“AXXX reserves”) required by New York Regulation 147, which is substantially similar to Actuarial Guideline 38, as adopted by the NAIC, 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.  Pursuant to this agreement, SLNY held the following assets and liabilities at December 31:

 
2011 
 
2010 
Assets
 
 
 
 
 
Reinsurance receivable
$
159,649 
 
$
133,088 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
Contractholder deposit funds and other policy liabilities
 
142,146 
 
 
104,795 
Future contract and policy benefits
 
33,138 
 
 
21,662 
Reinsurance payable
$
238,180 
 
$
225,387 

Reinsurance payable includes a funds-withheld liability of $194.3 million and $172.8 million at December 31, 2011 and 2010, respectively, and a deferred gain of $43.7 million and $52.6 million at December 31, 2011 and 2010, respectively.  The funds-withheld assets are managed by the Company and are comprised of trading fixed maturity securities, policy loans, equity securities, mortgage loans and related accrued income, totaling $191.2 million and $176.7 million at December 31, 2011 and 2010, respectively.  The coinsurance agreement with funds-withheld gives rise to an embedded derivative which is required to be separated from the host reinsurance contract.  The fair value of the embedded derivative increased contractholder deposit funds and other policy liabilities by $31.2 million and $3.2 million at December 31, 2011 and 2010, respectively.

The change in the fair value of this embedded derivative decreased derivative income by $28.1 million, $3.9 million and $11.3 million for the years ended December 31, 2011, 2010 and 2009, respectively.  In addition, the activities related to the reinsurance agreement have decreased revenues by $48.8 million, $31.0 million and $29.0 million, and decreased expenses by $26.8 million, $28.0 million and $20.9 million for the years ended December 31, 2011, 2010 and 2009, respectively.

The Company has other reinsurance agreements with SLOC and several unrelated companies, which provide reinsurance for portions of the net-amount-at-risk under certain individual variable universal life, individual private placement variable universal life, bank owned life insurance (“BOLI”) and corporate owned life insurance (“COLI”) policies.  These amounts are reinsured on a monthly renewable term, a yearly renewable term or a modified coinsurance basis.  These other agreements decreased revenues by approximately $91.7 million, $134.7 million and $173.9 million and reduced expenses by approximately $79.9 million, $140.1 million and $168.5 million for the years ended December 31, 2011, 2010 and 2009, respectively.

Group Protection Segment

SLNY has several agreements with unrelated companies whereby the unrelated companies reinsure the mortality and morbidity risks of certain of SLNY’s group contracts.

SLNY also has a reinsurance agreement, effective May 31, 2007, to assume the net risks of SLHIC’s New York issued contracts.  At December 31, 2011 and 2010, SLNY held policyholder liabilities of $25.7 million and $28.6 million, respectively, related to this agreement.  In addition, the reinsurance agreement increased revenues by $36.2 million, $47.6 million and $52.9 million for the years ended December 31, 2011, 2010 and 2009, respectively, and increased expenses by $26.2 million, $31.2 million and $44.3 million for the years ended December 31, 2011, 2010 and 2009, 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, 2011, 2010 and 2009

9.  RETIREMENT PLANS

Effective December 31, 2009, the Company transferred all of its employees to an affiliate, Sun Life Services, with the exception of 28 employees who were transferred to SLFD, another affiliate.  As a result of this transaction, the Company transferred pension and other employee benefit liabilities, accumulated other comprehensive income related to pension and other postretirement plans, and cash to Sun Life Services.  Concurrent with this transaction, Sun Life Services became the sponsor of the retirement plans described below.  The employee transfer did not materially change the provisions of the related retirement plans.  The annual cost of these benefits to the Company is allocated and charged to the Company in a manner consistent with the allocation of employee compensation expenses.

Prior to the December 31, 2009 employee transfer, the Company sponsored two non-contributory defined benefit pension plans for its employees and certain affiliated employees.  These plans were the staff qualified pension plan (“staff pension plan”) and the staff nonqualified pension plan (“UBF plan”) (collectively, the “Pension Plans”).  Expenses were 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 was to contribute amounts which at least satisfy the minimum amount required by the Employee Retirement Income Security Act of 1974 (“ERISA”).  Most pension plan assets consist of separate accounts of SLOC or other insurance company contracts.

Prior to the December 31, 2009 employee transfer, the Company sponsored 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 were allocated to participating companies based on the number of participants.  Substantially all employees of the participating companies may become eligible for these benefits if they reach normal retirement age while working for the Company, or retire early upon satisfying an alternate age plus service condition.  Life insurance benefits are generally set at a fixed amount.




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

For the Years Ended December 31, 2011, 2010 and 2009

9. RETIREMENT PLANS (CONTINUED)

The following tables set forth the change in the Pension Plans’ and the Other Post-Retirement Benefit Plan’s projected benefit obligations and assets, as well as information on the plans’ funded status at December 31, 2009:

 
 
Pension Plans
 
Other Post
Retirement
Benefit Plan
Change in projected benefit obligation:
 
 
 
 
Projected benefit obligation at beginning of year
$
270,902 
$
49,112 
Effect of eliminating early measurement date
 
- 
 
- 
Service cost
 
2,597 
 
1,754 
Interest cost
 
17,434 
 
3,218 
Actuarial loss
 
17,861 
 
2,344 
Benefits paid
 
(11,066)
 
(2,095)
Plan amendments
 
- 
 
(803)
Federal subsidy
 
- 
 
121 
Transfer to Sun Life Services
 
(297,728)
 
(53,651)
Projected benefit obligation at end of year
$
- 
$
- 

 
 
Pension Plans
 
Other Post
Retirement
Benefit Plan
Change in fair value of plan assets:
 
 
 
 
Fair value of plan assets at beginning of year
$
 195,511 
$
 - 
Effect of eliminating early measurement date
 
 - 
 
 - 
Employer contributions
 
 6,500 
 
 2,095 
Other
 
 1,547 
 
 - 
Actual return on plan assets
 
 49,375 
 
 - 
Benefits paid
 
 (11,066)
 
 (2,095)
Transfer to Sun Life Services
 
 (241,867)
 
 - 
Fair value of plan assets at end of year
$
 - 
$
 - 

 
 
Pension Plans
 
Other Post
Retirement
Benefit Plan
Information on the funded status of the plan:
 
 
 
 
Funded status
$
 - 
$
 - 
Accrued benefit cost
$
 - 
$
 - 




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, 2011, 2010 and 2009

9. RETIREMENT PLANS (CONTINUED)

The following table sets forth the components of the net periodic benefit cost and the Company’s share of net periodic benefit costs related to the Pension Plans and the Other Post-Retirement Benefit Plan for the year ended December 31:

 
Pension Plans
 
Other Post
Retirement Benefit
Plan
 
2009 
 
2009 
Components of net periodic cost (benefit):
 
 
 
 
 
Service cost
$
 2,597 
 
$
 1,754 
Interest cost
 
 17,434 
 
 
 3,218 
Expected return on plan assets
 
 (15,111)
 
 
 - 
Amortization of transition obligation asset
 
 (2,093)
 
 
 - 
Amortization of prior service cost (benefit)
 
 337 
 
 
 (529)
Recognized net actuarial loss
 
 2,782 
 
 
 382 
Net periodic cost
$
 5,946 
 
$
 4,825 
 
 
 
 
 
 
Company's share of net periodic cost
$
 5,946 
 
$
 3,926 

For the year ended December 31, 2011, Sun Life Services allocated costs to the Company of $1.2 million and $4.4 million for the Pension Plans and Other Post-Retirement Benefit Plan, respectively.  For the year ended December 31, 2010, Sun Life Services allocated costs to the Company of $3.1 million and $4.4 million for the Pension Plans and Other Post-Retirement Benefit Plan, respectively.

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

 
 
Pension Plans
 
Other Post
Retirement Benefit
Plan
 
 
2009 
 
2009 
Net actuarial (gain) loss arising during the year
 
$
 (16,402)
 
$
 2,344 
Net actuarial (loss) gain recognized during the year
 
 
 (2,782)
 
 
 (382)
Prior service cost arising during the year
 
 
 - 
 
 
 (803)
Prior service cost recognized during the year
 
 
 (337)
 
 
 529 
Transition asset recognized during the year
 
 
 2,093 
 
 
 - 
Transition asset arising during the year
 
 
 - 
 
 
 - 
Total recognized in AOCI
 
 
 (17,428)
 
 
 1,688 
Tax effect
 
 
 6,100 
 
 
 (591)
Total recognized in AOCI, net of tax
 
$
 (11,328)
 
$
 1,097 
 
 
 
 
 
 
 
Total recognized in net periodic (benefit) cost and      other comprehensive (loss) income, net of tax
 
$
 (7,463)
 
$
 3,648 



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, 2011, 2010 and 2009

9. RETIREMENT PLANS (CONTINUED)

Effective December 31, 2009, the Company transferred to Sun Life Services the following AOCI related to the Pension Plans and the Other Post-Retirement Benefit Plan:

 
Pension Plans
Other Post  Retirement
Benefit Plan
Total
Transfer of actuarial loss to affiliate
$
 (67,343)
$
 (7,525)
$
 (74,868)
Transfer of prior service (cost)/credit to affiliate
 
 (3,772)
 
 4,164 
 
 392 
Transfer of transition asset to affiliate
 
 1,495 
 
 - 
 
 1,495 
Total AOCI transferred to affiliate
 
 (69,620)
 
 (3,361)
 
 (72,981)
Tax effect
 
 24,367 
 
 1,176 
 
 25,543 
Total AOCI, net of tax, transferred to affiliate
$
 (45,253)
$
 (2,185)
$
 (47,438)

Assumptions

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

 
 
Pension Plans
 
 
 Other Post
Retirement Benefit
Plan
 
 
2009 
 
 
2009 
Discount rate
 
6.10%
 
 
6.10%
Rate of compensation increase
 
3.75%
 
 
n/a

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

 
 
Pension Plans
 
 
Other Post
Retirement Benefit
Plan
 
 
2009 
 
 
2009 
Discount rate
 
6.50%
 
 
6.50%
Expected long term return on plan assets
 
7.75%
 
 
n/a
Rate of compensation increase
 
3.75%
 
 
n/a

The expected long-term rate of return on plan assets is calculated by taking the weighted average return expectations based on the long-term return expectations and investment strategy, 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.



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, 2011, 2010 and 2009

9. RETIREMENT PLANS (CONTINUED)

Cash Flow

The Company contributed $6.5 million and $1.5 million to the staff pension plan and the UBF plan in 2009, respectively.

Savings and Investment Plan

Effective December 31, 2009, Sun Life Services sponsors a savings plan that qualifies under Section 401(k) of the Internal Revenue Code (the “401(k) Plan”) and in which substantially all employees of at least age 21 at date of hire are eligible to participate.  Prior to December 31, 2009, the Company sponsored the 401(k) Plan.  Employee contributions, up to specified amounts, are matched by Sun Life Services under the 401(k) Plan.

The 401(k) Plan also includes a retirement investment account that qualifies under Section 401(a) of the Internal Revenue Code (the “RIA”).  Sun Life Services 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 were at least age 40 on January 1, 2006 and whose age plus service on January 1, 2006 equaled or exceeded 45, the Company contributed to the RIA from January 1, 2006 through December 31, 2009, and Sun Life Services contributes to the RIA from January 1, 2010 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%

The amount of the 2009 employer contributions under the 401(k) Plan for the Company and its affiliates was $25.2 million.  Amounts are allocated to affiliates based upon their respective employees’ contributions.  The Company’s portion of the expense was $14.2 million for the year ended December 31, 2009.  For the years ended December 31, 2011 and 2010, Sun Life Services allocated $16.3 million and $17.4 million to the Company, 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, 2011, 2010 and 2009

10. FEDERAL INCOME TAXES

The Company accounts for current and deferred income taxes in the manner prescribed by FASB ASC Topic 740.  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:

 
 
2011 
 
2010 
 
2009 
Income tax (benefit) expense:
 
 
 
 
 
 
 
 
 
Current
 
$
 (30,769)
 
$
 (78,166)
 
$
 40,092 
Deferred
 
 
 (49,932)
 
 
 149,377 
 
 
 295,557 
 
 
 
 
 
 
 
 
 
 
Total income tax (benefit) expense related to
 
 
 
 
 
 
 
 
 
    continuing operations
 
$
 (80,701)
 
$
 71,211 
 
$
 335,649 
Total income tax expense related to
 
 
 
 
 
 
 
 
 
    discontinued operations
 
$
 - 
 
$
 - 
 
$
 40,690 

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 of 35%.  The following is a summary of the differences between the expected income tax (benefit) expense at the prescribed U.S. federal statutory income tax rate and the total amount of income tax (benefit) expense that the Company has recorded.

