6-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 6-K

Report of Foreign Private Issuer

Pursuant to Rule 13a-16 or 15d-16

under the Securities Exchange Act of 1934

For the month of March, 2020

Commission File Number: 001-15014

SUN LIFE FINANCIAL INC.

(the “Company”)

(Translation of registrant’s name into English)

1 York Street, 31st Floor, Toronto, Ontario M5J 0B6

(Address of principal executive offices)

Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.

Form 20-F  ☐            Form 40-F  ☒

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):  ☐

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):  ☐

Exhibit
99.1	Notice of Annual Meeting and Management Information Circular
99.2	Notice and Access – Notice of Annual Meeting and Notice of Availability of Meeting Materials
99.3	Proxy Form and Request for Delivery of Financial Statements
99.4	Electronic Distribution Insert
99.5	Annual Report

SIGNATURE

Pursuant to the requirement of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	Sun Life Financial Inc. (Registrant)
Date: March 26, 2020	By	/s/ “Tracie Allan”
		Tracie Allan
		Assistant Vice-President & Managing Counsel

EX-99.1

Exhibit 99.1

[Graphic Appears Here] 2020 SUN LIFE FINANCIAL INC. NOTICE OF ANNUAL MEETING OF COMMON SHAREHOLDERS May 5, 2020 MANAGEMENT INFORMATION CIRCULAR [Graphic Appears Here]

Contents

Letter to shareholders		1
Notice of our 2020 annual meeting		2
Management Information Circular		3
Delivery of meeting materials		3
●	Notice and access	3
Our 2020 annual meeting		5
●	Voting	5
●	Director nominees at a glance	9

●	The auditor	17
●	Non-binding advisory vote on approach to executive compensation	18
Corporate governance practices		19
●	Governance at a glance	19
●	Strong Culture	20
●	The board of directors	21
●	Shareholder engagement and communications	31
●	Shareholder proposals	33
●	Board committees	34
Director compensation		43
●	Compensation discussion and analysis	43
●	Compensation details	46
Executive compensation		47
●	Letter to shareholders	48
●	Compensation discussion and analysis	51
●	Compensation details	72

Other information	95
Schedule A – Charter of the Board of Directors	96

Dear Shareholder:

You are invited to attend our annual meeting of common shareholders on Tuesday, May 5, 2020 at 5:00 p.m. (Toronto time). At Sun Life, we are in the business of helping Canadians achieve lifetime financial security and live healthier lives. We have been actively monitoring COVID-19 developments and the directives from public health and government authorities. The health and well-being of our employees, Clients, investors and communities is our priority. In line with the latest guidance from public health and government authorities, this year’s meeting will be held in a virtual only format by way of live webcast. Shareholders will have the opportunity to attend the meeting online in real time regardless of their location, to submit questions and to vote on a number of important matters.

The business of the meeting is described in the accompanying Notice of our 2020 annual meeting and Management Information Circular.

We will be conducting the annual meeting of the voting policyholders and sole shareholder of Sun Life Assurance Company of Canada at the same time. The formal business of each meeting will be conducted separately, however, management’s presentation will address shareholders and policyholders.

Your vote is important. If you cannot attend the virtual meeting, please vote by submitting your proxy by mail, internet or telephone by 5:00 p.m. (Toronto time) on Friday, May 1, 2020, as described on pages 5 to 8 in the attached circular. If your shares are held in the name of a nominee, see page 7 for information about how to vote your shares.

We look forward to your attendance at this year’s meeting, which will occur by live webcast at https://web.lumiagm.com/186947015. Additional information on how to attend the meeting can be found in the attached circular.

William D. Anderson	Dean A. Connor
Chairman of the Board	President & Chief Executive Officer

Si vous désirez recevoir l’avis de convocation à l’assemblée annuelle et la circulaire d’information en français, veuillez communiquer avec le secrétaire en écrivant au 1 York Street, 31^st Floor, Toronto (Ontario) Canada M5J 0B6, en composant le 1-877-786-5433, ou en envoyant un courriel à servicesauxactionnaires@sunlife.com.

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Notice of our 2020 annual meeting

You are invited to our annual meeting of common shareholders:

When Tuesday, May 5, 2020 at 5:00 p.m. (Toronto time)

Where Virtual only meeting via live audio webcast online at https://web.lumiagm.com/186947015

Password: “sunlife2020” (case sensitive)

What the meeting will cover

1. Receipt of the 2019 consolidated financial statements

2. Election of the directors

3. Appointment of the auditor

4. A non-binding advisory vote on our approach to executive compensation

5. Consideration of other business that may properly be brought before the meeting.

A total of 585,109,774 votes are eligible to be cast at the meeting.

Consistent with the latest guidance from public health and government authorities regarding COVID-19, and in consideration of the health and safety of our employees, shareholders and the broader community, this year’s meeting will be held in a virtual only format by way of live webcast. Shareholders will have the opportunity to attend the meeting online in real time regardless of their geographic location, to submit questions and to vote on a number of important matters.

The annual meeting of Sun Life Assurance Company of Canada will also be held at the same time.

Registered shareholders and duly appointed proxyholders will be able to attend the virtual meeting, submit questions and vote in real time, provided they are connected to the internet and follow the instructions in the attached circular. Non-registered shareholders who have not duly appointed themselves as proxyholder will be able to attend the virtual meeting as guests but will not be able to vote at the virtual meeting.

Shareholders who wish to appoint a person other than the management nominees identified in the form of proxy or voting instruction form (including a non-registered shareholder who wishes to appoint themselves to attend the virtual meeting) must carefully follow the instructions in the attached circular and on their form of proxy or voting instruction form. These instructions include the additional step of registering such proxyholder with our transfer agent, AST Trust Company (Canada), after submitting the form of proxy or voting instruction form. If you wish that a person other than the management nominees identified on the form of proxy or voting instruction form attend and participate at the Meeting as your proxy and vote your Shares, you MUST register such proxyholder after having submitted your form of proxy or voting instruction form identifying such proxyholder. Failure to register the proxyholder with our transfer agent will result in the proxyholder not receiving a control number to participate in the virtual meeting and only being able to attend as a guest. Guests will be able to listen to the virtual meeting but will not be able to vote.

The attached circular is being sent to you because you owned common shares of Sun Life Financial Inc. on March 13, 2020 (the record date). It includes important information about what the meeting will cover, who can vote and how to vote.

The board of directors has approved the contents of this circular and has authorized us to send it to you.

Troy Krushel

Vice-President, Associate General Counsel & Corporate Secretary

Toronto, Ontario

March 13, 2020

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Management Information Circular

March 13, 2020

In this document, we, us, our, the company and SLF Inc. mean Sun Life Financial Inc., and Sun Life Assurance means Sun Life Assurance Company of Canada. You, your and shareholder mean common shareholders of SLF Inc.

Delivery of meeting materials

Notice and access

As permitted by the Canadian Securities Administrators and pursuant to an exemption from the proxy solicitation requirement received from the Office of the Superintendent of Financial Institutions Canada (OSFI), we are using “notice and access” to deliver this Management Information Circular (Circular) to both our registered and non-registered shareholders. Instead of receiving a paper copy of this Circular in the mail, shareholders who hold common shares of SLF Inc. as of March 13, 2020, the record date for the meeting, have access to it online. A package was sent to the shareholders in the mail with a notice (Notice) explaining how to access this Circular electronically and how to request a paper copy of it. A form of proxy for registered shareholders and share ownership account participants, or a voting instruction form for non-registered shareholders, was included with the Notice with instructions so that you can vote your shares.

Notice and access allows for faster access to this Circular, helps reduce printing and postage costs, contributes to the protection of the environment and is consistent with our sustainability strategy.

How to access the Circular electronically

This Circular is available on our website (www.sunlife.com/2020agm) and on the website of our transfer agent, AST Trust Company (Canada) (AST) (www.meetingdocuments.com/astca/slf), on SEDAR (www.sedar.com) and on EDGAR (www.sec.gov/edgar.shtml).

Delivery of financial statements and management’s discussion and analysis

The manner in which we deliver our financial statements and management’s discussion and analysis (MD&A) to you depends on whether you are a registered shareholder, a share ownership account participant or a non-registered shareholder.

• You are registered shareholder if you hold a paper share certificate in your name or your shares are recorded electronically in the Direct Registration System (DRS) maintained by our transfer agent;

• You are a share ownership account participant if you hold a share ownership statement; and

• You are a non-registered shareholder (also known as a beneficial shareholder) if your securities broker, clearing agency, financial institution, trustee or custodian or other intermediary (your nominee) holds your shares for you in a nominee account.

Registered shareholders

Registered shareholders who have not opted out of receiving our financial statements will receive them in hard copy, unless they have consented to electronic delivery (e-delivery). Please see Go digital! below for more information on signing up for e-delivery of our financial statements.

As permitted under securities laws, we are using notice and access to deliver our MD&A to registered shareholders. You may access the MD&A online in the same manner as described above for accessing the Circular online.

Share ownership account participants and non-registered shareholders

As permitted under securities laws, we are using notice and access to deliver our financial statements and MD&A to share ownership account participants and non-registered shareholders. You may access these materials online in the same manner as described above for accessing the Circular online.

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Go Digital!

All shareholders are encouraged to sign up for email delivery of notices of meeting.

Registered shareholders who have not opted out of receiving our financial statements and who currently receive them in hard copy are encouraged to consent to e-delivery to receive them. Doing so means that you will be notified by email when the financial statements are made available, at which time they can be viewed and/or downloaded from our website (www.sunlife.com).

The chart below outlines the process by which shareholders can sign up for e-delivery.

Go Digital! How to sign up for e-delivery
Registered shareholders and share ownership account participants	Non-registered shareholders in Canada and the United States
Sign up for e-delivery at the following website: https://ca.astfinancial.com/SLFGoDigital or by checking the box on the reverse side of your proxy form and providing your email address.	Sign up for e-delivery at www.proxyvote.com using the control number appearing on your voting instruction form, or after the meeting by obtaining a unique registration number from your financial intermediary.

How to request a paper copy of materials provided to you through notice and access

Shareholders may request a paper copy of this Circular or our financial statements and MD&A up to one year from the date the Circular was filed on SEDAR. If you would like to receive a paper copy prior to the meeting, please follow the instructions provided in the Notice or make a request at any time prior to the meeting on AST’s website (www.meetingdocuments.com/astca/slf) or by contacting AST at 1-888-433-6443 (toll free in Canada and the United States) or 416-682-3801 (other countries). A copy of the requested documents will be sent to you at no cost within three business days of your request. If you request a paper copy of any materials, you will not receive a new form of proxy, so you should keep the original form sent to you in order to vote.

Questions?

If you have questions about notice and access or to request a paper copy of this Circular after the meeting at no charge, you can call AST at 1-888-433-6443 (toll free in Canada and the United States), or 416-682-3801 (other countries).

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Our 2020 annual meeting

Consistent with the latest guidance from public health and government authorities regarding COVID-19, and in consideration of the health and safety of our employees, shareholders and the broader community, this year’s annual meeting will be held in a virtual only format by way of live webcast. Shareholders will have the opportunity to attend the meeting online in real time regardless of their geographic location, to submit questions and to vote on a number of important matters. Shareholders will not be able to attend the meeting in person. A summary of the information shareholders will need to attend the meeting online is provided below. In particular, see Voting on pages 5 to 8.

What the meeting will cover:

Financial statements

You will receive the consolidated financial statements for the year ended December 31, 2019, the auditors’ reports thereon and the actuary’s report on the policy liabilities reported in the financial statements.

Electing the directors (see pages 9 - 16)

You will vote on the election of 11 directors to serve on our board until the next annual meeting. All of the director nominees currently serve on our board. All 11 individuals are also nominated to serve as directors of Sun Life Assurance, a principal operating subsidiary which we wholly own.

Appointing the auditor (see page 17)

You will vote on the appointment of Deloitte LLP (Deloitte) as our auditor for 2020. Deloitte has been our auditor since SLF Inc. was incorporated in 1999 and has served as the auditor of Sun Life Assurance since 1875.

Having a “say on pay” (see page 18)

You will participate in a non-binding advisory vote on our approach to executive compensation, giving you an opportunity to express your view on the board’s approach to setting executive compensation as described in the Executive compensation section starting on page 47.

We will file the results of the votes, including the advisory vote, on SEDAR (www.sedar.com) and publish them on our website (www.sunlife.com). If a significant number of shareholders oppose the “say on pay” resolution, the board will consult shareholders to understand their concerns, and then review our approach to executive compensation with their concerns in mind. Our executive officers have a material interest in the outcome of the vote because it may affect our process for determining their compensation. It is impossible, however, for us to describe the impact of the vote or the consultations before they have taken place.

Considering other business

You can vote on other items of business that are properly brought before the meeting. As of the date of this Circular, we were not aware of any other items to be brought forward.

Voting

Who can vote

You are entitled to receive notice of and vote at our annual meeting of common shareholders if you were a shareholder of record as of 5:00 p.m. (Toronto time) on March 13, 2020.

As of March 13, 2020, we had 585,109,774 common shares outstanding. Each common share carries one vote. We require a simple majority of votes cast for any of the items of business to be approved.

Two persons holding, or representing by proxy, at least 25% of the shares entitled to vote constitute a quorum for the transaction of business at the meeting.

To the best of our knowledge, no person or company beneficially owns or exercises control or direction over, directly or indirectly, more than 10% of the voting rights attached to our common shares.

Common shares cannot be voted if they are beneficially owned by the Government of Canada, any province or territory of Canada, the government of a foreign country, or any political subdivision or agency of any of those entities.

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How to vote

You have two ways to vote:

• by proxy; or

• during the meeting by online ballot through the live webcast platform.

Registered shareholders and duly appointed proxyholders (including non-registered shareholders who have duly appointed themselves as proxyholder) that attend the meeting online will be able to vote by completing a ballot online during the meeting through the live webcast platform.

Guests (including non-registered shareholders who have not duly appointed themselves as proxyholder) can log into the meeting as set out below. Guests will be able to listen to the meeting but will not be able to vote during the meeting.

• Step 1: Log in online at https://web.lumiagm.com/186947015. We recommend that you log in at least one hour before the meeting starts.

• Step 2: Follow these instructions:

Registered shareholders: Click “I have a control number” and then enter your control number and password ”sunlife2020” (case sensitive). The control number located on the form of proxy or in the email notification you received from AST is your control number. If you use your control number to log in to the meeting, any vote you cast at the meeting will revoke any proxy you previously submitted. If you do not wish revoke a previously submitted proxy, you should not vote during the meeting.

Duly appointed proxyholders: Click “I have a control number” and then enter your control number and password ”sunlife2020” (case sensitive). Proxyholders who have been duly appointed and registered with AST as described in this circular will receive a control number by email from AST after the proxy voting deadline has passed.

Guests: Click “Guest” and then complete the online form.

It is your responsibility to ensure internet connectivity for the duration of the meeting and you should allow ample time to log in to the meeting online before it begins.

    Voting by proxy      

You can provide your instructions in one of these ways:
	Mark, sign, date and return in the envelope provided.
	Mark, sign, date, scan and email both pages to proxyvote@astfinancial.com.
	(Canada & U.S. only) Call 1-888-489-7352 from a touchtone telephone and follow the voice instructions. You will need your control number printed on the front of the proxy form.
	Go to www.astvotemyproxy.com and follow the instructions on screen. You will need your control number printed on the front of the proxy form.

If you did not receive a form of proxy with a control number, you can find a form of proxy on AST’s website at www.meetingdocuments.com/astca/slf and can contact our transfer agent AST at 1 (877) 224-1760 (within North America) or 1 (416) 682-3865 (outside of North America) to obtain your control number.

    Voting during the meeting      

We are holding our annual meeting in a virtual only format and it will be conducted via live audio webcast. Attending the virtual meeting gives you an opportunity to hear directly from management.

If you want to attend the virtual meeting and vote your shares during the meeting, do not complete or return the proxy form. Provided you are connected to the internet and follow the instructions in this circular, you will be able to vote online in real time by completing an online ballot through the live webcast platform.

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    If you change your mind    

You can revoke instructions you have already provided by giving us new instructions.

Registered shareholders and share ownership account participants can send a new proxy form in one of four ways:

• complete and sign a proxy form with a later date than the one you previously sent, and deliver or deposit it to AST as described above before 5:00 p.m. (Toronto time) on Friday, May 1, 2020

• submit new voting instructions to AST by telephone or internet before 5:00 p.m. (Toronto time) on Friday, May 1, 2020

• deliver or deposit a notice in writing with your new instructions signed by you, or your attorney as authorized by you in writing, to us before 5:00 p.m. (Toronto time) on Monday, May 4, 2020, or if the meeting is adjourned, before 5:00 p.m. (Toronto time) on the business day before the meeting is reconvened, at: SLF Inc., 1 York Street, 31^st Floor, Toronto, Ontario, Canada M5J 0B6 Attention: Corporate Secretary.

If you have followed the instructions for attending and voting at the meeting online, voting at the meeting online will revoke your previous instructions.

Non-Registered Holders who have not objected to their intermediary disclosing certain ownership information about themselves to the company are referred to as non-objecting beneficial owners or “NOBOs”. The company has elected to send the proxy-related materials directly to the NOBOs.

Carefully follow the instructions on the voting instruction form or proxy form your nominee provided with this Circular.

    Voting by proxy      

You can provide your instructions in one of these ways:
	Mark, sign, date and return in the envelope provided.
	(Canada only) Call 1-800-474-7493 (English) or 1-800-474-7501 (French); or (U.S. only) Call 1-800-454-8683, from a touchtone telephone and follow the voice instructions. You will need your control number printed on the front of the form.
	Go to proxyvote.com and follow the instructions on screen. You will need your control number printed on the front of the form.

If you are a non-registered holder and you did not receive a form of proxy or voting instruction form with a control number please contact your nominee (i.e. your securities broker, clearing agency, financial institution, trustee or custodian or other intermediary).

    Voting during the meeting      

If you want to attend and vote at the virtual meeting, you must appoint yourself as proxyholder by printing your name in the space provided on the form and then following your nominee’s instructions for returning the form. You must also complete the additional step of registering the proxyholder by calling AST at 1-866-751-6315 (within North America) or 1 (212) 235-5754 (outside of North America) by no later than 5:00 p.m. (Toronto time) on Friday, May 1, 2020. Failing to register your proxyholder online will result in the proxyholder not receiving a control number, which is required to vote at the meeting.

Non-registered shareholders who have not duly appointed themselves as proxyholder will not be able to vote at the meeting but will be able to participate as a guest.

    If you change your mind    

Non-registered shareholders can send a new voting instruction form to their nominees. To allow your nominee time to act on your instructions, you should provide them your instructions at least seven days before the meeting.

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Voting by proxy is the easiest way to vote because you are giving someone else the authority to attend the meeting and vote your shares for you (called your proxyholder). If you specify on your proxy form or in your voting instructions how you want to vote on a particular matter, then your proxyholder must vote your shares according to your instructions.

The enclosed proxy form names William D. Anderson, Chairman of the Board, or in his absence Scott F. Powers, Chair of the Governance, Nomination & Investment Committee (GNIC), or in his absence another director appointed by the board, as your proxyholder to vote your shares at the meeting according to your instructions.

If you appoint them as proxyholders but do not specify on the proxy form how you want to vote your shares, your shares will be voted:

• FOR electing each of the director nominees who are listed in the proxy form and Circular

• FOR appointing Deloitte as auditor

• FOR the advisory resolution accepting our approach to executive compensation.

You can appoint another person to vote your shares by printing his or her name in the space provided on the proxy form and registering them online, as described above. This person does not need to be a shareholder, but your vote can only be counted if he or she participates in the virtual meeting and votes for you. Regardless of who you appoint as your proxyholder, if you do not specify how you want to vote your shares, your proxyholder can vote as he or she sees fit. Your proxyholder can also vote as he or she decides on any other items of business that properly come before the meeting, and on any amendments to the items listed above.

AST must receive your voting instructions by 5:00 p.m. (Toronto time) on Friday, May 1, 2020 to have your vote recorded. If the meeting is adjourned, AST must receive your voting instructions by 5:00 p.m. (Toronto time) on the date that is two business days before the meeting is reconvened.

	You can call AST or one of its agents directly at the following numbers:
	Canada and the United States:	1-877-224-1760
	United Kingdom, Republic of Ireland, Channel Islands and Isle of Man:	+ 44 (0) 345-602-1587
	Philippines:	632-5318-8567 (Metro Manila) 1-800-1-888-2422 (Provinces)
	Hong Kong:	852-2862-8555
	Other countries:	416-682-3865

Processing the votes

AST counts and tabulates the votes on our behalf. Individual shareholder votes are kept confidential and voting instructions are only communicated to management if it is clear that the shareholder wants to communicate directly with management, or when the law requires it.

We will file the voting results on SEDAR (www.sedar.com) and publish them on our website (www.sunlife.com).

Solicitation of proxies

Management is soliciting your proxy, and we have retained Kingsdale Advisors (Kingsdale) to assist us at an estimated cost of $41,000. The solicitation of proxies will be made primarily by mail, but Kingsdale may also contact you by telephone. We pay all solicitation costs.

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Director nominees at a glance

As of the date of this Circular, we have 11 directors on our board. Under our by-laws, the board can have eight to 20 directors. At its meeting held on February 12, 2020, the board fixed the number of directors at 11. At the 2020 annual meeting, 11 directors are to be elected for a term ending at the conclusion of the next annual meeting. All of the 11 nominees currently serve on our board. Below are key highlights of your director nominees.

Qualified (see more on page ") 100% The GNIC has reviewed each of the nominees and confirmed that they have the key competencies and experience necessary for the board to fulfil its mandate. Diversity (see more on page ") 36% of the Board and 75% of the Committee Chairs are women Four out of 11 director nominees and 3 out of 4 committee chairs are women Independent (see more on pages ") 91% All directors are independent except the CEO. All board committee members are independent. Balanced Tenure and Board Renewal (see more on page ") 55% 0-5 years 45% 6-11 years Our average tenure among the nominated directors is 5.8 years. Attendance (see more on page ") 98% Our nominated directors had an excellent track record for attendance at the 2019 board and committee meetings. Shareholder Approval (see more on pages ") 99.5% Our nominated directors had an average of 99.5% votes FOR their election in 2019.

We expect that all of the nominees will be able to serve as director but if for any reason a nominee is unable to serve, the persons named in the proxy form have the right to vote at their discretion for another nominee proposed according to the company’s by-laws and applicable law.

The board recommends that shareholders vote for electing each of the director nominees profiled below. If you do not specify in the proxy form or your voting instruction how you want to vote your shares, the persons named in the form will vote for electing each of the director nominees profiled below.

Our policy on majority voting

The election of directors at the meeting is expected to be an uncontested election, meaning that the number of nominees will be equal to the number of directors to be elected. If a director receives more “withheld” than “for” votes in an uncontested election, he or she must tender a written offer to resign to the board. The board will accept the resignation within 90 days unless there are exceptional circumstances and will disclose the reasons for its decision in a news release. The director will not participate in these deliberations.

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Our policy on proxy access

Under the board’s proxy access policy, qualifying shareholders may submit one or more director nominations to be included in the Circular and form of proxy and ballot for any annual meeting. To make a nomination, qualifying shareholders must, prior to the deadline for submitting proposals (see Shareholder proposals on page 33), submit a nomination notice in the required form. The policy has the following principal features:

• one or more nominating shareholders (up to a maximum of 20) may nominate up to the greater of two directors and 20% of the board

• nominating shareholders must collectively own at least 5% of the company’s common shares

• nominating shareholders must have held their shares for at least three years

• the proposal will be included in the company’s Circular, form of proxy and ballot for the annual shareholders’ meeting

• nominating shareholders may include a statement of up to 500 words in support of their candidates.

A copy of the policy is available on our website (www.sunlife.com).

Alternatively, in accordance with section 147 of the Insurance Companies Act (Canada), shareholders holding in the aggregate not less than 5% of the company’s shares for the minimum period of time set out by the Insurance Companies Act (Canada) may submit a formal proposal for individuals to be nominated for election as directors in accordance with the specified procedures to be followed.

Our advance notice by-law

Our by-laws specify that a shareholder who wishes to nominate an individual for election as a director at an annual meeting must provide between 30 and 65 days advance notice to the company. The notice to the company must include information about the nominee, including age, address, principal occupation, the number of SLF Inc. shares owned or controlled, and any other information that would be required to be disclosed in a dissident’s proxy circular in connection with solicitations of proxies for the election of directors. The notice must also include information about the nominating shareholder, including ownership or control of, or rights to vote, SLF Inc. shares and any other information that would be required to be disclosed in a dissident’s proxy circular in connection with solicitations of proxies for the election of directors. The company may require additional information to be provided, including information to comply with requirements of OSFI relating to the suitability of directors and potential changes to the board.

The advance notice provisions described above do not apply to nominations made by or on behalf of the board or by shareholders pursuant to shareholder proposals, requisitioned meetings, or through our proxy access policy which have separate requirements and deadlines. In addition, in the case of a special meeting at which directors are to be elected, a shareholder’s notice of a nomination must be provided not later than 15 days after the date of the special meeting is announced.

Director nominee profiles

The following profiles provide information about each of the director nominees, including when they joined our board, their business experience, their committee memberships, their attendance at board and committee meetings in 2019, the level of support received from shareholders at our 2019 annual meeting, and other public company directorships held in the last five years. Our 11 director nominees have an average board tenure of 5.8 years and four of them (36%) are women.

The director nominee profiles also include information about the value of their holdings of SLF Inc. common shares and deferred share units (DSUs). A DSU is equal in value to a common share but cannot be redeemed until a director leaves the board. Common shares and DSUs count towards the achievement of our share ownership guidelines for directors which each director is expected to meet within five years of joining the board. The share ownership guidelines provide that director must own at least $735,000 in common shares and/or DSUs within five years of joining the board. For director nominees who have not achieved the guideline, we determine if they are “on target” by calculating the number of common shares and DSUs they will hold by their achievement due dates based on the form of remuneration they have individually elected. For this purpose we assume that the share price and dividend rate remain constant until the applicable achievement due date. The amounts shown in the profiles are as of February 28, 2020 and March 1, 2019 when the closing price of our common shares on the Toronto Stock Exchange (TSX) was $57.99 and $50.37, respectively. You can find additional information about our director compensation program and share ownership guidelines starting on pages 43 and 44, respectively.

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William D. Anderson, FCPA, FCA Toronto, ON, Canada Director since May 2010 Independent Age: 70 Areas of expertise: •   finance, accounting and actuarial •   risk management •   international business •   public company •   corporate strategy and development Current committees: •   None1	Mr. Anderson is the Chairman of the Boards of SLF Inc. and Sun Life Assurance. He was President of BCE Ventures, the strategic investment unit of the global telecommunications company BCE Inc., until he retired in December 2005. Mr. Anderson held senior positions including Chief Financial Officer of BCE Inc. and Bell Canada during his 14 years with that company. He spent 17 years with the public accounting firm KPMG, where he was a partner for nine years. Mr. Anderson is a Fellow of the Institute of Chartered Professional Accountants of Ontario and is also a Fellow of the Institute of Corporate Directors.
	2019 Meeting attendance			Other public company directorships
	Board	11 of 11	100%	Gildan Activewear Inc.		2006 – present
				TransAlta Corporation		2003 – 2016
	2019 Annual Meeting votes in favour: 99.7%
	SLF Inc. securities held:
	Year	Common shares	DSUs	Total common shares and DSUs	Total value	Share  ownership  guideline/  target date
	2020	15,600	27,836	43,436	$2,518,854	Meets
	2019	15,600	22,605	38,205	$1,924,386
	Change	0	5,231	5,231	$594,468
	1  Mr. Anderson attends committee meetings in his capacity as non-executive Chairman.

Dean A. Connor Toronto, ON, Canada Director since July 2011 Non-independent Age: 63 Current committees: •  None1	Mr. Connor is President & Chief Executive Officer of SLF Inc. and Sun Life Assurance. He was named as one of the 100 best performing CEOs of 2019 by Harvard Business Review, received the Ivey Business Leader of the Year award in 2018 from the Ivey Business School, and was named Canada’s Outstanding CEO of the Year® for 2017. Prior to his appointment in December 2011 he held progressively senior positions with Sun Life Inc. and Sun Life Assurance, including President, Chief Operating Officer, President of Sun Life Canada, and Executive Vice-President. Prior to joining the company in September 2006, Mr. Connor spent 28 years with Mercer Human Resource Consulting where he held numerous senior positions, most recently President for the Americas. Mr. Connor is a Fellow of the Canadian Institute of Actuaries and the Society of Actuaries. He is a trustee of the University Health Network in Toronto and a director of the Business Council of Canada. Mr. Connor is a member of the Ivey Advisory Board, Ivey Business School, Western University and the Asia Business Leaders Advisory Council. He holds an Honours Business Administration degree.
	2019 Meeting attendance			Other public company directorships
	Board	11 of 11	100%	None
	2019 Annual Meeting votes in favour: 99.7%
	SLF Inc. securities held:
	Year	Common shares	DSUs	Total common shares and DSUs	Total value	Share  ownership  guideline/  target date
	2020	95,643	140,567	236,210	$13,697,818	Meets2
	2019	94,807	135,385	230,192	$11,594,771
	Change	836	5,182	6,018	$2,103,047
	1  Mr. Connor attends committee meetings, in full or in part, as appropriate, at the request of the committee chairs, but is not a member of any committee. 2  As President & Chief Executive Officer, Mr. Connor is subject to different share ownership guidelines than the independent directors. See page 59.

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Stephanie L. Coyles Toronto, ON, Canada Director since January 2017 Independent Age: 53 Areas of expertise: •   client needs, sales and distribution •   international business •   public company •   corporate strategy and development •   digital and data/analytics Current committees: •   Audit •   Governance, Nomination & Investment	Ms. Coyles is a corporate director. Her background is as a strategic consultant and advisor who has worked with a diverse clientele across North America, including retail, consumer distribution, private equity and business consulting organizations. She was previously Chief Strategic Officer at LoyaltyOne Co. from 2008 to 2012 and a principal at McKinsey & Company Canada from 2000 to 2008. In addition to the public company boards listed below, Ms. Coyles serves on the advisory board of Reliant Web Hosting Inc. and on the board of The Earth Rangers Foundation. She holds a Master in Public Policy degree. Ms. Coyles received the ICD.D designation from the Institute of Corporate Directors and the CERT Certificate in Cybersecurity Oversight, issued by the CERT Division of the Software Engineering Institute at Carnegie Mellon University.
	2019 Meeting attendance			Other public company directorships
	Board	11 of 11	100%	Corus Entertainment Inc.			March 2020 – present
	Audit	5 of 5	100%	Metro Inc.			2015 – present
	Governance, Nomination & Investment	2 of 2	100%	Hudson’s Bay Company			2019 – March 2020
	Risk & Conduct Review	3 of 3	100%	Postmedia Network Canada Corp.			January –  October 2016
	2019 Annual Meeting votes in favour: 99.7%
	SLF Inc. securities held:
	Year	Common shares	DSUs	Total common shares and DSUs		Total value	Share  ownership  guideline/  target date
	2020	5,100	7,058	12,158	$	705,042	On target for  January 1,  2022
	2019	3,600	4,687	8,287	$	417,416
	Change	1,500	2,371	3,871	$	287,626

Martin J. G. Glynn Vancouver, BC, Canada Director since December 2010 Independent Age: 68 Areas of expertise: •   finance, accounting and actuarial •   risk management •   talent and culture •   international business •   public company Current committees: •   Management Resources •   Risk & Conduct Review	Mr. Glynn is Chair of the Public Sector Pension Investment Board. He was President and Chief Executive Officer of HSBC Bank USA until his retirement in 2006. During his 24 years with HSBC, an international banking and financial services organization, Mr. Glynn held various senior positions including President and Chief Executive Officer of HSBC Bank Canada. He is a director of The American Patrons of the National Library and Galleries of Scotland and St Andrews Applied Research Limited and is on the Fund Advisory Board for Balfour Pacific Capital. He holds a Master of Business Administration degree.
	2019 Meeting attendance			Other public company directorships
	Board	11 of 11	100%	Husky Energy Inc.		2000 – present
	Management Resources	6 of 6	100%
	Risk & Conduct Review	6 of 6	100%
	2019 Annual Meeting votes in favour: 99.7%
	SLF Inc. securities held:
	Year	Common shares	DSUs	Total common shares and DSUs	Total value	Share  ownership  guideline/  target date
	2020	10,316	22,077	32,393	$1,878,470	Meets
	2019	10,316	19,152	29,468	$1,484,303
	Change	0	2,925	2,925	$394,167

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Ashok K. Gupta, FFA London, England Director since May 2018 Independent Age: 65 Areas of expertise: •  finance, accounting and actuarial •  insurance, health and wealth •  risk management •  corporate strategy and development •  digital and data/analytics Current committees: •  Management Resources •  Risk & Conduct Review	Mr. Gupta is a corporate director. During his 40-year career in the UK insurance and financial services industry, he has held a number of senior executive, advisor and actuarial positions. From 2010 to 2013, he was an advisor to the Group Chief Executive Officer of Old Mutual plc. Prior to this he held various senior positions with the Pearl Group plc (now Phoenix Group Holdings plc), Kinnect of Lloyd’s of London, CGU plc (now part of Aviva plc), Scottish Amicable Life Assurance Company (now part of Prudential) and Tillinghast, Nelson & Warren Inc. (now part of Willis Towers Watson plc). Mr. Gupta is a Fellow of the Institute and Faculty of Actuaries. He is also Chairman of EValue Ltd., and a trustee of the Ethical Journalism Network. From 2013 to September 2019, Mr. Gupta was a director of New Ireland Assurance Company plc. He was involved in the UK public sector and served on the Actuarial Council and Codes and Standards Committee of the Financial Reporting Council in the U.K. between 2012 and 2018, was Chair of the Defined Benefits Taskforce of the Pensions and Lifetime Savings Association from 2016 to 2017 and Joint Deputy Chair of the Procyclicality Working Group of the Bank of England from 2012 to 2014. Mr. Gupta holds a Master of Business Administration degree.
	2019 Meeting attendance			Other public company directorships
	Board	11 of 11	100%	JPMorgan European Smaller Companies Investment Trust plc		2013 – present
	Management Resources	6 of 6	100%
	Risk & Conduct Review	6 of 6	100%
	2019 Annual Meeting votes in favour: 99.6%
	SLF Inc. securities held:
	Year	Common shares	DSUs	Total common shares and DSUs	Total value	Share  ownership  guideline/  target date
	2020	462	4,391	4,853	$281,425	On target for  May 9,  2023
	2019	0	1,852	1,852	$93,285
	Change	462	2,539	3,001	$188,140

M. Marianne Harris Toronto, ON, Canada Director since December 2013 Independent Age: 62 Areas of expertise: •  finance, accounting and actuarial •  insurance, health and wealth •  talent and culture •  public company •  corporate strategy and development Current committees: •  Management Resources (Chair) •  Risk & Conduct Review	Ms. Harris is a corporate director. She was Managing Director and President, Corporate and Investment Banking, Merrill Lynch Canada, Inc., an international banking and financial services organization, until 2013. She held progressively senior positions during her 13-year career with Merrill Lynch and affiliated companies in Canada and the U.S., including President, Global Markets and Investment Banking, Canada, Head of Financial Institutions Group, Americas and Head of Financial Institutions, Canada. Before joining Merrill Lynch, Ms. Harris held various investment banking positions with RBC Capital Markets from 1984 to 2000, including Head of the Financial Institutions Group. She is a director of President’s Choice Bank and a member of the Dean’s Advisory Council for the Schulich School of Business & the Advisory Council for the Hennick Centre for Business and Law. Ms. Harris holds a Master of Business Administration degree and a Juris Doctorate.
	2019 Meeting attendance			Other public company directorships
	Board	11 of 11	100%	Loblaw Companies Limited		2016 – present
	Management Resources	6 of 6	100%	Hydro One Limited		2015 – 2018
	Risk & Conduct Review	6 of 6	100%	Agrium Inc.		2014 – 2015
	2019 Annual Meeting votes in favour: 99.4%
	SLF Inc. securities held:
	Year	Common shares	DSUs	Total common shares and DSUs	Total value	Share  ownership  guideline/  target date
	2020	5,961	34,229	40,190	$2,330,618	Meets
	2019	5,743	27,986	33,729	$1,698,930
	Change	218	6,243	6,461	$631,688

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Sara Grootwassink Lewis, CPA, CFA Scottsdale, AZ, United States Director since December 2014 Independent Age: 52 Areas of expertise: •  finance, accounting and actuarial •  talent and culture •  government relations/policy •  public company •  corporate strategy and development •  designated audit committee financial expert Current committees: •  Audit (Chair) •  Governance, Nomination & Investment	Ms. Lewis is a corporate director. Prior to 2009 she held progressively senior positions during her seven-year career with Washington Real Estate Investment Trust, a publicly traded real estate investment trust, including Executive Vice-President, and was Chief Financial Officer from 2002 to 2009. In addition to the public company boards listed below, Ms. Lewis serves on the Leadership Board and Governance Working Group for the United States Chamber of Commerce—Center for Capital Markets Competitiveness and is Trustee of The Brookings Institution. She is a Board Leadership Fellow of the National Association of Corporate Directors and a member of the Tapestry West Audit Committee Network and the Institute of Corporate Directors. Ms. Lewis is a Certified Public Accountant and a Chartered Financial Analyst. She was named to the National Association of Corporate Directors (NACD) Directorship 100 in 2017.
	2019 Meeting attendance			Other public company directorships
	Board	11 of 11	100%	Healthpeak Properties, Inc.		2019 – present
	Audit	5 of 5	100%	Weyerhaeuser Company1		2016 – present
	Governance, Nomination & Investment	5 of 5	100%	PS Business Parks, Inc.		2010 – 2019
				Adamas Pharmaceuticals, Inc.		2014 – 2016
				Plum Creek Timber Company, Inc.1		2013 – 2016
				CapitalSource, Inc.		2004 – 2014
	2019 Annual Meeting votes in favour: 98.8%
	SLF Inc. securities held:
	Year	Common shares	DSUs	Total common shares and DSUs	Total value	Share  ownership  guideline/  target date
	2020	5,680	24,880	30,560	$1,772,174	Meets
	2019	5,500	21,060	26,560	$1,337,827
	Change	180	3,820	4,000	$434,347
	1  In 2016, Weyerhaeuser Company merged with Plum Creek Timber Company, Inc. and the combined company retained the Weyerhaeuser name. Ms. Lewis continues to serve on the board of Weyerhaeuser.