 
 
 
2011 
 
 
2010 
 
 
2009 
 
 
 
 
 
 
 
 
 
 
Expected federal income tax expense
 
$
 (64,336)
 
$
 71,920 
 
$
 424,261 
Low income housing tax credits
 
 
 (1,885)
 
 
 (2,028)
 
 
 (3,880)
Separate account dividends received deduction
 
 
 (14,702)
 
 
 (14,702)
 
 
 (16,232)
Prior year adjustments/settlements
 
 
 (968)
 
 
 5,243 
 
 
 1,320 
Valuation allowance-capital losses
 
 
-
 
 
 - 
 
 
 (69,670)
Goodwill impairment
 
 
 2,450 
 
 
 11,559 
 
 
-
Adjustments to tax contingency reserves
 
 
 - 
 
 
 305 
 
 
 1,605 
Other items
 
 
 (1,265)
 
 
 (1,358)
 
 
 (1,949)
 
 
 
 
 
 
 
 
 
 
Federal income tax (benefit) expense
 
 
 (80,706)
 
 
 70,939 
 
 
 335,455 
State income tax expense
 
 
 5 
 
 
 272 
 
 
 194 
 
 
 
 
 
 
 
 
 
 
Total income tax (benefit) expense related to
 
 
 
 
 
 
 
 
 
    continuing operations
 
$
 (80,701)
 
$
 71,211 
 
$
 335,649 
Total income tax expense related to
 
 
 
 
 
 
 
 
 
    discontinued operations
 
$
 - 
 
$
 - 
 
$
 40,690 




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, 2011, 2010 and 2009

10. FEDERAL INCOME TAXES (CONTINUED)

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:

 
 
 
2011 
 
 
2010 
Deferred tax assets:
 
 
 
 
 
 
    Actuarial liabilities
 
$
 689,286 
 
$
 155,285 
    Tax loss carryforwards
 
 
 251,591 
 
 
 347,172 
    Investments, net
 
 
 79,417 
 
 
 188,110 
    Goodwill and other impairments
 
 
 34,573 
 
 
 47,303 
    Other
 
 
 15,897 
 
 
 74,218 
Gross deferred tax assets
 
 
 1,070,764 
 
 
 812,088 
    Valuation allowance
 
 
-
 
 
-
Total deferred tax assets
 
 
 1,070,764 
 
 
 812,088 
 
 
 
 
 
 
 
Deferred tax liabilities:
 
 
 
 
 
 
    Deferred policy acquisition costs
 
 
 (622,388)
 
 
 (417,791)
Total deferred tax liabilities
 
 
 (622,388)
 
 
 (417,791)
 
 
 
 
 
 
 
Net deferred tax asset
 
$
 448,376 
 
$
 394,297 

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 net deferred tax asset at December 31, 2011 and 2010 was comprised of gross deferred tax assets and gross deferred tax liabilities.  The gross deferred tax asset was primarily related to unrealized investment security losses, actuarial liabilities and net operating loss (“NOL”) carryforwards, as well as a capital loss carryforward generated in 2009.  At December 31, 2011, the Company had $698.9 million of NOL carryforwards and $20.0 million of capital loss carryforward.  At December 31, 2010, the Company had $958.2 million of NOL carryforwards and $33.7 million of capital loss carryforward.  If not utilized, the NOL carryforwards will begin to expire in 2023 and the capital loss carryforward will expire in 2014.  The Company’s net deferred tax asset was $448.4 million and $394.3 million at December 31, 2011 and 2010, 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, 2011, 2010 and 2009

10. FEDERAL INCOME TAXES (CONTINUED)

The Company performs the required recoverability (realizability) test in terms of its ability to realize its recorded net deferred tax asset.  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.  In projecting future taxable income and sources of capital gains, the Company utilizes historical and current operating results and incorporates assumptions including the amount of future federal and state pre-tax operating income, the reversal of temporary differences, and the implementation of prudent and feasible tax planning strategies.

During the year ended December 31, 2011, no valuation allowance was recorded against the deferred tax asset for investment losses.  The Company believes that it is more likely than not that the deferred tax asset related to impairment losses will be realized due to tax planning strategies related to certain mortgage-backed securities, the Company’s intent and ability to hold the related investment securities to maturity, and other tax planning strategies.  For the remaining unrealized losses, the Company believes that it is more likely than not that the related deferred tax asset will be realized due to the Company’s intent and ability to hold the related investment securities to recovery of amortized cost.

FASB ASC Topic 740 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.

The liability for unrecognized tax benefits (“UTBs”) related to permanent and temporary tax adjustments, exclusive of interest, was $32.9 million, $31.2 million and $42.0 million at December 31, 2011, 2010 and 2009, respectively.  Of the $32.9 million, $1.6 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.

The net increase (decreases) in the tax liability for UTBs of $1.7 million, $(10.8) million and $(8.7) million in the years ended December 31, 2011, 2010 and 2009, respectively, resulted from the following:

 
 
2011 
 
2010 
 
2009 
Balance at January 1
 
$
 31,217 
 
$
 41,989 
 
$
50,679 
Gross increases related to tax positions in prior years
 
 
 13,855 
 
 
 23,214 
 
 
7,950 
Gross decreases related to tax positions in prior years
 
 
 (4,472)
 
 
 (16,170)
 
 
 (16,640)
Settlements
 
 
 (7,659)
 
 
 (20,187)
 
 
- 
Close of tax examinations/statutes of limitations
 
 
 - 
 
 
 2,371 
 
 
- 
 
 
 
 
 
 
 
 
 
 
Balance at December 31
 
$
 32,941 
 
$
 31,217 
 
$
41,989 



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, 2011, 2010 and 2009

10. FEDERAL INCOME TAXES (CONTINUED)

The Company has elected to recognize interest and penalties accrued related to UTBs in interest expense (income).  During the years ended December 31, 2011, 2010 and 2009, the Company recognized $2.6 million, $6.4 million and $(9.0) million, respectively, in gross interest expense (income) related to UTBs.  The Company had approximately $9.2 million and $6.6 million of interest accrued at December 31, 2011 and 2010, respectively.  During 2010, the Company settled interest assessments of $4.6 million with the Internal Revenue Service (the “IRS”) for the 2001 and 2002 tax years.  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.

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 2003.  In August 2006, the IRS issued a Revenue Agent’s Report for the Company’s 2001 and 2002 tax years.  The Company disagreed with some of the proposed adjustments, filed a protest, and the case was assigned to the Appeals division of the IRS (“Appeals”).  A settlement was reached and formally approved by the Company on January 11, 2010.   The effects of the settlement are in line with previous expectations and had no material impact on the Company’s consolidated financial statements.

On August 4, 2011, the IRS held an Opening Conference with the Company for the audit of the tax years 2007-2009.  The Company is in the process of responding to the IRS requests for information. The Company also provided a disclosure letter to the IRS on September 21, 2011, informing the IRS of potential issues in the tax years under audit.

On January 6, 2011, the IRS issued a Revenue Agent’s Report for the Company for tax years 2005 and 2006.  The Company disagrees with some of the issues and is in the process of filing a protest.  While the final outcome of the appeal and ongoing tax examinations is not determinable, the Company has adequate liabilities accrued and does not believe that any adjustments would be material to its financial position.

In October 2008, the IRS issued a Revenue Agent’s Report for the Company’s tax years 2003 and 2004.  The Company disagreed with some of the adjustments and filed a protest, which was assigned to Appeals in 2009.  On May 27, 2010, the IRS held an opening conference for the 2003 and 2004 Appeals.  The Company is involved in discussions with the IRS to reach a resolution.

The Company will file a consolidated federal income tax return with SLC – U.S. Ops Holdings for the  year ended December 31, 2011, as the Company did for the years ended December 31, 2010 and 2009.

Effective December 31, 2009, the Company paid a dividend of all of the issued and outstanding common stock of Sun Life Vermont to the Parent.  Sun Life Vermont continues to be included in the consolidated federal income tax return of the Parent after 2009.

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 upon 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.  Under the terms of the tax sharing agreements, deferred tax assets for tax attributes are realized by the Company when the tax attributes are utilized by the consolidated group.  The Company received income tax refunds of $21.0 million and $107.1 million in 2011 and 2010, respectively, and made income tax payments of $21.1 million in 2009.



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, 2011, 2010 and 2009

11. LIABILITY FOR UNPAID CLAIMS AND CLAIMS ADJUSTMENT EXPENSES

Activity in the liability for unpaid claims and claims adjustment expenses, which is related to the Company’s and its subsidiaries’ group life, group disability insurance, group dental and group stop loss products is summarized below:

 
 
2011 
 
 
2010 
 
 
2009 
 
 
 
 
 
 
 
 
 
Balance at January 1
$
76,181 
 
$
72,953 
 
$
71,316 
Less: reinsurance recoverable
 
(7,316)
 
 
(5,710)
 
 
(5,347)
Net balance at January 1
 
68,865 
 
 
67,243 
 
 
65,969 
Incurred related to:
 
 
 
 
 
 
 
 
 
Current year
 
73,573 
 
 
83,384 
 
 
86,905 
 
Prior years
 
468 
 
 
(1,823)
 
 
(5,817)
Total incurred
 
74,041 
 
 
81,561 
 
 
81,088 
Paid losses related to:
 
 
 
 
 
 
 
 
 
Current year
 
(46,861)
 
 
(54,312)
 
 
(58,598)
 
Prior years
 
(22,618)
 
 
(25,627)
 
 
(21,216)
Total paid
 
(69,479)
 
 
(79,939)
 
 
(79,814)
 
 
 
 
 
 
 
 
 
 
Balance at December 31
 
80,594 
 
 
76,181 
 
 
72,953 
Less: reinsurance recoverable
 
(7,167)
 
 
(7,316)
 
 
(5,710)
Net balance at December 31
$
73,427 
 
$
68,865 
 
$
67,243 

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 expenses increased (decreased) by $0.5 million, $(1.8) million and $(5.8) million, during the years ended December 31, 2011, 2010 and 2009, 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, 2011, 2010 and 2009

12. LIABILITIES FOR CONTRACT GUARANTEES

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, 2011:

Benefit Type
Account
Balance
Net Amount at
Risk (1)
Average Attained
Age
Minimum death
$
 20,437,429 
$
 2,074,633 
66.1 
Minimum income
$
 134,076 
$
 64,600 
63.0 
Minimum accumulation or
withdrawal
$
 13,633,969 
$
 841,197 
63.7 

The table below represents information regarding the Company’s variable annuity contracts with guarantees at December 31, 2010:

Benefit Type
Account
Balance
Net Amount at
Risk (1)
Average Attained
Age
Minimum death
$
 20,061,043 
$
 1,742,139 
66.0 
Minimum income
$
 179,878 
$
 59,322 
62.2 
Minimum accumulation or
withdrawal
$
 12,233,731 
$
 152,571 
63.2 

(1) Net amount at risk represents the excess of the guaranteed benefits over account balance for contracts that have an account value less than the guarantee.



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, 2011, 2010 and 2009

12. LIABILITIES FOR CONTRACT GUARANTEES (CONTINUED)

The following roll-forward summarizes the change in reserve for the Company’s GMDBs and GMIBs for the year ended December 31, 2011:

 
 
Guaranteed
Minimum
Death Benefit
 
Guaranteed
Minimum
Income Benefit
 
Total
Balance at January 1, 2011
$
123,605 
 
$
14,630 
 
$
138,235 
 
 
 
 
 
 
 
 
 
 
Benefit Ratio Change /
 
 
 
 
 
 
 
 
 
Assumption Changes
 
23,491 
 
 
4,443 
 
 
27,934 
Incurred guaranteed benefits
 
27,116 
 
 
1,257 
 
 
28,373 
Paid guaranteed benefits
 
(39,513)
 
 
(1,155)
 
 
(40,668)
Interest
 
9,072 
 
 
916 
 
 
9,988 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
143,771 
 
$
20,091 
 
$
163,862 

The following roll-forward summarizes the change in reserve for the Company’s GMDBs and GMIBs for the year ended December 31, 2010:

 
 
Guaranteed
Minimum
Death Benefit
 
Guaranteed
Minimum
Income Benefit
 
Total
Balance at January 1, 2010
$
96,267 
 
$
10,058 
 
$
106,325 
 
 
 
 
 
 
 
 
 
 
Benefit Ratio Change /
 
 
 
 
 
 
 
 
 
Assumption Changes
 
28,724 
 
 
6,519 
 
 
35,243 
Incurred guaranteed benefits
 
28,481 
 
 
1,434 
 
 
29,915 
Paid guaranteed benefits
 
(37,767)
 
 
(4,207)
 
 
(41,974)
Interest
 
7,900 
 
 
826 
 
 
8,726 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2010
$
123,605 
 
$
14,630 
 
$
138,235 

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 a projection model and stochastic scenarios.  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-calculated and adjusted regularly.  Changes to the liability balance are recorded as a charge or credit to policyowner 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, 2011, 2010 and 2009

12. LIABILITIES FOR CONTRACT GUARANTEES (CONTINUED)

GMABs and GMWBs are considered to be derivatives under FASB ASC Topic 815 and are recorded at fair value through earnings.  The Company records GMAB and GMWB assets or liabilities in its consolidated balance sheets as part of contractholder deposit funds and other policy liabilities.  The net balance of GMABs and GMWBs constituted a liability in the amount of $1,286.8 million and $2.3 million at December 31, 2011 and 2010, respectively.  The Company includes the following unobservable inputs in its calculation of the embedded derivative:

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 upon 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 upon the published credit spread for A-rated corporate bonds, which have ratings that are equivalent 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.

13. DEFERRED POLICY ACQUISITION COSTS AND SALES INDUCEMENT ASSET

The following roll-forward summarizes the change in DAC asset and SIA for the years ended December 31:

 
 
2011 
 
 
2010 
Balance at January 1
$
1,682,559 
 
$
2,173,642 
Acquisition costs deferred
 
244,659 
 
 
241,182 
Amortized to expense during the year  (1)
 
279,668 
 
 
(732,265)
Balance at December 31
$
2,206,886 
 
$
1,682,559 

(1)
Includes interest, unlocking and loss recognition.

Refer to Note 1 of the Company’s consolidated financial statements for information regarding the deferral and amortization methodologies related to DAC asset and SIA.  The Company tested its DAC asset and SIA for future recoverability and determined that the assets were not impaired at December 31, 2011.

During the year ended December 31, 2011, the Company recorded a negative amortization increasing its DAC asset and SIA by $770.2 million.  The negative amortization related to a decrease in actual gross profit which was due to a $1.3 billion increase in the fair value of GMAB and GMWB liabilities related to certain variable annuity products.  The increase in DAC asset and SIA was offset by an unlocking adjustment decreasing DAC asset and SIA by $575.2 million.  The unlocking adjustment recorded in 2011 was due to the total present value of the gross profit for the largest cohort of the Company’s fixed annuities, which was negative at December 31, 2011 resulting in decrease in DAC asset and SIA.

The Company wrote down DAC asset and SIA by $21.0 million and $126.0 million as a result of loss recognition related to certain annuity products for the years ended December 31, 2011 and 2010, respectively.  Of the $21.0 million charge for loss recognition in 2011, $18.3 million related to DAC and was reported as amortization of DAC.  The remaining $2.7 million related to SIA and was reported as a component of interest credited in the Company’s consolidated statement of operations.  Of the $126.0 million charge for loss recognition in 2010, $117.7 million related to DAC and was reported as amortization of DAC.  The remaining $8.3 million related to SIA and was reported as a component of interest credited in the Company’s consolidated statement 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, 2011, 2010 and 2009

14. VALUE OF BUSINESS AND CUSTOMER RENEWALS ACQUIRED

The following roll-forward summarizes the change in VOBA and VOCRA for the years ended December 31:

 
2011 
 
2010 
Balance at January 1
$
134,985 
 
$
168,845 
Amortized to expense during the year
 
(28,898)
 
 
(33,860)
Balance at December 31
$
106,087 
 
$
134,985 

Refer to Note 1 of the Company’s consolidated financial statements for information regarding the amortization methodologies related to VOBA and VOCRA.  The Company tested its VOBA and VOCRA assets for future recoverability and determined that the assets were not impaired at December 31, 2011.

 
The Company tested the VOCRA asset for impairment in the fourth quarter of 2009 and determined that the fair value was lower than its carrying value.  Accordingly, the Company decreased the carrying value of VOCRA and recorded an impairment charge of $2.6 million for the year ended December 31, 2009.  The impairment charge is included in amortization expense in the consolidated statements of operations and is allocated in the Group Protection segment.

15. CONSOLIDATING FINANCIAL INFORMATION

The following consolidating financial statements are provided in compliance with Regulation S-X of the SEC and in accordance with SEC Rule 12h-5.

The products of the Company’s wholly-owned subsidiary, SLNY, include, 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 fixed investment option period related to Contracts currently in-force or sold on or after that date.  The guarantee relieved 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 standalone 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, 2011, 2010 and 2009

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Operations
For the Year Ended December 31, 2011

 
 
SLUS as
Parent
 
SLNY
 
Other Subs
 
Eliminations &
Reclassification
 
Consolidated
Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and annuity considerations
$
20,524 
 
$
116,896 
 
$
-
 
$
-
 
$
137,420 
Net investment income (1)
 
608,647 
 
 
115,412 
 
 
3,569 
 
 
-
 
 
727,628 
Net derivative loss
 
(873,518)
 
 
(114,552)
 
 
-
 
 
-
 
 
(988,070)
Net realized investment gains (losses),
excluding impairment losses on available-for-
sale securities
 
35,284 
 
 
5,328 
 
 
(1,034)
 
 
-
 
 
39,578 
Other-than-temporary impairment losses (2)
 
(71)
 
 
 - 
 
 
 - 
 
 
-
 
 
(71)
Fee and other income
 
565,075 
 
 
42,276 
 
 
13,889 
 
 
(12,829)
 
 
608,411 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
355,941 
 
 
165,360 
 
 
16,424 
 
 
(12,829)
 
 
524,896 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest credited
 
370,024 
 
 
53,074 
 
 
1,110 
 
 
-
 
 
424,208 
Interest expense
 
47,170 
 
 
- 
 
 
- 
 
 
-
 
 
47,170 
Policyowner benefits
 
66,426 
 
 
67,733 
 
 
253 
 
 
-
 
 
134,412 
Amortization of DAC, VOBA and VOCRA
 
(214,767)
 
 
(32,634)
 
 
- 
 
 
-
 
 
(247,401)
Other operating expenses
 
298,518 
 
 
51,234 
 
 
13,402 
 
 
(12,829)
 
 
350,325 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total benefits and expenses
 
567,371 
 
 
139,407 
 
 
14,765 
 
 
(12,829)
 
 
708,714 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Loss) income before income tax (benefit)
expense
 
(211,430)
 
 
25,953 
 
 
1,659 
 
 
-
 
 
(183,818)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax (benefit) expense
 
(89,089)
 
 
7,947 
 
 
441 
 
 
-
 
 
(80,701)
Equity in the net income of subsidiaries
 
19,224 
 
 
-
 
 
-
 
 
(19,224)
 
 
-
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
$
(103,117)
 
$
18,006 
 
$
1,218 
 
$
(19,224)
 
$
(103,117)

(1)
SLUS as Parent’s and SLNY’s net investment income includes an increase in market value of trading investments of $152.4 million and $34.2 million, respectively, for the year ended December 31, 2011.  Other Subs’ net investment income does not include trading investments.
(2)
SLUS as Parent’s and SLNY’s OTTI losses for the year ended December 31, 2011 represent impairments related to credit loss.



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, 2011, 2010 and 2009

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Operations
For the Year Ended December 31, 2010

 
SLUS as
Parent
 
SLNY
 
Other Subs
 
Eliminations &
Reclassification
 
Consolidated
Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and annuity considerations
$
 16,680 
 
$
 119,495 
 
$
 - 
 
$
 - 
 
$
 136,175 
Net investment income (1)
 
 1,269,106 
 
 
 118,138 
 
 
 2,966 
 
 
 - 
 
 
 1,390,210 
Net derivative (loss) income
 
 (161,975)
 
 
 12,685 
 
 
 - 
 
 
 - 
 
 
 (149,290)
Net realized investment gains (losses),
excluding impairment losses on
available-for-sale securites
 
 26,848 
 
 
 827 
 
 
 (724)
 
 
 - 
 
 
 26,951 
Other-than-temporary impairment
losses (2)
 
 (735)
 
 
 (150)
 
 
 - 
 
 
 - 
 
 
 (885)
Fee and other income
 
 481,606 
 
 
 19,433 
 
 
 9,988 
 
 
 - 
 
 
 511,027 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
 1,631,530 
 
 
 270,428 
 
 
 12,230 
 
 
 - 
 
 
 1,914,188 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest credited
 
 342,977 
 
 
 57,924 
 
 
 947 
 
 
 - 
 
 
 401,848 
Interest expense
 
 51,334 
 
 
 455 
 
 
 - 
 
 
 - 
 
 
 51,789 
Policyowner benefits
 
 161,979 
 
 
 77,590 
 
 
 225 
 
 
 - 
 
 
 239,794 
Amortization of DAC, VOBA and
VOCRA
 
 606,896 
 
 
 90,206 
 
 
 - 
 
 
 - 
 
 
 697,102 
Other operating expenses
 
 268,798 
 
 
 39,938 
 
 
 9,434 
 
 
 - 
 
 
 318,170 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total benefits and expenses
 
 1,431,984 
 
 
 266,113 
 
 
 10,606 
 
 
 - 
 
 
 1,708,703 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income tax expense
 
 199,546 
 
 
 4,315 
 
 
 1,624 
 
 
 - 
 
 
 205,485 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
 69,993 
 
 
 643 
 
 
 575 
 
 
 - 
 
 
 71,211 
Equity in the net income of
subsidiaries
 
 4,721 
 
 
-
 
 
 - 
 
 
 (4,721)
 
 
 - 
Net income
$
 134,274 
 
$
 3,672 
 
$
 1,049 
 
$
 (4,721)
 
$
 134,274 

(1)
SLUS as Parent’s and SLNY’s net investment income includes an increase in market value of trading investments of $640.2 million, and $34.0 million, respectively, for the year ended December 31, 2010.  Other Subs’ net investment income does not include trading investments.
(2)
SLUS as Parent’s and SLNY’s OTTI losses for the year ended December 31, 2010 represent impairments related to credit loss.



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, 2011, 2010 and 2009

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Operations
For the Year Ended December 31, 2009

 
SLUS as
Parent
 
SLNY
 
Other Subs
 
Eliminations &
Reclassification
 
Consolidated
Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and annuity
considerations
$
14,374 
 
$
119,872 
 
$
-
 
$
-
 
$
134,246 
Net investment income (1)
 
2,345,022 
 
 
233,216 
 
 
4,069 
 
 
-
 
 
2,582,307 
Net derivative (loss) income
 
(62,600)
 
 
22,698 
 
 
-
 
 
-
 
 
(39,902)
Net realized investment losses,
excluding impairment losses on
available-for-sale securites
 
(30,129)
 
 
(2,815)
 
 
(3,731)
 
 
-
 
 
(36,675)
Other-than-temporary impairment
losses (2)
 
(4,450)
 
 
(181)
 
 
(203)
 
 
-
 
 
(4,834)
Fee and other income
 
375,570 
 
 
5,103 
 
 
5,163 
 
 
-
 
 
385,836 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
 
2,637,787 
 
 
377,893 
 
 
5,298 
 
 
-
 
 
3,020,978 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Benefits and Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest credited
 
336,754 
 
 
47,855 
 
 
1,159 
 
 
-
 
 
385,768 
Interest expense
 
39,035 
 
 
745 
 
 
-
 
 
-
 
 
39,780 
Policyowner benefits
 
36,409 
 
 
78,231 
 
 
(4,201)
 
 
-
 
 
110,439 
Amortization of DAC, VOBA and
VOCRA
 
917,129 
 
 
107,532 
 
 
-
 
 
-
 
 
1,024,661 
Other operating expenses
 
201,205 
 
 
42,368 
 
 
4,583 
 
 
-
 
 
248,156 
Total benefits and expenses
 
1,530,532 
 
 
276,731 
 
 
1,541 
 
 
-
 
 
1,808,804 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income tax expense
 
 1,107,255 
 
 
 101,162 
 
 
 3,757 
 
 
-
 
 
 1,212,174 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax expense
 
 305,150 
 
 
 29,650 
 
 
 849 
 
 
 - 
 
 
 335,649 
Equity in the net income of
subsidiaries
 
 179,391 
 
 
 - 
 
 
 - 
 
 
 (179,391)
 
 
 - 
Net income from continuing
operations
 
 981,496 
 
 
 71,512 
 
 
 2,908 
 
 
 (179,391)
 
 
 876,525 
Income from discontinued
operations, net of tax
 
 - 
 
 
 - 
 
 
 104,971 
 
 
 - 
 
 
 104,971 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
 981,496 
 
$
 71,512 
 
$
 107,879 
 
$
 (179,391)
 
$
 981,496 

(1)
SLUS as Parent’s, SLNY’s and Other Subs’ net investment income includes an increase in market value of trading investments of $1,913.3 million, $173.4 million and $0.0 million, respectively, for the year ended December 31, 2009.
(2)
SLUS as Parent’s, SLNY’s and Other Subs’ OTTI losses for the year ended December 31, 2009 represent impairments related to credit loss.



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, 2011, 2010 and 2009

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Balance Sheets at December 31, 2011

 
SLUS as
 Parent
 
SLNY
 
Other
Subs
 
Eliminations &
Reclassifications
 
Consolidated
Company
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities, at
fair value
$
 1,092,686 
 
$
 239,776 
 
$
 70,063 
 
$
 - 
 
$
 1,402,525 
Trading fixed maturity securities, at fair value
 
 8,633,690 
 
 
 1,646,846 
 
 
 - 
 
 
 - 
 
 
 10,280,536 
Mortgage loans
 
 1,269,140 
 
 
 153,987 
 
 
 34,229 
 
 
 - 
 
 
 1,457,356 
Derivative instruments – receivable
 
 422,404 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 422,404 
Limited partnerships
 
 34,088 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 34,088 
Real estate
 
 192,166 
 
 
 - 
 
 
 31,648 
 
 
 - 
 
 
 223,814 
Policy loans
 
 582,080 
 
 
 1,116 
 
 
 20,175 
 
 
 - 
 
 
 603,371 
Other invested assets
 
 32,735 
 
 
 4,340 
 
 
 - 
 
 
 - 
 
 
 37,075 
Short-term investments
 
 104,895 
 
 
 1,000 
 
 
 - 
 
 
 - 
 
 
 105,895 
Cash and cash equivalents
 
 793,146 
 
 
 63,168 
 
 
 15,750 
 
 
 - 
 
 
 872,064 
Investment in subsidiaries
 
 592,180 
 
 
 - 
 
 
 - 
 
 
 (592,180)
 
 
 - 
Total investments and cash
 
 13,749,210 
 
 
 2,110,233 
 
 
 171,865 
 
 
 (592,180)
 
 
 15,439,128 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrued investment income
 