James M. Peck San Antonio, TX, United States Director since January 2019 Independent Age: 56 Areas of expertise: •  talent and culture •  international business •  public company •  corporate strategy and development •  digital and data/analytics Current committees: •  Management Resources •  Risk & Conduct Review	Mr. Peck has over 20 years of information management, global product development and engineering experience. Mr. Peck served as Senior Advisor of TransUnion from May 2019 to February 2020 and as President & Chief Executive Officer from 2012 to May 2019. Prior to joining TransUnion in 2012 Mr. Peck held progressively senior positions during his career with Reed Elsevier (now RELX Group), a FTSE 100 multinational information and analytics company, where he served as Chief Executive Officer of its LexisNexis Risk Solutions business from 2004 to 2012. From 1999 to 2001 Mr. Peck was General Manager, Online Business and Senior Vice-President, Product Development with Celera Genomics, a bio-technology firm that sequenced the human genome. He is a director of CCC Information Services, Inc. and Neo on Business Ltd. Mr. Peck holds a Master of Business Administration degree, and received the CERT Certificate in Cybersecurity Oversight, issued by the CERT Division of the Software Engineering Institute at Carnegie Mellon University.
	2019 Meeting attendance			Other public company directorships
	Board	10 of 11	91%	TransUnion		2012 – February 2020
	Management Resources	6 of 6	100%
	Risk & Conduct Review	6 of 6	100%
	2019 Annual Meeting votes in favour: 99.4%
	SLF Inc. securities held:
	Year	Common shares	DSUs	Total common shares and DSUs	Total value	Share  ownership  guideline/  target date
	2020	0	4,695	4,695	$272,263	On target for  January 1,  2024
	2019	0	0	0	$0
	Change	0	4,695	4,695	$272,263

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Scott F. Powers Boston, MA, United States Director since October 2015 Independent Age: 60 Areas of expertise: •  talent and culture •  client needs, sales and distribution •  international business •  public company •  corporate strategy and development Current committees: •  Governance, Nomination & Investment (Chair) •  Management Resources	Mr. Powers is a corporate director. He was President and Chief Executive Officer of State Street Global Advisors until his retirement in August 2015. Before joining State Street in 2008 he was President and Chief Executive Officer of Old Mutual Asset Management Plc, the U.S.-based global asset management business of Old Mutual plc. Prior to 2008 Mr. Powers held senior executive positions at Mellon Institutional Asset Management, BNY Mellon’s investment management business, and at The Boston Company Asset Management, LLC. He has also served as a member of the Systemic Risk Council and the Advisory Board of the U.S. Institute of Institutional Investors.
	2019 Meeting attendance			Other public company directorships
	Board	11 of 11	100%	Automatic Data Processing, Inc.		2018 – Present
	Governance, Nomination & Investment	5 of 5	100%	PulteGroup, Inc.		2016 – Present
				Whole Foods Market, Inc.		May – August 2017
	Management Resources	6 of 6	100%
	2019 Annual Meeting votes in favour: 99.7%
	SLF Inc. securities held:
	Year	Common shares	DSUs	Total common shares and DSUs	Total value	Share  ownership  guideline/  target date
	2020	975	17,061	18,036	$1,045,908	Meets
	2019	975	12,209	13,184	$664,078
	Change	0	4,852	4,852	$381,830

Hugh D. Segal, OC, OONT., CD Kingston, ON, Canada Director since May 2009 Independent Age: 69 Areas of expertise: •  risk management •  client needs, sales and distribution •  government relations/policy •  public company •  corporate strategy and development Current committees: •  Audit •  Governance, Nomination & Investment	Mr. Segal is a corporate director. He served as Principal of Massey College, University of Toronto from 2014 to June 2019. Before that, he was a Canadian senator from 2005 to 2014 and President and Chief Executive Officer of the Institute for Research on Public Policy from 1999 to 2006. Mr. Segal was formerly Chair of the NATO Association of Canada and Vice-Chair of the Institute of Canadian Advertising. He is a Senior Advisor at Aird & Berlis LLP. Mr. Segal is Chair and a Distinguished Fellow at the School of Policy Studies External Advisory Board and the Donald Matthews Faculty Fellow in Global Public Policy, Queen’s University, a Distinguished Fellow at the Munk School of Global Affairs, University of Toronto and a Senior Fellow at the Canadian Institute of Global Affairs. He is an Honorary Captain of the Royal Canadian Navy, an Honorary Captain of the Canadian Forces College and Honorary Chair of the Navy League of Canada. Mr. Segal is an officer of the Order of Canada and a member of the Order of Ontario.
	2019 Meeting attendance			Other public company directorships
	Board	10 of 11	91%	Just Energy Group Inc. (formerly Energy Savings Income Fund)		2001 – 2015
	Audit	5 of 5	100%
	Governance, Nomination & Investment	5 of 5	100%
	2019 Annual Meeting votes in favour: 99.3%
	SLF Inc. securities held:
	Year	Common shares	DSUs	Total common shares and DSUs	Total value	Share  ownership  guideline/  target date
	2020	8,657	26,014	34,671	$2,010,571	Meets
	2019	8,657	22,944	31,601	$1,591,742
	Change	0	3,070	3,070	$418,829

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Barbara G. Stymiest, FCPA, FCA Toronto, ON, Canada Director since May 2012 Independent Age: 63 Areas of expertise: •  finance, accounting and actuarial •  insurance, health and wealth •  risk management •  government relations/policy •  corporate strategy and development •  designated audit committee financial expert Current committees: •  Risk & Conduct Review (Chair) •  Audit	Ms. Stymiest is a corporate director. She was a member of the Group Executive at Royal Bank of Canada, an international banking and financial services organization, from 2004 to 2011; Royal Bank’s Group Head, Strategy, Treasury and Corporate Services from 2010 to 2011; Chief Operating Officer from 2004 to 2009. Prior to that Ms. Stymiest held senior positions in the financial services sector including Chief Executive Officer, TSX Group Inc., Executive Vice-President and Chief Financial Officer, BMO Nesbitt Burns, and Partner, Financial Services Group, Ernst & Young LLP. She is a Fellow of the Institute of Chartered Professional Accountants of Ontario and received an Award of Outstanding Merit from that organization in 2011. In addition to the public company boards listed below, Ms. Stymiest is the Vice-Chair of the University Health Network in Toronto, a director of the Canadian Institute for Advanced Research and a director of President’s Choice Bank. She holds an Honours Business Administration degree. Ms. Stymiest was named to National Association of Corporate Directors (NACD) Directorship 100 in 2018.
	2019 Meeting attendance			Other public company directorships
	Board	11 of 11	100%	George Weston Limited		2011 – present
	Audit	5 of 5	100%	BlackBerry Limited		2007 – present
	Risk & Conduct Review	6 of 6	100%
	2019 Annual Meeting votes in favour: 99.7%
	SLF Inc. securities held:
	Year	Common shares	DSUs	Total common shares and DSUs	Total value	Share  ownership  guideline/  target date
	2020	5,000	40,295	45,295	$2,626,657	Meets
	2019	5,000	34,532	39,532	$1,991,227
	Change	0	5,763	5,763	$635,430

To the knowledge of the company, other than as set out below, no proposed director is, as at the date of this Circular, or has been, in the last ten years (a) a director, chief executive officer or chief financial officer of any company (including SLF Inc.) that was subject to a cease trade or similar order or an order that denied the relevant company access to any exemption under securities legislation, that was in effect for a period of more than 30 consecutive days that: (i) was issued while the proposed director was acting in the capacity as director, chief executive officer or chief financial officer; or (ii) was issued after the proposed director ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer; or (b) a director or executive officer of any company (including SLF Inc.) that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets.

Further, to the knowledge of the company, other than as set forth below, no proposed director has been (a) bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the proposed director; or (b) subject to (i) any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or (ii) any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable security holder in deciding whether to vote for a proposed director:

• Ms. Coyles was a director of Postmedia Network Canada Corp. while it completed a restructuring following an arrangement plan under the Canada Business Corporations Act in October 2016. Ms. Coyles is no longer a director of Postmedia Network Canada Corp.

• Mr. Glynn was a director of MF Global Holdings Ltd. when it filed a voluntary petition under Chapter 11 of the Bankruptcy Code in the United States in October 2011. Mr. Glynn is no longer a director of MF Global Holdings Ltd.

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• Mr. Peck was a director and President & Chief Executive Officer of TransUnion when it agreed to settle a Civil Investigative Demand by the U.S. Consumer Financial Protection Bureau (CFPB) in December 2016 focused on common industry practices relating to the advertising, marketing and sale of consumer reports, credit scores or credit monitoring products to consumers by TransUnion’s Consumer Interactive segment. TransUnion executed a Stipulation and Consent to the Issuance of a Consent Order which was issued by the CFPB in January 2017, which required them to implement certain practice changes in the way they advertise, market and sell products and services to consumers, develop a comprehensive compliance plan, and pay approximately US$13.9 million for redress to eligible customers and a civil money penalty to the CFPB in the amount of US$3.0 million.

Meeting attendance

The GNIC reviews the attendance record of each director as part of the nomination process. Directors must attend at least 75% of board and committee meetings every year. A director who does not meet this attendance requirement in two consecutive years must offer to resign. The table below is a consolidated view of how many board and committee meetings each director attended in 2019. From time to time unscheduled board meetings may be called on short notice to consider mergers and acquisitions (M&A) transactions or other matters and one or more of our directors may be unable to attend these meetings due to the short notice. Where a director is unable to attend a meeting, feedback and questions based on meeting materials are directed to the Chairman of the Board or the Chair of the applicable committee, as appropriate, to address at the meeting. During the year ended December 31, 2019, average attendance of all directors at both board and committee meetings was 98%.

Name	Board meetings attended			Committee meetings attended			Total meetings   attended
William D. Anderson1		11 of 11	100%		n/a	n/a		11 of 11	100%
Dean A. Connor2		11 of 11	100%		n/a	n/a		11 of 11	100%
Stephanie L. Coyles3		11 of 11	100%		10 of 10	100%		21 of 21	100%
Martin J. G. Glynn		11 of 11	100%		12 of 12	100%		23 of 23	100%
Ashok K. Gupta		11 of 11	100%		12 of 12	100%		23 of 23	100%
M. Marianne Harris		11 of 11	100%		12 of 12	100%		23 of 23	100%
Sara Grootwassink Lewis		11 of 11	100%		10 of 10	100%		21 of 21	100%
Christopher J. McCormick4		3 of 4	75%		4 of 6	67%		7 of 10	70%
James M. Peck		10 of 11	91%		12 of 12	100%		22 of 23	96%
Scott F. Powers		11 of 11	100%		11 of 11	100%		22 of 22	100%
Hugh D. Segal		10 of 11	91%		10 of 10	100%		20 of 21	95%
Barbara G. Stymiest		11 of 11	100%		11 of 11	100%		22 of 22	100%

¹  Mr. Anderson attended committee meetings in his capacity as non-executive Chairman.

²  Mr. Connor attended committee meetings in his capacity as President & Chief Executive Officer and a director.

³ On May 9, 2019, Ms. Coyles ceased to be a member of the Risk & Conduct Review Committee and became a member of the GNIC.

⁴ On May 9, 2019, Mr. McCormick retired. He was a member of the GNIC and the Management Resources Committee.

The auditor

The board, on the recommendation of the Audit Committee (AC), recommends that shareholders vote for the appointment of Deloitte as auditor of SLF Inc. for 2020. Deloitte has been our auditor since SLF Inc. was incorporated in 1999 and has served as the auditor of Sun Life Assurance since 1875. If you do not specify in the proxy form or your voting instructions how you want to vote your shares, the persons named in the form will vote for the appointment of Deloitte as auditor.

MANAGEMENT INFORMATION CIRCULAR 2020  |   17

Auditor’s fees

The following table shows the fees relating to services provided by Deloitte for the past two years.

For the year ended December 31	($millions)
	2019		20181
Audit services		18.1		17.4
Audit-related services		1.2		1.1
Tax services		0.5		0.3
All other services		1.7		1.3
Total		21.5		20.1

¹  Adjustment of $0.1 to audit services; adjustment of $0.3 to other services.

Audit fees relate to professional services rendered by the auditors for the audit of our annual consolidated financial statements, the statements for our segregated funds and services related to statutory and regulatory filings. Audit services fees of $12.6 (2018: $11.1) relates to audit of the consolidated financial statements of SLF Inc. and its subsidiaries to support the group audit opinions expressed in Deloitte’s report; the remaining Audit services fees of $5.5 (2018: $6.3) relates to audit of the statements for segregated funds and statutory and regulatory filing.

Audit-related services fees include assurance services not directly related to performing the audit of the annual consolidated financial statements of the company. These include internal control reviews, specified procedure audits and employee benefit plan audits.

Tax services fees relate to tax compliance, tax advice and tax planning.

All other services fees relate to products and services other than audit, audit-related and tax as described above.

We have a policy that requires the AC to pre-approve any services that are to be provided by the external auditor. The committee has, subject to certain fee thresholds and reporting requirements, pre-approved certain audit, audit-related and other permissible non-audit services that are consistent with maintaining the independence of the external auditor. You can find more information about this policy in our 2019 annual information form which is filed with the Canadian Securities Regulators on SEDAR (www.sedar.com) and on EDGAR (www.sec.gov/edgar.shtml).

Non-binding advisory vote on our approach to executive compensation

Since 2010, the board has held an annual advisory vote on our approach to executive compensation to respond to shareholders and other stakeholders who were advocating for this form of shareholder engagement.

One of the board’s primary responsibilities is to ensure Sun Life is able to attract, retain and reward qualified executives. While shareholders will provide their collective views on our approach to executive compensation through the advisory vote, the directors are still fully responsible for their compensation decisions. Detailed information on our approach to executive compensation and what we paid our named executive officers can be found beginning on page 47 of this Circular.

We will ask the shareholders to consider and vote on the following resolution. The board recommends that shareholders vote for the resolution. If you do not specify in the proxy form or your voting instructions how you want to vote your shares, the persons named in the form will vote for the resolution.

“RESOLVED THAT on an advisory basis and not to diminish the role and responsibilities of the board of directors, the shareholders accept the approach to executive compensation disclosed in the Management Information Circular dated March 13, 2020 delivered in advance of the annual meeting of common shareholders on May 5, 2020.”

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Corporate governance practices

Our board regularly reviews our governance processes and practices to make sure the board continues to effectively oversee management and our business affairs, and to ensure our governance framework meets regulatory requirements and reflects evolving best practices.

We believe our governance processes and practices are consistent with the Insurance Companies Act (Canada), the Canadian Securities Administrators’ corporate governance guidelines, guidelines issued by OSFI for effective corporate governance in federally regulated financial institutions, the TSX corporate governance rules, the New York Stock Exchange (NYSE) corporate governance rules for U.S. publicly listed companies and the Philippine Stock Exchange corporate governance guidelines applicable to us.

Governance at a glance

We say “Yes” to

_ü  Strong Culture (see more on page 20)  

• We have a strong culture built on a foundation of ethical behavior, high business standards, integrity, respect and doing the right thing for our Clients

• Our Code of Business Conduct (Code) applies to every director, officer and employee, who are required to review and certify compliance every year

_ü  Independence (see more on page 22)  

• Our Chairman of the Board, committee chairs and all members of our committees are independent directors

• Independent directors meet without management at each board and committee meeting

_ü  Key competencies and experience (see more on pages 22 - 23)  

• The eight key attributes we expect of our directors are integrity, independent and informed judgment, accountability, knowledge of business issues and financial matters, commitment to operational excellence, responsiveness, initiative and collaboration

• The GNIC ensures that the board includes members with a broad range of skills and experience to carry out its mandate

_ü  Tenure and renewal (see more on page 24)  

• We use professional executive search firms and referrals to identify prospective director candidates

• The GNIC, together with the Chairman of the Board, continuously monitors board succession requirements and maintains a directors’ skills matrix

• Shareholders elect individual directors annually

• Our policy on majority voting is informed by best practices and complies with TSX rules

• We limit the number of public company directorships our directors may have (limit of one other for directors that are employed full-time, and limit of three others for those not employed full-time)

• We have a limit on board interlocks (no more than two directors may serve on the board of another public company and directors may not serve together on more than two other public companies)

• The board has adopted a proxy access policy

_ü  Diversity and inclusion (see more on pages 25 - 27)  

• We have a board diversity policy that considers multiple aspects of diversity, including gender, race, religion, age, country of origin, physical ability and sexual orientation

• We are committed to diversity and inclusion, and have an enterprise strategy to strengthen diversity

• Four out of our current 11 directors and director nominees (36%) are women

• Three out of our four committee chairs (75%) are women

_ü  Board development and assessment (see more on pages 28 - 31)  

• Both current and new directors are provided orientation and continuing education programs

• New directors will attend site visits to each of the company’s four business pillar locations over a two to three year period primarily through the annual strategic planning meeting held in June

• The individual directors participate in an annual chair, board and committee effectiveness assessment process

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_ü  Strategic planning and risk management oversight (see more on page 30)  

• All directors attend an annual strategic planning meeting held in one of our four business pillar locations and management updates the board on the execution of strategy and strategic considerations at every regular board meeting

• The board provides ongoing oversight of risk management programs, including through the allocation of risk oversight to its four committees, and monitors that the principal risks are appropriately identified and managed

_ü  Succession planning and talent management (see more on page 30)  

• The Management Resources Committee (MRC) has oversight of talent development and succession planning for senior management and the CEO’s assessment of other senior officers, and the board conducts the assessment of the CEO

_ü  Shareholder engagement and alignment (see more on page 31)  

• The Chairman of the Board communicates with shareholders and other stakeholders in connection with governance-related matters

• Independent directors must own at least $735,000 (7x the cash portion of the independent director base retainer) in common shares and/or DSUs within five years of joining the board

We say “No” to

 _×  Slate voting for directors  

• Shareholders can vote for or withhold their vote from individual directors, and we do not have slate voting

 _×  Staggered voting for directors  

• Directors are not elected for staggered terms, and we have annual elections for all directors

 _×  Unequal voting structure  

• We do not have dual-class or subordinate voting structures

 _×  Tie-breaking vote  

• In the event of a tie vote at the board our Chairman does not have a deciding vote

 _×  Pledging or hedging of Sun Life securities  

• We do not allow pledging or hedging of SLF Inc. securities by directors and senior management

 _×  Pensions and stock options for independent directors  

• Independent directors are not allowed to participate in our stock option or pension plans

Strong Culture

We have built a strong corporate culture on a foundation of ethical behaviour, high business standards, integrity, respect and doing the right thing for our Clients. The board establishes the “tone from the top” and makes every effort to ensure that senior management consists of people of integrity who create and sustain a culture of integrity throughout the organization. Questions about integrity are included in our board, committee and chair effectiveness surveys.

The board has established the Code that applies to every director, officer and employee, with no exception. Each director, officer and employee receives training and is required to attest to compliance with the Code annually.

Our Code promotes speaking up and outlines our commitment against retaliation. Our Code also requires employees and directors to report all known and suspected breaches. Our Employee Ethics Hotline empowers our employees to play an active role in protecting the organization. Employees can seek guidance and report misconduct anonymously.

Communications that accompanied the Code in 2019 further reinforced our expectations of behaviours in the workplace; emphasizing the importance of fostering a workplace that is free of harassment of any kind and encouraging employees to report any inappropriate behavior or conduct that does not align with the Code.

The GNIC is responsible for reviewing the effectiveness of the Code, monitoring compliance with the Code and reporting the results of its review to the board annually. Any breaches of the Code are

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reported at the next committee meeting and the Chief Compliance Officer reviews our controls and compliance with the committee annually. The Code is currently under review and the updated Code will be published in June, 2020. A copy of our most recent Code is available on our website (www.sunlife.com), on SEDAR (www.sedar.com) and on EDGAR (www.sec.gov/edgar.shtml).

The board of directors

Mandate, roles and responsibilities

The board is responsible for supervising the management of the business and affairs of the company. It carries out its stewardship responsibilities directly and through its four standing committees. The board and the GNIC review the board charter at least annually (see Schedule A).

The Chairman of the Board is an independent director. He is responsible for providing leadership that enhances the effectiveness and independence of the board. He manages the board’s affairs to assist the directors in carrying out their responsibilities and helps the board operate cohesively. He works closely with the Chair of the GNIC to regularly evaluate, and in appropriate circumstances propose enhancements to, the board’s governance structure and procedures. He is a regular attendee of board committee meetings.

The Chairman of the Board and respective committee chairs are responsible for setting meeting agendas and reviewing the meeting materials with management before meetings so that the meetings are productive and enhance the board’s effectiveness and independence.

Committee chairs are consulted in advance in connection with the appointment, reassignment, replacement or dismissal of senior management within their respective committee’s areas of responsibility, including those in OSFI-identified control functions. Committee chairs are consulted annually on the performance assessment and compensation awarded to those individuals. Each committee chair is an independent director and generally holds the position for five years. Committees, in consultation with the Chairman of the Board, can hire independent advisors.

The President & Chief Executive Officer (CEO) is also a director, as required under the Insurance Companies Act (Canada). There is a written statement of mandate for the CEO which is reviewed by the board annually and which specifies the CEO’s overall accountability for leading the company’s business operations and creating sustainable value for all stakeholders. The CEO is responsible for championing the company’s global mission, purpose and values, managing the company’s resources to ensure optimal performance, and setting a standard for culture, conduct and character through his or her own behaviour and actions. The CEO develops the leadership capabilities and succession required for execution of the strategy and long-term success of Sun Life and provides leadership in the vision, purpose, governing principles, risk management and regulatory compliance, consistent with Sun Life’s risk appetite and culture.

We expect our directors to act ethically and with integrity in all personal, business and professional dealings. Directors must understand our corporate vision and strategic objectives, continually build their knowledge about our businesses and the financial services sectors in which we operate, and prepare for and actively participate in board and committee meetings in an objective way. They must also understand the board and committee charters and our corporate governance policies and practices, comply with our Code and meet our share ownership guidelines (see page 44).

We have eight key attributes we expect of our directors when they carry out their duties:

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The full position descriptions of our CEO, our directors, our Chairman of the Board and our committee chairs can be found on our website (www.sunlife.com).

Board size

According to our by-laws, our board can have a minimum of eight and a maximum of 20 directors. The board assesses its effectiveness and optimal size annually and believes the current size should be a minimum of 11 and a maximum of 14 directors in order to fulfil its responsibilities.

Independence

The board maintains a majority of independent directors to ensure it operates effectively and independently of management. All members of the board’s standing committees must be independent.

A director is independent under our Director Independence Policy if he or she does not have a direct or indirect relationship with SLF Inc. that could reasonably be expected to interfere with his or her ability to exercise independent judgment. You can find a copy of our Director Independence Policy on our website (www.sunlife.com).

The GNIC evaluated the independence of each director nominee according to our Director Independence Policy and confirmed that 10 of the 11 are independent, and that all of the current members of the AC and MRC meet the additional independence requirements set out in that policy for membership on those committees. Dean A. Connor is not independent because he is our CEO.

The roles of the Chairman and the CEO are separate. The board believes that this separation increases the effectiveness of the board and facilitates enhanced oversight of management. William D. Anderson is Chairman of the Board and an independent director. Having an independent Chairman promotes strong board leadership, encourages open discussion and debate at board meetings, and avoids potential conflicts of interest.

Meeting in-camera

The independent directors meet without management present at the end of each board and committee meeting. The members of the MRC also regularly meet without management present at the beginning of their meetings. The Chairman of the Board and committee chairs encourage open and candid discussions among the independent directors by providing them with an opportunity to express their views on key topics before decisions are made. The independent directors also meet routinely with the heads of key control functions at committee meetings (see committee reports pages 34 to 42).

Key competencies and experience

The GNIC ensures at all times that the board includes members with a broad range of business and strategic experience and expertise so that the board is able to effectively carry out its mandate. On an annual basis, the GNIC and the board determine the key competencies and experience that they believe are necessary for the board as a whole to possess in order to be an asset to the company and fulfil its responsibilities. These include the eight key attributes listed on page 21 and the specific competencies and experience listed in the table below and described in the text that follows. The table below also shows the key competencies and experience that each director nominee, other than Dean A. Connor, our CEO, has indicated he or she brings to the board. Each such director nominee has also identified the principal areas of expertise that he or she possesses and those are listed in the respective director nominee profiles on pages 11 to 16. The GNIC reviewed the areas indicated by each nominee and the rationale provided for their respective selections and is satisfied that the nominees possess skills in those areas.

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	William D. Anderson	Stephanie L. Coyles	Martin J. G. Glynn	Ashok K. Gupta	M. Marianne Harris	Sara G. Lewis	James M. Peck	Scott F. Powers	Hugh D. Segal	Barbara G. Stymiest
Key Competencies
Finance, Accounting and Actuarial knowledge of and experience with complex accounting, actuarial and/or capital management issues	✓	✓	✓	✓	✓	✓			✓	✓
Insurance, Health and Wealth industry experience in insurance, re-insurance, asset management, wealth management and/or health to provide insight into operations, strategy and market factors	✓		✓	✓	✓	✓		✓		✓
Risk Management knowledge of and experience with the identification of material risks, risk assessment, internal risk mitigation and controls, and risk reporting	✓	✓	✓	✓	✓	✓	✓	✓	✓	✓
Talent and Culture experience guiding and championing a high performance culture, embedding human resources practices that attract, retain and develop a disproportionate share of top talent, including knowledge of and experience with compensation plan design and administration, leadership development and talent management, succession planning and organizational design	✓	✓	✓	✓	✓	✓	✓	✓	✓	✓
Key Experience
Client Needs, Sales and Distribution experience in a senior level role in an organization with operations in Asia or other international jurisdictions and experience working with different cultures		✓	✓	✓			✓	✓	✓
International Business experience in a senior level role in an organization with operations in Asia or other international jurisdictions and experience working with different cultures	✓	✓	✓	✓			✓	✓	✓	✓
Government Relations/Policy experience in government relations or public policy				✓	✓	✓	✓		✓	✓
Public Company public company experience as a senior executive or director at a public company, with insight on the operations and governance of complex, publicly traded company	✓	✓	✓	✓	✓	✓	✓	✓	✓	✓
Corporate Strategy and Development experience in strategic planning and identifying and evaluating corporate development opportunities, including acquisitions, partnerships and joint ventures	✓	✓	✓	✓	✓	✓	✓	✓	✓	✓
Digital and Data/Analytics experience or knowledge relating to the cybersecurity, technology, digital and data/analytics needs and/or strategy for a major organization		✓		✓			✓			✓

The GNIC also reviews the membership of each committee annually to ensure each committee is comprised of members with the competencies and experience required to fulfil the committee’s mandate.

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Tenure and board renewal

Every year the GNIC recommends a list of candidates for nomination to the board.

Our Director Independence Policy includes provisions on directors’ tenure. Independent directors will generally retire from the board after they have served for 12 years. The independent directors can waive this retirement requirement to allow a director to serve for up to three additional years if they unanimously determine that it is in the company’s best interests to do so. Thereafter, the retirement requirement can be waived by the independent directors on an annual basis if they unanimously determine that it is in the company’s best interests to do so. The board does not have a mandatory retirement age for directors. Other mechanisms of board renewal include the rigorous board and committee assessments (see page 31), the evergreen list of prospective candidates (see page 25) and the annual review of the directors’ skills matrix (see page 23).

The average tenure of the independent director nominees is 5.8 years (4.9 years in prior year).

The table below shows the directors who are currently expected to retire or who will be required to retire under our director tenure provisions, unless waived, during the next three years, and the areas of expertise that they have indicated they bring to our board.

Director	Retirement Year	Committee Memberships	Areas of Expertise
Hugh D. Segal	Tenure limit reached in May 2021	Audit Governance, Nomination & Investment	•  government relations/policy •  risk management •  client needs, sales and distribution •  public company •  corporate strategy and development
William D. Anderson	Tenure limit reached in May 2022	N/A	•  finance, accounting and actuarial •  risk management •  International business •  public company •  corporate strategy and development
Martin J. G. Glynn	Tenure limit reached in May 2022	Management Resources Risk & Conduct Review	•  finance, accounting and actuarial •  risk management •  talent and culture •  International business •  public company

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The CEO must resign from the board when he or she retires or leaves the company.

A director must tender a written offer to resign if:

• he or she has not attended at least 75% of board and committee meetings for two consecutive years

• his or her principal employment or other business or professional circumstances have changed materially

• he or she receives more withheld votes than for votes from shareholders in an uncontested election.

Committee chairs are appointed annually. Generally, a director will serve as a committee chair for five years.

Recruiting new directors

Candidate Search GNIC identifies prospective candidates Candidate interviews with the Chairman, Committee Chairs, and the CEO GNIC makes recommendation to the Board = Board Approval of New Candidate

The GNIC has primary responsibility for identifying potential new directors and has adopted guidelines for director recruitment. The eight key attributes we expect of our directors (see page 21) together with the directors’ skills matrix (see page 23) are the primary considerations for the committee when determining a need to recruit a new director and identifying the competencies, skills and qualities that prospective directors should possess. The committee then develops a preferred candidate profile based on the considerations determined to be best suited to complement the existing directors or fill a need on the board. Candidates are identified through executive search firms and referrals. An evergreen list of prospective candidates is maintained, which is comprised of individuals who the committee feels may be appropriate as a board candidate when a vacancy arises and who could complement the current competencies, skills and qualities of the board, meet diversity criteria to help the board achieve its diversity aspirations set out in the board diversity policy and comply with the independence requirements of the board and its committees. Executive search and background screening firms conduct reference and background checks on potential candidates. Suitable candidates are interviewed by the Chairman of the Board, the committee chairs and the CEO. The committee receives input from all of these sources in connection with its recommendation to the board for the appointment or nomination of a new director.

Diversity and inclusion

Our commitment to diversity and inclusion is at the centre of our company values and is critical to the board and executive management. Highly qualified directors and executive leaders who reflect the Clients we serve, our employees around the world, and the communities where we operate bring broader perspectives and experience to deepen our insight, enhance innovation and accelerate growth. They also create an inclusive, high-performing culture where all employees, regardless of gender, race, religion, age, country of origin, physical ability, sexual orientation or other diversity attributes, can contribute to their full potential. For more information on diversity and inclusion and equal pay at the company, please see our Sustainability Report on our website (www. sunlife.com/sustainability).

A diverse group of directors produces better corporate governance and oversight, and the board has adopted a diversity policy that includes provisions relating to the identification and nomination of female directors. The objective of the board’s diversity policy is to ensure that the board as a whole possesses diverse qualifications, skills, experience and expertise relevant to the company’s business, in order to fulfil its mandate. Board diversity is more than gender diversity.

Effective implementation of the board’s diversity policy is the responsibility of the GNIC. When recruiting candidates for appointment or election to the board, the GNIC:

• is committed to multiples aspects of diversity including gender, race, religion, age, country of origin, physical ability and sexual orientation, and

• will require a director search firm to identify diverse candidates within the scope of the preferred candidate profile.

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The GNIC will assess the effectiveness of the board’s diversity policy by considering the level of diversity on the board based on the above factors and whether the target percentage of female directors has been achieved or exceeded. The committee reports to the board on this annually.

To drive our commitment to gender diversity, we have:

• signed the Catalyst Accord 2022, which aims to increase the average percentage of women on boards and women in executive positions in corporate Canada to 30% or more by 2022; and

• joined the 30% Club Canada, which has set a goal of 30% of board seats and C-suites to be held by women by 2022.

Women on the board

The board’s diversity policy includes provisions relating to identification and nomination of female directors. The board has set a target of having at least 30% female directors and will aim to increase this percentage when recruiting, taking into account the desired qualifications, skills, experience and expertise and the need for all forms of diversity on the board. As of the date of this Circular four out of our 11 current directors and director nominees (36%), and three out of our four committee chairs (75%) are women.

Women in executive officer positions

We are committed to diversity and inclusion, and have an enterprise strategy to strengthen diversity. The strategy focuses on a series of actions that address unique opportunities to understand our Clients’ needs in more depth, review and enhance our talent management practices, enrich our already collaborative and inclusive culture, and ensure our investments and participation in the community support our diversity objectives.

We are embedding diversity further into the core of our talent management practices to ensure they are free of systemic bias and that no group, including women, is disadvantaged. We are committed to gender equality in the workplace. Below is a list of efforts we have made to support our commitment to the advancement of women in our workplace.

• Inclusion Networks—we have sponsored two volunteer employee networks focused on the advancement of women: InvestHER in our asset management group, and Bright Women in North America

• Mentorship Programs—we have a number of informal and formal mentor and mentee opportunities across our company

• Representation Commitments—we have committed to improving the representation of women leaders by creating a goal to reach 40% women at the Vice-President level and above globally and a goal to reach 25% visible minorities at the Vice-President level and above in North America

• Community Involvement—we sponsor several charities and programs related to gender equality, celebrate events such as International Women’s Day and Pride month, and are actively involved and sponsor women focused events such as The Art of Leadership and the Simmons Conference.

• Building External Partnerships—we believe it is important to build key relationships with external partners that share the same drive to improve gender diversity in the workplace, including Bentley University’s Center for Women and Business, where we work with other corporate partners to explore issues and identify actions to increase workplace gender diversity

• Employee Training—we offer unconscious bias training for all employees in addition to diversity training seminars through our online learning resources and in classroom workshops designed to foster a more inclusive work environment

• Flexible Work Arrangements—our company maintains a flexible working environment that promotes “work from anywhere” and flexible hours in order to attract and retain diverse talent

• Recruitment—we require a diverse slate of candidates (including women) when we select leaders for executive officer and senior leadership positions, both internally and externally. In situations where we are working with external executive search firms, one of the standard terms and conditions in our contracts is the presentation of diverse candidates

• Monitoring Activities—we regularly monitor and review the number of women in executive and senior leadership positions through our annual talent review and succession planning process (see page 30). One of the key metrics we review is the number of women in executive and senior leadership roles and in our management pipeline

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• Compensation Analysis—at the conclusion of our annual performance management and compensation cycle, we analyze compensation levels across the organization, including the compensation of women holding executive officer and senior leadership positions, to ensure fair and equitable treatment, free from systemic bias.

We pride ourselves on creating an inclusive and welcoming environment that encourages diverse perspectives, experiences, preferences and beliefs. Below are examples of how we have been recognized for our ongoing commitment to gender equality:

• we have been included in the Pax Ellevate Global Women’s Index Fund (PXWEX) since 2014, the first broadly diversified mutual fund that invests in the highest-rated companies in the world that are advancing women’s leadership,

• we have been included in the Bloomberg Gender-Equality Index (GEI) since 2017, which recognizes organizations that make strong commitments to gender equality, measuring their contributions across internal company statistics, employee policies, external community support and engagement, and gender-conscious product offerings,

• we received Parity Certification by Women in Governance for our strong commitment to gender equality in the workplace. We were one of eight organizations in Canada to achieve platinum status, and

• in 2016 we signed the 100% Talent Compact, which is a pledge we signed to move to closing the gender wage gap in Boston.

The following chart shows the number and percentage of men and women who are executive officers (members of the Executive Team), direct reports of the CEO and senior executives of the company as of January 31, 2020. The executive officers are also officers of Sun Life Assurance.

Gender	Number of Executive Officers		Percentage of Executive Team Members		Number of CEO Direct Reports1		Percentage of CEO Direct Reports		Number of Senior Executives		Percentage of Senior Executives
Men		8		73%		6		60%		141		65%
Women		3		27%		4		40%		76		35%
Total		11		100%		10		100%		217		100%

¹  CEO Direct Reports includes nine Executive Officers, and one Senior Executive that reports directly to the CEO.

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Board development

Our orientation program for new directors includes formal information sessions and a directors’ manual with information about the company, the board and its committees, board administration, directors’ duties, policies applicable to the directors, and future meeting schedules. Information sessions cover the company’s four business groups, each corporate function, our corporate strategy and financial objectives. The Chairman of the Board and committee chairs meet with new directors to discuss the role of the board and board committees in detail.

Directors are provided with an extensive list of upcoming outside professional development programs that may be of interest, which is updated throughout the year as new programs become available. The list includes governance, financial, compensation and industry topics. Directors can participate in these programs at our expense, as long as the Chairman of the Board approves them in advance.   New directors attend site visits to each of the company’s four business pillar locations over a two to three year period, primarily through the board’s annual strategic planning board meeting in one of our four business pillar locations. The board believes that these site visits enhance ongoing director education. All of the directors are members of the Institute of Corporate Directors in Canada and the National Association of Corporate Directors in the U.S., which provide continuing education for directors through publications, seminars and conferences.

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We also hold regular education sessions in conjunction with board and committee meetings to give directors a deeper understanding of our businesses and operating environment, and to encourage more in-depth discussion in specific areas. The table below lists the education sessions we organized for our directors in 2019.

Month	Topic	Audience1
February	Cyber Security Update – Cloud Risk and Benefits	Risk & Conduct Review Committee (RCRC)
March	IFRS 17 Education Session	Board
May	Discussion on China	Board
May	Data Principles	Board
May	Competitive Update and External Trends	Board
May	North American Real Estate Overview	GNIC
May	Assessment of an External Credit Stress Test Performed on US Insurers	RCRC and GNIC
May	Executive Compensation Trends	MRC
May	Cyber Security Update – Anatomy of an attack	RCRC
May	Update on Solo Capital	RCRC
June	Deep Dive on SLF Philippines Business	Board
June	Hong Kong and Greater Bay Area	Board
June	Deep Dive on SLF Hong Kong Business	Board
July	Canadian Security Intelligence Service (CSIS) Discussion on Cybersecurity	Board
July	Deep Dive on Sun Life Financial Trust and Sun Life Insurance (Canada) Limited	AC
July	Update to the Risks for the Canadian Outlook	RCRC and GNIC
July	Quantum Computing and Encryption	RCRC
November	The Future of Risk Selection and Pricing	Board
November	Update on Hong Kong	Board
November	IFRS 17 Update	AC
November	Information Security Risk Assessment	RCRC

¹  The overall attendance rate of board and committee members at these education sessions was 95%.

Serving on other public company boards and audit committees

The board has a policy limiting the number of public company directorships that directors should hold. Directors who are employed full-time should hold no more than one other public company directorship and directors who are not employed full-time should hold no more than three other public company directorships. Directors are also required to notify the Chairman of the Board, the Chair of the GNIC, the CEO and the Chief Legal Officer prior to accepting a directorship on an additional public, private or not-for-profit board, to provide an opportunity for them to verify that the director continues to have the time and commitment to fulfil his or her obligations to the board and to be satisfied that the director is in compliance with the above policy and no real or apparent conflict of interest would result.