 146,021 
 
 
 21,994 
 
 
 1,746 
 
 
 - 
 
 
 169,761 
Deferred policy acquisition costs and sales
inducement asset
 
 2,038,342 
 
 
 168,544 
 
 
 - 
 
 
 - 
 
 
 2,206,886 
Value of business and customer renewals acquired
 
 102,670 
 
 
 3,417 
 
 
 - 
 
 
 - 
 
 
 106,087 
Net deferred tax asset
 
 437,558 
 
 
 7,391 
 
 
 3,427 
 
 
 - 
 
 
 448,376 
Goodwill
 
 - 
 
 
 7,299 
 
 
 - 
 
 
 - 
 
 
 7,299 
Receivable for investments sold
 
 4,589 
 
 
 503 
 
 
 - 
 
 
 - 
 
 
 5,092 
Reinsurance receivable
 
 2,061,777 
 
 
 175,928 
 
 
 101 
 
 
 - 
 
 
 2,237,806 
Other assets
 
 90,384 
 
 
 28,103 
 
 
 1,194 
 
 
 (356)
 
 
 119,325 
Separate account assets
 
 26,082,352 
 
 
 1,365,026 
 
 
 36,412 
 
 
 - 
 
 
 27,483,790 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
 44,712,903 
 
$
 3,888,438 
 
$
 214,745 
 
$
 (592,536)
 
$
 48,223,550 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contractholder deposit funds and other
policy liabilities
$
 11,981,712 
 
$
 1,620,152 
 
$
 24,661 
 
$
 - 
 
$
 13,626,525 
Future contract and policy benefits
 
 775,812 
 
 
 133,924 
 
 
 296 
 
 
 - 
 
 
 910,032 
Payable for investments purchased
 
 690 
 
 
 40 
 
 
 - 
 
 
 - 
 
 
 730 
Accrued expenses and taxes
 
 41,202 
 
 
 8,594 
 
 
 427 
 
 
 (356)
 
 
 49,867 
Debt payable to affiliates
 
 683,000 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 683,000 
Reinsurance payable
 
 1,848,776 
 
 
 251,311 
 
 
 37 
 
 
 - 
 
 
 2,100,124 
Derivative instruments – payable
 
 287,074 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 287,074 
Other liabilities
 
 269,518 
 
 
 55,279 
 
 
 14,844 
 
 
 - 
 
 
 339,641 
Separate account liabilities
 
 26,082,352 
 
 
 1,365,026 
 
 
 36,412 
 
 
 - 
 
 
 27,483,790 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
 41,970,136 
 
 
 3,434,326 
 
 
 76,677 
 
 
 (356)
 
 
 45,480,783 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
STOCKHOLDER’S EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
$
 6,437 
 
$
 2,100 
 
$
 2,542 
 
$
 (4,642)
 
$
 6,437 
Additional paid-in capital
 
 3,629,228 
 
 
 389,963 
 
 
 113,397 
 
 
 (503,360)
 
 
 3,629,228 
Accumulated other comprehensive income
 
 38,851 
 
 
 9,655 
 
 
 3,446 
 
 
 (13,101)
 
 
 38,851 
(Accumulated deficit) retained earnings
 
 (931,749)
 
 
 52,394 
 
 
 18,683 
 
 
 (71,077)
 
 
 (931,749)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total stockholder’s equity
 
 2,742,767 
 
 
 454,112 
 
 
 138,068 
 
 
 (592,180)
 
 
 2,742,767 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and stockholder’s equity
$
 44,712,903 
 
$
 3,888,438 
 
$
 214,745 
 
$
 (592,536)
 
$
 48,223,550 



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, 2011, 2010 and 2009

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Balance Sheets at December 31, 2010

 
SLUS as
Parent
 
SLNY
 
Other
Subs
 
Eliminations &
Reclassification
 
Consolidated
Company
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities, at fair value
$
 1,193,875 
 
$
 246,944 
 
$
 55,104 
 
$
 - 
 
$
 1,495,923 
Trading fixed maturity securities, at fair value
 
 9,911,284 
 
 
1,555,834 
 
 
 - 
 
 
 - 
 
 
 11,467,118 
Mortgage loans
 
 1,531,545 
 
 
 176,518 
 
 
 29,465 
 
 
 - 
 
 
 1,737,528 
Derivative instruments – receivable
 
 198,064 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 198,064 
Limited partnerships
 
 41,622 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 41,622 
Real estate
 
 161,800 
 
 
 - 
 
 
 52,865 
 
 
 - 
 
 
 214,665 
Policy loans
 
 695,607 
 
 
 1,217 
 
 
 20,584 
 
 
 - 
 
 
 717,408 
Other invested assets
 
 19,588 
 
 
 7,868 
 
 
 - 
 
 
 - 
 
 
 27,456 
Short-term investments
 
 813,745 
 
 
 18,994 
 
 
 - 
 
 
 - 
 
 
 832,739 
Cash and cash equivalents
 
 647,579 
 
 
 72,978 
 
 
 15,766 
 
 
 - 
 
 
 736,323 
Investment in subsidiaries
 
 559,344 
 
 
 - 
 
 
 - 
 
 
 (559,344)
 
 
 - 
Total investments and cash
 
15,774,053 
 
 
2,080,353 
 
 
173,784
 
 
 (559,344)
 
 
 17,468,846 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrued investment income
 
 165,841 
 
 
 21,130 
 
 
 1,815 
 
 
 - 
 
 
 188,786 
Deferred policy acquisition costs and sales inducement
asset
 
 1,571,768 
 
 
 110,791 
 
 
 - 
 
 
 - 
 
 
 1,682,559 
Value of business and customer renewals acquired
 
 130,546 
 
 
 4,439 
 
 
 - 
 
 
 - 
 
 
 134,985 
Net deferred tax asset
 
 378,078 
 
 
 12,057 
 
 
 4,162 
 
 
 - 
 
 
 394,297 
Goodwill
 
 - 
 
 
 7,299 
 
 
 - 
 
 
 - 
 
 
 7,299 
Receivable for investments sold
 
 5,166 
 
 
 162 
 
 
 - 
 
 
 - 
 
 
 5,328 
Reinsurance receivable
 
 2,184,487 
 
 
 162,522 
 
 
 77 
 
 
 - 
 
 
 2,347,086 
Other assets
 
 93,755 
 
 
 31,729 
 
 
 2,918 
 
 
 (2,873)
 
 
 125,529 
Separate account assets
 
 25,573,382 
 
 
 1,265,464 
 
 
 41,575 
 
 
 - 
 
 
 26,880,421 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
45,877,076 
 
$
3,695,946 
 
$
224,331
 
$
 (562,217)
 
$
 49,235,136 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LIABILITIES
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Contractholder deposit funds and other policy liabilities
$
12,991,306 
 
$
1,577,556 
 
$
 24,366 
 
$
 - 
 
$
 14,593,228 
Future contract and policy benefits
 
 732,368 
 
 
 116,946 
 
 
 200 
 
 
 - 
 
 
 849,514 
Payable for investments purchased
 
 44,723 
 
 
 104 
 
 
 - 
 
 
 - 
 
 
 44,827 
Accrued expenses and taxes
 
 49,224 
 
 
 4,612 
 
 
 1,665 
 
 
 (2,873)
 
 
 52,628 
Debt payable to affiliates
 
 783,000 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 783,000 
Reinsurance payable
 
 1,995,083 
 
 
 236,718 
 
 
 34 
 
 
 - 
 
 
 2,231,835 
Derivative instruments – payable
 
 362,023 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 362,023 
Other liabilities
 
 193,363 
 
 
 66,118 
 
 
 25,575 
 
 
 - 
 
 
 285,056 
Separate account liabilities
 
 25,573,382 
 
 
 1,265,464 
 
 
 41,575 
 
 
 - 
 
 
 26,880,421 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities
 
42,724,472 
 
 
3,267,518 
 
 
 93,415 
 
 
 (2,873)
 
 
 46,082,532 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
STOCKHOLDER’S EQUITY
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
 6,437 
 
 
 2,100 
 
 
 2,542 
 
 
 (4,642)
 
 
 6,437 
Additional paid-in capital
 
 3,928,246 
 
 
 389,963 
 
 
108,450
 
 
 (498,413)
 
 
 3,928,246 
Accumulated other comprehensive income
 
 46,553 
 
 
 1,977 
 
 
 1,707 
 
 
 (3,684)
 
 
 46,553 
(Accumulated deficit) retained earnings
 
 (828,632)
 
 
 34,388 
 
 
 18,217 
 
 
 (52,605)
 
 
 (828,632)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total stockholder’s equity
 
 3,152,604 
 
 
 428,428 
 
 
130,916
 
 
 (559,344)
 
 
 3,152,604 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total liabilities and stockholder’s equity
$
45,877,076 
 
$
3,695,946 
 
$
224,331
 
$
 (562,217)
 
$
 49,235,136 




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, 2011, 2010 and 2009

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Cash Flows
For the Year Ended December 31, 2011
 
 
     SLUS as
Parent		      SLNY      Other  Subs     Eliminations & Reclassification    
Consolidated
Company
                             
Cash Flows From Operating Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (loss) income
$
 (103,117)
 
$
 18,006 
 
$
 1,218 
 
$
 (19,224)
 
$
 (103,117)
Adjustments to reconcile net (loss) income to net
cash provided by (used in) operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net amortization of premiums on investments
 
 39,398 
 
 
 7,170 
 
 
 1,040 
 
 
 - 
 
 
 47,608 
Amortization of DAC, VOBA and VOCRA
 
 (214,767)
 
 
 (32,634)
 
 
 - 
 
 
 - 
 
 
 (247,401)
Depreciation and amortization
 
 8,860 
 
 
 311 
 
 
 841 
 
 
 - 
 
 
 10,012 
Net losses on derivatives
 
 846,426 
 
 
 114,552 
 
 
 - 
 
 
 - 
 
 
 960,978 
Net realized (gains) losses and OTTI credit losses
on available-for-sale investments
 
 (35,213)
 
 
 (5,328)
 
 
 1,034 
 
 
 - 
 
 
 (39,507)
Net increase in fair value of trading investments
 
 (152,403)
 
 
 (34,163)
 
 
 - 
 
 
 - 
 
 
 (186,566)
Net realized losses (gains) on trading investments
 
 100,143 
 
 
 (5,503)
 
 
 - 
 
 
 - 
 
 
 94,640 
Undistributed income on private equity limited
partnerships
 
 (2,883)
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 (2,883)
Interest credited to contractholder deposits
 
 370,024 
 
 
 53,074 
 
 
 1,110 
 
 
 - 
 
 
 424,208 
Deferred federal income taxes
 
 (50,262)
 
 
 532 
 
 
 (202)
 
 
 - 
 
 
 (49,932)
Equity in net income of subsidiaries
 
 (19,224)
 
 
 - 
 
 
 - 
 
 
19,224 
 
 
 - 
Changes in assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additions to DAC, SIA, VOBA and VOCRA
 
 (206,151)
 
 
 (18,963)
 
 
 - 
 
 
 - 
 
 
 (225,114)
Accrued investment income
 
 19,820 
 
 
 (864)
 
 
 69 
 
 
 - 
 
 
 19,025 
Net change in reinsurance receivable/payable
 
 63,424 
 
 
 6,108 
 
 
 (21)
 
 
 - 
 
 
 69,511 
Future contract and policy benefits
 
 43,444 
 
 
 16,978 
 
 
 96 
 
 
 - 
 
 
 60,518 
Other, net
 
 (20,765)
 
 
338 
 
 
 (11,705)
 
 
 - 
 
 
(32,132)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating
activities
 
 686,754 
 
 
 119,614 
 
 
 (6,520)
 
 
 - 
 
 
 799,848 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flows From Investing Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales, maturities and repayments of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities
 
 575,842 
 
 
 107,561 
 
 
 25,548 
 
 
 - 
 
 
 708,951 
Trading fixed maturity securities
 
 2,803,484 
 
 
 332,972 
 
 
 - 
 
 
 - 
 
 
 3,136,456 
Mortgage loans
 
222,227 
 
 
 23,303 
 
 
 8,069 
 
 
- 
 
 
 253,599 
Real estate
 
 745 
 
 
 2,313 
 
 
 67 
 
 
(2,313)
 
 
 812 
Other invested assets
 
 112,679 
 
 
 2,971 
 
 
 - 
 
 
 - 
 
 
 115,650 
Purchases of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities
 
 (443,343)
 
 
 (82,300)
 
 
 (35,499)
 
 
 - 
 
 
 (561,142)
Trading fixed maturity securities
 
 (1,558,387)
 
 
(390,072)
 
 
 - 
 
 
 - 
 
 
 (1,948,459)
Mortgage loans
 
 (10,363)
 
 
 (3,750)
 
 
 (932)
 
 
- 
 
 
 (15,045)
Real estate
 
 (5,415)
 
 
 - 
 
 
 (1,637)
 
 
 2,313 
 
 
 (4,739)
Other invested assets
 
 (70,295)
 
 
 (975)
 
 
 - 
 
 
 - 
 
 
 (71,270)
Net change in policy loans
 
 6,369 
 
 
 101 
 
 
 409 
 
 
 - 
 
 
 6,879 
Net change in short-term investments
 
 708,850 
 
 
 17,994 
 
 
 - 
 
 
 - 
 
 
 726,844 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by investing activities
$
 2,342,393 
 
$
 10,118 
 
$
 (3,975)
 
$
 - 
 
$
 2,348,536 



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, 2011, 2010 and 2009

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Cash Flows (continued)
For the Year Ended December 31, 2011

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
SLUS as
Parent
 
SLNY
 
Other  Subs
 
Eliminations &
Reclassification
 
Consolidated
Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flows From Financing Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additions to contractholder deposit funds
$
915,078 
 
$
114,792 
 
$
-
 
$
-
 
$
1,029,870 
Withdrawals from contractholder deposit funds
 
 (3,385,603)
 
 
 (244,743)
 
 
 (815)
 
 
 - 
 
 
 (3,631,161)
Repayment of debt
 
 (100,000)
 
 
 - 
 
 
-
 
 
 - 
 
 
 (100,000)
Capital contribution to subsidiaries
 
 (11,114)
 
 
 - 
 
 
-
 
 
11,114 
 
 
 - 
Return of capital from subsidiaries
 
 - 
 
 
 - 
 
 
-
 
 
 -
 
 
 - 
Capital contribution from SLUS as Parent
 
 - 
 
 
 - 
 
 
11,114 
 
 
 (11,114)
 
 
 - 
Return of capital to Parent
 
 (300,000)
 
 
 - 
 
 
-
 
 
 - 
 
 
 (300,000)
Return of capital to SLUS as Parent
 
 - 
 
 
 - 
 
 
 -
 
 
- 
 
 
 - 
Other, net
 
 (1,941)
 
 
 (9,591)
 
 
 180 
 
 
 - 
 
 
 (11,352)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by financing
activities
 
 (2,883,580)
 
 
 (139,542)
 
 
10,479 
 
 
 - 
 
 
 (3,012,643)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net change in cash and cash equivalents
 
 145,567 
 
 
 (9,810)
 
 
 (16)
 
 
 - 
 
 
 135,741 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, beginning of period
 
 647,579 
 
 
 72,978 
 
 
 15,766 
 
 
 - 
 
 
 736,323 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, end of period
$
 793,146 
 
$
 63,168 
 
$
 15,750 
 
$
 - 
 
$
 872,064 



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, 2011, 2010 and 2009

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Cash Flows
For the Year Ended December 31, 2010

 
 
SLUS  as
Parent
 
SLNY
 
Other  Subs
 
Eliminations & Reclassification
 
Consolidated  
Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flows From Operating Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
$
 134,274 
 
$
 3,672 
 
$
 1,049 
 
$
 (4,721)
 
$
 134,274 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net amortization of premiums on investments
 
 24,690 
 
 
 4,787 
 
 
 1,085 
 
 
 -
 
 
 30,562 
Amortization of DAC, VOBA and VOCRA
 
 606,896 
 
 
 90,206 
 
 
 -
 
 
 -
 
 
 697,102 
Depreciation and amortization
 
 4,418 
 
 
 312 
 
 
 953 
 
 
 -
 
 
 5,683 
Net loss (gain) on derivatives
 
 54,168 
 
 
 (12,685)
 
 
 -
 
 
 -
 
 
 41,483 
Net realized (gains) losses and OTTI credit losses
on available-for-sale investments
 
 (26,113)
 
 
 (677)
 
 
 724 
 
 
 -
 
 
 (26,066)
Net increase in fair value of trading investments
 
 (640,222)
 
 
 (34,001)
 
 
 -
 
 
 -
 
 
 (674,223)
Net realized losses (gains) on trading investments
 
 80,910 
 
 
 (13,633)
 
 
 -
 
 
 -
 
 
 67,277 
Undistributed loss on private equity limited
partnerships
 
 2,339 
 
 
 -
 
 
 -
 
 
 -
 
 
 2,339 
Interest credited to contractholder deposits
 
 342,977 
 
 
 57,924 
 
 
 947 
 
 
 -
 
 
 401,848 
Deferred federal income taxes
 
 158,398 
 
 
 (8,928)
 
 
 (93)
 
 
 - 
 
 
 149,377 
Equity in net income of subsidiaries
 
 (4,721)
 
 
 - 
 
 
 - 
 
 
 4,721 
 
 
 - 
Changes in assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additions to DAC, SIA, VOBA and VOCRA
 
 (167,199)
 
 
 (17,796)
 
 
 -
 
 
 -
 
 
 (184,995)
Accrued investment income
 
 45,884 
 
 
 (4,079)
 
 
 - 
 
 
 -
 
 
 41,805 
Net change in reinsurance receivable/payable
 
 124,563 
 
 
 5,328 
 
 
 16 
 
 
 -
 
 
 129,907 
Future contract and policy benefits
 
 16,192 
 
 
 17,691 
 
 
 (7)
 
 
 -
 
 
 33,876 
Other, net
 
 (24,455)
 
 
 42,324 
 
 
 (838)
 
 
 -
 
 
 17,031 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
 
 732,999 
 
 
 130,445 
 
 
 3,836 
 
 
 - 
 
 
 867,280 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flows From Investing Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales, maturities and repayments of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities
 
 402,623 
 
 
 79,623 
 
 
 15,841 
 
 
 -
 
 
 498,087 
Trading fixed maturity securities
 
 3,395,725 
 
 
 775,025 
 
 
 - 
 
 
 - 
 
 
 4,170,750 
Mortgage loans
 
 263,612 
 
 
 13,107 
 
 
 3,050 
 
 
 (30,486)
 
 
 249,283 
Real estate
 
 -
 
 
 1,000 
 
 
 2,010 
 
 
 (3,010)
 
 
 -
Other invested assets
 
 (317,388)
 
 
 1,244 
 
 
 501 
 
 
 -
 
 
 (315,643)
Purchases of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities
 
 (602,891)
 
 
(152,468)
 
 
(16,388)
 
 
 -
 
 
 (771,747)
Trading fixed maturity securities
 
(3,060,145)
 
 
(886,403)
 
 
 - 
 
 
 - 
 
 
(3,946,548)
Mortgage loans
 
 (66,252)
 
 
 (34,190)
 
 
(31,712)
 
 
 30,486 
 
 
 (101,668)
Real estate
 
 (6,818)
 
 
 -
 
 
 (1,066)
 
 
 3,010 
 
 
 (4,874)
Other invested assets
 
 (63,798)
 
 
 (1,200)
 
 
 -
 
 
 -
 
 
 (64,998)
Net change in policy loans
 
 5,367 
 
 
 (947)
 
 
 762 
 
 
 -
 
 
 5,182 
Net change in short-term investments
 
 394,575 
 
 
 39,997 
 
 
 - 
 
 
 -
 
 
 434,572 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) investing
activities
$
 344,610 
 
$
(165,212)
 
$
(27,002)
 
$
 -
 
$
 152,396 



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, 2011, 2010 and 2009

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Cash Flows (continued)
For the Year Ended December 31, 2010

 
SLUS as
Parent
 
SLNY
 
Other  Subs
 
Eliminations &
Reclassification
 
Consolidated
Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flows From Financing Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additions to contractholder deposit funds
$
1,043,300 
 
$
173,714 
 
$
 - 
 
$
-
 
$
1,217,014 
Withdrawals from contractholder deposit
funds
 
(3,354,527)
 
 
(248,878)
 
 
(2,930)
 
 
-
 
 
(3,606,335)
Repayment of debt
 
(100,000)
 
 
-
 
 
-
 
 
- 
 
 
(100,000)
Capital contribution to subsidiaries
 
(30,041)
 
 
-
 
 
- 
 
 
30,041 
 
 
- 
Capital contribution from Parent
 
400,000 
 
 
-
 
 
30,041 
 
 
(30,041)
 
 
400,000 
Other, net
 
(5,753)
 
 
7,587 
 
 
(74)
 
 
-
 
 
1,760 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash (used in) provided by financing
activities
 
(2,047,021)
 
 
(67,577)
 
 
27,037 
 
 
 - 
 
 
(2,087,561)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net change in cash and cash equivalents
 
(969,412)
 
 
(102,344)
 
 
3,871 
 
 
-
 
 
(1,067,885)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, beginning of
period
 
1,616,991 
 
 
175,322 
 
 
11,895 
 
 
-
 
 
1,804,208 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, end of period
$
647,579 
 
$
72,978 
 
$
15,766 
 
$
-
 
$
736,323 



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, 2011, 2010 and 2009

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Cash Flows
For the Year Ended December 31, 2009

 
SLUS as
Parent
 
SLNY
 
Other  Subs
 
Eliminations &
Reclassification
 
Consolidated
Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flows From Operating Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income from operations
$
 981,496 
 
$
 71,512 
 
$
 107,879 
 
$
 (179,391)
 
$
 981,496 
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net (accretion) amortization of premiums
on investments
 
 (203)
 
 
 (605)
 
 
 119 
 
 
 - 
 
 
 (689)
Amortization of DAC, VOBA and
VOCRA
 
 917,129 
 
 
 107,532 
 
 
 - 
 
 
 - 
 
 
 1,024,661 
Depreciation and amortization
 
 4,355 
 
 
 337 
 
 
 843 
 
 
 - 
 
 
 5,535 
Net gain on derivatives
 
 (73,343)
 
 
 (22,698)
 
 
 - 
 
 
 - 
 
 
 (96,041)
Net realized losses and OTTI credit losses
on available-for-sale investments
 
 34,579 
 
 
 2,996 
 
 
 3,934 
 
 
 - 
 
 
 41,509 
Net increase in fair value of trading
investments
 
 (1,913,351)
 
 
 (173,389)
 
 
 - 
 
 
 - 
 
 
 (2,086,740)
Net realized losses on trading investments
 
 357,470 
 
 
 9,867 
 
 
 - 
 
 
 - 
 
 
 367,337 
Undistributed loss on private equity
limited partnerships
 
 9,207 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 9,207 
Interest credited to contractholder deposits
 
 336,754 
 
 
 47,855 
 
 
 1,159 
 
 
 - 
 
 
 385,768 
Equity in net income of subsidiaries
 
 (179,391)
 
 
 - 
 
 
 - 
 
 
 179,391 
 
 
 - 
Deferred federal income taxes
 
 290,478 
 
 
 6,256 
 
 
 (1,126)
 
 
 - 
 
 
 295,608 
Changes in assets and liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additions to DAC, SIA, VOBA and
VOCRA
 
 (301,255)
 
 
 (45,645)
 
 
 - 
 
 
 - 
 
 
 (346,900)
Accrued investment income
 
 38,445 
 
 
 (1,825)
 
 
 116 
 
 
 - 
 
 
 36,736 
Net change in reinsurance
receivable/payable
 
 195,092 
 
 
 19,060 
 
 
 (4,515)
 
 
 - 
 
 
 209,637 
Future contract and policy benefits
 
 (131,052)
 
 
 5,280 
 
 
 (220)
 
 
 - 
 
 
 (125,992)
Dividends received from subsidiaries
 
 100,000 
 
 
 - 
 
 
 - 
 
 
 (100,000)
 
 
 - 
Other, net
 
 (90,229)
 
 
 (153,878)
 
 
 738 
 
 
 - 
 
 
 (243,369)
Adjustment related to discontinued
operations
 
 - 
 
 
 - 
 
 
(288,018)
 
 
 - 
 
 
 (288,018)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) operating
activities
 
 576,181 
 
 
 (127,345)
 
 
(179,091)
 
 
 (100,000)
 
 
 169,745 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flows From Investing Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales, maturities and repayments of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities
 
 86,619 
 
 
 21,303 
 
 
 5,556 
 
 
 - 
 
 
 113,478 
Trading fixed maturity securities
 
 1,673,886 
 
 
 333,236 
 
 
 98,233 
 
 
 (8,301)
 
 
 2,097,054 
Mortgage loans
 
 149,414 
 
 
 12,456 
 
 
 15 
 
 
 (18,392)
 
 
 143,493 
Real estate
 
 - 
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 - 
Other invested assets
 
 (209,135)
 
 
 1,587 
 
 
 - 
 
 
 - 
 
 
 (207,548)
Purchases of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale fixed maturity securities
 
 (342,313)
 
 
 (4,515)
 
 
 (311)
 
 
 - 
 
 
 (347,139)
Trading fixed maturity securities
 
 (226,389)
 
 
 (587,134)
 
 
 (62,088)
 
 
 8,301 
 
 
 (867,310)
Mortgage loans
 
 (12,602)
 
 
 (4,875)
 
 
 (18,433)
 
 
 18,392 
 
 
 (17,518)
Real estate
 
 (3,819)
 
 
 - 
 
 
 (883)
 
 
 - 
 
 
 (4,702)
Other invested assets
 
 (106,277)
 
 
 - 
 
 
 - 
 
 
 - 
 
 
 (106,277)
Net change in other investments
 
 (178,590)
 
 
 (4,922)
 
 
 - 
 
 
 - 
 
 
 (183,512)
Net change in policy loans
 
 3,574 
 
 
 (114)
 
 
 3,357 
 
 
 - 
 
 
 6,817 
Net change in short-term investments
 
 (739,502)
 
 
 56,978 
 
 
 (40,297)
 
 
 - 
 
 
 (722,821)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by (used in) investing
activities
$
 94,866 
 
$
 (176,000)
 
$
 (14,851)
 
$
 - 
 
$
 (95,985)



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, 2011, 2010 and 2009

15. CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Consolidating Statements of Cash Flows (continued)
For the Year Ended December 31, 2009

 
SLUS  as
Parent
 
SLNY
 
Other  Subs
 
Eliminations &
Reclassification
 
Consolidated  
Company
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash Flows From Financing Activities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Additions to contractholder deposit funds
$
2,298,455 
 
$
473,137 
 
$
24,347 
 
$
-
 
$
2,795,939 
Withdrawals from contractholder deposit funds
 
(2,752,493)
 
 
(252,351)
 
 
(6,655)
 
 
-
 
 
(3,011,499)
Capital contribution to subsidiaries
 
(58,910)
 
 
-
 
 
-
 
 
58,910 
 
 
-
Debt proceeds
 
 - 
 
 
-
 
 
 200,000 
 
 
-
 
 
200,000 
Capital contribution from parent
 
 748,652 
 
 
-
 
 
 58,910 
 
 
(58,910)
 
 
748,652 
Dividends paid to SLUS as Parent
 
 - 
 
 
 - 
 
 
(100,000)
 
 
100,000 
 
 
- 
Other, net
 
 (23,278)
 
 
 (4,108)
 
 
 74 
 
 
-
 
 
(27,312)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by financing activities
 
212,426 
 
 
216,678 
 
 
176,676 
 
 
100,000 
 
 
705,780 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net change in cash and cash equivalents
 
883,473 
 
 
(86,667)
 
 
(17,266)
 
 
-
 
 
779,540 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, beginning of period
 
733,518 
 
 
261,989 
 
 
29,161 
 
 
-
 
 
1,024,668 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, end of period
$
1,616,991 
 
$
175,322 
 
$
11,895 
 
$
-
 
$
1,804,208 




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, 2011, 2010 and 2009

16. 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 includes 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.  In addition, the Company consolidates certain VIEs as a component of the Wealth Management segment.  Refer to Note 4 for further discussion of the VIE that is consolidated in the Company’s consolidated financial statements.  Effective January 1, 2010, the Company discontinued the sales of certain of its fixed and fixed index annuity products.  Effective December 30, 2011, the Company discontinued new sales of its variable annuity products.  Refer to Note 1 for further details.