The board has adopted a policy limiting the number of board interlocks among our directors. This policy is intended to promote independence and avoid potential conflicts of interest. No more than two directors may serve together on the board of another public company, and directors may not serve together on the boards of more than two other public companies (each, an interlock). There are currently no interlocks.

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The NYSE corporate governance rules suggest that audit committee members should not serve on more than three public company audit committees. All of the current members of the AC comply with this standard.

Strategic planning

The board sets the strategic direction for the company and approves the annual business plan, including the annual capital and investment plans. It also approves the vision and mission statement and reviews the effectiveness of our strategic planning process on a regular basis.

We hold in-depth strategy sessions with the board every year in June at one of our four pillar locations. In June 2019, our strategic planning meeting was held in Hong Kong. In addition to considering strategic plans and priorities for each of our four business groups, the board focused on the key risks facing the business relating to the global trade environment, the dynamic regulatory environment, climate change, the company’s ability to grow in Asia and execution risk. The board also reviewed trends emerging in technology, banking, insurance and health in Asia, the macroeconomic and political environment in China, and the business, social, political and regulatory environment in Hong Kong. Consideration was also given to the alignment of the strategic plan projections with our risk appetite. The Executive Team reviewed and discussed the feedback and perspectives provided by the board and the board then approved the updated strategic plan at its meeting in July.

Management updates the board on the execution of the strategy and strategic considerations at every regular board meeting. The board must approve any transaction that will have a significant strategic impact on the company.

Risk Management Oversight

Our board is ultimately responsible for ensuring the oversight of all risks across the enterprise and has primary responsibility for taking action to ensure risk management policies, programs and practices are in place. By approving our Risk Management Framework and the Risk Appetite Policy, and providing ongoing oversight of the risk management programs, including through the allocation of risk oversight to its four standing committees, the board monitors that the principal risks are appropriately identified and managed. The board of directors also oversees business and strategic risk through review and approval of the business and strategic plans, and regularly discusses key themes, issues and risks emerging in connection with the design or implementation of these plans.

You can find more information about our risk management practices and the oversight provided by the board and the board committees in the description of our board committees beginning on page 34 and in our annual information form and MD&A for the year ended December 31, 2019 which are available on our website (www.sunlife.com), on SEDAR (www.sedar.com) and on EDGAR (www.sec.gov/edgar.shtml).

Succession planning and talent management

The MRC has primary oversight of talent development and succession planning for senior management and the CEO’s assessments of the other senior officers. The board has primary oversight of talent management, succession planning and the performance assessment of the CEO. The MRC and the board conduct in-depth reviews of succession options relating to senior management positions and the CEO, respectively, and, when appropriate, approves the rotation of senior executives into new roles to broaden their responsibilities and experiences and deepen the pool of internal candidates for senior management positions.

Annually the MRC reviews in detail updated succession plans for Executive Team roles and heads of key control functions. Each committee also reviews the talent and succession plans relevant to their specific functions and responsibilities.

Over the course of the year, the board will typically have direct exposure to over 100 senior executives as they present on their part of the company’s activities.

At least once each year, the board hosts a social event that includes members of management below the Executive Team. These events allow the board to interact and build relationships with high performance and high potential employees who are our future leaders.

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Assessing the board

   Questionnaires   
completed by all directors and
certain senior
executives u 1:1 interviews with the
Chairman u Committees
review and
discuss results u GNIC provides report to Board and
feedback to the Chairman u Board discusses
effectiveness =  Areas for
improvement
identified and
action items
created

The board, board committees and individual directors participate in an annual assessment process. A form of written questionnaire to be completed by each director was designed to produce feedback on the effectiveness with which the board and committees address their most significant business matters during the year and to identify areas for future improvement.

The questionnaires are also used to facilitate assessments of the effectiveness of the Chairman of the Board and the committee chairs. The chairs are assessed against the position descriptions for the board and committee chairs located on our website (www.sunlife.com) and in relationship to their leadership and facilitation of meetings and interactions with management. Certain members of the Executive Team also complete these questionnaires to provide additional perspective.

Further, the directors’ peer evaluation process consists of one-on-one interviews with the Chairman of the Board and feedback from certain senior executives collected by the Corporate Secretary. The Chair of the GNIC provides feedback to the Chairman of the Board based on comments provided by other directors. Through this process, the board and each committee follows up on actions to be taken to continuously improve their effectiveness.

Internal control and management information systems

The board has approved a comprehensive Internal Control Framework that codifies the company’s existing system of internal controls set out in policies and related documents. The Internal Control Framework is based on Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

The AC reviews and monitors the effectiveness of our internal control and management information systems and receives regular reports on internal control from management, including corporate oversight functions in the actuarial, finance, and internal audit departments. This oversight provides reasonable assurance of the reliability of our financial information and the safeguarding of assets.

Shareholder engagement and communications

The Board believes it is important to have constructive engagement with the company’s shareholders to allow shareholders to express their views. Sun Life has well developed practices to facilitate constructive engagement with its investor base. The table below outlines the key contacts and methods that shareholders can use to engage with Sun Life and access important information:

Board of Directors

The Chairman of the Board or his or her designate may communicate from time to time with shareholders, regulators, rating agencies and corporate governance-focused coalitions in connection with governance-related matters, including the results of the annual advisory vote on executive compensation. All such communications are reported to the board of directors no later than its next regularly scheduled meeting. Shareholders can contact the Chairman of the Board as indicated below under “Contacting the Board”.

Senior Management

The CEO, the Chief Financial Officer, the Vice-President, Investor Relations, and/or other senior management meet regularly with financial analysts and institutional investors, and senior management has recently engaged with institutional investors on topics such as gender pay gap and living wages. Senior management of the company also engages with shareholders and other stakeholders through executive presentations and by way of special events and announcements. In 2018 and 2019 these additional opportunities for

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	engagement included an Investor Day hosted by SLF Inc., participation and presentations at peer led financial services conferences and summits and institutional investors’ conferences. Shareholders can contact senior management as indicated below under “Contacting Investor Relations” and can refer to our Investor Relations website at: https://www.sunlife.com/Global/Investors for more information on upcoming presentations and engagements.
Investor Relations	Investor Relations provides shareholder resources including analyst coverage information, financial strength ratings, annual financial information and governance and sustainability practices information. Shareholders can contact Sun Life’s Investor Relations as indicated below under “Contacting Investor Relations”.
Shareholder Services	Our Shareholder Services team focuses on serving the needs of individual shareholders of the company and engages with our shareholders either directly or through our transfer agent, on matters related to annual meeting materials, dividend payments, tax receipts and the management and escalation of shareholder inquiries and complaints. In addition, our Shareholder Services team proactively operates asset reunification programs from time to time to find lost shareholders entitled to unclaimed shares and dividends. Shareholders can contact SLF Inc.’s Shareholder Services team or its transfer agent as indicated below under “Shareholder contacts”.
Live Broadcasts	Management conducts live webcasts of quarterly earnings release conference calls which are accessible to the shareholders and other interested parties, and the company’s annual meeting of shareholders may also be viewed by webcast and shareholders may submit questions through the webcast.

Contacting the Board

Shareholders and other interested parties can contact the directors and the company directly to give feedback:

Board of Directors

Sun Life Financial Inc.

1 York Street, 31^st Floor

Toronto, Ontario, Canada M5J 0B6

Email:     boarddirectors@sunlife.com

Contacting Investor Relations

Investor Relations

Sun Life Financial Inc.

1 York Street, 29^th Floor

Toronto, Ontario, Canada M5J 0B6

Email:     investor.relations@sunlife.com

Disclosure policy

The board reviews and approves the content of all major disclosure documents including the annual and interim financial statements, MD&A, earnings news releases, the annual information form and this Circular.

We strive to be responsive to the disclosure needs of the investment community and other stakeholders and provide timely, consistent and accurate information to the investing public while meeting our disclosure obligations. The GNIC receives a report annually on the status of compliance with and effectiveness of our disclosure and securities trading policy and the policy is reviewed on a regular basis to determine whether revisions are required to respond to legal and regulatory developments, to reflect changes in the business environment or internal operations or to enhance governance.

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The table below lists our corporate governance documents and when they are reviewed. All of them are available on our website (www.sunlife.com). Our Code is also available on SEDAR (www.sedar.com) and on EDGAR (www.sec.gov/edgar.shtml).

Corporate governance document	Review cycle
Board of Directors charter and committee charters	Annually
Position descriptions for directors, including the Chairman of the Board and the committee chairs	Annually
Statement of Corporate Governance Policies and Practices	Annually
Director Independence Policy	Annually
Code of Business Conduct	Annually, in-depth review at least every three years
Board Diversity Policy	Annually
Director Recruitment Guidelines	Annually

Shareholder contacts

For dividend information, change in share registration or address, lost stock certificates, tax forms, estate transfers or dividend reinvestment, please contact:

For shareholders residing in Canada:	For shareholders residing in the U.S.A.:
AST Trust Company (Canada) P.O. Box 700, Station B Montreal, Quebec, Canada H3B 3K3	American Stock Transfer & Trust Company, LLC 6201 15th Ave Brooklyn, New York 11219 U.S.A.

  Phone:
    
Email:       Canada: 1-877-224-1760     International: 1-416-682-3865     sunlifeinquiries@astfinancial.com                                   Phone:
      Email:       U.S.: 1-877-224-1760     International: 1-416-682-3865     sunlifeinquiries@astfinancial.com

Additional contact information for other regions is available at www.sunlife.com/shareholdercontacts

For other shareholder inquiries, please contact:

Shareholder Services

Sun Life Financial Inc.

1 York Street, 31^st Floor

Toronto, Ontario, Canada M5J 0B6

Email:        shareholderservices@sunlife.com

Shareholder proposals

Shareholder proposals for our 2021 annual meeting must be sent to us in writing. We must receive them by 5:00 p.m. (Toronto time) on December 13, 2020 to consider including them in our management information circular for the 2021 meeting.

Send the proposal to the Corporate Secretary at Sun Life Financial Inc.

Fax: Email: Mail: 416-585-9907 boarddirectors@sunlife.com 1 York Street, 31^st Floor Toronto, Ontario, Canada M5J 0B6

Withdrawn proposal

Based on SLF Inc.’s proposed approach to providing additional disclosure on gender pay gap in its Sustainability Report to be published in March, 2020, Vancity Investment Management Inc., 700 West Hastings Street, Vancouver, BC, V6C 1B4, agreed to withdraw a shareholder proposal related to gender pay gap.

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Board committees

The board’s four standing committees are:

• Audit Committee

• Governance, Nomination & Investment Committee

• Management Resources Committee

• Risk & Conduct Review Committee.

The board delegates work to its committees to fulfil its responsibility to supervise the management of the business and affairs of the company. The committee charters are reviewed at least annually and updated as required. All standing committees are comprised entirely of independent directors as defined in our Director Independence Policy.

The committees meet prior to board meetings at which the annual business plan and our annual and quarterly financial results are reviewed and approved, and at other times as required or appropriate.

The Chairman of the Board and the committee chairs review and approve the agenda for each committee meeting. Agendas are developed using the forward agenda and items noted for consideration or follow-up at prior meetings. The committees discuss reports prepared by management, hold private meetings with individual members of management, including the heads of key control functions, and then meet in-camera. Each committee chair reports to the board on the committee’s deliberations and any recommendations that require board approval.

Audit Committee

The primary functions of the AC are to assist the board with its oversight role with respect to:

• the integrity of financial statements and related information provided to shareholders and others

• the company’s compliance with financial regulatory requirements

• the adequacy and effectiveness of the internal control environment implemented and maintained by management

• the qualifications, independence and performance of the external auditor who is accountable to the AC, the board and the shareholders

• the actuarial, finance and internal audit functions and their independence, and assessing the effectiveness of the heads of each function.

Independence and financial literacy

All AC members meet the additional independence standards for audit committee members in our Director Independence Policy (see page 22).

The board has determined that each of Ms. Lewis, Chair of the AC, and Ms. Stymiest has the necessary qualifications to be designated as an “audit committee financial expert” as defined by the U.S. Securities and Exchange Commission (SEC) and has the accounting or related financial management experience required under the rules of the NYSE.

All AC members are “financially literate” within the meaning of the rules of the Canadian Securities Administrators on audit committees and the corporate governance listing standards of the NYSE.

The AC met five times in 2019. The AC met routinely in private with each of Deloitte, the Chief Financial Officer (CFO), the Chief Auditor and the Chief Actuary and met in-camera at each meeting. The AC also meets privately with the Chief Risk Officer and Chief Compliance Officer, as appropriate.

Financial reporting

Management is responsible for preparing our consolidated financial statements and the reporting process. Deloitte is responsible for auditing our consolidated financial statements in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board in the U.S., and the effectiveness of our internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board in the U.S.

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2019 activities

Actuarial

• reviewed reports on method and assumption changes and management actions and their impacts

• received a report on compliance with the Actuarial Governance Policy and approved amendments to the policy

• received an independent third party actuarial peer review of 2018 year-end policy liabilities, and an update on recommendations in the peer review

• reviewed a report on the governance of the Value of New Business

• reviewed a report on Provisions for Adverse Deviations (PfADS) in our actuarial liabilities

• received a report on the National Association of Insurance Commissioners (NAIC) Opinion on asset adequacy for the U.S. Branch.

Finance

• reviewed our principal accounting practices and policies and management’s accounting estimates and judgments with management and Deloitte

• reviewed regular reports from management on International Financial Reporting Standards (IFRS) developments and received education sessions on IFRS 17 and updates on IFRS 17 implementation plans

• reviewed the following documents with management and Deloitte, and recommended them to the board for approval: annual consolidated financial statements, quarterly unaudited consolidated financial statements, MD&A and earnings news releases on our annual and quarterly results (Filings)

• reviewed with management significant events impacting the Filings

• received updates on tax matters, including updates on the impacts of U.S. tax reform.

Internal audit

• reviewed the scope of the annual internal audit plan with management and the Chief Auditor, and approved the budget and staffing resources proposed for executing the plan

• reviewed quarterly reports from the Chief Auditor on audit activities, findings and recommendations and the adequacy and effectiveness of internal control, risk management and governance processes

• reviewed thematic control topics on information security risk, technology risk, third party risk, market conduct risk, change management risk and regulatory/compliance risk

• reviewed the controls assessment of the second line oversight functions from Internal Audit in respect of the Risk Management, Compliance, Finance and Actuarial functions

• reviewed reports from management on the effectiveness of our disclosure controls and procedures, internal control over financial reporting, and the attestation by Deloitte of the effectiveness of our internal controls

• received in depth reports on Internal Audit’s approach to insurance risk, to credit risk, and to market and liquidity risks

• reviewed and recommended to the board for approval amendments to the internal control framework.

Compliance

• received reports from the Chief Compliance Officer on compliance matters within the committee mandate, including compliance with the Code and whistleblowing program.

Finance, internal audit and actuarial functions

• reviewed and was satisfied with the independence of the Internal Audit function

• reviewed Statements of Mandate, Responsibility and Authority, including independence and resources, of the CFO, the Chief Auditor, and the Chief Actuary functions

• reviewed annual objectives and initiatives of the CFO, the Chief Auditor, and the Chief Actuary and assessed annual performance of the CFO, the Chief Auditor, and the Chief Actuary

• reviewed the organizational structures and effectiveness of the Finance, Internal Audit, and Actuarial functions

• reviewed succession plans and talent development in the Finance, Internal Audit, and Actuarial functions

• received business group presentations regarding the Finance, Actuarial, and Internal Audit functions and control environment in Sun Life Asia, Sun Life International, MFS Investment Management, and Sun Life U.S.

• received reports on management’s overall vision and strategy for the finance function

• reviewed and recommended to the GNIC and to the board updates to the AC’s charter.

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External auditor

• conducted the annual evaluation of the external auditor and recommended their re-appointment to the board for approval

• reviewed and accepted the independence of the external auditor and reviewed and approved the Restricting Use of External Auditor Policy

• reviewed and approved the overall scope of the annual audit plan and necessary resources

• reviewed and approved the scope and terms of the external auditor’s engagement and reviewed and recommended their engagement letter and remuneration to the board for approval

• reviewed and approved services and fees relating to the external auditor as required under the Restricting Use of External Auditor Policy

• received updates related to the new auditor reporting model, including the reporting of critical audit matters and key audit matters in the external auditor opinion

• reviewed the results of audits and opinion of the external auditor with respect to our financial statements, including areas identified as significant audit risks, having significant management judgment, and other notable matters.

Office of the Superintendent of Financial Institutions

• the entire board met with OSFI to review its annual examination report and the status of items to be reviewed with management on a regular basis

• received an update on the changes to OSFI’s corporate governance guideline

• received a report on OSFI’s supervisory review.

You can find more information about the AC in our 2019 annual information form which is filed with the Canadian securities regulators (www.sedar.com) and on EDGAR (www.sec.gov/edgar.shtml).

The members of the AC are satisfied with the committee’s mandate and believe that it met the terms of its charter in 2019.

Governance, Nomination & Investment Committee

The GNIC assists the board by:

• developing effective corporate governance guidelines and processes

• developing processes to assess the effectiveness of the board and its committees and the contributions of individual directors, including the Chairman of the Board and the committee chairs

• overseeing the director recruitment guidelines

• identifying individuals with the competencies, skills and qualifications determined by the board to be the best suited to complement the current board composition, while considering the level of diversity on the board, and recommending the director nominees for election

• overseeing policies and procedures to sustain ethical behaviour

• overseeing investment practices, performance, procedures and controls related to the management of the general fund portfolio

• reviewing and monitoring the annual investment plan

• reviewing and approving transactions, either separately or jointly with RCRC, where the acquisition of individual investments for the general account would, on their own, exceed certain limits or ranges in the company’s investment and credit risk management policy.

The GNIC is composed entirely of independent directors. The GNIC met five times in 2019. It met routinely with the Chief Investment Officer and met in-camera at each meeting.

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2019 activities

Corporate governance

• reviewed corporate governance developments and assessed current corporate governance practices

• reviewed subsidiary board governance activities, policies and processes

• reviewed corporate governance disclosure in the meeting materials for the annual meeting and the annual information form

• reviewed reports on our sustainability strategy and practices and reviewed and approved the annual sustainability report; you can find our sustainability report on our website (www.sunlife.com/sustainability)

• received the annual report on the Code program

• reviewed and approved policies regarding board diversity and director independence

• reviewed the adequacy of directors’ and officers’ liability insurance coverage

• reviewed and approved policies regarding disclosure, securities trading and assessment of responsible persons

• approved significant charitable donations and related policies and budgets.

Board governance, renewal and assessment

• reviewed and recommended approval of the management information circular and form of proxy and annual information form

• reviewed the board and committee charters

• assessed the independence of directors and reviewed and made recommendations to the board relating to board and committee composition

• reviewed the process for evaluating the board and directors

• reviewed the director recruitment guidelines and directors’ skills matrix and recommended amendments to the board

• reviewed potential director candidates, including the evergreen list of candidates

• provided oversight of, in consultation with the Chairman of the Board, the orientation program for new directors and education programs for current directors

• received a report from an independent advisor on director compensation, reviewed the director compensation program and recommended amendments to the board.

Investments

• reviewed investment strategy, actions and performance for the general account and the company’s asset management businesses

• received presentations on the North American real estate, private fixed income, and mortgages functions

• reviewed reports on and approved, together with the RCRC, significant investment transactions

• received reports on market trends, conditions and the future outlook

• received presentations and updates on commodities and real estate exposures, de-risking plans and the company’s credit risk profile in light of macro-economic developments

• received reports from the Chief Credit Risk Officer on market outlook, including investment risks and credit events impacting the company’s asset portfolio

• reviewed performance metrics for the company’s asset management businesses

• discussed investment strategy and reviewed and recommended to the board approval of the annual investment plan

• discussed the use of predictive analytics in the investment strategy

• reviewed management’s recommended changes to limits within the investment and credit risk management policy

• reviewed reports and received presentations on topics including U.S. leveraged loans, the assessment of an external credit stress test performed on U.S. insurers, and the Canadian economic outlook.

Investments function

• reviewed the Statement of Mandate, Responsibility and Authority of the Chief Investment Officer, including the adequacy of his resources, and assessed the effectiveness of the Investments function

• reviewed annual objectives and initiatives and assessed the annual performance of the Chief Investment Officer

• reviewed the organizational structure and effectiveness of the Investments function

• reviewed succession plans for the role of Chief Investment Officer and talent development in the Investments function

• reviewed and recommended to the board updates to the GNIC charter.

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Office of the Superintendent of Financial Institutions

• the entire board met with OSFI to review its annual examination report and the status of items to be reviewed with management on a regular basis.

The members of the GNIC are satisfied with the committee’s mandate and believe that it met the terms of its charter in 2019.

Management Resources Committee

The MRC is responsible for assisting the board with its oversight role by:

• providing input to the board on succession plans for the position of CEO and reviewing succession plans for other senior management positions, with the intent of ensuring timely and effective continuity of leadership

• reviewing the development of candidates for senior management positions, including the review of major changes in the overall organizational structure that impact senior management roles

• establishing and overseeing processes for evaluating the performance of the CEO and reviewing the CEO’s assessment of the performance of his or her direct reports

• reviewing and recommending to the board appropriate remuneration for the CEO, corporate Executive Vice-Presidents, Presidents of the business groups and control function leaders

• promoting talent development across the organization

• reviewing the employee value proposition to ensure there is sufficient focus on employee engagement and company culture

• reviewing and recommending to the board appropriate compensation policies, incentive compensation designs and operation, and executive compensation practices

• overseeing worldwide governance for employee pension plans and employee and advisor savings and retirement plans sponsored by subsidiary companies.

The MRC met six times in 2019. It met in camera at the beginning of each quarterly meeting and again after it reviewed reports from its independent advisors and management. The MRC also held private sessions with the Executive Vice-President, Chief Human Resources & Communications Officer at each quarterly meeting.

2019 activities

Executive compensation

• reviewed and approved executive compensation policies and programs, including pension and benefit arrangements, determined appropriate performance measures and targets for incentive compensation plans and approved payouts

• reviewed annual incentive plan design changes and recommended to the board for approval the annual incentive plan targets for 2020 which ensure continued alignment to our business strategy and focus on our Clients as the centre of our strategic objectives

• reviewed and recommended to the board for approval 2020 salary and long-term incentive budgets

• reviewed and considered market trends and regulatory developments in executive compensation, including environmental, social and governance considerations, as well as the economic value added analysis from Institutional Shareholder Services

• reviewed and approved executive compensation disclosure

• commissioned and considered the implications of reports from the independent executive compensation advisor

• reviewed long-term incentive plan and annual incentive plan assessment updates and information on accruals, including the design and operation of both material and non-material incentive plans

• reviewed and recommended amendments to the executive stock option plan and the Sun Share plan.

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Review of senior management

• recommended appropriate CEO compensation to the board based on our corporate performance and his leadership in 2019

• reviewed compensation recommendations for the Corporate Executive Vice-Presidents, Business Group Presidents and other Material Risk Takers and made recommendations to the board

• reviewed and recommended the appointments of the Chief Auditor, Chief Compliance Officer, Chief Credit Risk Officer and President, Sun Life Asia.

Talent development and employee engagement

• conducted an in-depth review of succession options for the CEO and other senior management positions, including at MFS Investment Management, and reviewed development plans for succession candidates

• completed the periodic review of the process for appointing an interim CEO

• reviewed the talent pipeline strength, methodology, metrics and results

• discussed employee relations and engagement matters

• reviewed the results of the global employee engagement survey and the major themes that require action

• reviewed progress against our diversity and inclusion strategy focused on enhancing our inclusive culture and ensuring our workforce reflects the Clients we serve and the communities where we operate, including an update on gender pay equity.

Governance, risk and compliance

• considered the implications of key risks (including human resources risks) across the enterprise on compensation programs and human resources practices

• met with the Chief Risk Officer to review risk performance and management for consideration in compensation assessments

• reviewed the design, approval and governance of material incentive programs to ensure they do not encourage excessive risk taking

• reviewed the compensation of executives who have a material impact on the risk exposure of the company

• reviewed with the Chief Internal Auditor the audit of our compensation programs against OSFI’s expectations and the Financial Stability Board’s Principles for Sound Compensation Practices

• approved amendments to the Canadian staff pension plan

• reviewed an annual assessment of worldwide pension and savings plans and related governance policies

• reviewed the progress on implementing a total compensation approach and framework for executive pay

• evaluated the independence, appointment and terms of engagement for the independent compensation advisor

• reviewed internal reporting on and approved amendments to the compensation and appointment policy

• monitored the human resources risk dashboard

• monitored key human resources developments and executive compensation trends, including CEO pay ratio and quantum of CEO pay, pay-for-performance analysis, gender pay equity, and peer group analysis

• reviewed key aspects of the compensation frameworks for an M&A transaction

• reviewed and recommended updates to the MRC’s charter.

Human resources function

• reviewed the Statement of Mandate, Responsibility and Authority of the Executive Vice-President, Chief Human Resources & Communications Officer, including the adequacy of her resources

• reviewed annual objectives and initiatives and assessed the performance of the Executive Vice-President, Chief Human Resources & Communications Officer

• reviewed the organizational structure and effectiveness of the human resources function

• reviewed succession plans and talent development in the human resources function.

Office of the Superintendent of Financial Institutions

• the entire board met with OSFI to review its annual examination report and the status of items to be reviewed with management on a regular basis.

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The members of the MRC are satisfied with the committee’s mandate and believe that it met the terms of its charter in 2019.

Risk & Conduct Review Committee

The RCRC is a standing committee of the board whose primary functions are to assist the board with its oversight role by:

• providing oversight of the management of current and emerging risks enterprise-wide, and of the risk management function to ensure that management has in place policies, processes and controls designed to identify and effectively manage the significant risks to which the company is exposed and has sufficient capital to underpin those risks

• regularly monitoring that the risk profile is within the agreed risk appetite of the company and that the company’s capital exceeds regulatory capital requirements; and monitoring and recommending to the board for approval, the annual capital plan

• regularly monitoring the liquidity position of the company and that it is within the agreed upon risk appetite

• overseeing the effectiveness of the risk management function and obtain reports from internal audit on the effectiveness of risk controls within the business and risk function

• providing oversight of the inherent and residual risks of potential changes to the company’s strategy and material transactions that are being proposed by the company

• overseeing risk management activities of our subsidiaries and joint ventures under Sun Life management control and risk posed to the company through its joint ventures

• reviewing and approving all risk management policies and reviewing compliance with those policies

• providing the board with an integrated view of oversight of all risk management programs across all board committees, where the board has allocated oversight of specific risk management programs to other board committees

• overseeing compliance with legal and regulatory requirements and the identification and management of compliance risk

• meeting with the senior business and functional leaders who have first hand knowledge of risks and the risk and compliance management programs.

The RCRC met six times in 2019. It routinely held separate private meetings with the Chief Risk Officer and with the Chief Compliance Officer and met in-camera at the beginning and conclusion of each meeting. The RCRC also met in camera with the Chief Credit Risk Officer periodically.

2019 activities

Oversight of risk management

• reviewed the emerging and top risks facing our business activities and the controls being applied to mitigate risks

• received regular briefings and held regular discussions on emerging industry, regulatory and risk management issues and governance trends

• reviewed the risk profile quarterly and its alignment with the Risk Appetite Policy including the risk appetite dashboard

• reviewed in-depth reports on identified key and emerging risks and discussed mitigation strategies with management

• reviewed regular reports on cyber security, including in-depth topics of cloud risks and benefits, the anatomy of an attack, quantum computing and encryption and the information security risk assessment process

• reviewed reports and received presentations on topics, including an outlook for the U.S. leveraged loan market, the assessment of an external credit stress test performed on U.S. insurers and an update to the risks for the Canadian economic outlook

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• reviewed with management the continued enhancement of the company’s operational risk management programs and received a demonstration on the application of the risk and control self-assessment tool

• reviewed the risk appetite statements for operational risks

• received business group presentations regarding risk management within our U.S. and Asia businesses

• reviewed risk considerations under the company’s strategic plan and business plan

• reviewed and recommended board approval of amendments to the Compliance Risk Management Framework, Risk Management Framework and Risk Appetite Policy periodically reviewed and approved amendments to policies for the management and control of risk and received reports on compliance with risk management policies

• considered how risk awareness and risk interconnectedness are embedded within the organization through ongoing discussion with management and regular oversight of risk reports, policies, and other risk management programs

• reviewed risk monitoring programs and reports on risk monitoring activities, including those related to risk appetite, asset liability management risk, product risk, investment and market risks, operational risks and insurance risks

• reviewed reports on compliance with risk policy limits, and monitored related management actions

• discussed with management optimizing the amount of risk taken within approved risk limits

• reviewed report on new products, new business lifetime return on equity, and value of new business

• reviewed stress testing reports

• received annual reports on material outsourcing agreements and reinsurance counterparties

• received an update on first line asset liability management.

Oversight of compliance

• received regular reports from the Chief Compliance Officer on residual Compliance risk assessments, Compliance risk controls assessment, key compliance matters, including compliance with applicable laws and regulations, ethical conduct, whistleblowing, anti-money laundering, market conduct, privacy and bribery and corruption

• received business group presentations regarding compliance within our U.S. and Asia businesses

• received reports on the Code Program

• reviewed and approved the annual Compliance plan

• received updates on key regulatory developments and key regulator interactions

• reviewed policies and programs to monitor compliance with legal and regulatory requirements

• reviewed the annual anti-money laundering risk assessment

• reviewed the Annual Report of the Ombudsman on the effectiveness of and compliance with disclosure procedures for Canada

• received reports on the company’s processes to ensure compliance with regulations relating to related party transactions.

Internal audit view of risk and compliance

• received quarterly reports from Internal Audit in relation to risk and compliance oversight as to the effectiveness of risk and compliance controls within the business and risk function

• received annual reports as to the effectiveness of the company’s anti-money laundering and anti-terrorist financing controls, in accordance with OSFI requirements.

Oversight of capital, liquidity and treasury management

• reviewed the results of Dynamic Capital Adequacy Testing (DCAT) and other scenario analyses, including an external actuarial peer review opinion report on DCAT scenarios, and provided input on the scenarios for 2020

• reviewed and recommended to the board approval of internal and operating capital targets in accordance with OSFI guidelines

• reviewed and recommended to the board approval of the annual capital plan

• reviewed our capital position and financial strength quarterly with management, and made recommendations to the board about allocation of capital, dividends, share repurchases, debt and security redemptions

• reviewed quarterly reports on the liquidity position of the company and that it is within the agreed upon risk appetite

• reviewed and recommended to the board approval the renewal of the base shelf prospectus and MTN prospectus supplement

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• reviewed a sustainability bond framework

• reviewed and recommended to the board approval for the renewal of authorisation to enter into credit facilities and renewal of authorisation to issue class A shares and debentures

• reviewed the model inventory and modifications log for OSFI approved segregated fund capital models

• reviewed and recommended board approval of amendments to the Capital Risk Policy and Capital Management and Liquidity Framework

• reviewed with management the report on the company’s own risk and solvency assessment (ORSA)

• reviewed OSFI’s parental Stand-Alone Capital Framework (Solo Capital) and solo ratios.

Risk monitoring and governance

• reviewed the Statements of Mandate, Responsibility and Authority, including independence and resources, of the Chief Risk Officer, Chief Credit Risk Officer and Chief Compliance Officer and assessed the effectiveness of their functions

• reviewed annual objectives and initiatives of the Chief Risk Officer and Chief Credit Risk Officer and assessed the annual performance of the Chief Risk Officer, Chief Credit Risk Officer and Chief Compliance Officer

• reviewed the organizational structure and effectiveness of the risk management and compliance function

• reviewed succession plans and talent development in the compliance and risk management functions

• reviewed and approved amendments to the Mergers & Acquisitions Policy

• reviewed specific risk reports to provide an integrated view of oversight of risk management programs to the board, including

^¡  the implications of key risks across the enterprise on compensation programs at the MRC

^¡  risk monitoring activities related to investment and market risks at the GNIC

^¡  risk considerations in the strategic plan at its annual strategy session

• reviewed and recommended to the GNIC and to the board updates to the RCRC charter.

Office of the Superintendent of Financial Institutions

• the entire board met with OSFI to review its annual examination report and the status of items to be reviewed with management on a regular basis

• received an update on the changes to OSFI’s corporate governance guideline

• received reports on OSFI’s supervisory reviews.

The members of the RCRC are satisfied with the committee’s mandate and believe that it met the terms of its charter in 2019.

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Director compensation

Compensation discussion and analysis

Our philosophy, approach and process

We have two primary compensation objectives:

• to align directors’ interests with the interests of our shareholders

• to fairly and competitively compensate directors in order to attract well qualified board members.

The board’s philosophy is to compensate directors fairly for the time and effort required to fulfil their responsibilities and contribute to the effective leadership and direction of the enterprise.

We compare the target pay for our directors (excluding the Chairman of the Board and the CEO) against the total compensation (annual retainer and meeting fees) paid to directors of Canadian financial services sector peers. We determine the median pay for the “typical director” at other financial institutions by reviewing publicly available information from our peer group (see below). We calculate the amount that a typical director at each financial institution would receive in a year assuming an equal number of board and committee meetings at each institution and an equal number of committee memberships for each director. We also benchmark the total compensation paid and trends in director compensation using a broad survey of the public companies included in the TSX60. We use these comparisons to assess the competitiveness of our directors’ compensation program every two years.

We benchmark pay for the Chairman of the Board against the compensation paid to the chairs of companies in our peer group. The median total compensation among peer board chairs is used as a baseline to assess the competitiveness of the Chairman’s compensation. The GNIC also considers other qualitative factors when making recommendations to the board on the Chairman’s compensation.

Our peer group is made up of six major Canadian banks and two insurance companies.   We selected these companies as peers because they are leading financial services organizations in Canada that we believe recruit director candidates with similar skills and experience as we seek. •  Bank of Montreal •  CIBC •  Great West Life •  Manulife Financial •  National Bank of Canada •  RBC •  The Bank of Nova Scotia •  The Toronto-Dominion Bank

The GNIC considers the responsibilities and time commitment required to be an effective director as well as the competitiveness of our program relative to our peer group and makes recommendations to the board.

Program structure

Directors receive an annual retainer, committee retainers and travel fees for serving on the boards of SLF Inc. and Sun Life Assurance. The cost is shared equally between the two companies. Directors are also reimbursed for travel and other expenses they incur to attend our board and committee meetings. Committee chairs receive an additional retainer because of their increased responsibilities.

Directors receive a portion of their annual board retainer in DSUs (see below). The Chairman of the Board receives a separate annual retainer that includes a portion in DSUs (see below). He is also reimbursed for travel and other expenses he incurs while carrying out his duties as Chairman. He does not receive travel fees.

Mr. Connor does not receive any director compensation because he is our CEO. Details regarding Mr. Connor’s compensation can be found in the Executive Compensation section of this Circular beginning on page 47.

MANAGEMENT INFORMATION CIRCULAR 2020  |   43

Directors’ Compensation

The GNIC reviews director compensation every two years. In 2019, the GNIC retained Meridian Compensation Partners (Meridian), an independent compensation consultant, to provide a competitive review of our director compensation program. Meridian used data from our peer group and data from a 2018 Meridian survey of the TSX60. Based on Meridian’s analysis the GNIC recommended, and the board approved, the compensation structure set out below effective January 1, 2019:

Chairman of the Board’s retainer	$	440,0001
Directors’ retainers	$	225,0002
Committee chairs’ retainers	$	45,000
Committee members’ retainers	$	10,000
Travel Fees	$	1,500 – 3,000 per meeting3

¹  $140,000 of which must be received in DSUs with the balance to be received in cash, DSUs and/or shares.

²  $120,000 of which must be received in DSUs with the balance to be received in cash, DSUs and/or shares.

³  Travel fees are (i) $1,500 when travel time for a round trip was two to six hours and (ii) $3,000 when travel time for a round trip was six hours or more.

The directors are required to receive at least $120,000 of their retainers in DSUs (approximately 53% of their annual director retainer) and the Chairman of the Board is required to receive at least $140,000 of his retainer in DSUs. Directors can choose to receive the balance of their compensation in any combination of cash, additional DSUs and common shares of SLF Inc. acquired on the open market. Directors cannot exercise their DSUs until they leave the board. All DSU awards are paid out in cash.

Independent directors do not participate in the company’s stock option plan.

Share ownership guidelines

We believe it is important for our directors to have a significant stake in the company to align their interests with those of our shareholders.

Directors (other than Mr. Connor) must own at least $735,000 (7x the cash portion of the independent director base retainer) in common shares and/or DSUs within five years of joining the board. Directors may not engage in equity monetization transactions, including pledges or hedges involving securities of SLF Inc. (see page 59).

As CEO, Mr. Connor has separate share ownership requirements which are described on page 59.

44  |  MANAGEMENT INFORMATION CIRCULAR 2020

Share ownership

The table below shows the common shares and DSUs each director (other than Mr. Connor) held as of February 28, 2020 and March 1, 2019, the portion of their base retainer they chose to receive in common shares or DSUs (excluding the portion of the annual board retainer that is automatically paid in DSUs) and the percentage of total annual board retainer received in common shares or DSUs.