Individual Protection

The Individual Protection segment includes a variety of life insurance products sold to individuals and corporate owners of life insurance.  The products include whole life, UL and variable life products.  The Company discontinued the sales of its individual life products and its corporate-owned life insurance effective December 30, 2011 and January 31, 2012, respectively.  Refer to Note 1 for further details.

Group Protection

The Group Protection segment includes 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 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, 2011, 2010 and 2009

16. SEGMENT INFORMATION (CONTINUED)

The following amounts pertain to the Company’s four segments:

Year ended December 31, 2011
 
 
Wealth
 
Individual
 
Group
 
 
 
 
 
Management
 
Protection
 
Protection
 
Corporate
 
Totals
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
$
312,953 
 
$
78,961 
 
$
124,677 
 
$
8,305 
 
$
524,896 
Total benefits and expenses
 
491,572 
 
 
89,404 
 
 
106,912 
 
 
20,826 
 
 
708,714 
(Loss) income before income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  tax (benefit) expense
 
(178,619)
 
 
(10,443)
 
 
17,765 
 
 
(12,521)
 
 
(183,818)
Net (loss) income
$
(98,818)
 
$
(6,558)
 
$
11,579 
 
$
(9,320)
 
$
(103,117)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Separate account assets
$
20,221,425 
 
$
7,262,365 
 
$
-
 
$
-
 
$
27,483,790 
General account assets
 
17,688,786 
 
 
2,278,730 
 
 
182,603 
 
 
589,641 
 
 
20,739,760 
Total assets
$
37,910,211 
 
$
9,541,095 
 
$
182,603 
 
$
589,641 
 
$
48,223,550 
 
Year ended December 31, 2010
 
 
Wealth
 
Individual
 
Group
 
 
 
 
 
Management
 
Protection
 
Protection
 
Corporate
 
Totals
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
$
 1,760,979 
 
$
 66,425 
 
$
 127,104 
 
$
 (40,320)
 
$
 1,914,188 
Total benefits and expenses
 
 1,514,754 
 
 
 68,585 
 
 
 106,346 
 
 
 19,018 
 
 
 1,708,703 
Income (loss) before income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  tax expense (benefit)
 
 246,225 
 
 
 (2,160)
 
 
 20,758 
 
 
 (59,338)
 
 
 205,485 
Net income (loss)
$
 162,975 
 
$
 (1,204)
 
$
 13,508 
 
$
 (41,005)
 
$
 134,274 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Separate account assets
$
 19,685,774 
 
$
 7,194,647 
 
$
 - 
 
$
 - 
 
$
 26,880,421 
General account assets
 
 19,453,702 
 
 
 2,067,064 
 
 
 181,482 
 
 
 652,467 
 
 
 22,354,715 
Total assets
$
 39,139,476 
 
$
 9,261,711 
 
$
 181,482 
 
$
 652,467 
 
$
 49,235,136 



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, 2011, 2010 and 2009

16. SEGMENT INFORMATION (CONTINUED)

Year ended December 31, 2009
 
 
Wealth
 
Individual
 
Group
 
 
 
 
 
Management
 
Protection
 
Protection
 
Corporate
 
Totals
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total revenues
$
 2,823,029 
 
$
 71,718 
 
$
 135,242 
 
$
 (9,011)
 
$
 3,020,978 
Total benefits and expenses
 
 1,623,582 
 
 
 40,477 
 
 
 119,134 
 
 
 25,611 
 
 
 1,808,804 
Income (loss) from continuing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  operations before income tax
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  expense (benefit)
 
 1,199,447 
 
 
 31,241 
 
 
 16,108 
 
 
 (34,622)
 
 
 1,212,174 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income from continuing
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  operations
 
 798,360 
 
 
 10,155 
 
 
 10,470 
 
 
 57,540 
 
 
 876,525 
Income from discontinued
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  operations, net of tax
 
 - 
 
 
 104,971 
 
 
 - 
 
 
 - 
 
 
 104,971 
Net income
$
 798,360 
 
$
 115,126 
 
$
 10,470 
 
$
 57,540 
 
$
 981,496 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Separate account assets
$
 16,396,394 
 
$
 6,929,928 
 
$
 - 
 
$
 - 
 
$
 23,326,323 
General account assets
 
 21,323,702 
 
 
 1,997,532 
 
 
 172,648 
 
 
 755,730 
 
 
 24,249,612 
Total assets
$
 37,720,096 
 
$
 8,927,460 
 
$
 172,648 
 
$
 755,730 
 
$
 47,575,935 




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, 2011, 2010 and 2009

17.  REGULATORY FINANCIAL INFORMATION

The Company and its insurance subsidiaries are required to file annual statements with state regulatory authorities prepared on a statutory accounting basis prescribed or permitted by such authorities.  As of December 31, 2009, the Company received permission from the Commissioner of Insurance of the State of Delaware to admit the equity value of its subsidiary, ILAC, without requiring audited financial statements because ILAC is not required to prepare audited financial statements under Rhode Island’s Annual Financial Reporting regulation.

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 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 were as follows:

 
 
Unaudited for the Years Ended December 31,
 
2011 
2010 
2009 
 
 
 
 
 
 
 
Statutory capital and surplus
$
 1,315,270 
$
 2,234,153 
$
 2,037,661 
Statutory net loss
$
 (507,715)
$
 (77,503)
$
 (23,879)



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, 2011, 2010 and 2009

18. DIVIDEND RESTRICTIONS

The Company’s and its insurance company subsidiaries’ ability to pay dividends is subject to certain statutory restrictions.  The 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 not permitted to pay dividends in 2012 without prior approval from the Delaware Commissioner of Insurance.

In 2011, after receiving prior approval from the Delaware Commissioner of Insurance, the Company paid a $300.0 million return of capital to the Parent.  In 2010 and 2009, the Company did not pay any cash dividends to the Parent.  However in 2009, with regulatory approval, the Company distributed Sun Life Vermont’s net assets and issued and outstanding common stock, totaling $94.9 million in the form of a dividend to the Parent, with regulatory approval.

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 Financial Services, 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 $1.9 million in 2012 without prior approval from the superintendent.  No dividends were paid by SLNY during 2011, 2010 or 2009.

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.  ILAC is permitted to pay dividends up to a maximum of $2.1 million in 2012 without prior approval from the Rhode Island Superintendent of Insurance.  No dividends were paid by ILAC during 2011, 2010 or 2009.




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, 2011, 2010 and 2009

19. COMPONENTS OF ACCUMULATED OTHER COMPREHENSIVE INCOME

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

 
2011 
 
2010 
 
2009 
Net unrealized gains on available-for-sale securities (1)
$
70,367 
 
$
83,926 
 
$
67,970 
Non-credit OTTI losses on available-for-sale fixed maturity
securities
 
(10,595)
 
 
(12,304)
 
 
(13,748)
Deferred income tax expense
 
(20,921)
 
 
(25,069)
 
 
(18,978)
 
 
 
 
 
 
 
 
 
Accumulated other comprehensive income
$
38,851 
 
$
46,553 
 
$
35,244 

(1)  Net of unrealized losses that were temporarily impaired.

20. COMMITMENTS AND CONTINGENCIES

Guaranty Funds

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 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.  In addition, 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.  During the twelve month-period ended December 31, 2011, the Company recorded a $9.3 million accrual for guaranteed fund assessments.

Income Taxes

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.  On May 30, 2010, the IRS issued an Industry Director Directive which makes clear that IRS interpretations prior to Revenue Ruling 2007-54 should be followed until new regulations are issued.  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, 2011 and 2010, the Company recorded benefits of $14.8 million and $11.5 million, respectively, related to the separate account DRD.  The amounts recorded for the year ended December 31, 2010 included an adjustment of $3.2 million to reflect a reduced run rate of separate account DRD benefits following the filing of the 2009 tax return.

Litigation

The Company and its subsidiaries are parties to threatened or pending legal proceedings, including ordinary routine litigation incidental to their business, both as a defendant and as a plaintiff.  While it is not possible to predict the resolution of these proceedings, management believes, based upon currently available information, that the ultimate resolution of these matters will not be materially adverse to the Company's financial position, results of operations or 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, 2011, 2010 and 2009

20. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Indemnities

In the normal course of its business, the Company has entered into agreements that include indemnities in favor of third parties, such as contracts with advisors and consultants, outsourcing agreements, underwriting and agency agreements, information technology agreements, distribution agreements and service agreements.  The Company has also agreed to indemnify its directors, 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 certain facilities under operating leases with terms of up to five years.  As of December 31, 2011, minimum future lease payments under such leases were as follow:

       
 
2012
$
506
 
2013
  
516
 
2014
  
516
 
2015
  
516
 
2016
  
551
 
Thereafter
  
2,327
 
      Total
$
4,932

The Company was party to a guarantee agreement under which the Company guaranteed the lease payment obligations of SLFD.  The lease agreement was terminated and the Company was not required to pay or accrue any of the lease termination costs.

Total rental expense for the years ended December 31, 2011, 2010 and 2009 was $7.0 million, $7.2 million and $6.9 million, respectively.

21. SUBSEQUENT EVENTS

During the first quarter of 2012, the Company and its wholly-owned subsidiary, SLNY, received all necessary insurance regulatory approvals to amend the fixed investment option period in their combination fixed and variable annuity contracts and other contracts to remove any negative market value adjustment (“MVA”) that can decrease the amount of the withdrawal proceeds.  (Refer to Note 15 for additional information concerning the MVA and the fixed investment option period).  The Company and SLNY filed amendments to the necessary registration statements to include the contract amendments and to remove from registration any fixed investment options that remained unsold.  The SEC declared the associated amended registration statements effective on March 22, 2012.  As a result of the foregoing, the fixed investment option period in the contracts is no longer considered a “security” under the Securities Act of 1933, and the Company subsequently filed Forms 15 on March 23, 2012 to provide notice of suspension of its duty to file reports under Section 15(d) of the Securities Exchange Act of 1934.  No other changes were made to the contracts, and all other terms and conditions of the contracts remain unchanged.  The MVA amendment described above did not have a material impact on the Company’s financial position.




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and Stockholders of
Sun Life Assurance Company of Canada (U.S.)
Wellesley Hills, Massachusetts

We have audited the accompanying consolidated balance sheets of Sun Life Financial Assurance Company of Canada (U.S.) and subsidiaries (the "Company") as of December 31, 2011 and 2010, 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, 2011. 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, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011, 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 and reporting for other-than-temporary impairments as required by accounting guidance adopted in 2009.



/s/ Deloitte & Touche LLP


Boston, Massachusetts

March 29, 2012




SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Item 8. Financial Statements and Supplementary Data (Continued).

Supplementary financial information as required by Item 302(a) of Regulation S-K is provided below.

Quarterly Financial Data (Unaudited)

The following is a tabulation of the unaudited quarterly results of operations (in 000’s):

 
 
 
 
 
2011 
 
 
 
 
March 31
 
June 30
 
September 30
 
December 31
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and other revenue
$
 182,298 
 
$
 193,422 
 
$
 197,089 
 
$
 173,022 
Net investment income and net realized gains (losses)
 
 323,780 
 
 
 127,954 
 
 
 (495,631)
 
 
 (177,038)
Total revenues
 
 506,078 
 
 
 321,376 
 
 
 (298,542)
 
 
 (4,016)
 
 
 
 
 
 
 
 
 
 
 
 
Policyowner benefits and other expenses
 
 481,534 
 
 
 218,372 
 
 
 (768,486)
 
 
 777,294 
Income (loss) before tax expense (benefit)
 
 24,544 
 
 
 103,004 
 
 
 469,944 
 
 
 (781,310)
Net income (loss)
$
 20,385 
 
$
 71,414 
 
$
 310,873 
 
$
 (505,789)
 
 
 
 
 
 
2010 
 
 
 
 
March 31
 
June 30
 
September 30
 
December 31
 
 
 
 
 
 
 
 
 
 
 
 
Premiums and other revenue
$
 150,817 
 
$
 153,653 
 
$
 157,441 
 
$
 185,291 
Net investment income and net realized gains
 
 
 
 
 
 
 
 
 
 
 
(losses)
 
 406,659 
 
 
 (106,923)
 
 
 427,161 
 
 
 540,089 
Total revenues
 
 557,476 
 
 
 46,730 
 
 
 584,602 
 
 
 725,380 
 
 
 
 
 
 
 
 
 
 
 
 
Policyowner benefits and other expenses
 
 393,702 
 
 
 (167,301)
 
 
 679,263 
 
 
 803,039 
Income (loss) before tax expense (benefit)
 
 163,774 
 
 
 214,031 
 
 
 (94,661)
 
 
 (77,659)
Net income (loss)
$
 111,651 
 
$
 144,800 
 
$
 (64,395)
 
$
 (57,782)



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)


None.