Director	Year		Number of common shares		Number of DSUs		Total number of common shares and DSUs		Total value of common shares and DSUs ($)		Guideline met (✓) or value ($) required to meet guideline		Portion chosen as common shares or DSUs (%)1			Total received in common shares or DSUs (%)
William D. Anderson		2020		15,600		27,836		43,436		2,518,854		✓		–			32
		2019		15,600		22,605		38,205		1,924,386		✓		33			54
		Change		0		5,231		5,231		594,468
Stephanie L. Coyles		2020		5,100		7,058		12,158		705,042		29,958		–	2		53	2
		2019		3,600		4,687		8,287		417,416		317,584		100			100
		Change		1,500		2,371		3,871		287,626
Martin J. G. Glynn		2020		10,316		22,077		32,393		1,878,470		✓		–			53
		2019		10,316		19,152		29,468		1,484,303		✓		–			53
		Change		0		2,925		2,925		394,167
Ashok K. Gupta		2020		462		4,391		4,853		281,425		453,575		100			100
		2019		0		1,852		1,852		93,285		641,715		30			67
		Change		462		2,539		3,001		188,140
M. Marianne Harris		2020		5,961		34,229		40,190		2,330,618		✓		100			100
		2019		5,743		27,986		33,729		1,698,930		✓		100			100
		Change		218		6,243		6,461		631,688
Sara Grootwassink Lewis		2020		5,680		24,880		30,560		1,772,174		✓		–			53
		2019		5,500		21,060		26,560		1,337,827		✓		–			53
		Change		180		3,820		4,000		434,347
James M. Peck		2020		0		4,695		4,695		272,263		462,737		100			100
		2019		0		0		0		0		735,000		100			100
		Change		0		4,695		4,695		272,263
Scott F. Powers		2020		975		17,061		18,036		1,045,908		✓		75			88
		2019		975		12,209		13,184		664,078		70,922		75			88
		Change		0		4,852		4,852		381,830
Hugh D. Segal		2020		8,657		26,014		34,671		2,010,571		✓		–			53
		2019		8,657		22,944		31,601		1,591,742		✓		–			53
		Change		0		3,070		3,070		418,829
Barbara G. Stymiest		2020		5,000		40,295		45,295		2,626,657		✓		90			95
		2019		5,000		34,532		39,532		1,991,227		✓		75			88
		Change		0		5,763		5,763		635,430

¹  The % reflects the amount of compensation received in common shares or DSUs that directors can otherwise elect to receive in cash.

²  Ms. Coyles uses all of her after tax director income to purchase common shares of the company.

The closing value of our common shares on the TSX was $57.99 on February 28, 2020 and $50.37 on March 1, 2019.

MANAGEMENT INFORMATION CIRCULAR 2020  |   45

Compensation details

Director compensation table

We paid a total of $2,966,905 to the directors of SLF Inc. and Sun Life Assurance in 2019, compared to $2,686,131 in 2018.

Name

Fees earned ($)

Share- based awards ($)

Travel fees ($)

Option- based awards1 ($)

Non-equity incentive plan compen- sation ($)

Pension value ($)

All other compen- sation2 ($)

Total ($)

William D. Anderson

201,000

239,000

–

–

–

–

–

440,000

Stephanie L. Coyles

–

245,000

3,000

–

–

–

–

248,000

Martin J. G. Glynn

125,000

120,000

15,000

–

–

–

–

260,000

Ashok K. Gupta

88,037

157,500

15,000

–

–

–

–

260,537

M. Marianne Harris

–

280,000

3,000

–

–

–

–

283,000

Sara Grootwassink Lewis

115,000

165,000

18,000

–

–

–

–

298,000

Christopher J. McCormick

–

87,500

3,000

–

–

–

6,868

97,368

James M. Peck

–

245,000

12,000

–

–

–

–

257,000

Scott F. Powers

40,000

240,000

15,000

–

–

–

–

295,000

Hugh D. Segal

125,000

120,000

–

–

–

–

–

245,000

Barbara G. Stymiest

40,000

240,000

3,000

–

–

–

–

283,000

TOTAL

2,966,905

¹  Independent directors do not participate in the company’s stock option plan.

²  The amount for Mr. McCormick was a charitable donation made on his behalf when he retired from the board.

46  |  MANAGEMENT INFORMATION CIRCULAR 2020

Executive compensation

This section discusses our approach to executive compensation, how we make decisions, the different components of our programs, what we paid our named executive officers in 2019 and the rationale for our decisions. Management prepared the compensation discussion and analysis and compensation details provided below on behalf of the Management Resources Committee (MRC). It was reviewed and approved by the MRC and our board. All figures are in Canadian dollars unless stated otherwise.

Contents

Letter to shareholders		48
Compensation discussion and analysis		51
●	2019 compensation decisions and approvals	51
●	Changes for 2020	52
●	Comparing shareholder value to executive compensation	53
●	Compensation philosophy and approach	54
●	Compensation governance	54
●	Alignment of compensation programs and risk management	56
●	Decision-making cycle	58
●	Our compensation program	60
Compensation details		72
●	Individual pay and performance outcomes	72
●	Summary compensation table	79
●	Incentive plan awards	81
●	Pension benefits	88
●	Termination and change of control benefits	89
●	Aggregate compensation for Material Risk Takers	94
●	Securities authorized for issue under equity compensation plans	95

MANAGEMENT INFORMATION CIRCULAR 2020  |   47

Letter to shareholders

To our fellow shareholders:

2019 was a strong year for your company with good share price growth and continued momentum in our Client for Life strategy. Across our businesses, we put Clients at the centre of everything that we do. We strengthened our relationships with Canadians through Lumino Health, our innovative digital health platform. We enabled American families to make better choices for insurance protection through our Sun Life + Maxwell Health platform. In Asia, we rolled out mobile apps for Clients in all seven of our local markets. In Asset Management, through internal actions and acquisitions, we continued to expand our capability to provide a full-spectrum of solutions built on alternative asset classes for our Clients. These actions and others advanced your company towards our ambitious goal of becoming one of the best insurance and asset management companies in the world and delivering on our purpose: to help our Clients achieve lifetime financial security and live healthier lives.

Ensuring pay aligns to performance is a fundamental part of our compensation philosophy. In the following pages, we share our approach to compensation that reflects your company’s performance in 2019 as well as key governance activities over the past year.

Company performance highlights

We delivered solid financial performance with underlying net income exceeding $3 billion, underlying ROE of 14.3%, growth in sales and value of new business, and global assets under management reaching $1.1 trillion.

Basis	Measure	2019	2018	Year-over-year Change
Reported	Net Income	$2,618 million	$2,522 million	4%
	ROE	12.3%	12.1%	Up 0.2 percentage points
	Earnings per Share	$4.40	$4.14	6%
Underlying	Net Income	$3,057 million	$2,947 million	4%1
	ROE	14.3%	14.2%	Up 0.1 percentage points
	Earnings per Share	$5.16	$4.86	6%

¹  Excluding the one-time earnings of $110M from Par Seed Capital in 2018, Underlying Net Income grew by 8% vs. prior year

	Value	Year-over-year Change
Insurance Sales	$3,524 million	11%
Wealth Sales	$159 billion	16%
Value of New Business (VNB)	$1,206 million	5%
Global assets under management (AUM)	$1,099 billion	16%

• All of our business groups performed well, with good growth in Underlying Net Income and sales. Assets Under Management grew 16% to reach $1.1 trillion, reflecting underlying business growth and strong equity market returns

• The Value of New Business grew 5%, reflecting increased sales volume tempered by the impact of product mix and low interest rates

• Annualized total shareholder return (TSR), was 36%, 9%, and 11% for the 1-, 3-, and 5-year periods ending December 31, 2019. Our 5-year TSR ranks in the top quartile among North American and global insurance competitors

• Executing on our Client-centric strategy, we improved Client experience as assessed by Client Index—our Client survey that measures proactive contact, ease of doing business, and problem resolution

• We completed our acquisition of a majority stake in BentallGreenOak, announced our intention to acquire a majority stake in InfraRed Capital Partners, a global infrastructure investment manager, and signed a bancassurance distribution agreement with TPBank in Vietnam

• We also re-purchased and cancelled 11.5 million Sun Life common shares in 2019, and increased the common shareholder dividend by 10%.

48  |  MANAGEMENT INFORMATION CIRCULAR 2020

Compensation highlights in 2019

Our approach to compensation is based on guiding principles (page 54) that align pay decisions with shareholder interests, while providing incentives and linking rewards to the longer-term success of your company. Over the course of 2019, the MRC executed against its full mandate as outlined on page 38. We carefully assessed talent and compensation programs, practices, and outcomes and at times exercised discretion when deemed appropriate. We brought an independent expert to assist us in reviewing matters related to compensation to ensure the appropriate challenge was in place.

With consideration to our 2019 performance and the recommendations of the MRC, the board approved the following decisions aligning pay to performance, the details of which are shown in the following pages:

• Total company performance factor of 90% for the annual incentive plan (AIP). This is down from our 2018 factor of 108%. While Underlying EPS and sales grew well year-over-year and exceeded our goals, the 2019 AIP result is below target as Reported EPS and VNB were below plan due in part to a decline in interest rates during the year

• AIP payouts across the company were determined taking into account the unique circumstances in each business group. A modest degree of discretion was applied, both positive and negative, which, in aggregate, increased the payout from the calculated value. Discretion was exercised to ensure final AIP outcomes aligned with overall performance of each business, including underlying results, and with consideration to changes being implemented in the AIP in 2020 described below. This use of discretion does not affect the CEO’s or CFO’s payouts, which are based on the 90% total company performance factor.

• Executive Sun Share Unit Plan (Sun Shares) payouts. Final payout value reflects very strong relative TSR over the last three years (2017 to 2019) and resulted in a performance factor of 133%. This is up from 118% for the 2016-to-2018 period

• 2020 pay and performance targets, based on our 2020 plan and strategic priorities

• 2020 mid and long-term incentive awards, the ultimate value of which will reflect our performance over the next three to ten years.

Overall, our incentive plans delivered a below-target AIP result in a year in which we did not meet all of our ambitious annual business objectives, and an above-target Sun Share result reflecting strong share price growth, dividends and TSR performance relative to peers over the long term. The MRC sought input from the Chief Risk Officer and is confident that these results were delivered without excessive risk taking.

CEO performance and compensation

When determining compensation for the CEO, we consider target compensation set with the context of market data, business and individual performance versus annual strategic and financial goals, funding under the compensation plans, and results in the broader context of Client, employee, and shareholder experience. The board’s assessment of the CEO’s performance includes consideration of results versus short, medium, and long-term goals, broader strategic and financial performance, input from the CEO and others as needed, and feedback from all board members. The MRC considers the board’s performance assessment, reviews compensation history and market information, and seeks input from our independent advisor, in making a compensation recommendation to the board.

Following the review, the MRC recommended, and the board approved total direct compensation (TDC) for Mr. Connor of $9,160,000, $160,000 above his target of $9,000,000 and $140,000 below 2018 actual TDC. 2019 annual incentive compensation was awarded at $1,810,000, reflecting the 90% total company performance factor and a 122% individual performance multiplier, which was 10% above target and 18% below 2018. The table on page 73 shows the strong performance alignment between the compensation outcomes for the CEO and the value created for shareholders over time.

In addition, the MRC recommended and the board approved target TDC of $9,250,000 for Mr. Connor in 2020, $250,000 above 2019, with the increase delivered in long-term incentives, which we believe is appropriate considering competitive pay levels, the scope and complexity of the role, and Mr. Connor’s leadership in driving the performance of the company, delivering sustainable value to stakeholders, and building for the future.

MANAGEMENT INFORMATION CIRCULAR 2020  |   49

Advancing our strategic and talent objectives

In 2019, the MRC reviewed the results of our actions for Clients and the rewards generated as part of the Client measures in the AIP. The MRC continued to review and approve compensation plans that support the growth and evolution of Sun Life Capital Management. In support of our Purpose, the MRC approved the introduction of auto-enrollment for maximum participation in our Canadian retirement savings plan, a step to help our employees achieve lifetime financial security.

Talent acquisition, development, engagement, and succession planning are critical areas of focus for the MRC. We believe we have great talent at your company and continue to invest for the future. In 2019, the MRC discussed HR Risk management using a new framework designed to provide a future-looking assessment of our workforce’s sufficiency. Recognizing diversity and inclusion as key drivers of innovation and meeting Client needs, the MRC reviewed analyses on gender pay to ensure there is no systemic bias in pay decisions. We are proud that your company was once again named to the Bloomberg Gender Equality Index.

Looking forward

We continually challenge how our compensation programs align to business strategy and positive outcomes for shareholders and Clients. In 2020, supporting our focus on strategic alignment, the earnings measure in the AIP will evolve to an equally weighted assessment of reported and underlying EPS. This approach continues to recognize reported net income as a key funding measure and ensures alignment to factors impacting shareholders such as interest rates and equity markets, balanced by recognizing underlying net income as a key business performance metric for both shareholders and management. The change also increases ease of understanding for shareholders and employees by directly aligning to published financial results, and ensures our incentive design continues to be competitive with market pay practices.

Have your say

In 2019, we received positive feedback (94.9% in favour) on our compensation program from our shareholders, through our advisory vote on executive compensation (‘say on pay’) and that helps us to ensure our decisions and actions align with shareholder expectations.

We aim to provide you with the information that instills confidence in the decisions taken and seek feedback on what more you want to know. We believe that an open dialogue is important and invite you to contact us at boarddirectors@sunlife.com on matters pertaining to executive compensation, and encourage you to continue to take advantage of your ‘say on pay’ again in 2020.

Sincerely,

M. Marianne Harris	Bill Anderson, FCPA, FCA
Chair, Management Resources Committee	Chairman of the Board

50  |  MANAGEMENT INFORMATION CIRCULAR 2020

Compensation discussion and analysis (CD&A)

2019 compensation decisions and approvals

We evaluate our business performance to assess whether our targets set at the beginning of the year remain appropriate, whether external perceptions of our performance are consistent with the calculated results from our formulae, and the extent to which delivered results represent long-term sustainable performance or one-off events.

The table below summarizes the 2019 compensation decisions for the individuals who are our named executive officers for 2019. Because one executive officer in the “top-five highest paid” retired before the end of the year, we have a sixth executive officer for 2019. We describe the plans, payouts and new grants in more detail starting on page 60. The increase in option exercises over the previous year was facilitated by the addition of an automatic securities disposition plan (ASDP—see Changes for 2020 on page 52), partly to help exercise a promotion-related option grant that was nearing the end of its 10-year life in a pre-planned manner.

											Long Term Incentives (000s)
					Annual Incentives						Sun Shares				Options				SLC Phantom
	Annualized salary (000s)				Actual (000s)		Target ($)				Value Vested / Paid (2017 grant)		Value Granted		Value Exercised		Value Granted		Value Granted
Named Executive   Officer	2019		2020		2019		2019		2020		2020		2020		2019		2020		2020
Dean A. Connor President & Chief Executive Officer		1,100		1,100		1,810		1,650		1,650		7,892		4,875		8,597		1,625		–
Kevin D. Strain Executive Vice-President & Chief Financial Officer		600		650		825		750		815		2,368		1,650		950		550		–
Stephen C. Peacher President, Sun Life Capital Management		US 580		US 580		US 1,595		US 1,450		US 1,450		US 3,117		US 625		US 296		US 625		US 1,250
Daniel R. Fishbein President, Sun Life U.S.		US 575		US 600		US 890		US 725		US 760		US 1,700		US 1,125		–		US 375		–
Claude A. Accum President, Sun Life Asia		550		–		700		690		–		1,579		–		–		–		–
Jacques Goulet President, Sun Life Canada		550		600		675		690		755		–		1,650		–		550		–

Summaries of performance for each named executive officer (“NEO”) that formed the basis for compensation decisions start on page 72.

The value of the 2017 Sun Share awards paid in 2020 reflects the change in share price, accumulated dividends and application of the 133% performance factor. See page 64 for details about the performance factor for Sun Share awards.

MANAGEMENT INFORMATION CIRCULAR 2020  |   51

Changes for 2020

Management Resources Committee

The MRC conducted its annual review of our compensation programs and approved the following changes for 2020.

Annual Incentive Plan

Earnings per share (EPS) (AIP basis) account for 50% of the AIP business results. EPS (AIP basis) is defined as Reported Net Income less Other Adjustments, divided by the weighted average number of common shares outstanding and is measured on a constant-currency basis.

For 2020, EPS will no longer be calculated on a unique AIP basis. The business results used for AIP will change to 25% Reported EPS and 25% Underlying EPS. We made this change to reflect the importance of Underlying Net Income, along with Reported Net Income, as key business metrics that drive shareholder value. This ensures we pay our employees in the same way we talk about our results, both internally and externally, which adds transparency and aligns more closely to our peers. There is no change to Value of New Business (“VNB”) (AIP Basis). Within Client measures, Client Business Outcomes are a custom and dynamic set of key performance measures designed to promote our strategy to place our Clients at the centre of everything we do.

The mix of business results for NEOs will be:

• CEO and CFO: 25% total company Reported EPS, 25% total company Underlying EPS, 25% VNB, and 25% Client measures

• NEOs excluding the President, Sun Life Capital Management: 25% total company Reported EPS, and relevant business group results for Underlying Earnings (25%), VNB (25%) and Client measures (25%)

• In 2020, compensation for the President, Sun Life Capital Management will be tied to the performance of that business group, including Client outcomes, investment performance and financial measures.

President, Sun Life Capital Management’s long-term incentive plan

The mix of LTI vehicles for the President, Sun Life Capital Management’s 2020 grant consists of 25% stock options, 25% Senior Executive Sun Shares, and 50% SLC Management phantom shares (with a 50%-50% split on SLC Management Fixed Income and BentallGreenOak (BGO) performance metrics), to reflect the strategic emphasis for his role.

Retirement treatment of mid and long-term incentives

We modified the specific conditions an employee needs to meet to qualify for retirement under each of our mid and long-term incentive plans. For awards granted on or after July 31, 2019:

• Be at least 55 years old

• Have 5 or more years of continuous service

• Sum of age and years of service being at least 65

• Voluntarily terminate employment and provide at least six months’ notice

• Agree not to compete with Sun Life or solicit any of our employees or Clients for 12 months under the option plan, and for the length of time that units remain outstanding under the Sun Share Unit Plan.

Executive stock option plan: automatic securities disposition plan

In 2019, we implemented an ASDP program, which allows for the exercise of stock options in a pre-planned manner and ensures intent to transact is registered while not in possession of material non-public information.

Auto-enrollment in the Canadian defined contribution (DC) pension plan

Approved to begin in 2020, all new Canadian employees will be auto-enrolled at the DC employee contribution level which maximizes the employer match under the DC Plan, with an option for employees to adjust their contribution to suit their needs. This action follows successful implementation of auto-enrolment in 2019 for U.S. new employees, and is aligned to a key element of our Purpose: helping Clients achieve lifetime financial security. Introducing auto-enrolment in Canada is another reflection of leadership in the Canadian DC market.

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Comparing shareholder value to executive compensation

The graph below compares the cumulative value of $100 invested in Sun Life shares for the five years starting on December 31, 2014 with the value of $100 invested in each of two indices, S&P/TSX Composite Index and the S&P/TSX Composite Financials Index, for the same period, assuming dividends were reinvested. The graph also shows total compensation, as outlined in the summary compensation table on page 79, for the named executive officers (NEO) (limited to the CEO, CFO and the next three highest paid named executive officers for each year) as a dollar value and indexed to 100 over the same period.

The graph shows that Sun Life’s returns have generally outpaced other indices and the growth in NEO total compensation over the period. For more information on the alignment between CEO pay and shareholder value, see page 73.

Year ended December 31	2014		2015		2016		2017		2018		2019
SLF Inc.		100		107		132		138		125		170
S&P/TSX Composite Index		100		92		111		121		110		136
S&P/TSX Composite Financials Index		100		98		122		138		125		152
NEO Total Compensation Index		100		104		130		140		158		141
Total compensation of top-5 paid NEOs (millions)	$	19.7	$	20.5	$	25.6	$	27.6	$	31.0	$	27.8

Cost of management ratio

The cost of management ratio below expresses total compensation, as outlined in the summary compensation table, of the five most highly paid executive officers as a percentage of underlying net income attributed to shareholders. This table shows that the cost of management ratio is the same as it was in 2015.

Cost of management ratio	2015		2016		2017		2018		2019
Total compensation of top-5 paid NEOs (millions)	$	20.5	$	25.6	$	27.6	$	31.0	$	27.8
Underlying net income attributed to shareholders (millions)	$	2,305	$	2,335	$	2,546	$	2,947	$	3,057
Cost of management ratio		0.9%		1.1%		1.1%		1.1%		0.9%

MANAGEMENT INFORMATION CIRCULAR 2020  |   53

Compensation philosophy and approach

  Compensation principles

Our approach to compensation is guided by five principles for designing compensation programs that:

1. align to our business strategy, such as our focus on Clients

2. provide incentive to meet strategic business priorities

3. support fairness for all employees, and reward top performance

4. are simple and clearly communicated

5. ensure alignment with the investor experience of short, mid and long-term performance and create a longer-term ownership mindset for senior leaders, including leading share ownership requirements.

  How we ensure alignment

The following are four ways we ensure our pay and performance are aligned with shareholder interests:

1. at-risk pay (including variable and deferred compensation) accounts for 88% of total compensation paid to our CEO and 77% for the other Executive Team members

2. performance measures in the AIP that reflect value added for shareholders through earnings, profitable sales and progress against strategic priorities across the enterprise

3. performance targets in the AIP that are based on the annual business plan approved by the board and aligned with the company’s risk framework

4. absolute and relative shareholder returns that are reflected in our Sun Share and LTI programs.

  Our approach to setting compensation

• On average, we target compensation at the median (or middle) of pay levels of peer companies and benchmark target total compensation to ensure the target market position for each role is appropriate

• We align perquisites, benefits and pension arrangements with the median of practices among peer companies. The value of these benefits does not fluctuate significantly with business or individual performance

• At the end of the year, we adjust the actual pay based on achieving both business and individual performance goals. If we deliver superior performance above target, that will result in pay above target market position. Performance below expectations will result in pay below target market position

• We use a formal decision-making process that incorporates assessment of performance and value added for shareholders, benchmarking against peers, independent advice, an annual decision-making cycle and the use of board discretion when appropriate.

Compensation governance

Management Resources Committee involvement and composition

The MRC oversees compensation design and outcomes, focusing on programs that are considered material to the company. The MRC and board exercise control over the compensation programs at MFS Investment Management through approval of the annual salary budget, bonus pool and long-term equity awards.

Composed entirely of independent directors, MRC members have direct experience related to executive compensation, succession planning and risk management. Collectively, they have the expertise required to make decisions on executive compensation and governance.

The profiles of all directors are contained in the section on director nominees starting on page 11. Additional committee-specific information relevant to MRC members is provided below.

• M. Marianne Harris, Chair of the MRC, was the Managing Director and President, Corporate and Investment Banking of Merrill Lynch Canada from 2006 to 2013 and Head of Financial Institutions Group Americas from 2003 to 2006 in New York. Ms. Harris has expertise in governance, stakeholder relations, risk and regulation and considerable experience in the design and administration of compensation programs as well as the governance and operation of executive compensation. She is currently on the pension committee of one other publicly traded company. Ms. Harris served on the human resources committees of two other public companies between 2014 and August 2018 and was Chair of the Board of the Investment Industry Regulatory Organization of Canada from 2012 to September 2018.

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• Martin J.G. Glynn is Chair of the Public Sector Pension (PSP) Investment Board. He was President and Chief Executive Officer of HSBC Bank USA from 2003 to 2006 and President and Chief Executive Officer of HSBC Bank Canada from 1999 to 2003. In those roles he had responsibility for human resources and compensation matters in Canada and the U.S. Mr. Glynn currently serves on the compensation committee of one other publicly traded company and was a member of the Human Resources and Compensation Committee of the PSP from 2014 to early 2018 when he became the Chair of PSP and chaired the same committee from May 2017 to early 2018.

• Ashok K. Gupta has 40 years of experience in the insurance and financial services industry in the UK, holding a number of senior executive, advisor and actuarial positions. He was an advisor to the Group Chief Executive Officer of Old Mutual Group plc from 2010 to 2013, Operating Partner of the Pearl Group plc (now Phoenix Group Holdings) from 2004 to 2009, and Chief Executive Officer of Kinnect of Lloyd’s of London from 2001 to 2004. Mr. Gupta is currently Chairman of EValue Ltd. and a director of JPMorgan European Smaller Companies Trust PLC. He also served on the Remuneration Committee of Old Mutual Wealth Management Limited (now Quilter PLC) from 2013 to 2014. These roles had responsibility for executive compensation and executive development.

• James M. Peck was President & Chief Executive Officer of TransUnion, a global risk and information solutions provider from 2012 until May 2019 and led the company through its IPO in 2015. Prior to joining TransUnion in 2012, he was Chief Executive Officer, LexisNexis Risk Solutions with Reed Elsevier (now RELX Group), a FTSE 100 multinational information and analytics company, from 2004 to 2012. In those roles, Mr. Peck had responsibility for human resources matters and compensation programs.

• Scott F. Powers was the President and Chief Executive Officer of State Street Global Advisors from 2008 to 2015 where he gained experience in governance, risk management and oversight for compensation programs. He has experience in the design and administration of compensation in the asset management industry. Mr. Powers currently chairs the compensation and management development committee of one other publicly traded company.

The MRC’s membership is reviewed annually to ensure members have the experience and expertise required to fulfil the MRC’s mandate. More information on the operation and activities of the MRC can be found on page 38.

Incentive Plan Review Group

A group of senior executives from finance, actuarial, risk management, legal/compliance, human resources and internal audit comprise our Incentive Plan Review Group (IPRG) and participate in the compensation decision-making process. The IPRG meets prior to each MRC meeting to review the design of our incentive compensation plans, performance targets and assessments, and information on risk management. It provides input for the CEO, MRC and the board to consider as part of their final recommendations and approvals. For more information on our decision-making cycle is available on page 58.

Independent advice

In 2016, the MRC retained Pay Governance LLC (Pay Governance) as its independent consultant. Pay Governance provides advice on the strategy, design and quantum of compensation programs for the CEO and top executive officers and on our executive compensation governance, including advice on compensation programs relating to MFS Investment Management.

The MRC approves the engagement of the independent consultant, the proposed work plan and all associated fees. It considers any other work to be assigned to the independent consultant that is material in nature and will only approve it if it believes the work will not compromise the consultants’ independence as advisor to the MRC.

The independent consultant advises the MRC throughout the year, giving input on policy recommendations, helping assess the appropriateness of our executive compensation programs including design and outcomes and reviewing this circular. The MRC considers information provided by the independent consultant and makes recommendations to the board for approval. The board is ultimately responsible for compensation decisions.

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The table below shows the fees paid to Pay Governance over the last two years.

Executive compensation-related fees	2019		2018
Pay Governance	US$	176,643	US$	128,884

Alignment of compensation programs and risk management

Our risk management approach

Our compensation programs are aligned to the organization’s risk management practices through our: •  Governance structure for the design and approval of incentive compensation plans •  Processes used to support the alignment of compensation and risk management. Described in more detail below, the MRC concluded that we did not take risks beyond our risk appetite to generate the business results that led to incentive payouts.

We use the “three-lines-of-defence” model as a means to ensure roles and responsibilities are consistent, transparent and clearly documented for decision-making, risk management and control in support of effective governance. Under the model: •  The first line refers to business roles who own, identify, and manage business risks •  The second line is the oversight functions, which are independent of the first line, and oversee the risk management programs through the risk framework and policies. Independence of the second line is supported with no direct business unit reporting relationships or direct incentive measures based on individual business unit performance •  The third line of defence is the internal audit function or a third party, which provides independent assurance as to the effectiveness of risk management, control and governance processes.

Governance structure for approval of incentive plans

The MRC reviews the annual, mid and long-term incentive plans, which represent 91% of the total spend on incentive programs across the enterprise. The remaining plans are generally sales compensation plans developed within approved frameworks and managed through the three-lines-of-defence model. Amounts and key risks under these plans are reviewed by the MRC on an annual basis.

In addition to formal approval processes, the following actions also support the alignment of compensation and risk management:

• Identification of Material Risk Takers (MRTs). MRTs are individuals in roles having a material impact on our risk exposure. Pay decisions for MRTs are reviewed by the MRC and alignment of their compensation with long-term performance of the company is ensured through a minimum of 40% of their variable pay that is deferred when the earnings threshold is exceeded. See page 94 for the aggregate compensation of our MRTs

• Application of compensation clawbacks. See page 59 for a description of our clawback policy

• Ability to lower share unit payments. The MRC and board have discretion in the Sun Share plan to cancel all outstanding awards if they determine that payments would seriously jeopardize our capital position or solvency

• Application of overall discretion. The MRC and board have discretion to lower or zero out incentive awards, and to lower or not grant long-term incentive awards to individuals or groups, if they conclude results were achieved by taking risks outside of board-approved risk appetite levels

• Regular audit of our compensation programs. Internal audit reviews our compensation programs against the FSB Principles and reports to the MRC on its findings on an annual basis.

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Processes supporting the alignment of compensation and risk management

Our compensation design and review processes incorporate the following risk management practices:

• They are managed through the three-lines-of-defence model and principles

• Each year an annual business plan is developed and approved by the board based on approved risk appetite levels and is used as the basis for setting annual performance targets under the AIP

• The Chief Risk Officer makes an annual presentation to the MRC on the key enterprise risks and whether they are being managed appropriately and if adjustments to outcomes are required, and attends other meetings as required

• The MRC receives updates on the incentive plan assessments, including human resources talent risk and has the discretion to lower or zero out incentive awards, and to lower or not grant long-term incentive awards to individuals or groups, if they conclude results were achieved by taking risks outside of approved risk-appetite limits

• The IPRG meets prior to each MRC meeting to review incentive plan outcomes from the perspective of finance, actuarial, risk management, legal/compliance, human resources and internal audit. The IPRG also meets after the end of the year to discuss whether any adjustments should be made to the overall or business group AIP score based on the risk, compliance and control environment

• The MRC reviews information on the grant value and outstanding value of all salary, bonus and long-term incentive awards over the past five years for each member of the Executive Team. The MRC also reviews stress-testing analysis for Executive Team members by reviewing the potential value of outstanding equity awards over a range of future share prices

• The MRC annually reviews aggregate payouts under all incentive programs, the processes and the control environment governing incentive plans and areas of focus for the upcoming year based on an assessment of indicators of potential risk such as size of plan, size and variability of payout levels, and plan design and operational features.

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Decision-making cycle

Our annual-incentive decision-making cycle is a rigorous process carried out in three stages for the relevant performance period:

Design of incentive compensation plans to mitigate risk

The design of our incentive plans helps to mitigate risk, as follows:

• Designs are stress-tested to ensure an understanding of possible outcomes

• Pay mix is managed so that more senior roles have a significant portion of their compensation deferred, a significant portion of which is tied to multi-year performance

• Caps on payouts are incorporated in all non-sales compensation plan designs and, where appropriate, sales compensation plan designs

• The AIP and Sun Life Capital Incentive Plan (SLC IP) (see pages 61 - 63) both include a measure whereby funding can be reduced based on the risk, compliance and control environment

• Performance measures generally include a mix of financial and non-financial absolute and relative measures

• AIP funding is limited to total company and business group performance, with no direct compensation impact for sales or decisions around individual products within a business group

• SLC IP funding is at the aggregate Investments level, with no direct compensation impact on individual investment decisions within an asset class.

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Executive share ownership and share retention requirements

Our executives align their interests with those of our shareholders by holding an ongoing stake in the company.

Type of executive	Years to achieve minimum requirement
New to the company	5
Newly promoted	3 years from promotion date

In 2016, we increased the minimum levels of share ownership for named executive officers and added a requirement that they achieve at least 25% of their minimum level of share ownership through personal actions, including personal ownership of shares and elections to defer bonuses into DSU awards. They have five years to achieve the new requirement.

In addition, starting with grants in 2017, we added a requirement that following an exercise of stock options, our active executive officers must retain shares equal to 50% of the after-tax gain from the exercise for three years. This hold requirement does not apply if they have achieved at least 25% of their minimum level of share ownership through personal actions or if they retire.

	Multiple of annual salary	Post-retirement guidelines
Chief Executive Officer (CEO)	10x	Hold at least 100% of guideline for 1 year Hold at least 50% of guideline for 2 years
Named Executive Officers (NEO)	5x	Hold at least 100% of guideline for 1 year

All insiders must follow our insider trading rules, and executives and directors must notify the appropriate individual of their intention to trade in our securities. Executives must notify the CEO, while directors, including the CEO, must notify the Chairman of the Board. The Chairman of the Board must notify the Chair of the GNIC.

No hedging or pledging

We have a policy that prohibits all insiders subject to our share ownership requirements from participating in equity monetization transactions including pledging or hedges involving the company’s securities.

Clawbacks

Our clawback policy allows the company to recoup compensation in situations of material restatement and/or misconduct. The policy gives the board discretion to recover any or all of the incentive compensation received or realized in the previous 24 months if the employee (or former employee) was involved in misconduct, including fraud, dishonesty, negligence, and/or non-compliance with legal requirements or our internal policies, including the Code. In the case of material restatement, compensation can be recovered if the incentive compensation received would have been less had the restated financial results been known.

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Our compensation program

Seven components made up our 2019 compensation program:

Component	Pay type	Performance period	Who’s eligible
Salary	Fixed	•  reviewed annually	•  all employees
Annual incentives	Variable	•  up to 1 year	•  all employees
Sun Share Unit Plan	Variable	•  3 years’ forward-looking performance	•  key contributors; Vice-Presidents and above
Executive stock option plan	Variable	•  10 years •  vest over 4 years •  for the 2017 grants onwards, must hold shares equal to 50% of the after-tax gain from an exercise for three years if personal share ownership requirement is not met	•  Executive Team
Deferred share unit plan (DSU plan)	Variable	•  redeemed when the executive leaves the organization	•  Vice-Presidents and above
Pension and other benefits	Fixed	•  accrue during employment	•  all employees
Perquisites	Fixed	•  available during employment	•  Vice-Presidents and above

The majority of compensation paid to our senior executives is variable and at risk. Pay mix varies based on the ability of the executive to influence short and long-term business results, the level and location of the executive and competitive practices. The average mix of total direct compensation by level, based on target pay, is summarized below. The actual pay mix for individuals may be different depending on business and individual performance and geographic location, as well as investor experience (i.e., dividends and share price movements), per our guiding principles. Pension, benefits and perquisites are supplemental, and outlined on pages 79 and 80.

Benchmarking

• We look at how other companies similar to us compensate similar roles. We look at each component of compensation along with total compensation to ensure we can attract and retain the talent we need

• Surveys of peer groups are used to benchmark our compensation levels for certain executive officers, as outlined below. We selected these peer groups because they include the leading financial services organizations in Canada and the broader U.S. insurance industry that we compete in for talent. We also review publicly available compensation information for relevant companies that are publicly

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traded and compensation information for the asset management sector as appropriate before setting the compensation range for our executive officers.

• Canadian market survey: The Financial Services Executive Compensation Survey produced by Korn Ferry is used to benchmark Canadian executives. Our Canadian peer group is made up of six major Canadian banks and two insurance companies:

•  RBC	•  Scotiabank	•  CIBC	•  Manulife Financial
•  TD Bank Financial Group	•  BMO Financial Group	•  National Bank Financial Group	•  Canada Life

• U.S. market surveys: The Diversified Insurance Study of Executive Compensation produced by Willis Towers Watson is used to benchmark most U.S. executives. The study includes 30 U.S. insurance companies (in addition to Sun Life):

•  AFLAC   •  AIG   •  Allianz Life Insurance   •  Allstate   •  AXA Group   •  Brighthouse Financial   •  CIGNA   •  CNO Financial   •  Genworth Financial •  Guardian Life   •  Hartford Financial Services   •  John Hancock   •  Lincoln Financial   •  Massachusetts Mutual   •  MetLife   •  Nationwide •  New York Life   •  Northwestern Mutual   •  OneAmerica Financial Partners   •  Pacific Life   •  Principal Financial Group   •  Protective Life   •  Prudential Financial •  Securian Financial Group   •  Symetra Financial   •  Thrivent Financial for Lutherans   •  Transamerica   •  Unum   •  USAA   •  Voya Financial Services

• For the asset management sector where appropriate, including Mr. Peacher, President, Sun Life Capital Management, we consider benchmarking information from the 2019 McLagan Investment Management survey, which includes investment management roles from over 50 US insurance companies.

Salaries

Annual incentive plan

This plan rewards employees with cash awards based on how well we achieved our financial, sales and Client objectives for the year. The maximum overall AIP payout for exceptional business results and individual performance is 250% of target.

Awards are determined using the following formula:

Annual incentive plan target ($)  X  Business results (%)  X  Individual multiplier (%)  =  Annual incentive plan award ($)

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Business results

We used three measures to assess our total company performance under the AIP as outlined below.

Management uses a business performance scorecard to conduct a comprehensive “look back” on performance and ensure fairness and reasonableness of the final performance payout factor. Total company performance is reviewed to confirm the calculated results and inform whether a discretionary adjustment of up to ±20% is appropriate based on a set of guiding principles. The plan also includes a modifier for Risk, Compliance and Control considerations that is neutral to negative, and can be applied to lower the overall business result to zero. The MRC maintains its discretion to lower or zero out incentive awards.

Calculated payout factor  ±  Scorecard adjustment (if any)  –  Risk, Compliance and
Control adjustment (if any)  =  Final performance payout factor

Earnings (AIP basis) is defined as Reported Net Income less Other Adjustments as defined in Section L of our Non-IFRS measures in our 2019 MD&A filed with Canadian securities regulators. You can find a copy on our website (www.sunlife.com), on SEDAR (www.sedar.com) and on EDGAR (www.sec.gov/edgar.shtml). Note for AIP purposes, the impact of currency is held constant.

Mix of business results

The current mix of business results for our named executive officers is as follows:

• 100% total company business results for the CEO, and CFO; and

• 50% total company and 50% relevant business group business results for other named executive officers.

The business group component for the President, Sun Life Capital Management reflects 50% weight on the SLC IP business result and 50% weight an assessment of affiliate performance, specifically BGO, Prime Advisors, Inc., and Ryan Labs Asset Management, Inc.

Executive Team members who run a business group continue to have a significant portion of their compensation tied to total company results through the mid and long-term incentive programs.

Individual multiplier

All employees, including the named executive officers, receive an individual performance multiplier based on their individual contributions during the year. Performance is assessed against individual performance objectives for the year. The multiplier for the named executive officers can range from 0% for unsatisfactory performance to 200% for exceptional performance.

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Sun Life Capital Management incentive plan

This plan rewards employees using a pool-based approach with discretionary allocation to individuals, which is a design typical of systems found commonly in the market for similar businesses. The President, Sun Life Capital Management participates in the AIP and his payout includes performance on SLC IP measures, weighted as noted on page 62.

Performance under the SLC IP is assessed subjectively across three areas.

The plan includes a modifier for Risk, Compliance and Control considerations that is neutral to negative, and can be applied to lower the overall business result to zero. The MRC maintains its discretion to lower or zero out incentive awards.

Long-term incentive compensation

Mix of long-term incentive vehicles

The current mix of long-term incentive vehicles for eligible participants is as follows:

• 75% Sun Shares and 25% options for the CEO and Executive Team

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• 100% Sun Shares for Senior Vice-Presidents, Vice-Presidents and key contributors (below Vice-President).

These incentive plans are designed to align and reward executives and other key contributors for creating shareholder value and generating superior returns over the performance period of the plans, which range from three to 10 years. In the case of the CEO and the Executive Team, the proportion of long-term incentive delivered in options is considered in light of age and career stage. Incentive pools are allocated to business leaders to decide the award for participants based on contributions during the year and their potential impact on long-term results. Awards are granted as a fixed amount, however, the actual payout value will vary based on our share price, dividends and, in the case of Sun Shares, our performance relative to peers over the performance period. Prior to approving awards, the MRC receives information on past awards for each Executive Team member. Awards are granted based on position level, individual performance and potential and competitive practice.

Sun Share Unit Plan

Objectives for the Sun Share Unit Plan include aligning payouts to sustained performance, absolute and relative total return performance versus peers, and retention. The plan design has a range of potential payouts (from 0% to 200% of target) for our most senior executives, reflecting their accountability and impact on our results. Less senior participants have a narrower range of potential payouts because our focus at those levels is more on alignment of deferred pay to absolute TSR and retention.

The plan incorporates two performance measures:

Performance Measure	Description	Applies to
1. Absolute TSR	the underlying value of the share units based on increases or decreases to share price and dividend performance	All Sun Share participants
2. Relative TSR	modifies the ultimate number of shares awarded based on our relative TSR performance versus peers	Vice-Presidents and above

The relative TSR performance measure for executives ensures that payouts are aligned to both absolute and relative total return performance over the performance period.

The grant value of each Sun Share is the average closing price of our common shares on the TSX over the five trading days before the grant date. Sun Shares accumulate dividend equivalents over the performance period and vest in full after three years. The payout value of each Sun Share is based on the average closing price of our common shares on the TSX over the five trading days before the vesting date and is adjusted through the application of the performance factor for executives.

The formula below shows how we calculate the payout value of Sun Shares for named executive officers:

Sun Shares (#)	X	Share price ($)	X	Performance factor	=	Payout value
(number of units awarded plus additional units credited as reinvested dividends)		(average price of our common shares on the TSX over the five trading days before the vesting date)		(0% to 200%) based on the weighted average of three annual 3-year TSR factors		of Sun Shares on vesting ($)

We calculate the TSR performance factor for Sun Shares using the weighted average of three annual three-year TSR factors. The annual TSR factor is calculated as the change in price of our common shares over the 36-month period ending December 31 of the applicable year plus reinvested dividends during the same period measured relative to peers.

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For the 2019 Sun Share grant the annual TSR factors are weighted as follows:

We benchmark our performance under the Sun Share Unit Plan against a custom weighted index of 12 public Canadian and U.S. banks and insurance companies. These companies are most similar to us in terms of measuring business performance since they operate in the same broader financial services market and directly compete with us in some business segments. We also compete with these companies for talent and access to capital. The companies listed below have been used in calculating the annual performance factors since 2015.

This custom weighted index is a subset of the peer groups that we use for benchmarking compensation levels (see page 61). The custom weighted index is not used for any other purpose.

	Weight		Sun Share Benchmark Peers
Canadian banks	25%	•  RBC •  TD Bank Financial Group	•  Scotiabank •  BMO Financial Group	•  CIBC
North American insurance companies	75%	•  Canada Life •  Lincoln Financial •  Manulife Financial	•  MetLife •  Principal Financial Group •  Prudential Financial	•  Unum Group

Level of   performance	If the 3-year relative TSR	Then the annual TSR factor is
Maximum	exceeds the average of the custom weighted index by 10% or more		200%
Target	is at the average of the custom weighted index		100%
Threshold	is at 10% below the custom weighted index		25%
Below threshold	is more than 10% below the average of the custom weighted index		0%

Intermediate values are interpolated.

Executive stock option plan

Starting in 2013, we limited the use of options to Executive Team members, who receive up to 25% of their annual long-term incentive award in options. The exercise price of an option is the closing price of our common shares on the TSX on the grant date. Options vest 25% per year over four years, starting on the first anniversary of the grant date, and are exercisable until 10 years after grant. Starting with the 2017 grant, if an executive has not achieved share ownership requirements, we require that active executives hold shares equal to 50% of the after-tax gain on exercise for 3 years, which, if exercised, extends the combined hold on a portion of the options and underlying common shares to a minimum of 7 years. Options are not subject to any performance goals and only have value if the price of our common shares increases after the grant date.

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The MRC recommends the terms of each grant to the board for approval. The exercise price of an option already granted cannot be lowered or forfeited in exchange for options with a lower exercise price. If there is a change of control, the board can choose from a range of alternatives to address outstanding options, including accelerated vesting. Options cannot be transferred or assigned.

The option plan may be amended by the board as long as we receive other necessary approvals. The following amendments require shareholder approval unless they result from the plan’s anti-dilution provisions:

• increasing the number of common shares that can be issued under the plan

• reducing the exercise price of an option, including cancelling and re-granting an option on different terms within three months

• extending the expiry date of an option or permitting the grant of an option with an expiry date of more than 10 years from the grant date

• permitting an option to be transferred other than to a spouse, minor child or minor grandchild

• expanding the categories of eligible participants in the plan

• increasing or deleting the limits relating to common shares that may be issued to insiders or any one person

• permitting other types of compensation (e.g., share awards) by issuing equity

• revising the amendment procedure itself.

For grants from 2019 onwards, the board has amended our option plan to align our post-retirement treatment of options with our peer group. Options granted under the amended plan will terminate on the earlier of the last exercise date of the options and the date that is 60 months following the retirement of the Executive.

The plan allows the board to grant options with stock appreciation rights, although it has not granted any to date. A stock appreciation right allows the executive to exercise his or her option and receive, in cash, the difference between the market price of our common shares and the exercise price of the option. Stock appreciation rights provide the same compensation value as the underlying options.

The table below shows the number of options granted, outstanding and available for grant under the option plan as at December 31, 2019. We can issue up to 29,525,000 of our common shares under the plan (5.0% of the shares outstanding as at December 31, 2019), as long as we do not issue more than 10% of our total outstanding common shares to insiders and no more than 1% to any one person. The annual grant increased year-over-year as a result of a lower calculated five-year-average Black-Scholes value for 2019 (14.3% in 2019 and 17.7% in 2018), as was the case the previous year after we switched to using a formula to calculate the Black-Scholes value.

Measure of dilution	2019				2018				2017
	# of options		% of shares outstanding		# of options		% of shares outstanding		# of options		% of shares outstanding
Annual grant1		745,243		0.13		516,576		0.09		368,590		0.06
Options outstanding2		3,073,966		0.52		3,101,421		0.52		3,008,321		0.49
Options available for grant3		5,375,637		0.91		6,120,830		1.02		6,612,855		1.08
Overhang4		8,449,603		1.44		9,222,251		1.54		9,621,176		1.58
Burn rate5				0.13				0.09				0.06

¹  the total number of options granted under the option plan each year

²  the total number of options outstanding at the end of each year, including the annual grant

³  the number of options in reserve approved by shareholders that are available for grant at the end of each year

⁴  the number of options outstanding plus the number of options in reserve approved by shareholders that are available for grant in the future

⁵  the number of awards granted in the applicable fiscal year as a percentage of the weighted average number of outstanding shares for the same fiscal year

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Deferred share unit plan

DSUs are an effective way for executives to meet their share ownership requirements and they can only be redeemed when the executive leaves the organization. We sometimes grant DSUs to new executives to replace the value of long-term incentives they forfeited with a previous employer, and on a limited basis to recognize additional responsibilities associated with promotions during the year.

DSUs are redeemed for cash based on the value of our common shares at the time of redemption, plus any dividend equivalents accumulated over the period.

The formula below shows how we calculate the payout value of DSUs:

Deferred Share Units (#)	X	Share price ($)	=	Payout value
(number of units plus additional units credited as reinvested dividends)		(average price of our common shares on the TSX over the five trading days before the redemption date)		of DSU on redemption ($)

Share ownership levels

The table below shows the values of common shares and share units held by each named executive officer as at December 31, 2019. We calculated the value of common shares and share units using $59.21, the closing price of our common shares on the TSX on December 31, 2019. In 2016, we added a requirement for the CEO and Executive Team members to achieve at least 25% of their minimum level of share ownership through personal actions, including personal ownership of shares and elections to defer bonuses into DSU awards (personal ownership excludes Sun Shares). For presentation purposes, the Sun Shares have been valued using the target performance factor (100%).

Named executive   officer					Total share ownership at December 31, 2019 ($)
	Minimum ownership requirement		Total ownership as a multiple of salary		Common shares		Sun Shares		Deferred share units (DSUs)		Total ownership
Dean A. Connor		10x salary		27.9x		5,658,814		16,701,093		8,322,959		30,682,866
Kevin D. Strain		5x salary		9.2x		656,150		4,854,638		–		5,510,788
Stephen C. Peacher		5x salary		13.1x		–		8,342,072		1,714,567		10,056,639
Daniel R. Fishbein		5x salary		7.7x		174,255		4,773,415		908,062		5,855,732
Claude A. Accum		5x salary		10.8x		1,025,695		3,572,235		1,323,531		5,921,461
Jacques Goulet		5x salary		8.5x		–		4,672,561		–		4,672,561

All named executive officers have met their share ownership requirement and are on track to meet their personal actions requirement by the attainment date.

Pension benefits

Our pension plans deliver a portion of pay that provides protection and wealth accumulation for retirement. Only defined contribution plans are available to new hires worldwide (except for our small defined benefit plan in the Philippines). The named executive officers participate in the pension plans available in their country of employment.

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When employees transfer employment between countries where defined benefit plans are in place, the defined benefit formula of their last country applies, with an offset for vested defined benefits in prior countries. As Mr. Accum transferred employment between Canada and U.S., he earned pension benefits in both countries.

Canadian plans

On January 1, 2009, we closed the Canadian staff defined benefit plan to new employees and replaced it with a defined contribution plan, which we describe in more detail starting on page 70. Canadian employees hired before then continue to participate in the previous plan, which includes both defined benefit and defined contribution components.

Mr. Connor, Mr. Strain and Mr. Accum are named executive officers in Canada who were hired before 2009, and they participate in the defined benefit plan. Mr. Goulet is a named executive officer in Canada who was hired after 2009, and he participates in the defined contribution plan.

Our retirement program for Canadian employees hired before January 1, 2009 (including applicable named executive officers) consists of two elements:

• a defined benefit accrual for service prior to 2005

• a combination of defined benefit and defined contribution accruals for service after 2004.

Benefits up to the tax limits are paid from registered plans. Benefits above the tax limits are paid from non-registered pension plans that are secured through a Retirement Compensation Arrangement, subject to limitation on funding for U.S. taxpayers impacted by section 409A of the Internal Revenue Code.

Defined benefit formula for service prior to 2005

The pension formula for service prior to 2005 depends on which legacy pension plan the applicable executive participated in.

Pension formula prior to January 1, 2005 (designated executives, including Mr. Accum):

Years of service before 20051	X		1.3% of average pensionable earnings	+	1.65% of average pensionable earnings		=	Annual pension as of age 65
(maximum 35 years)			up to the average of the last three YMPE2 under the Canada Pension Plan		over the average YMPE2

¹  Mr. Accum continued to accrue benefits under this formula until December 31, 2005.

²  YMPE = Years’ Maximum Pensionable Earnings

Under this formula, pensionable earnings consist of annual salary and the target annual incentive. Average pensionable earnings is based on the employee’s highest average pensionable earnings in any 36 consecutive months in the last 10 years of employment.

The benefit is payable from age 65 for the life of the employee, with 60% of the benefit payable to a surviving spouse. Other optional forms of payment are available on an actuarially equivalent basis. Employees can retire and start to receive the pension benefit at a reduced level as early as age 55. If an employee has at least 90 points, the pension benefit is reduced by 3% for each year that retirement precedes age 60. If he or she has less than 90 points, the pension benefit is reduced by 5% for each year that retirement precedes age 65.

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Mr. Strain’s pension formula for service prior to January 1, 2005 is slightly different, as he is a member of the Clarica pension plan, which was acquired by Sun Life in 2001.

Years of service before 2005  X   1.0% of average pensionable earnings up to $100,000  +   1.65% of average
pensionable earnings above $100,000   =   Annual pension as of age 65

Under the Clarica formula, pensionable earnings consist of annual salary and annual incentives. Average pensionable earnings is based on the employee’s highest average pensionable earnings in the best three consecutive years in the last 120 months of employment.

Clarica benefits are payable from age 65 for life, with 60 monthly payments guaranteed. Other forms of payment are available on an actuarially equivalent basis. Employees with Clarica service can retire as early as age 55, and the benefit is reduced by 3% for each year that retirement precedes age 63, and an additional 3% for each year that retirement precedes age 60.

Defined benefit formula for service after 2004

(Designated executives, including Mr. Connor, Mr. Strain and Mr. Accum)

Years of service after 2004³  X  1.6% of average pensionable earnings  =  Annual pension as of age 65

³  Mr. Accum accrued benefits under this formula from July 20, 2009, when he transferred back to Canada from the U.S.

Under this formula, pensionable earnings consist of annual salary and the actual annual incentive, capped at the lesser of 100% of target and 100% of base salary. Average pensionable earnings is based on the employee’s highest average pensionable earnings in any three consecutive calendar years in the last 10 years of employment.

The pension is payable for the lifetime of the employee. Other forms of payment are available on an actuarially equivalent basis.

If a designated executive leaves before age 62, the pension formula is reduced. If he or she leaves:

• before age 51, we use a factor of 1.0% in the pension formula (instead of 1.6%)

• between the ages 51 and 62, we increase the factor of 1.0% by 0.05% for each complete year between age 50 and retirement, to a maximum of 1.6% at age 62 or later.

Designated executives can choose to start receiving the pension benefit as early as age 55, but the benefit is actuarially reduced from age 62 to reflect the earlier start.

Pension maximums

The total combined annual pension benefit for all service in all company sponsored defined benefit plans, excluding Clarica service, is capped at 65% of the named executive officer’s best consecutive, three-calendar-year average pensionable earnings over the last 10 years of employment. Pensionable earnings includes actual incentive compensation only up to the target level, limiting the pension benefit for all employees even if annual incentive awards are paid above target levels. The target incentive is further capped at 100% of salary for service after 2004.

Defined contribution plan for employees hired before 2009

The pension plan also includes a defined contribution component for service after 2004. Employees can contribute 1.5% of pensionable earnings up to the year’s maximum pensionable earnings (YMPE), and 3.0% of pensionable earnings above the YMPE. Sun Life matches 50%. Pensionable earnings consist of salary and actual annual incentive, capped at target. Participants will receive the value of their vested accumulated contributions and associated investment return upon termination or retirement.

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Total contributions to the plan (employee and company matching contributions) are subject to the limits of the Income Tax Act (Canada). Employee and company contributions end once the maximum contribution limit is reached ($27,230 for 2019).

Defined contribution plan for new hires after 2008

New hires on or after January 1, 2009 participate in the Sun Life staff pension plan, which provides a core company contribution of 3% of pensionable earnings from the date of hire. Employees have the option to make voluntary contributions of 1% to 5% of pensionable earnings and will receive a matching company contribution of 50%. Starting in 2020, new hires will be auto-enrolled at the 5% level, and can adjust their contribution level to suit their needs. Pensionable earnings consist of salary and actual annual incentives, capped at target. Company contributions vest immediately, and participants will receive the value of their vested accumulated contributions and associated investment return upon termination or retirement. Total company and employee contributions are restricted to the defined contribution limit in the Income Tax Act (Canada) ($27,230 for 2019).

Vice-Presidents and above participate in a supplemental, non-registered defined contribution plan. Once an executive has reached the maximum limit under the registered plan, the supplemental plan provides a contribution of 10.5% of his or her pensionable earnings above the level of pay where the maximum contribution limit is reached for the registered plan. The contribution rate of 10.5% is the maximum amount that the company and an employee, combined, can contribute to the registered plan.

U.S. plans

On January 1, 2006, the defined benefit plan in the U.S. was frozen to new entrants and participants who were under age 50 and had not yet reached 60 years of combined age and service (60 points). We introduced a Retirement Investment Account (RIA), an employer-paid defined contribution arrangement, to replace the defined benefit plan as of January 1, 2006. In December 2014, the defined benefit pension plan was frozen for all grandfathered participants who were still accruing benefits. Mr. Accum was a participant in the U.S. retirement plans during his period of employment from April 1, 2003 until July 19, 2009, when he transferred back to Canada. His service in the U.S. defined benefit plan is credited under the Canadian defined benefit plan formula, and his Canadian defined benefit is offset by the actuarial equivalent of the benefit payable from the U.S. defined benefit pension. Mr. Accum’s U.S. accumulated defined contribution balances remained in the U.S. until he left the company. Mr. Peacher, and Mr. Fishbein our named executive officers in the U.S., were hired after 2006 and do not participate in the defined benefit plan.

Our U.S. defined contribution retirement program has three elements:

• a voluntary tax-qualified 401(k) plan

• a tax-qualified RIA that provides automatic employer contributions

• a non-qualified retirement investment plan for certain employees whose compensation exceeds the IRS limits (US$280,000 for 2019).

Effective January 1, 2019, the 401(k) plan was changed to qualify for certain IRS “safe harbor” rules and to add auto-enrollment and auto-escalation features. All new hires who do not make an election will be automatically enrolled at 3% employee contribution level, which will increase by 1% each subsequent year until reaching 10%. Employees can adjust their level of contributions to meet their needs.

401(k) plan

Employees can contribute up to 60% of their eligible earnings (salary, sales incentives, actual incentive payments, and other eligible pay), up to the maximum contribution set by the IRS (for 2019, US$19,000 plus an additional US$6,000 for participants age 50 and older). A participant can contribute on a pre-tax or after-tax basis. Prior to January 1, 2019, we matched 50% of the employee’s contribution, up to 6% of eligible earnings. Beginning January 1, 2019, we match 100% on the first 3% and 50% on the next 2% of the employee’s contribution (maximum of US$11,200 matching contributions for 2019). Participants receive the value of their vested accumulated contributions and associated investment return upon termination or retirement.

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Retirement Investment Account (RIA)

We contribute a percentage of eligible earnings to the RIA each year based on the employee’s age and years of service, as of January 1. The named executive officers in the U.S. participate in the RIA and their eligible earnings consist of salary plus the actual incentive bonus up to the IRS compensation limit, and other eligible pay (US$280,000 for 2019).

The table below shows the age and service criteria for the RIA contribution.

Age and service   as at January 1	% of eligible earnings
	Prior Jan 1, 2019	After Jan 1, 2019
Under 40	3	2
40 to 54	5	4
55 and over	7	6

Total contributions that we and the participant make to the tax-qualified RIA and the 401(k) cannot exceed the maximum set by the IRS (US$56,000 for each participant under age 50 and $62,000 for each participant age 50 or older in 2019). Maximum eligible earnings that can be used to determine the annual allocations under the RIA and the 401(k) are US$280,000 for each participant in 2019.

Non-qualified retirement investment plan (Top Hat)

Mr. Peacher and Mr. Fishbein participate in the Top Hat plan. We contribute 15% of eligible earnings that exceed the IRS compensation limit for the tax-qualified plan. Eligible earnings for the Top Hat plan are defined as salary plus the actual incentive bonus, capped at the target payout.

Mr. Accum was eligible to participate in the Top Hat plan from January 1, 2006 until July 19, 2009 when he transferred back to Canada, and rejoined the Canadian pension plans.

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Compensation details

Individual pay and performance outcomes

The board assessed the performance of the CEO, and the CEO assessed the performance of the other named executive officers, against their individual objectives for 2019. In addition to a review of pay-for-performance and competitive practice, these assessments formed the basis for compensation decisions. A summary of the individual performance for each named executive officer follows.

  Dean A. Connor, President and Chief Executive Officer

            Mr. Connor has been our CEO since December 1, 2011. Under Mr. Connor’s leadership, we have defined our Client for Life Strategy and in 2019 we made excellent progress on a number of key priorities aligned with our strategic plan.   In recognition of his contribution in 2019, Mr. Connor was allocated an AIP award of $1,810,000 (122% individual multiplier), and granted a 2020 long-term incentive award of $6,500,000.

Significant accomplishments in 2019 include:

• Embedding our Purpose and driving our Client for Life strategy, including new processes to be more proactive and personalized, to make it easier for Clients to do business with us, and to resolve Clients’ problems better

• Delivering improvements across all pillars in Client Index, our key measure of Client loyalty and satisfaction

• Continuing to build new digital capabilities and business models and enhancing mobile applications

• Expansion of Lumino Health Network, a first-of-its-kind digital network offering consumer ratings, cost and other information in order to empower Canadians to live healthier lives

• Actively managing talent in the company to build new capabilities, including positive progress on our diversity and inclusion goals

• Delivering solid financial results, with reported EPS of $4.40, underlying EPS of $5.16, up 6% over prior year (10% excluding the impact of Par Seed Capital from 2018 results), underlying ROE of 14.3%, and VNB up 5% over prior year

• Increasing the common share dividend by 10% over prior year, and delivering TSR of 36% in 2019, in the top quartile among 20 global life insurers over the past five years at 11% per annum compounded annually

• Announcing the acquisition of a majority interest in InfraRed Capital Partners, an infrastructure equity investment firm, completing the acquisition of a majority interest following the merger of Bentall Kennedy and GreenOak Real Estate, and signing a 15-year distribution arrangement with TPBank in Vietnam

• Launching a refreshed Sustainability strategy, with continued recognition as one of the Global 100 Most Sustainable Corporations in the World

• Maintaining an effective risk, compliance and control culture by establishing tone and managing the organization within established risk appetite levels approved by the board.

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Compensation Summary

	2019				2018		2017
	Target		Actual		Actual		Actual
Salary		1,100,000		1,142,308		1,100,000		1,100,000
Annual   incentives		1,650,000		1,810,000		2,200,000		2,185,000
Total Cash		2,750,000		2,952,308		3,300,000		3,285,000
Sun Shares		4,687,504				4,500,028		4,125,043
Stock options		1,562,503				1,500,001		1,375,001
Long Term   Incentives		6,250,007				6,000,029		5,500,044
Total Direct   Compensation1		9,000,007		9,202,315		9,300,029		8,785,044
1  2019 actual represents the Total Direct Compensation value as approved by the Board and as described in the Letter to Shareholders, plus adjustments due to the fact that 2019 included an extra (27th) pay period for Canadian employees, as well as rounding of long-term incentive grants, as we grant only whole Sun Shares and stock options (no fractional units).

The following table illustrates the alignment between CEO pay and shareholder value. The table compares the current value of total direct compensation awarded to Mr. Connor over the last five years to a comparable measure of the value received by shareholders over the same period. The actual compensation values include salary and cash incentive payments, the value at vesting of Sun Shares granted (or current value for units that are outstanding), the value of stock options exercised during the period and the value of in-the-money stock options that remain outstanding. Compensation outcomes are also compared to the value to shareholders, which represents the cumulative value of a $100 investment in our shares made on the first trading day of the period indicated, assuming the reinvestment of dividends.

							Value of $100
Fiscal   Year	Total Direct Compensation Awarded ($000)1		Compensation realized and realizable ($000)		Period		CEO2		Shareholder value3
2015		7,563		12,010		December 31, 2014 – December 31, 2019		159		170
2016		8,378		11,782		December 31, 2015 – December 31, 2019		141		159
2017		8,785		10,142		December 31, 2016 – December 31, 2019		115		128
2018		9,300		9,427		December 31, 2017 – December 31, 2019		101		123
2019		9,202		10,571		December 31, 2018 – December 31, 2019		115		136
						Average		126		143

¹  Includes salary and variable compensation awarded at year-end in respect of performance during the year.

²  Represents the actual value to Mr. Connor for each $100 awarded in total direct compensation during the fiscal years indicated.

³  Represents the cumulative value of a $100 investment in shares made on the first trading day of the period indicated, assuming reinvestment of dividends.

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  Kevin D. Strain, Executive Vice-President and Chief Financial Officer

    On May 29, 2017, Mr. Strain was appointed Executive Vice-President and CFO and is responsible for overseeing a portfolio of functions including Finance, Taxation, Capital, Investor Relations, and Enterprise Services. Prior to his appointment, Mr. Strain was President, Sun Life Asia, and has held several senior roles in the Corporate Office and the Canadian business including SVP, Individual Insurance and Investments, VP Investor Relations, VP Individual Finance and VP of Clarica’s Pension business.   In recognition of his contribution in 2019, Mr. Strain was allocated an AIP award of $825,000 (122% individual multiplier), and granted a 2020 long-term incentive award of $2,200,000.

Significant accomplishments in 2019 include:

• Identifying opportunities to deliver value to shareholders through tax, treasury, capital management, and other financial initiatives.

• Leading our expense management initiatives and driving opportunities to enhance productivity and generate savings, including programs to reduce third party spend and reduce Corporate office expenses

• Enterprise Services: robust IT stability performance, strong ratings and uptake in use of our mobile applications, and leadership role for the Digital Enterprise initiative

• Providing leadership to the business groups in capital deployment decisions, assessing risks and opportunities and managing capital requirements and continuing the transition to IFRS 17

• Supporting initiatives and actions to fulfil the Client for Life strategy, including improving Client experience, leveraging digital, data & analytics to meet Client needs, pursuing distribution excellence, reinforcing our high-performance culture, and ensuring strong financial discipline

• Supporting M&A activity across businesses and geographies

• Managing regulatory changes and identifying related strategic and operational opportunities

• Leading strong talent management and development within the finance and information technology functions.

Compensation Summary

	2019				2018		2017
	Target		Actual		Actual		Actual
Salary		600,000		623,077		600,000		576,923
Annual   incentives		750,000		825,000		1,000,000		1,081,664
Total Cash		1,350,000		1,448,077		1,600,000		1,658,587
Sun Shares		1,387,506				1,237,525		1,237,547
Stock options		462,503				412,504		412,508
Long Term   Incentives		1,850,009				1,650,030		1,650,055
Total Direct   Compensation		3,200,009		3,298,085		3,250,030		3,308,642

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  Stephen C. Peacher, President, Sun Life Capital Management

            Mr. Peacher became our EVP and Chief Investment Officer on October 13, 2009, and on January 11, 2016 was appointed President, Sun Life Capital Management with responsibility for the strategy, development and performance of our invested asset portfolio, and Sun Life Capital Management, our third-party institutional asset management business which includes BGO, Prime Advisors, Inc., Ryan Labs Asset Management Inc. and SLC Management (Canada) Inc.   In recognition of his contribution in 2019, Mr. Peacher was allocated an AIP award of US$1,595,000 (110% individual multiplier), and granted a 2020 long-term incentive award of US$2,500,000.

Significant accomplishments in 2019 include:

• Completing the merger of Bentall Kennedy and GreenOak Real Estate to create BGO (Bentall Kennedy and GreenOak Real Estate)

• Announcing an 80% majority stake in InfraRed Capital Partners (international infrastructure and real estate investment manager with more than $16 billion assets under management)

• Successful re-branding of SLC Management and integration of Ryan Labs and Prime Advisors

• Generating strong investment performance across Sun Life’s general account to support product sales and support net income, and continuing to position the balance sheet for evolving market cycles

• Delivering strong excess returns for SLC Management’s third-party institutional investors, leading to strong Client retention

• Strengthening our talent base through the development and promotion of existing employees and new hires

• Continuing to grow SLC Management with $9.5B of gross inflows and $3.6B of net inflows

• Advancing our efforts to incorporate ESG factors into our investment decisions and the management of commercial real estate properties for our general account and for third-party clients.

Compensation Summary (USD)

	2019				2018		2017
	Target		Actual		Actual		Actual
Salary		580,000		580,000		580,000		570,769
Annual   incentives		1,450,000		1,595,000		1,650,000		2,051,686
Total Cash		2,030,000		2,175,000		2,230,000		2,622,455
Sun Shares		1,788,736				1,614,480		1,669,697
Stock options		596,241				538,156		556,565
Long Term   Incentives		2,384,977				2,152,636		2,226,262
Total Direct   Compensation		4,414,977		4,559,977		4,382,636		4,848,717

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  Daniel R. Fishbein, President, Sun Life U.S.

            Mr. Fishbein has been our EVP and President, Sun Life U.S. since March 17, 2014 and is responsible for leading our United States insurance businesses, which include a stop-loss and employee benefits business, a voluntary benefits business and in-force blocks of individual life insurance.   In recognition of his contribution in 2019, Mr. Fishbein was allocated an AIP award of US$890,000 (125% individual multiplier), and granted a 2020 long-term incentive award of US$1,500,000.

Significant accomplishments in 2019 include:

• Growing underlying income for the fifth consecutive year reaching US$399 million in 2019 and an ROE of 14.7%

• Achieving an after-tax profit margin for Group Benefits for the full year of 7.3%, achieving our target of 7%+

• Reaching our highest total Group Benefit sales ever at US$1,043 million, and business-in-force of US$4.3 billion as of December 31, 2019

• Expanding our medical stop-loss presence in the marketplace reaching $1.9 billion of business-in-force, an increase of 17% versus 2018, and maintaining our position as the largest independent stop-loss provider in the U.S.

• Completing the major milestones of our integration of the employee benefits business acquired in 2016, including reaching our full target of US$100 million in pre-tax run-rate synergies

• Launching the Sun Life + Maxwell Health platform and surpassing 10,000 members in 2019, providing employers and employees with an intuitive digital benefits administration experience and helping Clients close their coverage gaps and protect their families

• Introducing a new FullscopeRMS offering for an integrated absence solution for industry partners and gained traction in the marketplace with its medical stop-loss offering for health plans

• Enhancing the Client experience through improved onboarding processes, helping Clients reduce health care costs, and helping members safeguard their finances by providing auto-enrollment for income protecting disability coverage

• Helping our In-force Management Clients achieve their estate planning goals by offering them an individual life product extension beyond age 100 for policies that would have otherwise expired

• Significantly strengthening and diversifying our U.S. senior leadership in 2019 with the addition of four female Vice Presidents/Senior Vice Presidents with strong industry expertise

• Introducing paid family and medical leave offerings in select states to help employers provide fully insured and self-insured paid leave programs, and continued our leadership working with lawmakers, regulators and advocates to help expand access to these benefits for more Americans through their employers.

Compensation Summary (USD)

	2019				2018		2017
	Target		Actual		Actual		Actual
Salary		575,000		575,000		569,231		550,000
Annual   incentives		725,000		890,000		925,000		1,022,669
Total Cash		1,300,000		1,465,000		1,494,231		1,572,669
Sun Shares		1,043,423				954,028		910,740
Stock options		347,808				318,005		303,580
Long Term   Incentives		1,391,231				1,272,033		1,214,320
Total Direct   Compensation		2,691,231		2,856,231		2,766,264		2,786,989

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  Claude A. Accum, President, Sun Life Asia

    On May 29, 2017, Mr. Accum was appointed EVP and President, Sun Life Asia and was responsible for Sun Life’s fastest growing business pillar encompassing life, health and wealth management businesses in seven Asian markets—Philippines, Hong Kong, China, Indonesia, Vietnam, Malaysia, and India—as well as the International High Net Worth Business.   In recognition of his contribution in 2019, Mr. Accum was allocated an AIP award of $700,000 (115% individual multiplier). He did not receive a 2020 long-term incentive award due to his retirement.

Significant accomplishments in 2019 include:

• Completing the rollout of mobile apps for Clients across all seven of our local markets

• Expanding our bancassurance footprint through two new distribution agreements in Vietnam and Indonesia

• Continually improving our Client experience as measured by both our Client Index scores and our new Client business outcomes metrics, covering areas such as Clients’ onboarding journey and digital payment options

• Continued strong underlying earnings performance

• Asia insurance sales increased by 43% (excluding impact of foreign exchange) driven by growth in all local insurance markets and in the International division

• Asia wealth sales increased by 8% (excluding impact of foreign exchange) driven by elevated money market sales in the Philippines and growth in the Hong Kong pension business

• Strong business results in India and favourable Available For Sales (“AFS”) gains and credit support

• Laid the foundation for our new presence in Singapore

• Began offering an Employee Assistance Program in all of our Asia markets to promote employee mental and financial wellbeing.

Compensation Summary

	2019				2018		2017
	Target		Actual		Actual		Actual
Salary		550,000		564,423		525,000		519,231
Annual   incentives		690,000		700,000		950,000		868,637
Total Cash		1,240,000		1,264,423		1,475,000		1,387,868
Sun Shares		1,125,037				900,038		825,048
Stock options		375,006				300,004		275,005
Long Term   Incentives		1,500,043				1,200,042		1,100,053
Total Direct   Compensation		2,740,043		2,764,466		2,675,042		2,487,921

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  Jacques Goulet, President, Sun Life Canada

            On January 15, 2018, Mr. Goulet was appointed EVP and President Sun Life Canada and is responsible for leading our largest business group providing insurance, wealth management including mutual funds, group retirement services and group benefits in Canada.   In recognition of his contribution in 2019, Mr. Goulet was allocated an AIP award of $675,000 (115% individual multiplier), and granted a 2020 long-term incentive award of $2,200,000.

Significant accomplishments in 2019 include:

• Reaching 5% growth on underlying earnings supported by 10% growth in expected profit and strong financial discipline

• Maintaining leadership position in workplace solutions, reaching over $110 billion Group Retirement Services (GRS) assets under administration and $11 billion of business-in-force in Group Benefits

• GRS growth over prior year driven by Defined Benefits Solutions sales of $1.9 billion as we continue to shape the market by bringing customized and innovative solutions to companies to assist them in de-risking their pension plans

• Maintaining #1 position in Individual insurance and health sales by offering a wide-range of solutions, including the launch of a Universal Life product targeted to meet the needs of small business owners

• Continued retail wealth momentum with AUM for SLGI of $29 billion growing 27% from the prior year, driven by strong performance of the flagship Granite Managed Solutions products, where 98%, 100%, and 84% of SLGI Granite Managed Portfolio retail assets exceeded their peer median for five-, three-, and one-year performance, respectively

• Net sales of long-term mutual funds were strong relative to the industry and advisor perception rank increased materially over prior year

• Driving our digital transformation through enhancements of Ella, who helped 2.7 million Clients in the year to save over $400 million for retirement and increase their insurance overage by over $640 million, as well as Lumino Health empowering more and more Canadians to live healthier lives

• Improving Client experience as evidenced by growth of Client Index scores (specifically: ease of doing business, problem resolution, proactive engagement) from 46 to 48, supported by the creation of our new Client Experience Office (CXO)

• Continuing to develop and acquire talent in key leadership roles in areas such as Distribution

• Being recognized for the eleventh consecutive year as “Most Trusted Life Insurance Company” by Reader’s Digest, and for the fifth consecutive year as one of “Canada’s Top Employers for Young People” in the editorial competition organized by the Canada’s Top 100 Employers project.

Compensation Summary

	2019				2018
	Target		Actual		Actual
Salary		550,000		571,154		518,269
Annual   incentives		690,000		675,000		780,000
Sign-on Cash1		-		-		2,110,000
Total Cash		1,240,000		1,246,154		3,408,269
Sun Shares		1,275,012				4,129,058
Stock options		425,000				375,007
Long Term   Incentives1		1,700,012				4,504,065
Total Direct   Compensation		2,940,012		2,946,166		7,912,334
1  Sign-on cash is related to replacing variable incentives that were forfeited from Mr. Goulet’s previous employer. Long-term incentives also include replacement equity value on-hire.

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Summary compensation table

The table below shows the total compensation paid to our named executive officers for the fiscal years ended December 31, 2019, 2018 and 2017.

Mr. Peacher and Mr. Fishbein receive their compensation in U.S. dollars. We have converted their compensation to Canadian dollars in the tables that follow using the average annual exchange rates of C$1.327 for 2019, C$1.295 for 2018 and C$1.298 for 2017.

Name and principal   position	Year		Paid salary ($)		Share awards ($)		Option awards ($)		Non-equity annual incentive plan compens -ation ($)		Pension value ($)		All other compen- sation ($)		Total compen- sation ($)
Dean A. Connor   President & Chief   Executive Officer		2019		1,142,308		4,687,504		1,562,503		1,810,000		433,077		11,233		9,646,625
		2018		1,100,000		4,500,028		1,500,001		2,200,000		400,833		11,997		9,712,859
		2017		1,100,000		4,125,043		1,375,001		2,185,000		350,743		11,060		9,146,847
Kevin D. Strain   Executive Vice-   President & Chief   Financial Officer		2019		623,077		1,387,506		462,503		825,000		111,077		–		3,409,163
		2018		600,000		1,237,525		412,504		1,000,000		162,833		94,905		3,507,767
		2017		576,923		1,237,547		412,508		1,081,664		865,743		364,761		4,539,146
Stephen C. Peacher   President, Sun Life   Capital Management		2019		769,660		2,373,653		791,211		2,116,565		386,535		740,974		7,178,598
		2018		751,100		2,090,752		696,912		2,136,750		372,074		–		6,047,588
		2017		740,858		2,167,267		722,422		2,663,089		356,256		103,715		6,753,607
Daniel R. Fishbein   President, Sun Life   U.S.		2019		763,025		1,384,622		461,541		1,181,030		237,546		–		4,027,764
		2018		737,154		1,235,467		411,817		1,197,875		226,314		–		3,808,627
		2017		713,900		1,182,141		394,047		1,327,424		196,647		–		3,814,159
Claude A. Accum   President, Sun Life   Asia		2019		564,423		1,125,037		375,006		700,000		310,077		487,019		3,561,562
		2018		525,000		900,038		300,004		950,000		96,833		383,728		3,155,603
		2017		519,231		825,048		275,005		868,637		674,743		198,419		3,361,082
Jacques Goulet   President, Sun Life   Canada		2019		571,154		1,275,012		425,000		675,000		116,383		781		3,063,330
		2018		518,269		4,129,058		375,007		780,000		42,040		2,112,199		7,956,573

Paid Salary

• In 2019, actual paid salary was greater than annualized salary due to an extra pay period in Canada. The regular bi-weekly pay for December 21, 2019 to January 3, 2020 was moved to December 31, 2019, which created a 27^th pay period. This affected the paid salary for Mr. Connor, Mr. Strain, Mr. Accum and Mr. Goulet.

• Includes mid-year salary increases in March as follows:

• Mr. Accum in 2019,

• Mr. Fishbein in 2018, and

• Mr. Strain and Mr. Peacher in 2017.