Evaluation of Disclosure Controls and Procedures

The Company's management, including the Company's principal executive officer and principal financial officer, have evaluated the Company's disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based on this evaluation, management concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2011.

Management's Report on Internal Control over Financial Reporting

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f)).

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.  A company’s internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed its internal controls over financial reporting as of December 31, 2011 in relation to criteria for effective internal control over financial reporting described in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.  Based on this assessment under those criteria, the Company’s management concluded that its internal control over financial reporting was effective as of December 31, 2011.

This annual report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting.  Management’s report on internal control over financial reporting was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.

Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting (as defined in Securities Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the year ended December 31, 2011 that had materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Item 9B.  Other Information.

None.

PART III


Omitted pursuant to Instruction I(2)(c) to Form 10-K.


Omitted pursuant to Instruction I(2)(c) to Form 10-K.


Omitted pursuant to Instruction I(2)(c) to Form 10-K.


Omitted pursuant to Instruction I(2)(c) to Form 10-K.


For the fiscal years ended December 31, the fees billed to the Company by its external auditors, Deloitte & Touche LLP, for professional services were as follows (in 000’s):

Nature of Services
 
2011 
 
 
2010 
Audit fees
$
4,279 
 
$
3,550 
Audit-related fees
 
49 
 
 
1,422 
Tax fees
 
-
 
 
-
All other fees
 
25 
 
 
156 
 
 
 
 
 
 
Total
$
 4,353 
 
$
 5,128 

Audit Fees

Audit Fees are for professional services rendered by the external auditors for the audit of the Company’s annual consolidated financial statements and review of consolidated financial statements included in the Company’s quarterly reports on Form 10-Q, as well as for services normally provided in connection with statutory and regulatory filings for the last two fiscal years.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Item 14. Principal Accounting Fees and Services (continued)

Audit-Related Fees

Audit-Related Fees are for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s consolidated financial statements and are not reported under the Audit Fees category above.  These services consisted of employee benefit plan audits, internal control reviews and agreed-upon procedures engagements.

Tax Fees

Tax Fees are for tax compliance, tax advice and tax planning.  These services consist of tax compliance, including the review of original and amended tax returns, assistance with questions regarding tax audits and refund claims, tax advice in connection with acquisitions and tax planning and advisory services relating to domestic and international taxation.  There were no Tax Fees billed in each of the last two fiscal years by the Company’s external auditors.

All Other Fees

These fees related to benchmarking study services which compared certain cost structures and efficiencies of the Company's annuities operations against other participants in the study, as well as due diligence services related to potential enhancements to the Company's distribution systems.

Audit Committee Approval

The Company has adopted SLF’s “Policy restricting the use of external auditors” (the “Policy”) requiring audit committee pre-approval of services provided by the Company’s external auditors, a copy of which is set out below with amendments to make it applicable to the Company.  All professional services rendered by the external auditors to the Company have been approved by the Company’s audit committee in accordance with the Policy in affect at the relevant time.  None of the services described in the table above were approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of SEC Rule 2-01 of Regulation S-X.

Policy restricting the use of external auditors*

Introduction and purpose
This policy governs all proposals by the Corporation or any of its subsidiaries to engage, as a service provider, the Corporation’s external auditor or any of its affiliates, related businesses or associated persons as defined in the Sarbanes-Oxley Act of 2002 (“S-O Act”) (collectively referred to as the “External Auditor”).

Scope and application
This Policy applies to SLF Canada, SLF U.S., SLF Asia, M.F.S., SLF U.K, Enterprise Services and the Corporate Office, including each of the operating subsidiaries, Business Units or other divisions within those Business Groups or Units. This Policy does not currently apply to the Corporation’s joint ventures.

Policy
The External Auditor will normally be engaged to provide audit and audit-related services, including advisory services related to the External Auditor’s audit and audit-related work such as advice pertaining to internal audit, tax, actuarial valuation, risk management, and regulatory and compliance matters, subject to the prohibitions contained in the S-O Act and in any other applicable laws, regulations or rules.  Prohibitions are set out in Appendix A.

Each engagement of the External Auditor to provide services will require the approval in advance of the Audit and Conduct Review Committees of Sun Life Financial Inc. and/or Sun Life Assurance Company of Canada, as applicable, and the audit committee of any affected subsidiary that is itself directly subject to the S-O Act.  The Audit and Conduct Review Committee may establish procedures regarding the approval process, which will be co-coordinated by the Corporation’s Senior Vice-President, Finance.

The Corporation and its subsidiaries will not employ or appoint as chief executive officer, president, chief financial officer, chief operating officer, general counsel, chief accounting officer, controller, director of internal audit, director of financial reporting, treasurer, appointed actuary or any equivalent position within the Corporation or subsidiary, any person who was, at any time during the previous two years, employed by the External Auditor and who provided any services to the Corporation or any subsidiary.  In addition, the Company will not employ or appoint as a member of the board of directors any person who was, at any time during the previous two years, employed by the External Auditor and who provided services to the Company.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Item 14. Principal Accounting Fees and Services (continued)

Personnel of the Corporation and its subsidiaries employed in the key financial reporting oversight roles described in Appendix B shall not use the External Auditor to prepare either their personal tax returns or those of their dependents.

The Corporation’s Senior Vice-President, Finance is responsible for the application and interpretation of this policy, and should be consulted in any case where there is uncertainty regarding whether a proposed service is, or is not, an audit or audit-related service.  He/she will revise the Appendices as required, from time to time, to reflect changes in applicable laws, regulations, rules or management roles.

Appendix A - Prohibition on Services
The External Auditor is prohibited from providing the following services:
 
a)
bookkeeping or other services related to the accounting records or financial statements;
 
b)
financial information systems design and implementation;
 
c)
appraisal or valuation services, fairness opinions, or contribution in-kind reports;
 
d)
actuarial services;
 
e)
internal audit outsourcing services;
 
f)
management functions or human resources;
 
g)
broker or dealer, investment adviser, or investment banking services;
 
h)
legal services and expert services unrelated to the audit;
 
i)
any service for which no fee is payable unless a specific result is obtained (contingent fees or commissions);
 
j)
any non-audit tax services that recommend the Corporation engage in confidential transactions or aggressive tax position transactions, as defined by the U.S. Public Company Accountability Oversight Board; and
 
k)
any other service that governing regulators or professional bodies determine to be impermissible.

 
Appendix B - Key Financial Reporting Oversight Roles
The incumbents in the following financial reporting oversight roles are not permitted to use the Corporation’s external auditors to prepare either their personal tax returns or those of their dependents:

 
§
Chief Executive Officer
 
§
Chief Operating Officer
 
§
President
 
§
Executive Vice-President and Chief Financial Officer
 
§
Executive Vice-President and Chief Legal Officer
 
§
Senior Vice-President, Finance
 
§
Senior Vice-President and Chief Actuary
 
§
Vice-President and Chief Accountant
 
§
Vice-President and Chief Auditor
 
§
Vice-President, Corporate Capital
 
§
Vice-President, Tax
 
§
Assistant Vice-President, Financial Reporting Standards

The comparable positions in subsidiaries are similarly prohibited from using the Corporation’s external auditors for either their own or their dependents’ personal tax returns.

* In this policy, the term “Corporation” refers to Sun Life Financial Inc.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

PART IV


(a)(1) Financial statements (set forth in Item 8):

- Consolidated Statements of Operations for each of the three years ended December 31, 2011, December 31, 2010 and December 31, 2009.
 
- Consolidated Balance Sheets at December 31, 2011 and December 31, 2010.
 
- Consolidated Statements of Comprehensive (Loss) Income for each of the three years December 31, 2011, December 31, 2010 and December 31, 2009.
 
- Consolidated Statements of Changes in Stockholder’s Equity for each of the three years ended December 31, 2011, December 31, 2010 and December 31, 2009.
 
- Consolidated Statements of Cash Flows for each of the three years ended December 31, 2011, December 31, 2010 and December 31, 2009.
 
- Notes to Consolidated Financial Statements.
 
- Report of Independent Registered Public Accounting Firm.
 
- Supplementary financial information.

(a)(2) Financial statement schedules (set forth below):

- Schedule I - Summary of Investments, Other than Investments in Related Parties.
 
- Schedule III - Supplementary Insurance Information.
 
- Schedule IV - Reinsurance.

Financial statement schedules not included in this annual report on Form 10-K have been omitted because the required information either is not applicable or is presented in the Company’s consolidated financial statements or notes thereto.



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
SCHEDULE I
SUMMARY OF INVESTMENTS, OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 2011
(in 000’s)

Available-for-sale fixed maturity securities:
Cost
 
Fair Value
 
Balance Sheets Amounts
Non-corporate securities:
 
 
 
 
 
 
 
 
Asset-backed securities
$
55 
 
$
55 
 
$
55 
Residential mortgage-backed securities
 
24,340 
 
 
26,543 
 
 
26,543 
Commercial mortgage-backed securities
 
9,643 
 
 
8,912 
 
 
8,912 
U.S. states and political subdivision securities
 
214 
 
 
221 
 
 
221 
U.S. treasury and agency securities
 
375,751 
 
 
382,569 
 
 
382,569 
Total non-corporate securities
 
410,003 
 
 
418,300 
 
 
418,300 
 
 
 
 
 
 
 
 
 
Corporate securities
 
929,957 
 
 
984,225 
 
 
984,225 
Total available-for-sale fixed maturity securities
$
1,339,960 
 
$
1,402,525 
 
$
1,402,525 
 
 
 
 
 
 
 
 
 
Trading fixed maturity securities:
 
 
 
 
 
 
 
 
Non-corporate securities:
 
 
 
 
 
 
 
 
Asset-backed securities
$
423,464 
 
$
292,252 
 
$
292,252 
Residential mortgage-backed securities
 
868,588 
 
 
713,195 
 
 
713,195 
Commercial mortgage-backed securities
 
785,912 
 
 
683,018 
 
 
683,018 
Foreign government & agency securities
 
97,404 
 
 
116,598 
 
 
116,598 
U.S. states and political subdivision securities
 
486 
 
 
527 
 
 
527 
U.S. treasury and agency securities
 
323,298 
 
 
336,954 
 
 
336,954 
Total non-corporate securities
 
2,499,152 
 
 
2,142,544 
 
 
2,142,544 
 
 
 
 
 
 
 
 
 
Corporate securities
 
7,836,906 
 
 
8,137,992 
 
 
8,137,992 
Total trading fixed maturity securities
$
10,336,058 
 
$
10,280,536 
 
$
10,280,536 
 
 
 
 
 
 
 
 
 
Mortgage loans
$
1,457,356 
 
$
1,588,473 
 
$
1,457,356 
Derivative instruments - receivable
 
422,404 
 
 
422,404 
 
 
422,404 
Limited partnerships
 
34,088 
 
 
34,088 
 
 
34,088 
Real estate
 
223,814 
 
 
277,736 
 
 
223,814 
Policy loans
 
603,371 
 
 
651,876 
 
 
603,371 
Other invested assets
 
45,159 
 
 
37,075 
 
 
37,075 
Short-term investments
 
105,895 
 
 
105,895 
 
 
105,895 
   Total investments
$
2,892,087 
 
$
3,117,547 
 
$
2,884,003 



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(in 000’s)

Segment
Deferred
Acquistions
Costs
Future Policy
Benefits, Losses,
Claims and Loss
Expenses
Other Policy
Claims and
Benefits Payable (1)
 
 
 
 
Wealth Management
 
 
 
2011 
$
1,978,779 
$
13,106,104 
$
21,874 
2010 
 
1,466,505 
 
14,221,135 
 
15,642 
 
 
 
 
 
 
 
Group Protection
 
 
 
 
 
 
2011 
$
-
$
91,848 
$
11,457 
2010 
 
-
 
85,911 
 
9,827 
 
 
 
 
 
 
 
Individual Protection
 
 
 
 
 
 
2011 
$
228,107 
 
1,338,606 
$
12,852 
2010 
 
216,054 
 
1,135,696 
 
16,375 
 
 
 
 
 
 
 
Corporate
 
 
 
 
 
 
2011 
$
-
$
-
$
-
2010 
 
-
 
-
 
-

Segment
Premium
Revenue
Net Investment
Income (Loss)
(2)
Benefits, Claims,
Losses and
Settlement
Expenses
Amortization of
DAC, VOBA
and VOCRA
Interest and
Other Operating
Expenses
 
 
 
 
 
 
 
Wealth Management
 
 
 
 
 
 
2011 
$
 22,038 
$
733,039 
$
475,296 
$
(265,245)
$
281,533 
2010 
 
 17,796 
 
1,444,054 
 
569,811 
 
670,759 
 
274,184 
2009 
 
 14,562 
 
2,510,698 
 
416,442 
 
1,004,949 
 
202,191 
 
 
 
 
 
 
 
 
 
 
 
Group Protection
 
 
 
 
 
 
 
 
 
 
2011 
$
 115,185 
$
9,357 
$
76,672 
$
1,022 
$
29,218 
2010 
 
 118,166 
 
8,824 
 
73,454 
 
1,327 
 
31,565 
2009 
 
 119,446 
 
15,668 
 
81,357 
 
4,976 
 
32,801 
 
 
 
 
 
 
 
 
 
 
 
Individual Protection
 
 
 
 
 
 
 
 
 
 
2011 
$
 197 
$
61,926 
$
6,652 
$
16,822 
$
65,918 
2010 
 
 213 
 
25,755 
 
(1,623)
 
25,016 
 
45,192 
2009 
 
 238 
 
68,352 
 
(1,592)
 
14,736 
 
27,333 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
 
 
 
 
 
 
 
 
 
2011 
$
 - 
$
(76,694)
$
 - 
$
-
$
20,826 
2010 
 
 - 
 
(88,423)
 
 - 
 
-
 
19,018 
2009 
 
 - 
 
(12,411)
 
 - 
 
-
 
25,611 
 
 
 
 
 
 
 
 
 
 
 
Total 2011
$
 137,420 
$
727,628 
$
558,620 
$
(247,401)
$
397,495 
Total 2010
 
 136,175 
 
1,390,210 
 
641,642 
 
697,102 
 
369,959 
Total 2009
 
 134,246 
 
2,582,307 
 
496,207 
 
1,024,661 
 
287,936 

(1) Other claims and benefits are included in Future Policy Benefits, Losses, Claims and Loss Expenses.