Share Awards

Fiscal Year	Grant Date	Share Price
2019	February 26, 2019		$49.71
2018	February 27, 2018		$54.18
2017	February 28, 2017		$48.73

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• Share price is based on the average closing price of our common shares on the TSX over the five trading days before the grant date.

• Mr. Goulet’s 2018 Share award also includes replacement equity value on-hire, in addition to his annual grant.

Option Awards

• The grant date fair value of stock options awarded was calculated using the following data:

Fiscal Year	Grant Date	Exercise Price		Accounting Fair Value
2019	February 26, 2019		$50.58		$5.56
2018	February 27, 2018		$53.96		$7.00
2017	February 28, 2017		$48.20		$9.41

• For awards granted on February 27, 2018 and going forward, we use a five-year average calculated Black-Scholes ratio to determine awards.

• The five-year average represents a long-term value considering long-term estimates of factors used in the Black-Scholes valuation model.

Non-equity annual incentive plan compensation

• Values include the amounts the named executive officers chose to defer.

Pension value

• Represents compensatory costs as described in the defined benefit and defined contribution tables on pages 88 and 89.

• Mr. Strain had a higher compensatory cost in 2017 because of an increase to his salary and target bonus.

• Mr. Accum had a higher compensatory cost in 2019 because of an increase to his salary and target AIP.

All other compensation

• Includes flexible benefit credits taken in cash by Mr. Connor and Mr. Goulet.

• Includes tax equalization adjustments in 2017 and 2019 for Mr. Peacher. The 2019 amount is larger because it also includes 2018 tax equalization amounts.

• For all named executive officers, the amounts shown exclude the total value of perquisites and other personal benefits provided to each NEO that are not generally available to all employees because the total for each named executive officer is less than $50,000 in the aggregate and less than 10% of their total salary for the fiscal year.

• In 2018, Mr. Strain’s amount includes taxes paid relating to a previous overseas assignment. In 2018 and 2017, his amounts include flexible benefit credits taken in cash and executive allowance and perquisites. In 2017, his amount includes relocation expenses and tax preparation assistance and assignment-related allowances.

• Mr. Accum’s 2017 to 2019 amount includes allowances relating to his overseas assignment.

• Mr. Goulet’s 2018 amount includes a sign-on cash payment provided to replace variable incentives that were forfeited from his previous employer.

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Incentive plan awards

Outstanding share and option awards

The table on the following page is a summary of the outstanding option awards and share awards for the named executive officers as at December 31, 2019.

Value of unexercised in-the-money options is the difference between the exercise price of the options and $59.21, multiplied by the number of options.

Market value of share awards that have not vested or not been paid is $59.21 multiplied by the number of share units. For presentation purposes, the Sun Shares have been valued using the target performance factor (100%). Share awards that have vested but have not been paid represent an elected deferral of annual incentive, payout under an incentive plan prior to demutualization and/or awards for recruiting purposes or upon mid-year promotion.

			Option awards								Share awards
Named  executive  officer	Year		Number of securities underlying unexercised options (#)		Option exercise price ($)		Option expiration date		Value of unexercised in-the money options ($)		Plan		Number of share units that have not vested (#)		Market value of share awards that have not vested ($)		Market value of vested share awards that have not been paid ($)
Dean A.  Connor		2012		337,239	$	21.53		Feb 28, 2022		12,707,166
		2013		168,440	$	28.20		Feb 26, 2023		5,223,324
		2014		127,324	$	39.27		Feb 25, 2024		2,538,841
		2015		128,140	$	39.02		Feb 24, 2025		2,587,147
		2016		124,502	$	40.16		Feb 23, 2026		2,371,763
		2017		114,108	$	48.20		Feb 28, 2027		1,256,329		Sun Shares		94,597		5,601,110
		2018		157,053	$	53.96		Feb 27, 2028		824,528		Sun Shares		89,562		5,302,950
		2019		216,026	$	50.58		Feb 26, 2029		1,864,304		Sun Shares		97,906		5,797,032
												Vested DSU						8,322,959
Total				1,372,832						29,373,402				282,065		16,701,092		8,322,959
Kevin D.  Strain		2014		25,465	$	39.27		Feb 25, 2024		507,772
		2015		25,628	$	39.02		Feb 24, 2025		517,429
		2016		27,391	$	40.16		Feb 23, 2026		521,799
		2017		34,233	$	48.20		Feb 28, 2027		376,905		Sun Shares		28,380		1,680,379
		2018		43,190	$	53.96		Feb 27, 2028		226,748		Sun Shares		24,630		1,458,332
		2019		63,944	$	50.58		Feb 26, 2029		551,837		Sun Shares		28,980		1,715,927
Total				219,851						2,702,490				81,990		4,854,638

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			Option awards								Share awards
Named  executive  officer	Year		Number of securities underlying unexercised options (#)		Option exercise price ($)		Option expiration date		Value of unexercised in-the money options ($)		Plan		Number of share units that have not vested (#)		Market value of share awards that have not vested ($)		Market value of vested share awards that have not been paid ($)
Stephen C.  Peacher		2016		15,407	$	40.16		Feb 23, 2026		293,503
		2017		59,952	$	48.20		Feb 28, 2027		660,072		Sun Shares		49,701		2,942,781
		2018		72,968	$	53.96		Feb 27, 2028		383,082		Sun Shares		41,611		2,463,796
		2019		109,390	$	50.58		Feb 26, 2029		944,036		Sun Shares		49,578		2,935,494
												Vested DSU						1,714,567
Total				257,717						2,280,693				140,890		8,342,071		1,714,567
Daniel R.  Fishbein		2014		23,561	$	36.98		May 16, 2024		523,761
		2015		31,999	$	39.02		Feb 24, 2025		646,060
		2016		37,662	$	40.16		Feb 23, 2026		717,461
		2017		32,701	$	48.20		Feb 28, 2027		360,038		Sun Shares		27,109		1,605,147
		2018		43,118	$	53.96		Feb 27, 2028		226,370		Sun Shares		24,589		1,455,906
		2019		63,811	$	50.58		Feb 26, 2029		550,689		Sun Shares		28,920		1,712,361
												Vested DSU						908,062
Total				232,852						3,024,379				80,618		4,773,414		908,062
Claude A.  Accum		2013		7,979	$	28.20		Feb 26, 2023		247,429
		2014		22,919	$	39.27		Feb 25, 2024		457,005
		2015		25,628	$	39.02		Feb 24, 2025		517,429
		2016		24,901	$	40.16		Feb 23, 2026		474,364
		2017		22,822	$	48.20		Feb 28, 2027		251,270		Sun Shares		18,920		1,120,275
		2018		31,411	$	53.96		Feb 27, 2028		164,908		Sun Shares		17,913		1,060,628
		2019		51,847	$	50.58		Feb 26, 2029		447,440		Sun Shares		23,498		1,391,332
												Vested DSU						1,323,531
Total				179,528						2,559,845				60,332		3,572,235		1,323,531
Jacques  Goulet		2018		39,264	$	53.96		Feb 27, 2028		206,136		Sun Shares		52,284		3,095,755
		2019		58,759	$	50.58		Feb 26, 2029		507,090		Sun Shares		26,631		1,576,806
Total				98,023						713,226				78,915		4,672,561

We have not amended, cancelled, replaced or modified any option-based awards that were previously granted.

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Incentive plan awards – value vested or earned during the year

The table below shows:

• the value the named executive officers would have realized if they had exercised the options that vested in 2019 on their vesting dates

• the value of share awards that vested and were paid out in 2019

• the annual incentive award earned in 2019 and paid out in March 2020.

Named executive   officer	Option-based awards – value vested during the year ($)		Share-based awards – value vested during the year ($)		Non-equity incentive   plan compensation –   value earned during   the year ($)
Dean A. Connor		685,290		6,033,742		1,810,000
Kevin D. Strain		147,613		1,327,447		825,000
Stephen C. Peacher		299,423		2,986,722		2,116,565
Daniel R. Fishbein		188,514		1,825,255		1,181,030
Claude A. Accum		137,055		1,206,787		700,000
Jacques Goulet		–		1,439,606		675,000

Value of options vested during the year

The table below shows the value of options that vested for each named executive officer in 2019.

See Executive stock option plan on page 65 and 66 for more information about the option plan.

Named executive   officer	Grant year		Vesting date		Options vesting (#)		Option exercise price ($)		Share price on vesting date ($)		Option-based awards – value vested during the year ($)
Dean A. Connor		2015		24-Feb-19		32,035		39.02		49.70		342,134
		2016		23-Feb-19		31,126		40.16		49.70		296,942
		2017		28-Feb-19		28,527		48.20		49.82		46,214
		2018		27-Feb-19		39,263		53.96		51.11		–
										Total		685,290
Kevin D. Strain		2015		24-Feb-19		6,407		39.02		49.70		68,427
		2016		23-Feb-19		6,847		40.16		49.70		65,320
		2017		28-Feb-19		8,559		48.20		49.82		13,866
		2018		27-Feb-19		10,798		53.96		51.11		–
										Total		147,613
Stephen C. Peacher		2015		24-Feb-19		12,000		39.02		49.70		128,160
		2016		23-Feb-19		15,407		40.16		49.70		146,983
		2017		28-Feb-19		14,988		48.20		49.82		24,281
		2018		27-Feb-19		18,242		53.96		51.11		–
										Total		299,423

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Named executive   officer	Grant year		Vesting date		Options vesting (#)		Option exercise price ($)		Share price on vesting date ($)		Option-based awards – value vested during the year ($)
Daniel R. Fishbein		2015		24-Feb-19		8,000		39.02		49.70		85,440
		2016		23-Feb-19		9,416		40.16		49.70		89,829
		2017		28-Feb-19		8,176		48.20		49.82		13,245
		2018		27-Feb-19		10,780		53.96		51.11		–
										Total		188,514
Claude A. Accum		2015		24-Feb-19		6,407		39.02		49.70		68,427
		2016		23-Feb-19		6,225		40.16		49.70		59,387
		2017		28-Feb-19		5,705		48.20		49.82		9,242
		2018		27-Feb-19		7,853		53.96		51.11		–
										Total		137,055
Jacques Goulet		2018		27-Feb-19		9,816		53.96		53.11		–
										Total		–
										Total		1,457,895

• Share price on vesting date is the closing price of our common shares on the TSX on the vesting date or the previous trading day if the vesting date falls on a weekend or holiday

• Value vested during the year is the number of options vesting multiplied by the difference between the option exercise price and share price on the vesting date.

Aggregate option exercises for the year ended December 31, 2019

The following table shows for each named executive officer the number of common shares acquired through option exercises during the year ended December 31, 2019 and the aggregate value realized upon exercise. Value realized upon exercise is the difference between the closing price of our common shares on the TSX on the exercise date and the exercise price of the option.

Named executive officer	Securities acquired at exercise (#)		Aggregate value realized ($)
Dean A. Connor		304,239		8,596,700
Kevin D. Strain		44,957		950,373
Stephen C. Peacher		27,407		354,640
Daniel R. Fishbein		–		–
Claude A. Accum		–		–
Jacques Goulet		–		–

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Share awards

The table below shows the total Sun Shares vested and paid out to each named executive officer in 2019. The value of Sun Shares received on vesting is the number of accrued Sun Shares multiplied by the performance factor, multiplied by the vesting price.

Named executive officer	Grant date		Sun Shares accrued (#)		Performance factor		Vesting price ($)		Value received on vesting ($)
Dean A. Connor		Feb 23, 2016		103,446		118%		49.43		6,033,742
Kevin D. Strain		Feb 23, 2016		22,759		118%		49.43		1,327,447
Stephen C. Peacher		Feb 23, 2016		51,206		118%		49.43		2,986,722
Daniel R. Fishbein		Feb 23, 2016		31,293		118%		49.43		1,825,255
Claude A. Accum		Feb 23, 2016		20,690		118%		49.43		1,206,787
Jacques Goulet		Feb 27, 2018		28,792		100%		50.00		1,439,606

• Vesting price is the average price of our common shares on the TSX over the five trading days before the vesting date.

The table below shows how we calculated the performance factor for the 2016 Sun Share awards (for the performance period from 2016 to 2018, and paid out in early 2019).

					Relative Peer TSR Performance
Performance   cycle	Peer groups	Weight			Below threshold		Threshold		Target (peer avg.)		Maximum		SLF TSR		Actual TSR Multiplier
2016 –   2018	North American Insurance		75%	TSX		< -6.5%		-6.5%		3.5%		13.5%		6.5%		130	%
				NYSE		< -6.4%		-6.4%		3.6%		13.6%		6.9%		133	%
	Canadian Banks		25%	TSX		<2.5%		2.5%		12.5%		22.5%		6.5%		55	%
2018 Multiplier – payout factor (50% weight)						0%		25%		100%		200%				112	%
2015 –   2017	North American Insurance		75%	TSX		< 0.3%		0.3%		10.3%		20.3%		11.5%		113	%
				NYSE		< -1.0%		-1.0%		9.0%		19.0%		7.5%		89	%
	Canadian banks		25%	TSX		< 2.1%		2.1%		12.1%		22.1%		11.5%		96	%
2017 Multiplier – payout factor (25% weight)						0%		25%		100%		200%				100	%
2014 –   2016	North American Insurance		75%	TSX		< -3.6%		-3.6%		6.4%		16.4%		14.8%		184	%
				NYSE		< -6.3%		-6.3%		3.7%		13.7%		5.9%		122	%
	Canadian Banks		25%	TSX		< 1.6%		1.6%		11.6%		21.6%		14.8%		132	%
2016 Multiplier – payout factor (25% weight)						0%		25%		100%		200%				148	%
Overall weighted average performance factor																118	%

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Non-equity incentive plan compensation

See Annual incentive plan starting on page 61 for more information.

Named executive officer	Target award ($)		Business results		Individual multiplier		Final award($)
Dean A. Connor		1,650,000		90%		122%		1,810,000
Kevin D. Strain		750,000		90%		122%		825,000
Stephen C. Peacher		1,924,150		100%		110%		2,116,565
Daniel R. Fishbein		962,075		98%		125%		1,181,030
Claude A. Accum		690,000		88%		115%		700,000
Jacques Goulet		690,000		85%		115%		675,000

• Target Award pro-rated for active employment is used to calculate AIP (subject to any sign-on provisions for the initial year of employment)

• The business results for the CEO and CFO are based 100% on total company performance. For the other named executive officers, the business results reflect 50% weighting on total company performance and 50% on relevant business group performance. Business group performance is measured using the same three measures (Earnings (AIP basis), VNB (AIP basis) and Client measures) as total company, except for Mr. Peacher whose business group result reflects the payout from the SLC IP and an assessment of performance in the SLC Management affiliate companies (BGO, Prime Advisors, Inc., and Ryan Labs Asset Management, Inc.). When determining AIP payouts, unique circumstances in each business group were considered, and a modest amount of discretion was applied, both positive and negative, which led to an overall net increase to the size of the pool payout from the calculated value. This outcome aligns better with the new earnings methodology being implemented into AIP in 2020. This use of discretion does not affect the CEO’s or CFO’s payouts. For Mr. Peacher the business group result was 110%, for Mr. Fishbein the business group result was 105%, for Mr. Accum the business group result was 85%, and for Mr. Goulet the business group result was 80%.

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The table below shows how we calculated the performance factor for total company business results. Earnings (AIP basis) is defined as Reported Net Income less Other Adjustments as defined in Section L of our Non-IFRS measures in our 2019 MD&A, divided by the weighted average number of common shares outstanding. VNB (AIP basis) excludes the asset management business. EPS (AIP basis) and VNB (AIP basis) are measured on a constant currency basis.

Primary measures	Weighting	Below threshold		Threshold		Target		Maximum		What we achieved in 2019 Result
Earnings per share   (AIP basis)	50%	< $	3.40	$	3.40	$	4.86	$	5.83	$	4.68	Below Target
Payout factor			0%		25%		100%		200%			91%
+
Value of new business   (AIP basis)	25%	< $	895	$	895	$	1,278	$	1,534	$	1,170	Below Target
Payout factor			0%		25%		100%		200%			79%
+
Client measures	25%		Assessment of Client Index scores and performance on key Client Business Outcomes									At Target
Payout factor			0%		50%		100%		150%			100%
Overall calculated payout factor												90%
+
Business performance   scorecard	A mechanism to conduct a comprehensive look back on performance and alignment with shareholder experience (up to ±20%)						No adjustment					–%
+
Risk, Compliance and   Control	Results reviewed for any risk, compliance and control considerations (neutral to negative and can lower results to zero)						No adjustment					–%
=
Final performance payout factor			0%		25%		100%		200%			90%

In addition to these objectives and values outlined in the previous table, highlights of our performance in 2019 are provided on page 48.

You can find more information about our business segment results in our 2019 MD&A.

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Pension benefits

Defined benefit plans

The table below shows the defined benefit pension plan obligations for each named executive officer as at December 31, 2019.

We used the same actuarial methods and assumptions in 2019 that we used to calculate the pension liabilities and annual expenses in our 2019 consolidated financial statements. These assumptions reflect our best estimate of future events, so the values shown in the table below may not be directly comparable to pension liabilities estimates disclosed by other companies.

Named executive   officer

Number of years credited service

Annual lifetime pension

Accrued obligation at start of year ($)

Compensatory change ($)

Non - compensatory change ($)

Accrued obligation at year end ($)

At year end

At age 65

Dean A. Connor

13.3

467,000

529,000

6,258,000

424,000

711,000

7,393,000

Kevin D. Strain

22.1

336,000

634,000

5,094,000

102,000

949,000

6,145,000

Stephen C. Peacher

–

–

–

–

–

–

–

Daniel R. Fishbein

–

–

–

–

–

–

–

Claude A. Accum

32.9

584,000

584,000

9,041,000

301,000

1,584,000

10,926,000

Jacques Goulet

–

–

–

–

–

–

–

• Credited service is the actual years of service with the company as of December 31, 2019 used for purposes of the Canadian defined benefit plan.

• Figures for annual lifetime pension at age 65 are based on the named executive officer’s pensionable earnings up to December 31, 2019. As Mr. Accum retired as of December 31, 2019, his accrued annual lifetime pension is not expected to increase.

• Accrued obligation is the actuarial value of the projected defined benefit obligations for service up to December 31, 2018 and December 31, 2019. The accrued obligation assumes a named executive officer will receive his or her target bonus between now and retirement. The difference between the accrued obligation at the start and end of the year is made up of the compensatory and non–compensatory change detailed in the chart.

• Compensatory change is the defined benefit service cost for 2019 (the value of the projected pension earned during the year) and the impact of any differences between actual increases in compensation in 2019 and the actual assumptions used for the year. The 2019 valuation assumptions for the plan include a projected salary increase based on age, which produced a weighted average assumption of 3.0% for all plan participants.

• Non–compensatory change represents the change in pension obligation based on non–compensatory factors like interest on the obligations, impact of changes to the accounting assumptions, and other actuarial gains and losses. Among other factors, in 2019, the discount rate decreased, which resulted in a net increase in the obligations. Mr. Accum’s retirement at the end of 2019 created a net actuarial loss.

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Defined contribution plans

The table below shows the defined contribution pension plan values for each named executive officer as at December 31, 2019.

Named executive officer	Accumulated value at start of year ($)		Compensatory ($)		Accumulated value at end of year ($)
Dean A. Connor		454,681		9,077		591,812
Kevin D. Strain		536,750		9,077		408,524
Stephen C. Peacher		4,160,123		386,535		5,405,303
Daniel R. Fishbein		1,135,206		237,546		1,618,166
Claude A. Accum		1,306,063		9,077		1,359,903
Jacques Goulet		53,430		116,383		200,028

• U.S. plan values have been converted to Canadian dollars using an exchange rate of 1.364 as of January 1, 2019, 1.299 as of December 31, 2019, and the 2019 average rate of 1.327 for amounts other than beginning and ending balances.

• Compensatory amounts shown for Mr. Connor, Mr. Strain Mr. Accum and Mr. Goulet represent our matching contributions to the Canadian defined contribution plan. The amounts shown for Mr. Peacher and Mr. Fishbein reflect our contributions to the U.S. 401(k) plan, RIA and non-qualified (Top Hat) plan.

• Accumulated values include net investment earnings and employee contributions. Mr. Accum’s accumulated values include his Canadian and US defined contribution balances.

Termination and change of control benefits

Change of control

We have change of control agreements with our named executive officers so we can retain our key leaders if we are involved in a transaction affecting the control of Sun Life. This is key to balancing the goals of the business and the interests of shareholders during a transaction.

If employment is terminated without cause within three years of the change of control (double trigger), benefits are paid as follows:

• 24 months of annual pay and incentive compensation from the date of termination

• mid and long-term incentive awards vest (prorated for Mr. Fishbein in the event of a change of control for our U.S. business) and are paid according to the terms of the respective plans

• most benefits and perquisites continue during the severance period. The early retirement reduction factors in the pension plan may be enhanced, depending on the provisions of the pension plan in which the executive participates.

We define change of control as:

• a consolidation or merger of SLF Inc. or Sun Life Assurance with a non-affiliate, when our outstanding voting shares represent less than 60% (50% for Mr. Fishbein) of the outstanding voting shares of the new entity immediately after the transaction is complete,

• the sale of all or substantially all of the assets of SLF Inc. or Sun Life Assurance to a non-affiliate (except for Mr. Fishbein), or

• the acquisition by a non-affiliate of more than 20% (30% for Mr. Fishbein) of the voting shares of SLF Inc. or Sun Life Assurance.

If the majority of the assets of SLF Inc., Sun Life Assurance, or our U.S. business are sold, it constitutes a change of control for Mr. Fishbein.

When there is a change of control:

• Sun Shares vest and are paid on an accelerated basis when an executive is terminated without cause or leaves the organization for good reason (double trigger) prior to the normal payment date (which is a maximum of three years from the grant date) and are otherwise paid on the normal payment date under the terms of the plan

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• DSUs vest and are paid either when the executive leaves the organization or on the normal payment date, whichever is earlier

• the board can choose from a range of alternatives to address outstanding options, including accelerated vesting.

Employee agreements

The table below summarizes our contractual agreements with the named executive officers who are actively employed as of December 31, 2019:

Nature of termination	Who it applies to	Type of arrangement
Termination   (without cause)	Dean A. Connor	•  Entitled to receive up to 24 months of annual salary.
Termination   (without cause)	Stephen C. Peacher Daniel R. Fishbein	•  Governed by the terms of severance arrangements that apply to all of our U.S. employees above the Vice-President level. Entitled to four weeks of compensation for each year of service with a minimum severance amount of 12 months of base salary and a maximum of 18 months.

Benefits on termination and change of control

The table below summarizes how we treat the components of our executive compensation program under different termination scenarios. For our named executive officers, termination for cause results in the forfeiture of outstanding unvested share units and options, and can also result in a clawback of any or all of the incentive compensation received or realized in the previous 24 months where appropriate.

		Incremental entitlements on other termination scenarios
Compensation   element	Entitlement on resignation	Termination (without cause)	Retirement	Change of control and termination without cause
Salary	•   salary ends	•   salary ends unless otherwise stated in employment agreement	•   salary ends	•   24 months of salary
Annual incentive   award	•   award forfeited	•   award forfeited	•   receive pro-rated award calculated from January 1 to retirement date	•   receive prorated award calculated from January 1 to the date of termination (assumes target performance) •   24 months of bonus calculated as the average bonus paid for the previous three years, or the target bonus for the current year, whichever is higher

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			Incremental entitlements on other termination scenarios
Compensation   element		Entitlement on resignation	Termination (without cause)	Retirement	Change of control and termination without cause
Mid and long-term incentives	Sun Shares	•   unvested awards forfeited	•   receive pro-rated portion of Sun Shares for active employment during performance period •   paid immediately •   valued using performance factor that includes any variables known at the time of termination	•   fully vest and paid at normal payment date •   valued using actual performance factor	•   unvested awards vest •   paid immediately •   valued using performance factor that includes any variables known at the time of termination
	Stock options	•   60 days to exercise vested options •   unvested awards forfeited	•   60 days to exercise vested options •   unvested awards forfeited	•   up to 36 months to exercise vested options and options that become vested during the period; up to 60 months for the 2019 grant onward	•   accelerated vesting of all options and up to 36 months to exercise vested options
DSUs		•   vested awards are paid with timing at the executive’s election •   unvested awards forfeited	•   vested awards are paid with timing at the executive’s election •   unvested awards forfeited	•   vested awards are paid with timing at the executive’s election •   unvested awards are forfeited	•   vested awards are paid with timing at the executive’s election •   unvested awards vest
Estimated pension		•   estimated lump-sum value of accrued pension •   unvested value forfeited	•   estimated lump-sum value of accrued pension •   unvested value forfeited	•   estimated lump-sum value of accrued pension •   unvested value forfeited	•   estimated lump-sum value of accrued pension including change of control severance period under the defined benefit plans •   unvested value vests

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		Incremental entitlements on other termination scenarios
Compensation   element	Entitlement on resignation	Termination (without cause)	Retirement	Change of control and termination without cause
Estimated perquisites	•  perquisites end	•  perquisites end	•  perquisites end	•  perquisites continue until 24 months after termination or reemployment, whichever is earlier •  outplacement counselling services (maximum $40,000 in CAD, or USD if paid in USD)

Executives are required to meet specific conditions to qualify for retirement under each of our incentive plans, which include:

For mid and long-term incentives granted before July 31, 2019, and annual incentive awards:

• Be at least 55 years old and have 10 years of continuous service

• Voluntarily terminate employment and provide at least six months’ notice

• Agree not to compete with Sun Life or solicit any of our employees or customers for 12 months under the option plan, and for the length of time that units remain outstanding under the Sun Share Unit Plan.

For mid and long-term incentives granted on or after July 31, 2019:

• Be at least 55 years old

• Having 5 or more years of continuous service

• Sum of age and years of service being at least 65

• Voluntarily terminate employment and provide at least six months’ notice

• Agree not to compete with Sun Life or solicit any of our employees or customers for 12 months under the option plan, and for the length of time that units remain outstanding under the Sun Share Unit Plan.

The table below shows the estimated value of the incremental payments the named executive officers would receive in each of the situations listed above, assuming a termination date of December 31, 2019. U.S. values have been converted to Canadian dollars using an exchange rate of 1.299 as of December 31, 2019 for pension ending balances and the 2019 average rate of 1.327 for all other amounts. In the table:

• termination (without cause) represents only contractually agreed upon severance amounts

• change of control assumes double trigger (change of control and termination without cause)

• cash includes salary and annual incentives

• vested and unvested awards include awards under the mid and long–term incentive plans.

Named executive   officer	Compensation component	Estimated existing payments on resignation		Estimated incremental value on termination, retirement or change of control as of December 31, 2019
				Termination (without cause)		Retirement		Change of control
Dean A. Connor	Cash:		–		2,200,000		1,650,000		8,306,667
President and Chief Executive Officer	Vested awards:		25,669,604		–		–		–
	Unvested awards:		–		10,449,245		20,265,936		20,732,012
	Pension:		7,801,000		–		–		286,000
	Perquisites:		–		–		–		102,316
	Total:		33,470,604		12,649,245		21,915,936		29,426,995
	Vested DSUs		8,322,959		–		–		–

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Named executive   officer	Compensation component	Estimated existing payments on resignation		Estimated incremental value on termination, retirement or change of control as of December 31, 2019
				Termination (without cause)		Retirement		Change of control
Kevin D. Strain	Cash:		–		–		–		3,887,946
Executive Vice-President and Chief Financial Officer	Vested awards:		1,661,693		–		–		–
	Unvested awards:		–		3,044,331		–		5,989,596
	Pension:		4,553,000		–		–		799,000
	Perquisites:		–		–		–		91,948
	Total:		6,214,693		3,044,331		–		10,768,490
	Vested DSUs		–		–		–		–
Stephen C. Peacher	Cash:		–		769,660		1,450,000		8,715,989
President, Sun Life Capital Management	Vested awards:		425,806		–		–		–
	Unvested awards:		–		5,254,706		10,123,147		10,359,155
	Pension:		5,405,303		–		–		–
	Perquisites:		–		–		–		88,909
	Total:		5,831,109		6,024,366		11,573,147		19,164,054
	Vested DSUs:		1,714,567		–		–		–
Daniel R. Fishbein	Cash:		–		763,025		–		5,035,066
President, Sun Life U.S.	Vested awards:		1,944,546		–		–		–
	Unvested awards:		–		2,968,532		–		5,945,079
	Pension:		1,618,166		–		–		–
	Perquisites:		–		–		–		88,909
	Total:		3,562,712		3,731,557		–		11,069,054
	Vested DSUs:		980,062		–		–		–
Claude A. Accum	Cash:		–		–		690,000
President, Sun Life Asia	Vested awards:				–		–		–
	Unvested awards:		–				4,341,143
	Pension:				–		–		–
	Perquisites:		–		–		–
	Total:						5,031,143
	Vested DSUs:		1,323,531		–		–		–
Jacques Goulet	Cash:		–		–		–		3,170,000
President, Sun Life Canada	Vested awards:		51,534		–		–		–
	Unvested awards:		–		2,405,717		–		5,427,126
	Pension:		200,028		–		–		–
	Perquisites:		–		–		–		91,948
	Total:		251,562		2,405,717		–		8,689,074
	Vested DSUs:		–		–		–		–

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Mr. Connor, Mr. Peacher and Mr. Accum qualify as retirement eligible because of their age and years of service. This has the following effects:

• the cash amount under Retirement represents an AIP award at target

• unvested Sun Shares would fully vest, be valued using the actual performance factor and be paid at the normal payment date.

Mr. Accum retired as of December  31, 2019.

Aggregate compensation for Material Risk Takers

As required under the FSB’s Implementation Standard 15, we have defined executives who have a material impact on our risk exposure as MRTs. We had 31 MRT positions in 2019, including members of our Executive Team, executives who perform certain corporate and investment oversight roles, and Business Leaders with significant profit-and-loss accountability who have authority to materially impact the risk exposure of the organization. The table below shows the total compensation granted, paid or outstanding for MRTs as of and for the year ended December 31, 2019. Any compensation paid in U.S. dollars has been converted to Canadian dollars using the 2019 average annual exchange rate of 1.327.

Annual fixed and variable compensation

Annual incentives

Share-based incentives

Outstanding

Compensation   element

Salary

Cash

Deferred (DSUs)

Granted

Paid

Vested

Unvested

Sign-on payments

Severance payments

Aggregate value ($M)

15.1

16.7

0.2

33.6

46.2

24.8

99.9

1.1

–

• Cash incentives for 2019 did not include any guaranteed payments

• Annual incentives represent bonus earned for the 2019 performance year, paid in 2020, inclusive of business and individual performance results

• Share-based incentives include the value of share units and options and any additional units credited as dividends on share units

• Granted represents the value at annual grant in 2019

• Paid represents the value received in 2019 when options were exercised and value at vesting, including performance adjustments for performance share units

• Outstanding share-based incentives represents the in-the-money value of options and the market value of share unit awards using a share price of $59.21 for vested and unvested options and share units as at December 31, 2019

• Sign-on payments represent cash and share unit commitments made upon hire to replace amounts forfeited from previous employer

• Severance payments represent the value of benefits received on termination.

The table below shows the change in value of outstanding MRT deferred compensation during 2019 based on explicit, implicit and other adjustments as outlined in the guidelines issued by the Basel Committee on Banking Supervision.

			Change in value during 2019
	Aggregate value of deferred compensation at January 1, 2019 ($M)		Explicit adjustments ($M)		Implicit adjustments ($M)		Other adjustments ($M)		Aggregate value of deferred compensation at December 31, 2019 ($M)
Total		114.4		16.5		60.2		-7.7		183.5
Percentage change				14.4%		52.6%		-6.7%		60.4%

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• Aggregate value at January 1, 2019 reflects the value of outstanding share units and options

• Explicit adjustments reflect the interim performance factor estimates for the 2017, 2018 and 2019 awards approved by the board in February 2020. This would also include clawbacks if applicable, but none were applied in 2019

• Implicit adjustments reflect the impact of changes in share price and accumulated dividends

• Other adjustments reflect the net impact of the redemption of vested share units, the grant of new share units, forfeited units and option exercises during 2019

• Aggregate value at December 31, 2019 reflects the impact of explicit, implicit and other adjustments during 2019 on the value of outstanding share units and options.

Securities authorized for issue under equity compensation plans

The table below shows the common shares to be issued under the option plan as at December 31, 2019. It also shows the number of common shares available for issue under the option plan which was approved by our common shareholders.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
Equity compensation plans approved by security holders		3,073,966	$	42.36		5,375,637

Other information

Loans to directors and executives

We do not grant personal loans to our directors and executive officers. The table below shows the total loans outstanding to current and former employees of SLF Inc. and our subsidiaries as at February 29, 2020.

	Total outstanding loans
Purpose	To Sun Life or our subsidiaries ($)		To another entity ($)
Securities purchases	$	589,200		–
Other	$	3,939,100		–

Directors and officers liability insurance

We have liability insurance to protect our directors and officers against liabilities they may incur in their capacity as directors and officers of SLF Inc. and our subsidiaries in circumstances where the company cannot provide indemnification. The current policy runs from November 1, 2019 to October 31, 2020 with coverage of up to $210 million. We pay a premium of approximately $1.1 million and there is no deductible.

For more information

You can find recent financial information about SLF Inc. in our consolidated financial statements and MD&A for the year ended December 31, 2019. These and other documents are available on our website (www.sunlife.com), on SEDAR (www.sedar.com) and on EDGAR (www.sec.gov/edgar.shtml). In addition, our sustainability report is available on our website (www.sunlife.com).

You may also request a copy of our most recent consolidated financial statements and MD&A from our Corporate Secretary.

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Schedule A

Charter of the Board of Directors

Mission

The mission of the Board of Directors (the “Board”) is to be a strategic asset of the organization measured by the effective execution of its overall stewardship role and the contribution the Directors make – individually and collectively – to the long – term success of the enterprise.

Membership

The by–laws provide for the Board to have a minimum of eight and a maximum of 20 Directors. Each Director shall possess the attributes set out in the Position Description for Directors. In addition, a majority of the Directors must meet the independence requirements set out in the Director Independence Policy.

Structure and Operations

A schedule of regular Board and Committee meetings will be agreed upon by Chairman of the Board (“Chairman”), in consultation with the Governance, Nomination & Investment Committee and circulated to the Directors prior to the commencement of a calendar year. Confirmation of the date, time and place of regular meetings will be sent to the Directors approximately three weeks in advance of regularly scheduled meetings. Special meetings may be called with 24 hours’ notice.

A quorum at any meeting of the Board shall be a majority of Directors and meetings must be constituted so that the resident Canadian requirements of the Insurance Companies Act (Canada) are met. At each meeting of the Board, the independent Directors will meet privately.

On an annual basis, the Board will review this Charter and its Forward Agenda and approve changes as necessary. This Charter will be posted on the Corporation’s website.

Duties and Responsibilities of the Board

The Board is responsible for supervising the management of the business and affairs of the Corporation. In connection with this responsibility the Board:

Culture

• sets an ethical tone for the Corporation;

• satisfies itself that senior management is sustaining a culture of integrity throughout the organization;

• complies with and reviews employee compliance with the Code of Business Conduct and ensures prompt disclosure of any waivers of the Code of Business Conduct for Directors or senior management.

Governance

• establishes corporate governance practices and policies and monitors corporate governance trends;

• performs its overall stewardship responsibilities either directly or through delegation to its Committees, including the allocation of risk oversight to its Committees;

• establishes position descriptions for the Directors, Chairman and Chairs of Board Committees;

• maintains an orientation program for new Directors, supports ongoing education for all Directors and assesses the effectiveness of the Board, its Committees, the Chairman, the Committee Chairs, and individual Directors on an annual basis.

The Board has clearly outlined matters that require Board approval and those that have been delegated to management. In connection with its duties and responsibilities, the Board approves and oversees:

Strategy

• the Corporation’s vision and purpose statements;

• the strategic plan and business, capital and investment plans on an annual basis;

• significant strategic initiatives, investments and transactions, including significant activities of subsidiaries.

Risk Management, Capital Management and Internal Control

• the Risk Management Framework, Risk Appetite Policy and Internal Control Framework;

• significant policies, plans and strategic initiatives related to the management of, or that materially impact risk, capital and liquidity;

• the Code of Business Conduct.

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Board, Senior Management and Control Functions

Board

• Board and Committee size and composition;

• the evaluation and selection of candidates for election at each annual meeting based on a skills, qualifications and competencies assessment process and consideration of the level of diversity on the Board;

• the formulation of succession plans for the Board, the Chairman and the Committee Chairs.

Senior Management and Control Functions

• the appointment, evaluation and, if necessary, replacement of the President & Chief Executive Officer and other members of senior management, including the Appointed Actuary;

• the delegation to management powers to manage the Corporation;

• talent management and succession plans for the role of President & Chief Executive Officer and other senior management positions;

• the performance and compensation frameworks for senior management, including alignment of those frameworks with applicable regulatory principles;

• the mandates, authority, independence and resources of Control Functions.

Financial Reporting, Communication and Disclosure

• the review and approval of the annual and interim financial statements, Management’s Discussion and Analysis and related news releases;

• the external audit plan, including the fees and scope of the audit engagement, the engagement letter and remuneration of the external auditor under the engagement letter;

• the internal audit plan;

• the review and approval of corporate governance disclosure to shareholders and other stakeholders;

• the process by which shareholders are able to provide feedback to the independent Directors.

In connection with its duties and responsibilities, the Board provides challenge, advice and guidance to senior management of the Corporation on:

Operational and Business Policies

• significant operational, business, risk and crisis management policies of the Corporation, including those in respect of credit, market, operational, insurance, regulatory compliance and strategic risks, and their effectiveness; and

• compensation policy for all human resources that is consistent with the Financial Stability Board (FSB) Principles for Sound Compensation;

Business Performance and Effectiveness of Risk Management

• performance relative to the strategic plan and business, capital and investment plans;

• effectiveness of the strategic planning process;

• effectiveness of the Risk Appetite Policy;

• effectiveness of the internal control framework and management information systems that provide assurance as to the reliability of the Corporation’s financial information and the safeguarding of its assets;

• effectiveness of the Control Functions;

• effectiveness of significant policies and plans related to management of capital and liquidity (e.g., stress testing, ORSA report);

• compliance with legislative and regulatory requirements;

Operations

• reports from senior management, including leaders of Business Groups, on business, financial and operational performance relative to plans and the Risk Appetite Policy; and

• information on client engagement and value creation for clients.

The duties above are the responsibility of senior management. The Board has the discretion to decide the extent and nature of its input, and to provide challenge, advice and guidance on these matters and others.

In connection with its duties and responsibilities, the Board provides advice and counsel to the President & Chief Executive Officer, establishes his or her annual objectives and reviews performance against objectives. The Board may, at the expense of the Corporation, engage any special advisors it deems necessary to provide independent advice, require management to inform applicable regulators in a timely manner of substantial issues affecting the Corporation, and perform such other functions as prescribed by law or as assigned to the Board in the Corporation’s governing documents.

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At Sun Life, we believe that being accountable for the impact of our operations on the environment is one part of building sustainable, healthier communities for life. The adoption of “Notice and Access” to deliver this circular to our shareholders has resulted in significant cost savings as well as the following environmental savings: [Graphic Appears Here] Trees 535 35 water lbs gallons 249,750 of solid 16,720 waste lbs greenhouse 46,050 lbs 249 of mil total . BTUs pollutants water gases energy This circular is printed on FSC® certified paper. The fibre used in the manufacture of the paper stock comes from well-managed forests and controlled sources. [Graphic Appears Here] The greenhouse gas emissions associated with the production, distribution and paper lifecycle of this circular have been calculated and offset by Carbonzero. [Graphic Appears Here] [Graphic Appears Here] Being a sustainable company is essential to our overall business success. Learn more at sunlife.com/sustainability 1 York Street, Toronto Ontario Canada M5J 0B6 sunlife.com MIC-01-2020 [Graphic Appears Here]

EX-99.2

Exhibit 99.2

[Graphic Appears Here] Notice of 2020 annual meeting of common shareholders and notice of availability of meeting materials NOTICE AND ACCESS As permitted by the Canadian Securities Administrators and pursuant to an exemption from the proxy solicitation requirement received from the Office of the Superintendent of Financial Institutions, we are using “notice and access” to deliver our Management Information Circular (circular) to our registered and non-registered shareholders for our annual meeting. We are also using “notice and access” to deliver our annual management’s discussion and analysis (“MD&A”) to our registered shareholders and our MD&A and annual financial statements (together with our MD&A and circular, the “meeting materials”) to share ownership account participants and non-registered shareholders. This means that instead of receiving a paper copy of certain meeting materials, you are receiving this notice, which provides information on how to access these meeting materials online. You will also find below information on how to request paper copies of these meeting materials if you prefer. Adopting notice and access allows us to reduce our printing and mailing costs, and is consistent with our sustainability strategy. You will find enclosed with this notice a proxy or voting instruction form, enabling you to vote at our annual meeting. WHERE: Virtual only meeting via live audio webcast online at https://web.lumiagm.com/186947015 Password: ”sunlife2020” (case sensitive) We recommend that you log in at least one hour before the meeting starts. SHAREHOLDERS WILL BE ASKED TO CONSIDER AND VOTE ON THE FOLLOWING MATTERS: 01 Election of the directors (page 9 of the circular) 02 Appointment of the auditor (page 17 of the circular) 03 A non-binding advisory vote on our approach to executive compensation (page 18 of the circular) NA-1-20 Notice of 2020 Annual Meeting | Notice of Availability of Meeting Materials 01

MEETING MATERIALS CAN BE FOUND ONLINE ON: SEDAR at www.sedar.com EDGAR at www.sec.gov/edgar.shtml Our transfer agent’s website at www.meetingdocuments.com/astca/slf Our website at www.sunlife.com/2020agm VOTING: Registered shareholders are asked to return their completed proxies, or exercise their vote by the voting deadline, May 1, 2020 at 5:00 P.M. (Toronto time). Please refer to your proxy for detailed instructions on how to vote. INTERNET: www.astvotemyproxy.com TELEPHONE: 1 888-489-7352 (toll-free Canada & U.S.) FAX: 1 866-781-3111 (toll-free Canada & U.S.) or 416-368-2502 (other countries). MAIL: Please use the envelope provided REQUESTING A PAPER COPY OF MEETING MATERIALS:Upon request received at any time prior to or up to one year following the date of filing of the circular, annual report, annual financial statements or annual MD&A, as applicable we will send you a paper copy of the document at no cost. The request can be made online at www.meetingdocuments.com/astca/slf or by telephone at 1-888-433-6443 (toll–free from Canada and the U.S.) or 416-682-3801 (other countries). For the circular, your request for a paper copy should be received at least seven business days in advance of the proxy deposit date (being April 23, 2020) in order to receive the circular in advance of the voting deadline. PLEASE CALL:AST Trust Company (Canada), our transfer agent, at 1-888-433-6443 (toll–free Canada and the U.S.) or 416-682-3801 (other countries) if you have questions about Notice and Access. Go Digital! Electronic delivery of other continuous disclosure documents REGISTERED SHAREHOLDERS AND SHARE OWNERSHIP ACCOUNT PARTICIPANTS Sign up for e-delivery at https://ca.astfinancial.com/SLFGoDigital OR by checking the box on the reverse side of your proxy form and providing your email address. NON-REGISTERED SHAREHOLDERS IN CANADA AND U.S. Sign up for e-delivery at www.proxyvote.com using the control number on your voting instruction form OR after the meeting by obtaining a unique registration number from your financial intermediary.NA-1-20 Notice of 2020 Annual Meeting | Notice of Availability of Meeting Materials 02

EX-99.3

Exhibit 99.3

x`

Sun Life Financial Inc. Form of Shareholder Proxy for the May 5, 2020 Annual Meeting [Graphics apeears here] Your control number is: The UNDERSIGNED common shareholder of Sun Life Financial Inc. (the “Company”) hereby appoints William D. Anderson, Chairman of the Board, or failing him, Scott F. Powers, Chair of the Governance, Nomination & Investment Committee, or failing him, a director of the Company appointed by the directors present at the meeting, or instead of any of the foregoing, as the proxy holder of the undersigned to attend, vote and act on behalf of the undersigned at the Annual Meeting of the Company to be held on Tuesday, May 5, 2020 and at any continuation of the meeting after any adjournment thereof, to the same extent and with the same powers as if the undersigned were personally present at such meeting or any such continuation thereof. A common shareholder has the right to appoint a person or company other than those designated above by inserting the name of such person in the space provided above. In addition, YOU MUST call 1-866-751-6315 (within North America) or 1 (212) 235-5754 (outside of North America) by 5:00 pm (Toronto time) on Friday, May 1, 2020 and provide the Company’s transfer agent and registrar, AST Trust Company (Canada) (AST), with the required information for your chosen proxyholder so that AST may provide the proxyholder with a control number via email. This control number will allow your proxyholder to log in to and vote at the meeting. Without a control number, your proxyholder will only be able to log in to the meeting as a guest and will not be able to vote. A duly completed form of proxy must be received by AST Trust Company no later than 5:00 pm (Toronto time) on Friday, May 1, 2020 or, in the case of an adjournment of the meeting, by no later than 5:00 pm (Toronto time) on the date that is two business days before the meeting is reconvened. See reverse side for instructions for submitting your proxy. Information on the following can be found in the Management Information Circular of the Company dated March 13, 2020. The directors and management recommend common shareholders vote FOR the matters below. Unless otherwise specified, the proxy holders designated by the directors and management intend to vote FOR the matters below 1. Election of Directors 01 William D. Anderson For Withhold 07 Sara Grootwassink Lewis For Withhold 02 Dean A. Connor For Withhold 08 James M. Peck For Withhold 03 Stephanie L. Coyles For Withhold 09 Scott F. Powers For Withhold 04 Martin J. G. Glynn For Withhold 10 Hugh D. Segal For Withhold 05 Ashok K. Gupta For Withhold 11 Barbara G. Stymiest For Withhold 06 M. Marianne Harris 2. Appointment of Deloitte LLP as Auditor For Withhold 3. Non-Binding Advisory Vote on Approach to Executive Compensation For Against Your Signature(s) (all common shareholders named on proxy must sign) X Date (dd-mm-yyyy) If you have questions regarding this proxy, please refer to the Voting section of the Management Information Circular for contact information. S-1

Notes to the Form of Proxy This form of proxy is solicited by and on behalf of the Board of Directors and management. This proxy is valid only for the Annual Meeting on May 5, 2020, and any continuation of the Annual Meeting after any adjournment thereof. a) If the common shareholder intends to vote by proxy, this form of proxy must be signed and dated by the common shareholder. All signatures must agree with the names on this proxy. If the common shareholder is a corporation, it must be signed by a duly authorized signing officer whose title should be provided. b) If this form of proxy is signed pursuant to a power of attorney, written evidence of the appointment of the attorney must be returned with the completed proxy. c) Should any of the nominees named in paragraph one of this proxy be unable to serve as a director for any reason, the proxy holder reserves the right to vote for another nominee in his or her discretion unless the proxy holder has been specifically instructed on this form of proxy to withhold the vote for the election of directors. d) This form of proxy confers discretionary authority upon the proxy holder with respect to matters that may properly come before the meeting. e) This proxy must be delivered in accordance with the provisions set out in the Management Information Circular dated March 13, 2020. Instructions for Submitting Your Proxy By Mail: Mark, sign, date and return in the envelope provided. By Email: Mark, sign, date, scan and email both pages to proxyvote@astfinancial.com. By Telephone: From Canada or the United States only, using a touch-tone telephone, call toll free 1-888-489-7352 (English and French) and follow the voice instructions. You will need to refer to your control number printed on the front of this proxy form. By Internet: Access www.astvotemyproxy.com and follow the instructions. You will need to refer to your control number printed on the front of this proxy form. THIS IS THE END OF THE PROXY FORM FOR THE 2020 ANNUAL MEETING. [Graphic Appears Here] Electronic Delivery of Documents We are permitted to deliver our Management Information Circular and management’s discussion and analysis to you through notice-and-access as described in the Circular. If you wish to go digital and receive other materials prepared by Sun Life Financial Inc., such as notices of meeting, proxy forms, annual financial statements and other information by e-mail instead of in hard copy, you can provide your consent by signing up on-line at: https://ca.astfinancial.com/SLFGoDigital or by checking the box and providing your e-mail address below. We encourage you to take advantage of this service. You may change your instructions at any time by writing to the Company’s transfer agent, AST Trust Company (Canada), at sunlifeinquiries@astfinancial.com. Please provide your instructions along with your name, address and Shareholder Account Number at the bottom of this form. To: AST Trust Company (Canada) I wish to receive materials prepared by Sun Life Financial Inc., such as notices of meeting, proxy forms, annual financial statements and other information required to be sent to shareholders, electronically. Doing so means that you will be notified by email when such documents are available, at which time they can be viewed and/or downloaded from our website: www.sunlife.com My e-mail address is: The Insurance Companies Act (Canada) provides that you may also decline to receive annual financial statements, by mail or electronically, by providing written instructions. Please check the box below if you do not wish to receive future annual financial statements. If you do not provide instructions below, the annual financial statements will be sent to you. I do not wish to receive annual financial statements. Shareholder’s name and account number Your signature(s) – all common shareholders named on proxy must sign XDate (dd-mm-yyyy)

REQUEST FOR FINANCIAL STATEMENTS | DEMANDE D’ÉTATS FINANCIERS ONLINE: VISIT BROADRIDGEFINANCIALREQUESTS.COM USING YOUR COMPUTER OR MOBILE DATA DEVICE. YOUR CONTROL NUMBER IS LOCATED BELOW. CONTROL NUMBER: NUMÉRO DE CONTRÔLE : 9999 9999 9999 9999 [Graphic Appears Here] EN LIGNE : VISITEZ BROADRIDGEFINANCIALREQUESTS.COM À L’AIDE DE VOTRE ORDINATEUR OU DE VOTRE APPAREIL PORTABLE. VOTRE NUMÉRO DE CONTRÔLE EST INDIQUÉ CI-DESSOUS. [Graphic Appears Here] SCAN TO REQUEST MATERIAL NOW NUMÉRISEZ POUR DEMANDER LES DOCUMENTS MAINTENANT[Graphic Appears Here] To: Holders of Sun Life Financial Inc. (“SLF”) Class A Preferred Shares, Series 1, 2, 3, 4, 5, 8R, 9QR, 10R, 11QR and 12R Request for Financial Statements Sun Life Financial Inc.’s annual financial statements, interim financial statements and the related management’s discussion and analysis are available on-line at www.sunlife.com/financialreports. If you want us to mail you a printed copy of these documents, please indicate below. If you do not provide instructions, these documents will not be sent to you. You will be asked this question annually. YES, I wish to receive a paper copy of the 2020 annual financial statements and the related management’s discussion and analysis. YES, I wish to receive a paper copy of the 2020 interim financial statements and the related management’s discussion and analysis. You may also sign up on-line at: https://ca.astfinancial.com/financialstatements (company code: 6981b). Signature Date (dd/mm/yy) Thank you for investing in Sun Life Financial Inc. Dest. : Porteurs d’actions privilégiées de catégorie A, série 1, 2, 3, 4, 5, 8R, 9QR, 10R, 11QR et 12R de la Financière Sun Life inc. (la «FSL») Demande d’envoi des états financiers Les états financiers annuels et les états financiers intermédiaires de la Financière Sun Life inc., de même que les rapports de gestion s’y rapportant, sont accessibles en ligne sur le site www.sunlife.com/rapportsfinanciers.. Si vous désirez que nous vous envoyions par la poste un exemplaire imprimé de ces documents, veuillez l’indiquer ci-dessous. Si vous ne fournissez pas de directives, ces documents ne vous seront pas envoyés. Cette question vous sera posée chaque année. OUI - Je désire recevoir un exemplaire Papier des états financiers annuels de 2020 et du rapport de gestion s’y rapportant. OUI - Je désire recevoir un exemplaire papier des états financiers intermédiaires de 2020 et des rapports de gestion s’y rapportant. Vous pouvez également vous inscrire en ligne à l’adresse https://ca.astfinancial.com/etatsfinanciers (code de la société : 6981b). Signature Date (jj/mm/aa) Nous vous remercions d’avoir investi dans la Financière Sun Life inc. 9999 9999 9999 9999

EX-99.4

Exhibit 99.4

Go Digital! At Sun Life we have a long-standing commitment to sustainability. As part of that commitment, we are accountable for the impact of our operations on the environment. Help us reduce the amount of printed material we produce: please consider receiving your investor information electronically. E-DELIVERY IS EASY ANDCONVENIENT. FOLLOW THESE SIMPLE STEPS NOW: Go to www.proxyvote.com or use your smartphone to scan the QR code provided Enter the 16-digit control number from the enclosed Voting Instruction Form Vote and make your final submission Click on the “SIGN UP” button Enter and verify your email address Create and verify your confidential PIN Confirm you have read the Description of Service Submit and you are done! [Graphic Appears Here] -1-2020

EX-99.5

Exhibit 99.5

2019 Annual Report Sun Life Financial Inc.

Table of Contents 02 Financial highlights 03 Chairman’s message 04 CEO’s message 09 Management’s discussion and analysis 88 Consolidated financial statements and notes 167 Sources of earnings 170 Board of directors and executive team 171 Subsidiaries and associates 175 Major offices 177 Corporate and Shareholder information The world of Sun Life Sun Life is a leading international financial services organization. We provide insurance, wealth and asset management solutions to individual and corporate Clients worldwide. 40,600 Employees* Offices in 27 markets* 125,900 Advisors* *At the end of 2019. Includes Asia joint ventures. Bringing our Purpose to life Sustainability is a priority for us and is essential to our business success. Our new sustainability plan focuses on our greatest opportunities to have a positive impact on society while creating a competitive advantage for our business: increasing financial security, fostering healthier lives, and advancing sustainable investing. These efforts build from our foundation as a trusted and responsible business. Learn more about our sustainability efforts and the progress we’re making at sunlife.com/sustainability. Our Clients at the centre of everything we do We’ve set out to be one of the best insurance and asset management companies in the world. To achieve this ambition, we’ve focused our efforts in five key areas: Building lasting and trusting relationships with our Clients Providing our Clients with the right support through distribution excellence Transforming our business using digital, data and analytics Cultivating top talent and culture Continuing our track record of prudent risk management and financial discipline

Our Purpose Helping our Clients achieve lifetime financial security and live healthier lives Scott, a Sun Life U.S. Client, had tonsil cancer. To treat it, surgery that left his speech impaired. He could no longer job, which required him to speak with his clients over the phone. With support from Sun Life vocational specialists, Scott received a prosthetic device. It helped him to speak clearly, and he was able to return to work full-time. The people at Sun Life were so supportive in helping me get back to work. Now I can still help my clients. It’s a good feeling when I go home at night. Balanced and Diversified Business Business diversification Geographic diversification $ Underlying net income*,1,2 Underlying net income*,1,2 1.1 trillion 11% 31% 5% Run-off Asset 16% Sun Life UK Assets under 19% management Sun Life 31% management1,2 U.S. Sun Life Group insurance Canada 201 9 201 9 $ 17% 17 Sun Life Asia billion 15% 24% Wealth 31% Claims and Individual Sun Life Asset insurance Management** benefits paid * Excludes Corporate Support in 20191,2 ** Includes operations in North America, Europe, Asia and Australia

FINANCIAL H I G H L I G H T S Delivering value to our shareholders 5-year total shareholder return Dividend per common share % % Sun Life TSX Financial Sector TSX Composite 70 8 52% 5-Year CAGR3 $ $2.10 % $ 1.91 $1.62 1.75 36 $1.51 0% Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 2015 2016 2017 2018 2019 Represents Total Shareholder Return as described in our 2019 Management Information Circular. Data source: Bloomberg. Underlying net income2 Sales growth2 Value of new business2,4 in C$ millions in C$ millions 11% Insurance 13% 5-Year 5-Year CAGR3 11% 3 5-Year CAGR3 CAGR $3,057 $ $2,947 $1,154 1,206 $968 $2,546 $ $860 $ Wealth and asset 712 $2,305 2,335 management % 5-Year 8 CAGR3 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 Strong capital and financial flexibility Life insurance % % Financial leverage % capital 143 130 ratio1,2 21.2 adequacy test Sun Life Sun Life Target leverage (LICAT) ratio1 Financial Inc. Assurance ratio is 25% Medium-term EPS growth Return on Dividend payout financial 8-10% per annum equity 12-14% ratio 40-50% 2 objectives 5-year progress on medium-term objectives5 Average based % % % on underlying 12 13.2 41 net income Growth in Return Dividend earnings per share on equity payout ratio 1All figures as of December 31, 2019. • 2Underlying net income, underlying return on equity, underlying earnings per share, financial leverage ratio, dividend payout ratio, value of new business, sales and assets under management described on pages 1-8 of this Annual Report represent non-IFRS financial measures. For additional information see Non-IFRS financial measures in our 2019 Annual Management’s discussion and analysis. • 3Percentage results are 5-year compound annual growth rates (CAGR) from 2014 to 2019. • 4Value of new business represents the present value of our best estimate of future distributable earnings, net of the cost of capital, from new business contracts written in a particular time period, except new business in our Asset management pillar. • 5Underlying EPS growth is calculated using a compound annual growth rate. Underlying ROE and dividend payout ratio are calculated using an average. • 2019 reported net income by business group (excludes Corporate support): Asset management 32%, Canada 31%, Asia 18%, UK 13%, U.S. 6% • 2019 reported net income by type of business (excludes Corporate support): Asset Management 32%, Individual Insurance 20%, Wealth 19%, Group Insurance 18%, Run-off 11% • Reported net income: 2015 $2.2 billion; 2016 $2.5 billion; 2017 $2.1 billion; 2018 $2.5 billion; 2019 $2.6 billion. 02 | Sun Life Financial Inc. 2019 Annual Report

CHAIRMAN’S M E S S A G E To my Fellow Shareholders I’m delighted to share Sun Life’s 2019 Annual details the Company’s strong performance and across our four strategic pillars. In 2019, Sun Life continued to deliver long-term value for our Shareholders, while also delivering on its Purpose to help Clients achieve lifetime financial security and live healthier lives. Our diversified and balanced business model, coupled with a steadfast focus on Clients and a prudent risk profile, helps us build our leadership position in each of our markets. This balanced approach by business mix and geography underpins our ability to continue to perform well against our medium-term objectives, even in a sustained low-interest rate environment. Growth in each of our strategic pillars contributed to solid financial results, and we again increased our common share dividend twice during the year. With a LICAT ratio of 143% at Sun Life Financial Inc. and a healthy balance sheet, capital remains a key strength of your Company. We continue to adhere to our disciplined approach to capital allocation, including investments to grow our business organically, acquisitions that accelerate our strategy, and return of capital to our Shareholders through dividends and share repurchases. During the past year, we made advances in a number of areas. We rolled out our Client Data Privacy Principles – a shared vision and commitment to how we will protect Client data as we accelerate our digital transformation. As part of our digital journey, we continued to make it easier for Clients to do business with us in all of our markets, using technology and data to be more personal, predictive and proactive. Our Board continues to have complete confidence in the Company’s leadership team and the strategic direction of Sun Life. We were thrilled to see Dean Connor named as one of Harvard Business Review’s 100 Best-Performing CEOs in the World. The inclusion was all the more noteworthy given the greater emphasis on environmental, sustainability and governance (ESG) scores, along with financial performance. This is especially gratifying, as we have long focused on ensuring Sun Life’s growth as a sustainable organization, while delivering long-term value to our Clients, Employees, Shareholders and communities. We proudly remain one of the Global 100 Most Sustainable Corporations in the World and support the Sustainable Development Goals developed by the United Nations. We recently launched a refreshed sustainability strategy with even greater aspirations and clearer targets that aligns closely to our business and focuses our efforts on delivering on our Purpose. Operating ethically, treating our Clients and Employees with utmost respect, investing in communities, maintaining our strong corporate governance, and continuing to foster our unique Client-focused culture of collaboration propelled by speed and agility – these are all vital elements that ensure the longevity and success of our business. In a world of accelerating change, it is critically important we continue to focus on strengthening the capabilities of our organization, both by developing our people and by continuing to attract top talent. We are committed to creating inclusive, diverse and empowering workplaces where everyone feels valued, and we are proud to once again be named to the Bloomberg Gender-Equality Index. On behalf of Sun Life’s Board of Directors, I would sincerely like to thank our Clients and Shareholders for the confidence they place in us. I also want to say a heartfelt thank you to all Sun Life Employees for their commitment to Client excellence and sustained focus on moving us toward our ambition of being one of the best insurance and asset management companies in the world. William (Bill) D. Anderson Chairman of the Board Sun Life Financial Inc. 2019 Annual Report | 03 CHAIRMAN’S M E S S A G E To my Fellow Shareholders I’m delighted to share Sun Life’s 2019 Annual details the Company’s strong performance and across our four strategic pillars. In 2019, Sun Life continued to deliver long-term value for our Shareholders, while also delivering on its Purpose to help Clients achieve lifetime financial security and live healthier lives. Our diversified and balanced business model, coupled with a steadfast focus on Clients and a prudent risk profile, helps us build our leadership position in each of our markets. This balanced approach by business mix and geography underpins our ability to continue to perform well against our medium-term objectives, even in a sustained low-interest rate environment. Growth in each of our strategic pillars contributed to solid financial results, and we again increased our common share dividend twice during the year. With a LICAT ratio of 143% at Sun Life Financial Inc. and a healthy balance sheet, capital remains a key strength of your Company. We continue to adhere to our disciplined approach to capital allocation, including investments to grow our business organically, acquisitions that accelerate our strategy, and return of capital to our Shareholders through dividends and share repurchases. During the past year, we made advances in a number of areas. We rolled out our Client Data Privacy Principles – a shared vision and commitment to how we will protect Client data as we accelerate our digital transformation. As part of our digital journey, we continued to make it easier for Clients to do business with us in all of our markets, using technology and data to be more personal, predictive and proactive. Our Board continues to have complete confidence in the Company’s leadership team and the strategic direction of Sun Life. We were thrilled to see Dean Connor named as one of Harvard Business Review’s 100 Best-Performing CEOs in the World. The inclusion was all the more noteworthy given the greater emphasis on environmental, sustainability and governance (ESG) scores, along with financial performance. This is especially gratifying, as we have long focused on ensuring Sun Life’s growth as a sustainable organization, while delivering long-term value to our Clients, Employees, Shareholders and communities. We proudly remain one of the Global 100 Most Sustainable Corporations in the World and support the Sustainable Development Goals developed by the United Nations. We recently launched a refreshed sustainability strategy with even greater aspirations and clearer targets that aligns closely to our business and focuses our efforts on delivering on our Purpose. Operating ethically, treating our Clients and Employees with utmost respect, investing in communities, maintaining our strong corporate governance, and continuing to foster our unique Client-focused culture of collaboration propelled by speed and agility – these are all vital elements that ensure the longevity and success of our business. In a world of accelerating change, it is critically important we continue to focus on strengthening the capabilities of our organization, both by developing our people and by continuing to attract top talent. We are committed to creating inclusive, diverse and empowering workplaces where everyone feels valued, and we are proud to once again be named to the Bloomberg Gender-Equality Index. On behalf of Sun Life’s Board of Directors, I would sincerely like to thank our Clients and Shareholders for the confidence they place in us. I also want to say a heartfelt thank you to all Sun Life Employees for their commitment to Client excellence and sustained focus on moving us toward our ambition of being one of the best insurance and asset management companies in the world. William (Bill) D. Anderson Chairman of the Board Sun Life Financial Inc. 2019 Annual Report | 03

2019 – year of growth and progress CE O’S M E S S A G E 2019 marked another year of progress for Sun Life, with continued growth and new milestones. Underlying net income grew to over $3 billion, and the common share dividend increased by 10%. Reported net income and value of new business both grew as well, but were short of expectations due to the decline in interest rates during the year. For the first time in our history, we surpassed $1 trillion of assets under management (AUM). That’s a large number, but the real story is about the millions of Clients who count on us to invest for their retirement, save for their kids’ education, cover health expenses, provide payment upon illness or death, or help them make a healthy return to work. In this world of low interest rates and lower returns, our Clients need us more than ever. Surpassed $1 trillion of assets under management in 2019 Our Clients are at the heart of what we do Our Purpose is to help our Clients achieve lifetime financial security and live healthier lives. We include health in our Purpose because it aligns directly to our health, disability and wellness products solutions, which currently make up 20% of our business. It’s also a reminder that our Clients’ physical and mental well-being is as important as their financial well-being – indeed the two are often interconnected. Helping Clients with their health will become an even bigger part of our future and we believe we’re in a unique position to deliver. Here’s an example: Denise*, one of our advisors in Hong Kong, was meeting with Raymond*, a young, healthy Client. Denise explained the benefits of Critical Illness Insurance and what it could 04 | Sun Life Financial Inc. 2019 Annual Report provide for his young family in the event of an illness. Raymond didn’t think health insurance was necessary. Denise kept in touch, and after a year, Raymond decided to buy the insurance based on her advice and trust. Several months later, Raymond was diagnosed with brain cancer. The lump sum from Sun Life helped cover his medical costs and other additional expenses, and allowed him to focus on his recovery. Raymond was deeply grateful for Denise’s advice to purchase insurance. That’s our Purpose in action! Several years ago we introduced ‘Client for life’, which is what we call our obsession about Clients. We want our Client interactions to be personal, predictive and proactive. Clients expect us to be easy to do business with, and to do * Names have been changed to protect Client privacy.

a great job fixing problems if they occur. We survey Clients every six months on these dimensions, and I’m pleased to report that our Client experience index improved again in 2019 for the third year in a row since we started tracking it. What’s driving this improvement in Client experience? In short, it’s not one thing – it’s every thing. Rewriting thousands of documents in plain language, more mobile apps to make it easy to do business with Sun Life, more proactive outreach to Clients, new approaches for resolving Client problems, new ways to share Client stories, and new dashboards to track progress. As we write this letter, countries around the world are working hard to contain the spread of the COVID-19 virus, and to mitigate as best as possible the negative financial impacts on people and businesses. At Sun Life, we are making every effort to be there for our Clients, including accelerated claims payment related to COVID-19, a steady hand on the tiller of investment solutions and advice, and timely and relevant information. One quarter of our Annual Incentive Plan award depends on improved Client experience, and our employee engagement surveys confirm that Client for life has become deeply embedded in the DNA of Sun Life. That said, we have a lot more to do. Not enough of our Clients have a financial plan yet. We can do a better job helping members of our retirement savings plans chart the course for a financially healthy retirement. Sometimes Clients have to wait too long to get a decision on their disability claim, or to get through to one of our call centres. We need to help Clients take a longer-term view of investment performance. The obsession about Clients will never end! The right industry, the right company, at the right time We are in a wonderful industry, helping people with their financial needs, sometimes at the most joyous moments in their lives, and sometimes at the most difficult times. The demand for what we do is expected to grow as: • populations age; • governments and employers download more responsibility onto the shoulders of individuals; • millions of people across Asia move into the middle class; and • digital solutions make it easier for Clients to buy what our industry provides. These are secular trends that should persist for quite some time. Our Four Pillar strategy puts Sun Life in a particularly good place to take advantage of those growth trends. By simplifying and focusing our business, we have freed up our leaders and our capital to focus on growth. Each of our four Business Groups faces exciting growth opportunities that come from the big secular trends noted above. Here are a few examples, by Business Group. In Canada we’ve created Lumino Health, a digital platform that is open to all Canadians, providing them with access to a wide range of health resources. There are now 10,000 user searches per day on Lumino Health as people tap into 14 million Client ratings on dentists, physiotherapists and other health professionals, along with key information like cost, location, and feedback based on their experience. We are encouraged by early efforts to drive new revenue from the platform and have a number of ideas to broaden Lumino Health. In the U.S., we rolled out our Sun Life + Maxwell Health benefits platform, a technology solution that makes it easy for members and HR teams to access and manage employee benefits year-round. We now have over 10,000 families enrolled on the platform, and we’re seeing nearly three times the product selections by employers, compared to our typical employee benefits Clients. We see this as a trifecta: • for employees, it’s easier to enrol and close coverage gaps; • for employers, they get more kudos for the benefits they’re providing, and sleep better knowing employees are making informed choices; and • for Sun Life, it helps fulfill our Purpose, and drives more revenue. In Asset Management, we rebranded Sun Life Investment Management to SLC Management, our alternatives asset manager. During 2019, we completed the purchase of a majority stake in BentallGreenOak, broadening our global real estate capabilities, and announced an agreement to acquire a majority stake in InfraRed Capital Partners, which will add infrastructure equity to the suite of alternatives asset solutions we can offer Clients. Sun Life Financial Inc. 2019 Annual Report | 05

Including InfraRed, SLC Management will have grown to US$100 billion in third-party AUM in just six years. MFS net sales improved in 2019, sparked by four consecutive quarters of positive net sales in U.S. Retail. AUM grew 23% to US$527 billion by year end. MFS made strong progress in growing its institutional fixed income presence and sales, as well as European retail sales. But above all, MFS once again delivered outstanding investment performance for Clients. For example, out of 55 investment firms in the Barron’s annual U.S. fund family rankings, MFS placed #1 for one-year performance, #2 for five-year and #4 for 10-year. Our Asia business continues to grow at a rapid pace, with insurance sales up 29% in the year, reflecting the underlying demand driven by demographics, as well as an ever-stronger Sun Life presence in each of our seven markets. We increased the number of Sun Life advisors, improved quality through our Most Respected Advisor program, and expanded bancassurance through new distribution agreements in Vietnam and Indonesia. We continue to work with strategic partners, including telcos like U Mobile in Malaysia, insurtech start-ups like Bowtie Life Insurance in Hong Kong, and digital marketplaces like Lazada in the Philippines. We see a bright future, built on a long history of doing business in Asia, including in the Philippines where we’re celebrating 125 years of bringing our Purpose to life for millions of Clients. It’s also worth noting the efforts of our United Kingdom team who manage the insurance and pension promises for over 500,000 Clients in a business that is closed to new sales. They have done an excellent job improving Client service, managing risk and maintaining strong relationships with regulators. Building a workforce for the future None of this happens overnight or without the talent and capabilities of an incredible workforce, one that’s primed for the future of work. It means having the talent and skills to lead us into the next decade of innovation and transformation. That includes diversity and inclusion, which is critically important for high performing teams. We’ve set commitments around gender and visible minority representation in leadership roles, and made progress in 2019. While it’s a good start, we know there’s more to do and this is a key area of focus for our leadership team. Spotlight on digital and data Our work on digital and data directly supports our Client for life strategy, and we’ve been at the forefront of the industry when it comes to introducing digital and mobile technology. We introduced new features in our highly rated Canadian mobile app, giving our more than one million users another way to submit health claims, check investment balances or connect with their advisors. In the U.S., we’re using robotics to streamline processes, including a bot that helps calculate and pay orthodontic claims quickly and accurately. In Asia, we’re meeting Clients where they hang out – on their mobile phones – with Client apps in all seven of our local Asian markets. We are also changing how we build and maintain technology, and have begun the shift to a more agile development process, centred around Clients, with short iterations instead of a traditional waterfall approach. It is a new way of working together, and we aim to better meet Client needs and reduce development time and cost. Of course, with digital capabilities comes data privacy and security. 06 | Sun Life Financial Inc. 2019 Annual Report

Clients trust us with their information, and it’s critical we take a leadership role when it comes to protecting Client data. That’s why we’ve launched our Client Data Privacy Principles. These principles serve as guardrails to cover all aspects of data governance – from what’s collected, to who’s accountable, to how data is used and protected – including the commitment that Sun Life will not sell Client data. Advancing sustainable communities In 2019 we refreshed our global sustainability plan to better align to our strategy and our Purpose. Our new plan focuses on three key areas where we can have the most impact in creating a more sustainable future: Sustainable Investing, Financial Security, and Healthier Lives. You can see our new sustainability plan at sunlife.com/sustainability. Last year, Sun Life became the first insurance company globally to issue a Sustainability Bond. The $750 million in capital raised from institutional investors will support projects that contribute to the long-term health of communities, like investments in hospitals or childcare centres. Our focus on diabetes connects directly to our Purpose, and to date, Sun Life has contributed more than $31 million to this cause. Through our Team Up Against Diabetes platform, it’s about awareness, prevention, care and research across the globe Our commitment comes to life through our Dunk for Diabetes pr in North America and with the thousands of people participating Sun Life Resolution Run events, now spanning five cities across A Leading to strong Shareholder outcomes The execution behind the Four Pillar strategy, Client for life, Talent, and Risk contributed to strong outcomes for Shareholders in 2019, and over the past five years. During that period, Sun Life’s Total Common Shareholder Return (share appreciation plus dividend yield) averaged 11.2% per annum, placing us Top Quartile among 20 global peers. We continue to perform well against our medium-term objectives: Medium-term objective Five-year average Underlying EPS growth of 8-10% per annum 12% per annum Underlying ROE of 12-14% 13.2% Dividend payout ratio of 40-50% of earnings 41% Sun Life Financial Inc. 2019 Annual Report | 07

Sun Life is a company with a remarkable past and even brighter future Shaping our future We aspire to be one of the best insurance and asset management companies in the world, and in 2019 we made good progress on this journey. While the world can be unpredictable, we know our Clients need us more than ever. They need health-care solutions, savings solutions, and investment and insurance solutions that meet their needs. Sun Life is a company with a remarkable past and even brighter future, on a path to becoming one of the best global firms in the industry. I want to thank our Shareholders for your ongoing confidence in Sun Life. Thanks to our Board of Directors for your guidance and governance. Thanks to our Employees, Advisors and Partners, for your enthusiasm and commitment as we become even more Client-obsessed. And to our Clients, thank you for putting your trust in Sun Life, today and into the future. Dean A. Connor President & Chief Executive Officer 08 | Sun Life Financial Inc. 2019 Annual Report

MANAGEMENT’S

DISCUSSION

AND ANALYSIS

10	A.  HOW WE REPORT OUR RESULTS
11	B.  OVERVIEW
11	1. Strategy
13	2. Financial Objectives
13	3. Acquisitions and Other
14	C.  FINANCIAL SUMMARY
15	D.  PROFITABILITY
15	2019 vs. 2018
17	E. GROWTH
17	1. Sales and Value of New Business
18	2. Premiums and Deposits
18	3. Assets Under Management
19	F. FINANCIAL STRENGTH
21	G.  PERFORMANCE BY BUSINESS GROUP
22	1. Canada
25	2. U.S.
28	3. Asset Management
31	4. Asia
34	5. Corporate
35	H.  INVESTMENTS
35	1. Investment Profile
36	2. Debt Securities
37	3. Equities
37	4. Mortgages and Loans
39	5. Derivatives
40	6. Investment Properties
41	7. Impaired Assets
41	8. Asset Default Provision

41	I.  CAPITAL AND LIQUIDITY MANAGEMENT
41	1. Capital
44	2. Capital Adequacy
45	3. Shareholder Dividends
45	4. Principal Sources and Uses of Funds
46	5. Liquidity
47	J.  RISK MANAGEMENT
47	1. Risk Management Framework
48	2. Risk Governance
49	3. Risk Universe
49	4. Risk Appetite
50	5. Risk Management Policies
50	6. Risk Management Process
50	7. Three Lines of Defence
51	8. Risk Culture and Philosophy
52	9. Risk Categories
68	K.  ADDITIONAL FINANCIAL DISCLOSURE
68	1. Items related to Statement of Operations
70	2. Items related to Statement of Financial Position
71	3. Fourth Quarter 2019 Profitability
73	4. Fourth Quarter 2019 Growth
73	5. Previous Quarters
74	L.  NON-IFRS FINANCIAL MEASURES
78	M.  ACCOUNTING AND CONTROL MATTERS
78	1. Critical Accounting Policies and Estimates
83	2. Changes in Accounting Policies
85	3. Disclosure Controls and Procedures
86	N.  LEGAL AND REGULATORY PROCEEDINGS
86	O.  FORWARD-LOOKING STATEMENTS

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     9

Management’s Discussion and Analysis

February 12, 2020

 A. How We Report Our Results

Sun Life Financial Inc. (“SLF Inc.”) is a leading international financial services organization providing insurance, wealth and asset management solutions to individual and corporate Clients. Sun Life has operations in a number of markets worldwide, including Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China, Australia, Singapore, Vietnam, Malaysia and Bermuda. As of December 31, 2019, Sun Life had total assets under management (“AUM”) of $1,099 billion.