(2) Net investment income is allocated based on segmented assets by line of business.


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.
SCHEDULE IV
REINSURANCE
(in 000’s)

 
 
 
 
 
 
  
 
 
 
Percentage
 
 
  
 
  
 
Ceded to
 
  
 
of Amount
 
 
Direct Amount
 
Assumed Amount
 
Other Companies
 
Net Amount
 
Assumed to Net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2011
 
 
 
 
 
 
 
 
 
 
 
 
 
Life Insurance In-Force
$
52,068,476 
 
$
198,056 
 
$
29,510,236 
 
$
22,756,296 
 
1%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Life Insurance
$
47,505 
 
$
7,917 
 
$
4,674 
 
$
50,748 
 
16%
 
Accident and Health
 
62,064 
 
 
28,252 
 
 
3,644 
 
 
86,672 
 
33%
Total Premiums
$
109,569 
 
$
36,169 
 
$
8,318 
 
$
137,420 
 
26%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2010
 
 
 
 
 
 
 
 
 
 
 
 
 
Life Insurance In-Force
$
58,150,057 
 
$
267,963 
 
$
37,432,073 
 
$
20,985,947 
 
1%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Life Insurance
$
45,033 
 
$
9,302 
 
$
4,161 
 
$
50,174 
 
19%
 
Accident and Health
 
49,836 
 
 
38,314 
 
 
2,149 
 
 
86,001 
 
45%
Total Premiums
$
94,869 
 
$
47,616 
 
$
6,310 
 
$
136,175 
 
35%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2009
 
 
 
 
 
 
 
 
 
 
 
 
 
Life Insurance In-Force
$
57,579,257 
 
$
36,947,180 
 
$
332,851 
 
$
20,964,928 
 
2%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Premiums:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Life Insurance
$
41,754 
 
$
10,220 
 
$
3,885 
 
$
48,089 
 
21%
 
Accident and Health
 
44,917 
 
 
42,636 
 
 
1,396 
 
 
86,157 
 
49%
Total Premiums
$
86,671 
 
$
52,856 
 
$
5,281 
 
$
134,246 
 
39%



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.

Item 15. Exhibits, Financial Statement Schedules (continued).

(a)(3) Exhibits required by Item 601 of Regulation S-K:

Exhibit No.


3.1
Certificate of Incorporation, as amended through March 24, 2004, (Incorporated herein by reference to Registrant's Form 10-K, File No. 333-82824, filed on March 29, 2004);
   
3.2
By-laws, as amended March 19, 2004 (Incorporated herein by reference to Registrant’s Form 10-K, File No. 33-82824, filed on March 29, 2004)
   
4.1
Certificate to be issued in connection with Flexible Payment Combination Fixed/Variable Annuity Contract (Incorporated herein by reference to the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4, File No. 333-83256, filed on February 22, 2002)
   
4.2
Certificate to be issued in connection with Flexible Payment Combination Fixed/Variable Annuity Contract (Incorporated herein by reference to the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4, File No. 333-83364, filed on February 25, 2002)
   
4.3
Certificate to be issued in connection with Flexible Payment Combination Fixed/Variable Annuity Contract (Incorporated herein by reference to the to Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4, File No. 333-74844, filed on December 10, 2001)
   
4.4
Certificate to be issued in connection with Flexible Payment Combination Fixed/Variable Annuity Contract (Incorporated herein by reference to Post-Effective Amendment No. 5 to the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4, File No 33-41628, filed on April 28, 1995)
   
4.5
Certificate  to be issued in connection with Flexible Payment Combination Fixed/Variable Annuity Contract (Incorporated herein by reference to Post-Effective Amendment No. 9 to the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4, File No. 33-41628, filed on March 2, 1998)
   
4.6
Certificate to be issued in connection with Flexible Payment Combination Fixed/Variable Annuity Contract (Incorporated herein by reference to the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4, File No. 333-83362, filed on February 25, 2002)
   
4.7
Certificate to be issued in connection with Flexible Payment Combination Fixed/Variable Annuity Contract (Incorporated herein by reference to the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4, File No. No. 333-37907, filed on October 14, 1997)
   
4.8
Certificate to be issued in connection with Flexible Payment Combination Fixed/Variable Annuity Contract (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. 333-41438, filed on September 25, 2000)
   
4.9
Certificate to be issued in connection with Flexible Payment Combination Fixed/Variable Annuity Contract (Incorporated herein by reference to Post-Effective Amendment No. 2 to the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4, File No. No. 333-05227, filed on April 10, 1998)



SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.

Item 15. Exhibits, Financial Statement Schedules (continued).

(a)(3) Exhibits required by Item 601 of Regulation S-K (continued):

4.10
Certificate to be issued in connection with Flexible Payment Combination Fixed/Variable Annuity Contract (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. 333-30844, filed on June 9, 2000)
   
4.12
Certificate to be issued in connection with Flexible Payment Combination Fixed/Variable Annuity Contract (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. 333-82957, filed September 29, 1999)
   
4.13
Certificate to be issued in connection with Flexible Payment Combination Fixed/Variable Annuity Contract (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. 333-31248, filed June 14, 2000)
   
4.14
Certificate to be issued in connection with Flexible Payment Combination Fixed/Variable Annuity Contract (Incorporated herein by reference to the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4, File No. 333-74972, filed on December 12, 2001)
   
4.15
Certificate to be issued in connection with Flexible Payment Combination Fixed/Variable Annuity Contract (Incorporated herein by reference to Post-Effective Amendment No. 9 to the Registration Statement of Sun Life of Canada (U.S.) Variable Account F on Form N-4, File No. 33-29852, filed on April 16, 1998)
   
4.16
Group Contract Form No. DIA(1); Certificate Form No. DIA(1)/CERT; and Individual Contract Form No. DIA(1)/IND (Incorporated herein by reference to Pre-Effective Amendment No. 1 to Registration Statement of Keyport Life Insurance Company on Form S-1, File No. 333-13609, filed on or about February 7, 1997)
   
4.17
Group Contract Form No. MVA(1) and Certificate Form No. VA(1)/CERT (Incorporated herein by reference to the Registration Statement of Keyport Life Insurance Company on Form S-1, File No. 333-1783, filed on March 18, 1996)
   
4.18
Single Payment Deferred Combination Variable and Fixed Individual Annuity Contract [Regatta NY] (Incorporated herein by reference to Post-Effective Amendment No. 5 to Registration Statement of Sun Life (N.Y.) Variable Account C on Form N-4, File No. 33-41629, filed on April 28, 1998)
   
4.19
Flexible Payment Deferred Combination Variable and Fixed Individual Annuity Contract [Regatta Gold NY and Futurity NY] (Incorporated herein by reference to Post-Effective Amendment No. 2 to Registration Statement of Sun Life (N.Y.) Variable Account C on Form N-4, File No. 333-5037, filed March 29, 2000)
   
4.20
Flexible Payment Deferred Combination Variable and Fixed Individual Annuity Contract (Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Registration Statement of Sun Life (N.Y.) Variable Account C on Form N-4, File No. 333-119151, filed on December 29, 2004)
   
4.21
Flexible Payment Deferred Combination Variable and Fixed Individual Annuity Contract (Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Registration Statement of Sun Life (N.Y.) Variable Account C on Form N-4, File No. 333-119154, filed on December 29, 2004)


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.

Item 15. Exhibits, Financial Statement Schedules (continued).

(a)(3) Exhibits required by Item 601 of Regulation S-K (continued):

   
10.1
Terms Agreement, dated as of September 12, 2006, by and among Sun Life Assurance Company of Canada (U.S.), Sun Life Financial Global Funding III, L.P., Sun Life Financial Global Funding III, U.L.C., Sun Life Financial Global Funding III, L.L.C., Citigroup Global Markets, Inc., Deutsche Bank Securities Inc., Banc of America Securities LLC, Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, RBC Capital Markets Corporation and Wachovia Capital Markets, LLC (Incorporated herein by reference to Registrant's Current Report on Form 8-K, filed on September 15, 2006)
   
10.2
Purchase Agreement, dated as of September 5, 2006, by and among Sun Life Assurance Company of Canada (U.S.), Sun Life Financial Global Funding III, L.P., Sun Life Financial Global Funding III, U.L.C., Sun Life Financial Global Funding III, L.L.C., Citigroup Global Markets, Inc., Deutsche Bank Securities Inc., Banc of America Securities LLC, Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, RBC Capital Markets Corporation and Wachovia Capital Markets, LLC (Incorporated herein by reference to Registrant's Current Report on Form 8-K, filed on September 15, 2006)
   


SUN LIFE ASSURANCE COMPANY OF CANADA (U.S.)
(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.

Item 15. Exhibits, Financial Statement Schedules (continued).

(a)(3) Exhibits required by Item 601 of Regulation S-K (continued):

10.5
Terms Agreement, dated as of September 21, 2006, by and among Sun Life Assurance Company of Canada (U.S.), Sun Life Financial Global Funding III, L.P., Sun Life Financial Global Funding III, U.L.C., Sun Life Financial Global Funding III, L.L.C., Citigroup Global Markets, Inc., Deutsche Bank Securities Inc., Banc of America Securities LLC, Credit Suisse Securities (USA) LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. Incorporated, RBC Capital Markets Corporation and Wachovia Capital Markets, LLC (Incorporated herein by reference to Registrant's Current Report on Form 8-K, filed on September 26, 2006)
   
14
Omitted pursuant to Instruction I(2)(c) to Form 10-K
   
21
Omitted pursuant to Instruction I(2)(b) to Form 10-K
   
23.1
Consent of Deloitte & Touche LLP
   
31.1
Certification pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
31.2
Certification pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
   
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
32.2
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS
XBRL Instance Document [1]
   
101.SCH
XBRL Taxonomy Extension Schema Document
   
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document

[1]     
Includes the following materials contained in this Annual Report on Form 10-K for the year ended December 31, 2011 formatted in XBRL (eXtensible Business Reporting Language) (i) the Consolidated Statements of Operations, (ii) the Consolidated Balance Sheets, (iii) the Consolidated Statements of Changes in Equity, (iv) the Consolidated Statements

 (b) Exhibits required by Item 601 of Regulation S-K:

See Item 15(a)(3) above.

(c) Financial statements required by Regulation S-X which are excluded from the annual report to shareholders by Rule 14a-3(b):

Other than the financial statement schedules set forth in Item 15(a)(2) above, no other financial statement schedules are required to be filed.




SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant, Sun Life Assurance Company of Canada (U.S.), has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 
Sun Life Assurance Company of Canada (U.S.)
(Registrant)
     
 
By:
/s/ Westley V. Thompson
   
Westley V. Thompson
   
President, SLF U.S.
     
 
Date:
March 29, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.

/s/ Westley V. Thompson
  
President, SLF U.S. and Director
Westley V. Thompson
  
(principal executive officer)
     
/s/ Larry Madge
  
Senior Vice President and Chief Financial Officer
Larry Madge
  
and Director
   
(principal financial officer)
     
/s/ Michael Moran
  
Vice President and Chief Accounting Officer
Michael Moran
  
(principal accounting officer)
     
/s/ Thomas A. Bogart
  
Director
Thomas A. Bogart
    
     
/s/ Scott M. Davis
  
Director
Scott M. Davis
    
     
 /s/ Kenneth A. McCullum   Director
 Kenneth A. McCullum    
     
/s/ Colm J. Freyne
  
Director
Colm J. Freyne
    
     
     




Supplemental Information to be Furnished With Reports Filed
Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered
Securities Pursuant to Section 12 of the Act



The registrant is wholly-owned by Sun Life of Canada (U.S.) Holdings, Inc. and does not send annual reports or proxy material to its sole security holder.


 
158