SLF Inc. is a publicly traded company domiciled in Canada and is the holding company of Sun Life Assurance Company of Canada (“Sun Life Assurance”). In this management’s discussion and analysis (“MD&A”), SLF Inc., its subsidiaries and, where applicable, its joint ventures and associates are collectively referred to as “the Company”, “Sun Life”, “we”, “our”, and “us”. Unless otherwise indicated, all information in this MD&A is presented as at and for the year ended December 31, 2019 and the information contained in this document is in Canadian dollars. Where information at and for the year ended December 31, 2019 is not available, information available for the latest period before December 31, 2019 is used. Except where otherwise noted, financial information is presented in accordance with International Financial Reporting Standards (“IFRS”) and the accounting requirements of the Office of the Superintendent of Financial Institutions (“OSFI”). Reported net income (loss) refers to Common shareholders’ net income (loss) determined in accordance with IFRS.

We manage our operations and report our financial results in five business segments: Canada, United States (“U.S.”), Asset Management, Asia, and Corporate. Prior to the second quarter of 2019, these business segments were referred to as Sun Life Financial Canada, Sun Life Financial U.S., Sun Life Financial Asset Management, Sun Life Financial Asia, and Corporate, respectively, in our interim and annual MD&A. Information concerning these segments is included in our annual and interim consolidated financial statements and accompanying notes (“Annual Consolidated Financial Statements” and “Interim Consolidated Financial Statements”, respectively, and “Consolidated Financial Statements” collectively) and this MD&A. Effective in the first quarter of 2018, we transferred our International business unit from the U.S. to Asia and comparable periods have been changed to conform to the current year presentation.

i. Use of Non-IFRS Financial Measures

We report certain financial information using non-IFRS financial measures, as we believe that these measures provide information that is useful to investors in understanding our performance and facilitate a comparison of our quarterly and full year results from period to period. These non-IFRS financial measures do not have any standardized meaning and may not be comparable with similar measures used by other companies. For certain non-IFRS financial measures, there are no directly comparable amounts under IFRS. These non-IFRS financial measures should not be viewed in isolation from or as alternatives to measures of financial performance determined in accordance with IFRS. Additional information concerning these non-IFRS financial measures and reconciliations to the closest IFRS measures are available in section L - Non-IFRS Financial Measures in this document. Further additional information concerning these non-IFRS financial measures and reconciliations to the closest IFRS measures are included in the Supplementary Financial Information packages that are available on www.sunlife.com under Investors - Financial results & reports.

ii. Forward-looking Statements

Certain statements in this document are forward-looking statements within the meaning of certain securities laws, including the “safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities legislation. Additional information concerning forward-looking statements and important risk factors that could cause our assumptions, estimates, expectations and projections to be inaccurate and our actual results or events to differ materially from those expressed in or implied by such forward-looking statements can be found in section O - Forward-looking Statements in this document.

iii. Additional Information

Additional information relating to the Company can be found in the Consolidated Financial Statements and SLF Inc.’s Annual Information Form (“AIF”) for the year ended December 31, 2019. These documents are filed with securities regulators in Canada and are available at www.sedar.com. SLF Inc.’s Annual Consolidated Financial Statements, annual MD&A and AIF are filed with the United States Securities and Exchange Commission (“SEC”) in SLF Inc.’s annual report on Form 40-F and SLF Inc.’s interim MD&As and Interim Consolidated Financial Statements are furnished to the SEC on Form 6-Ks and are available at www.sec.gov.

10    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

 B. Overview

Sun Life is a leading international financial services organization providing a diverse range of insurance, wealth and asset management solutions to individual and corporate Clients.

Purpose and Ambition

Our Purpose is to help our Clients achieve lifetime financial security and live healthier lives.

Our ambition is to be one of the best insurance and asset management companies in the world. To achieve this, across each of the four pillars of our business we aim to have:

• Top quartile Client scores relative to our competitors

• Each pillar of our business be viewed as one of the best in its market

• Top quartile total shareholder return

• A disproportionate share of top talent, wrapped in an empowering culture

1. Strategy

We aim to provide outstanding value to our Clients. Our strategy places the Client at the centre of everything we do. We believe our Client for life strategy and purpose, as described below, will allow us to gain a distinct competitive advantage to achieve our goal to be a leader in each of our four pillars.

Our Client Strategy

Our Client-centric strategy has five key areas of focus that we are pursuing across each of our four pillars. These areas of focus define how we compete in our markets, extend our competitive advantages, fulfill our purpose and support our ambition to be one of the best insurance and asset management companies in the world.

Client: Our Clients are at the centre of everything we do and we are focused on building lasting and trusted Client relationships by providing quality products and services that deliver on our Purpose. We believe this allows us to maximize the value we provide our Clients, and leads to better business outcomes for Sun Life. We achieve this by:

• Making it easier to do business with us

• Being more proactive in contacting and engaging with our Clients

• Delivering consistently superior Client service

Distribution Excellence: Our Clients work with high-quality distribution partners who put them at the centre of what they do. Our distribution partners will engage Clients where, when and how they wish, in a personalized and relevant way. We continue to invest in our distribution capabilities, through digital channels and by enabling our advisors, agents, partners and brokers to deliver great Client experiences and focus on meeting Client needs.

Digital, Data & Analytics: Our Digital, Data & Analytics capabilities are critical to both delivering value to our Clients and for efficiency and effectiveness, while respecting our Clients’ privacy. As consumer preferences evolve and technological advancements enable new possibilities and services, Sun Life is investing in new capabilities across our businesses to reach our Clients more effectively, drive efficiencies and explore new business opportunities. Our focus in these areas is to:

• Digitize current processes and interactions

• Be more proactive, predictive and personalized with our Clients

• Build and deploy new digital business models

Financial Discipline: Our continued financial and risk management prudence, efficient use of capital and strong execution will support our medium-term financial objectives and also support us in meeting our aim of top quartile total shareholder returns while maintaining a preferred risk and capital profile. Specific areas of focus are to:

• Deliver strong earnings growth and disciplined expense management to support the enterprise’s medium-term objectives

• Create a culture of accountability, purpose and passion for long-term Client and business value embodied by all employees, including a strong focus on efficient use of resources to drive top and bottom line growth

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     11

Talent and Culture: Delivering on our strategy will require that we maintain our focus on attracting, retaining and developing the best talent, while also continuing to evolve our talent and culture to manage the increasing pace of change. Specifically, our talent goals are to continue to:

• Attract a disproportionate share of top talent across our geographies, wrapped in an empowering culture

• Build on our high performance culture and support and reward our diverse, talented workforce

• Ensure that our focus on our Clients becomes deeply embedded in our unique and inclusive culture

• Remain committed to the highest standards of business ethics and good governance

Our Four Pillars

Our four pillar approach defines the businesses and markets in which we compete. In each of these pillars, we focus on creating value for our Clients and shareholders in businesses that have strong growth prospects, favourable return on equity and strong capital generation in attractive global markets.

Currently, in our four pillars we are:

A leader in insurance and wealth solutions in our Canadian Home Market

• Delivering value to over six million Clients via our Group and Individual businesses

• Market leader in providing benefits and pensions in the workplace

• Servicing individuals with a wide range of wealth, health, and insurance products via our retail channels, including our leading SLFD⁽¹⁾ network

A leader in U.S. group benefits

• A market leader in group benefits serving employees and their families with employer-sponsored benefits at workplaces of all sizes across the country including group life, disability, dental, vision, voluntary and supplemental health products

• The largest independent provider of medical stop-loss insurance in the U.S.

• A leader in providing turnkey solutions for insurance and health plan partners through FullscopeRMS, including disability, absence management, life, stop-loss and supplemental health coverages

A leader in Global Asset Management

• A provider of investment products through MFS Investment Management (“MFS”) and SLC Management that delivers superior value to Clients through traditional active asset management as well as liability driven investing (“LDI”) and alternative asset classes:

• MFS is a premier asset management firm offering a comprehensive selection of asset management products and services to retail and institutional investors around the world

• SLC Management is an institutional investment management business delivering customized LDI, alternative fixed income and global real estate solutions

A leader in Asia through distribution excellence in higher growth markets

• A provider of individual life and health insurance that delivers Client value in all markets

• A provider, in select markets, of asset management and group retirement products and services

• Operating in seven local markets: Philippines, Hong Kong, Indonesia, Vietnam, Malaysia, India and China

• Among the global leaders in providing life insurance solutions to international high-net-worth Clients

Underpinning Our Strategy is an Enduring Commitment to Sustainability

Sustainability is a priority and is essential to our long-term business success. We strive to contribute to a healthier, more financially resilient, environmentally secure, and economically prosperous world. Our sustainability plan is underpinned by our Purpose of helping our Clients achieve lifetime financial security and live healthier lives, and is integrated into our business activities. We focus on three areas where we have the greatest opportunity to have a positive impact on society, while creating competitive advantage for our business.

Financial Security: We provide our Clients and employees with innovative products and services that increase their lifetime financial security. We’re committed to improving financial resiliency in society by advocating for and expanding access to products and services to close insurance coverage gaps and build long-term wealth.

Healthier Lives: We offer our Clients and employees products and tools to live healthier lives. Through investments in community health and access to health and disability insurance, we’re focused on improving health and wellness in society.

Sustainable Investing: We manage capital with sustainability embedded in our investment processes. We offer our Clients and employees sustainable investing opportunities, and invest our assets to support a low-carbon and more inclusive economy.

Our sustainability plan builds from our foundation as a Trusted and Responsible Business. At the core of this foundation is our commitment to being a responsibly-managed business that is Client-focused, competitive, forward-thinking, financially and environmentally resilient, and sustainable for the long term. Operating ethically, treating our Clients and employees with utmost respect, investing in communities and reducing our impact on the environment are all vital components of maintaining the proven longevity and resiliency of our business. Our robust approach to managing our business creates trust and value for our Clients, employees and stakeholders.

For additional information on our sustainability plan and recent progress, refer to www.sunlife.com/sustainability.

(1) Sun Life Financial Distribution - our proprietary career advisory network.

12    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

2. Financial Objectives

Our medium-term financial objectives are outlined as follows:

Measure(1)	Medium-term financial objectives	5-Year(2)	2019 results
Underlying EPS growth
Growth in EPS reflects the Company’s focus on generating
sustainable earnings for shareholders.	8%-10%	12%	6%
Underlying ROE
ROE is a significant driver of shareholder value and is a major focus
for management across all businesses.	12%-14%	13.2%	14.3%
Dividend payout ratio
Payout of capital serves shareholder value, based on underlying
net income.	40%-50%	41%	41%

(1) Underlying earnings per share (“EPS”), underlying return on equity (“ROE”) and the dividend payout ratio are non-IFRS financial measures. See section L - Non-IFRS Financial Measures. The dividend payout ratio represents the ratio of common shareholders’ dividends to underlying net income. See section I - Capital and Liquidity Management - 1 - Capital in this document for further information regarding dividends.

(2) Underlying EPS growth is calculated using a compound annual growth rate. Underlying ROE and dividend payout ratio are calculated using an average.

We have performed well against our medium-term financial objectives. Although considered reasonable, we may not be able to achieve our medium-term financial objectives as our assumptions may prove to be inaccurate. Accordingly, our actual results could differ materially from our medium-term financial objectives as described above. Our medium-term financial objectives do not constitute guidance. Our medium-term financial objectives are forward-looking non-IFRS financial measures and additional information is provided in this MD&A in the section O - Forward-looking Statements - Medium-Term Financial Objectives.

3. Acquisitions and Other

The following developments occurred since January 1, 2019. Additional information concerning acquisitions and dispositions is provided in our 2019 Annual Consolidated Financial Statements.

On December 17, 2019, we entered into an agreement with InfraRed Capital Partners (“InfraRed”), a global infrastructure and real estate investment manager, to purchase 80% of the entity and the ability to acquire the remaining interest in the future (“InfraRed transaction”). InfraRed will form part of our Asset Management business segment. The InfraRed transaction is expected to close during the first half of 2020, subject to receipt of regulatory approvals and satisfaction of customary closing conditions.

At the beginning of the third quarter of 2019, we completed the acquisition of our majority stake in BentallGreenOak (“BGO acquisition”), which was the product of the merger of the Bentall Kennedy group of companies and GreenOak Real Estate, a global real estate investment firm. The acquisition increases our global real estate investment footprint, while adding organizational depth and a full spectrum of solutions including equity and debt real estate strategies. As a result of the acquisition, total equity was reduced by $860 million, primarily driven by the establishment of financial liabilities associated with the anticipated increase of our future ownership in BGO.

On October 17, 2019, we entered into a 15-year bancassurance partnership with Tien Phong Commercial Bank (“TPBank”). The agreement combines TPBank’s distribution network with our market-leading life insurance products, giving 2.5 million TPBank customers access to a comprehensive range of innovative insurance solutions. TPBank is fast growing with a strong Client focus, and is a digital leader in Vietnam.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     13

 C. Financial Summary

($ millions, unless otherwise noted)		2019		2018		2017
Profitability
	Net income (loss)
	Reported net income (loss)	2,618		2,522		2,149
	Underlying net income (loss)(1)	3,057		2,947		2,546
	Diluted EPS ($)
	Reported EPS (diluted)	4.40		4.14		3.49
	Underlying EPS (diluted)(1)	5.16		4.86		4.15
	Reported basic EPS ($)	4.42		4.16		3.51
	Return on equity (%)
	Reported ROE(1)	12.3	%	12.1	%	10.7	%
	Underlying ROE(1)	14.3	%	14.2	%	12.7	%
Growth
	Sales
	Insurance sales(1)	3,524		3,189		3,042
	Wealth sales(1)	158,992		136,702		145,314
	Value of new business(1)	1,206		1,154		968
	Premiums and deposits
	Net premium revenue	20,288		18,642		15,281
	Segregated fund deposits	11,958		11,553		10,858
	Mutual fund sales(1)	99,836		84,202		87,515
	Managed fund sales(1)	45,062		38,903		44,093
	ASO premium and deposit equivalents(1)(2)	6,802		6,808		6,933
	Total premiums and deposits(1)	183,946		160,108		164,680
	Assets under management(1)
	General fund assets	180,229		168,765		162,720
	Segregated fund assets	116,973		103,062		106,392
	Mutual fund assets, managed fund assets and other AUM(1)	802,145		679,316		705,673
	Total AUM(1)	1,099,347		951,143		974,785
Financial Strength
	LICAT ratios(3)(4)
	Sun Life Financial Inc.	143	%	144	%	n/a
	Sun Life Assurance(5)	130	%	131	%	n/a
	Financial leverage ratio(1)	21.2	%	21.2	%	23.6	%
	Dividend(6)
	Dividend yield(7)	3.9	%	3.7	%	3.6	%
	Dividend payout ratio(1)	41	%	39	%	42	%
	Dividends per common share ($)	2.100		1.905		1.745
	Capital
	Subordinated debt and innovative capital instruments(8)	3,738		3,738		4,136
	Participating policyholders’ equity and non-controlling interests	1,110		864		650
	Total shareholders’ equity	23,398		23,706		22,321
	Total capital	28,246		28,308		27,107
	Average common shares outstanding (millions)	592		606		613
	Closing common shares outstanding (millions)	588		599		611

(1) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

(2) Administrative Services Only (“ASO”).

(3) Life Insurance Capital Adequacy Test (“LICAT”) ratio.

(4) LICAT ratios are not applicable before January 1, 2018; we previously used the Minimum Continuing Capital and Surplus Requirements (“MCCSR”) guideline, the former capital regulatory guideline.

(5) Sun Life Assurance is SLF Inc.’s principal operating life insurance subsidiary.

(6) See section I - Capital and Liquidity Management - 1 - Capital in this document for further information regarding dividends.

(7) Dividend yield is calculated on dividends per common share paid divided by the daily annual average share price for the year.

(8) Innovative capital instruments consist of Sun Life ExchangEable Capital Securities (“SLEECS”) which qualify as capital for Canadian regulatory purposes. Under IFRS, these items are reported as Senior debentures in our Consolidated Financial Statements. For additional information, see the section I - Capital and Liquidity Management - 1 - Capital in this document.

14    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

 D. Profitability

2019 vs. 2018

The following table reconciles our reported net income and underlying net income. The table also sets out the impacts that other notable items had on our reported net income and underlying net income in 2019 and 2018. All factors discussed in this document that impact our underlying net income are also applicable to reported net income.

($ millions, after-tax)	2019		2018
Reported net income	2,618		2,522
Less: Market-related impacts(1)	(237	)	(188	)
Assumption changes and management actions(1)	(46	)	(155	)
Other adjustments(1)	(156	)	(82	)
Underlying net income(2)	3,057		2,947
Reported ROE(2)	12.3	%	12.1	%
Underlying ROE(2)	14.3	%	14.2	%
Impacts of other notable items on reported and underlying net income
Experience-related items(3)
Impacts of investment activity on insurance contract liabilities (“investing activity”)	131		135
Credit	74		72
Mortality	22		(6	)
Morbidity	(70	)	51
Lapse and other policyholder behaviour	(24	)	(49	)
Expenses	(18	)	(62	)
Other experience	(29	)	90

(1) Represents an adjustment made to arrive at a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document for a breakdown of components within this adjustment.

(2) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

(3) Experience-related items reflect the difference between actual experience during the reporting period and best estimate assumptions used in the determination of our insurance contract liabilities.

Reported net income increased by $96 million or 4% in 2019 compared to 2018, driven by less unfavourable assumption changes and management actions (“ACMA”) impacts, partially offset by higher fair value adjustments on MFS’s share-based payment awards and unfavourable market-related impacts. Underlying net income increased by $110 million or 4%, driven by business growth, higher net benefits from tax-related items, improved expense experience, favourable mortality experience in the U.S. and Canada and improved lapse and other policyholder behaviour experience, partially offset by unfavourable morbidity experience in Canada, interest on par seed capital⁽¹⁾ in 2018 and lower new business gains in Canada and Asia.

i. Market-related impacts

Market-related impacts in 2019 compared to 2018 reflected unfavourable impacts from interest rates and changes in the fair value of investment properties, largely offset by favourable impacts from equity markets. See Section L - Non-IFRS Financial Measures in this document for a breakdown of the components of market-related impacts.

ii. Assumption changes and management actions

Due to the long-term nature of our business, we make certain judgments involving assumptions and estimates to value our obligations to policyholders. The valuation of these obligations is recorded in our financial statements as insurance contract liabilities and investment contract liabilities and requires us to make assumptions about equity market performance, interest rates, asset default, mortality and morbidity rates, lapse and other policyholder behaviour, expenses and inflation and other factors over the life of our products.

We review assumptions each year, generally in the third quarter, and revise these assumptions if appropriate. We consider our actual experience in current and past periods relative to our assumptions as part of our annual review.

Compared to a decrease of $155 million in 2018, ACMA in 2019 resulted in a decrease of $46 million to reported net income.

(1) In the first quarter of 2018, the seed capital that was transferred into the participating account at demutualization was transferred into the shareholder account, along with accrued investment income (“interest on par seed capital”). The results include income of $110 million of which $75 million was in Canada and $35 million was in the U.S.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     15

Assumption Changes and Management Actions by Type

The following table sets out the impacts of ACMA on our reported net income in 2019.

2019	Full year
($ millions, after-tax)		Impacts on reported net income(1)	Comments
Mortality / morbidity		318	Updates to reflect mortality / morbidity experience in all jurisdictions. The largest items were favourable mortality impacts in the United Kingdom (“UK”) in Corporate and in Group Retirement Services (“GRS”) in Canada.
Lapse and other policyholder behaviour		(91)	Updates to lapse and policyholder behaviour in all jurisdictions. The largest item was an unfavourable lapse update in International in Asia.
Expenses		(9)	Updates to reflect expense experience in all jurisdictions.
Investment returns		10	Updates to various investment-related assumptions across the Company, partially offset by updates to promulgated ultimate reinvestment rate.
Model enhancements and other		(274)	Various enhancements and methodology changes across all jurisdictions. The largest items were unfavourable strengthening of reinsurance provisions in In-force Management in the U.S., as well as methodology changes relating to medical stop-loss in Group Benefits in the U.S., partially offset by a favourable change to participating accounts in the UK in Corporate and the Philippines in Asia.
Total impacts on reported net income(2)		(46)

(1) ACMA is included in reported net income and is presented as an adjustment to arrive at underlying net income.

(2) In this table, ACMA represents the shareholders’ reported net income impacts (after-tax) including management actions. In Note 10.A of our 2019 Annual Consolidated Financial Statements, the impacts of method and assumptions changes represents the change in shareholders’ and participating policyholders’ insurance contract liabilities net of reinsurance assets (pre-tax) and does not include management actions. Further information can be found in section L - Non-IFRS Financial Measures in this document.

Additional information on estimates relating to our policyholder obligations, including the methodology and assumptions used in their determination, can be found in this MD&A under the section M - Accounting and Control Matters - 1 - Critical Accounting Policies and Estimates and in Note 10 in our 2019 Annual Consolidated Financial Statements.

iii. Other adjustments

Other adjustments in 2019 decreased reported net income by $156 million, compared to $82 million in 2018, reflecting higher fair value adjustments on MFS’s share-based payment awards, higher acquisition and integration costs in SLC Management and restructuring costs in Corporate, partially offset by lower integration costs in the U.S. and Corporate. The costs in SLC Management relate to the BGO acquisition and the pending InfraRed transaction. The costs in Corporate include severance costs as a result of various initiatives to simplify our organizational structure and drive efficiencies. The lower costs in the U.S. reflect the successful completion of the integration of the U.S. employee benefits business acquired in 2016.

iv. Experience-related items

Compared to 2018, the significant changes in experience-related items are as follows:

• Favourable mortality experience in the U.S. and Canada;

• Unfavourable morbidity experience in Canada;

• Improved lapse and other policyholder behaviour experience in the U.S., Asia and Canada, partially offset by the UK in Corporate;

• Improved expense experience resulting from expense discipline while growing the businesses, and lower incentive compensation costs; and

• Unfavourable other experience, including interest on par seed capital of $110 million - $75 million in Canada and $35 million in the U.S. in 2018, and higher project spend including the adoption of IFRS 17 Insurance Contracts (“IFRS 17”).

v. Income taxes

Our statutory tax rate is normally reduced by various tax benefits, such as lower taxes on income subject to tax in foreign jurisdictions, a range of tax-exempt investment income, and other sustainable tax benefits that are expected to decrease our effective tax rate.

For 2019, our effective tax rates on reported and underlying net income⁽¹⁾ were 8.8% and 14.1%, respectively, compared to 17.0% and 17.2%, respectively, for 2018. Our effective tax rate on underlying net income for 2019 is below our expected range of 15% to 20%, primarily due to the favourable resolution of Canadian tax matters and higher tax-exempt investment income. For additional information, refer to Note 20 in our 2019 Annual Consolidated Financial Statements. Our effective tax rate on underlying net income for 2018 was within our expected range.

vi. Impacts of foreign exchange translation

We have operations in many markets worldwide, including Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China, Australia, Singapore, Vietnam, Malaysia and Bermuda, and generate revenues and incur expenses in local currencies in these jurisdictions, which are translated to Canadian dollars.

(1) Our effective income tax rate on underlying net income is calculated using underlying net income and income tax expense associated with underlying net income, which excludes amounts attributable to participating policyholders.

16    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

Items impacting our Consolidated Statements of Operations are translated into Canadian dollars using average exchange rates for the respective period. For items impacting our Consolidated Statements of Financial Position, period end rates are used for currency translation purposes.

The following table provides the foreign exchange rates for the U.S. dollar, which is usually our most significant impact of foreign exchange translation, over the past four quarters and two years.

Exchange rate	Quarterly								Full year
	Q4’19		Q3’19		Q2’19		Q1’19		2019		2018
U.S. Dollar - Average		1.320		1.320		1.337		1.329		1.327		1.295
U.S. Dollar - Period end		1.299		1.324		1.309		1.334		1.299		1.364

In general, our net income benefits from a weakening Canadian dollar and is adversely affected by a strengthening Canadian dollar as net income from the Company’s international operations is translated back to Canadian dollars. Conversely, in a period of losses, the weakening of the Canadian dollar has the effect of increasing losses in foreign jurisdictions. The relative impacts of foreign exchange translation in any given period are driven by the movement of foreign exchange rates as well as the proportion of earnings generated in our foreign operations. We generally express the impacts of foreign exchange translation on net income on a year-over-year basis.

During 2019, the impacts of foreign exchange translation increased reported net income and underlying net income by $33 million and $47 million, respectively.

 E. Growth

1. Sales and Value of New Business

($ millions)	2019		2018		2017
Insurance sales by business group(1)
Canada		988		984		1,125
U.S.(2)		1,382		1,307		1,106
Asia(2)		1,154		898		811
Total insurance sales		3,524		3,189		3,042
Wealth sales by business group(1)
Canada		16,114		15,286		14,976
Asia		8,373		10,101		13,056
Total wealth sales excluding Asset Management		24,487		25,387		28,032
Asset Management sales(1)		134,505		111,315		117,282
Total wealth sales		158,992		136,702		145,314
Value of New Business(1) (“VNB”)		1,206		1,154		968

(1) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

(2) Effective January 1, 2018, we transferred our International business unit from the U.S. to Asia, and comparative figures in 2017 have been changed to conform to the current year presentation.

Total Company insurance sales increased by $335 million or 11% ($283 million or 9%, excluding the impacts of foreign exchange translation) in 2019 compared to 2018.

• Canada insurance sales were in line with 2018.

• U.S. insurance sales increased by 3%, excluding the favourable impacts of foreign exchange translation of $32 million, primarily driven by strong growth in medical stop-loss sales, partially offset by lower large case sales in employee benefits.

• Asia insurance sales increased by 26%, excluding the favourable impacts of foreign exchange translation of $20 million, driven by growth in all local insurance markets.

Total Company wealth sales increased by $22.3 billion or 16% ($19.1 billion or 14%, excluding the impacts of foreign exchange translation) in 2019 compared to 2018.

• Canada wealth sales increased by 5%, primarily driven by continued growth in GRS.

• Asia wealth sales decreased by 18%, excluding the favourable impacts of foreign exchange translation of $120 million, as a result of lower mutual fund sales in India due to weak market sentiment, partially offset by money market sales in the Philippines and growth in the pension business in Hong Kong.

• Asset Management sales increased by 18%, excluding the favourable impacts of foreign exchange translation of $3.1 billion, driven by higher mutual and managed fund sales in MFS and higher sales in SLC Management.

Total Company VNB was $1,206 million in 2019, an increase of 5% compared to 2018, driven by higher sales in the U.S. and Asia, partially offset by changes in sales mix and the impact of lower interest rates.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     17

2. Premiums and Deposits

($ millions)	2019		2018		2017
Premiums and Deposits
Net premium revenue		20,288		18,642		15,281
Segregated fund deposits		11,958		11,553		10,858
Mutual fund sales(1)		99,836		84,202		87,515
Managed fund sales(1)		45,062		38,903		44,093
ASO premium and deposit equivalents(1)		6,802		6,808		6,933
Total premiums and deposits(1)		183,946		160,108		164,680
Adjusted premiums and deposits(2)		181,100		160,710		166,897

(1) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

(2) Adjusted premiums and deposits is a non-IFRS financial measure excludes from premiums and deposits the impacts of Constant Currency Adjustment and Reinsurance in Canada’s GB Operations Adjustment as described in section L - Non-IFRS Financial Measures in this document.

Premiums and deposits increased by $23.8 billion or 15% in 2019, compared to 2018, driven by increased mutual fund and managed fund sales. The impacts of foreign exchange translation increased premiums and deposits by $3.4 billion. Adjusted premiums and deposits increased by $20.4 billion or 13% in 2019 compared to 2018, driven by increased mutual fund and managed fund sales.

Net premium revenue increased by $1.6 billion or 9% in 2019 compared to 2018, driven by increased premium revenue in Canada, Asia and the U.S. The impacts of foreign exchange translation increased net premiums revenue by $184 million.

Segregated fund deposits increased by $405 million or 4% in 2019 compared to 2018, driven by increased deposits in Canada. The impacts of foreign exchange translation increased segregated fund deposits by $37 million.

Mutual fund sales increased by $15.6 billion or 19% in 2019 compared to 2018, driven by increased sales in MFS, the Philippines in Asia and Canada. The impacts of foreign exchange translation increased mutual fund sales by $2.2 billion.

Managed fund sales increased by $6.2 billion or 16% in 2019 compared to 2018, driven by increased sales in MFS, SLC Management and Hong Kong in Asia. The impacts of foreign exchange translation increased managed fund sales by $1.0 billion.

ASO premium and deposit equivalents in 2019 were in line with 2018. The impacts of foreign exchange translation increased ASO premium and deposit equivalents by $6 million.

3. Assets Under Management

AUM consists of general funds, segregated funds and other AUM. Other AUM includes mutual funds and managed funds, which include institutional and other third-party assets managed by the Company.

($ millions)	2019		2018		2017
Assets under management
General fund assets		180,229		168,765		162,720
Segregated fund assets		116,973		103,062		106,392
Mutual fund assets, managed fund assets and other AUM(1)		802,145		679,316		705,673
Total AUM(1)		1,099,347		951,143		974,785

(1) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

AUM increased by $148.2 billion or 16% as at December 31, 2019 compared to December 31, 2018, resulting primarily from:

(i) an increase of favourable market movements on the value of mutual funds, managed funds and segregated funds of $166.6 billion;

(ii) an increase of $12.6 billion from the BGO acquisition;

(iii) an increase in AUM of general fund assets of $11.5 billion; and

(iv) an increase of other business activities of $2.4 billion; partially offset by

(v) a decrease of $35.6 billion from the impacts of foreign exchange translation (excluding the impacts from general fund assets); and

(vi) net outflows from mutual, managed and segregated funds of $9.3 billion.

The net outflow of mutual, managed and segregated funds of $9.3 billion in 2019 was predominantly driven by net outflows from MFS of $15.8 billion, which were partially offset by net inflows of $3.6 billion in SLC Management, $2.4 billion in Asia and $1.4 billion in Canada.

General fund assets increased by $11.5 billion or 7% as at December 31, 2019 compared to December 31, 2018, primarily attributable to:

(i) other business activities of $7.8 billion; and

(ii) an increase of $7.1 billion from the change in value of fair value through profit or loss (“FVTPL”) assets and liabilities; partially offset by

(iii) a decrease of $3.4 billion from the impacts of foreign exchange translation.

Segregated fund assets increased by $13.9 billion or 13% as at December 31, 2019 compared to December 31, 2018, primarily driven by favourable market movements of $14.7 billion, partially offset by the impacts of foreign exchange translation of $0.3 billion and net outflows of $0.1 billion.

18    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

Mutual funds, managed funds and other AUM increased by $122.8 billion or 18% as at December 31, 2019 compared to December 31, 2018, driven by favourable market movements of $152.0 billion, an increase of $12.6 billion from the BGO acquisition, other business activities of $2.8 billion, partially offset by the impacts of foreign exchange translation of $35.3 billion and net outflows of $9.2 billion.

 F. Financial Strength

	2019		2018		2017
LICAT ratio(1)
Sun Life Financial Inc.	143	%	144	%	n/a
Sun Life Assurance	130	%	131	%	n/a
Financial leverage ratio(2)	21.2	%	21.2	%	23.6	%
Dividend
Dividend payout ratio(2)	41	%	39	%	42	%
Dividends per common share ($)	2.100		1.905		1.745
Capital ($ millions)
Subordinated debt	3,538		3,039		3,437
Innovative capital instruments(3)	200		699		699
Equity
Participating policyholders’ equity and non-controlling interests	1,110		864		650
Preferred shareholders’ equity	2,257		2,257		2,257
Common shareholders’ equity	21,141		21,449		20,064
Total equity	24,508		24,570		22,971
Total capital	28,246		28,308		27,107

(1) LICAT ratios are not applicable before January 1, 2018.

(2) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

(3) Innovative capital instruments consist of Sun Life ExchangEable Capital Securities and qualify as regulatory capital. However, under IFRS they are reported as Senior debentures in our Consolidated Financial Statements. For additional information, see section I - Capital and Liquidity Management - 1 - Capital in this document.

Life Insurance Capital Adequacy Test

OSFI has developed the regulatory capital framework referred to as the Life Insurance Capital Adequacy Test for Canada. LICAT measures the capital adequacy of an insurer using a risk-based approach and includes elements that contribute to financial strength through periods when an insurer is under stress as well as elements that contribute to policyholder and creditor protection wind-up.

SLF Inc. is a non-operating insurance company and is subject to the LICAT guideline. As at December 31, 2019, SLF Inc.’s LICAT ratio was 143%, which was 1% lower than December 31, 2018. The favourable impacts of reported net income, market movements and net change in subordinated debt were more than offset by the impacts of payment of dividends, repurchases of common shares, redemption of innovative capital instruments, OSFI’s 2019 LICAT guideline revisions, the de-registration of a U.S. reinsurer in the second quarter and the BGO acquisition.

Sun Life Assurance, SLF Inc.’s principal operating life insurance subsidiary, is also subject to the LICAT guideline. As at December 31, 2019, Sun Life Assurance’s LICAT ratio was 130%, compared to 131% as at December 31, 2018. The favourable contribution of reported net income and market impacts were more than offset by dividends to SLF Inc. and the impact from OSFI’s 2019 LICAT guideline revisions. The Sun Life Assurance LICAT ratios in both periods are well above OSFI’s supervisory ratio of 100% and regulatory minimum ratio of 90%.

Capital

Our total capital consists of subordinated debt and other capital instruments, participating policyholders’ equity and total shareholders’ equity which includes common shareholders’ equity, preferred shareholders’ equity, and non-controlling interests. As at December 31, 2019, our total capital was $28.2 billion, largely unchanged from the prior year. The decreases to total capital included the payment of $1,236 million of dividends on common shares of SLF Inc. (“common shares”), the impact related to the BGO acquisition of $860 million⁽¹⁾, the decrease of $592 million from the repurchase and cancellation of common shares, the impacts of foreign exchange translation loss of $564 million included in other comprehensive income (loss) (“OCI”), changes in the remeasurement of defined benefit plans of $42 million and net changes in debentures detailed below that net to $nil, largely offset by reported net income of $2,618 million, net unrealized gains on available-for-sale (“AFS”) assets of $369 million and change in participating policyholders’ equity of $227 million.

We strive to achieve an optimal capital structure by balancing the use of debt and equity financing. The financial leverage ratio for SLF Inc., which includes the innovative capital instruments and preferred shares issued by SLF Inc. as part of debt for the purposes of this calculation, was 21.2% as at December 31, 2019, consistent with December 31, 2018.

The legal entity, SLF Inc. (the ultimate parent company) and its wholly-owned holding companies had $2.3 billion in cash and other liquid assets⁽²⁾ as at December 31, 2019. Of this amount, $1.3 billion was held at SLF Inc. The remaining $1.0 billion of liquid assets were held by SLF Inc.’s wholly-owned holding companies, which are available to SLF Inc. without any regulatory restrictions. SLF Inc. and its wholly-owned holding companies had $2.5 billion in cash and other liquid assets as at December 31, 2018.

(1) For additional information, refer to Note 3 in our 2019 Annual Consolidated Financial Statements.

(2) Other liquid assets include cash equivalents, short-term investments, and publicly traded securities.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     19

On May 13, 2019, SLF Inc. redeemed all of the outstanding $250 million principal amount of Series 2014-1 Subordinated Unsecured 2.77% Fixed/Floating Debentures, in accordance with the redemption terms attached to such debentures. The redemption was funded from existing cash and other liquid assets.

On July 2, 2019, SLF Inc.’s Series D Senior Unsecured 5.70% Debentures matured and SLF Inc. repaid all of the outstanding $300 million principal amount of such debentures together with all accrued and unpaid interest. Under LICAT, senior debentures do not qualify as available capital, as a result, the repayment of the Series D Debentures had no impact on the LICAT ratio of Sun Life Assurance or SLF Inc. In addition, a separate pool of assets had been set aside to support the redemption of these debentures. As such, the redemption did not affect the cash and other liquid assets held by SLF Inc. and its wholly-owned holding companies noted above.

On August 13, 2019, SLF Inc. completed its issuance of Series 2019-1 Subordinated Unsecured 2.38% Fixed/Floating Debentures, with a principal amount of $750 million, due 2029. Sun Life intends to use an amount equal to the net proceeds to finance or refinance eligible assets as defined in our Sustainability Bond Framework.

On December 31, 2019, Sun Life Capital Trust II, a subsidiary of SLF Inc. redeemed all of the outstanding $500 million principal amount of Sun Life ExchangEable Capital Securities - Series 2009-1, in accordance with the terms outlined in the prospectus for the securities.

Common Share Dividend Activity

SLF Inc. increased the dividend paid on its common shares in the second and fourth quarter of 2019 and paid total common shareholder dividends of $2.100 per common share in 2019, compared to $1.905 paid in 2018. In relation to the Canadian Dividend Reinvestment and Share Purchase Plan (“DRIP”), commencing with the dividends paid on March 31, 2016, common shares were acquired by the plan agent on the open market and no shares were issued from treasury in connection with the plan in 2017, 2018 or 2019.

Normal Course Issuer Bids

On August 14, 2019, SLF Inc. renewed its normal course issuer bid, which remains in effect until August 13, 2020, or such earlier date as SLF Inc. may determine, or until SLF Inc. has purchased an aggregate of 15.0 million common shares under the bid. Shares purchased in 2019 were as follows:

	2019
	Common shares purchased(1)(2) (millions)		Amount ($ millions)
Bid announced August 2018 (expired August 13, 2019)		8.6		445
Bid announced August 2019		2.8		147
		11.4		592

(1) All of the common shares purchased under SLF Inc.’s normal course issuer bids during 2019 were subsequently cancelled.

(2) There were no common shares purchased in the fourth quarter of 2019.

Financial Strength Ratings

Independent rating agencies assign credit ratings to securities issued by companies and assign financial strength ratings to financial institutions such as Sun Life Assurance.

The financial strength ratings assigned by rating agencies are intended to provide an independent view of the creditworthiness and financial strength of a financial institution. Each rating agency has developed its own methodology for the assessment and subsequent rating of life insurance companies.

Rating agencies do not assign a financial strength rating for SLF Inc., however, credit ratings are assigned to the securities issued by SLF Inc. and its subsidiaries and are described in SLF Inc.’s AIF under the heading Security Ratings.

The following table summarizes the financial strength ratings for Sun Life Assurance as at January 31, 2020 and January 31, 2019.

	A.M. Best	DBRS	Moody’s	Standard & Poor’s
January 31, 2020	A+	AA	Aa3	AA
January 31, 2019	A+	AA(low)	Aa3	AA-

Rating agencies took the following actions on the financial strength rating of Sun Life Assurance throughout 2019:

• March 14, 2019 - Standard and Poor’s (“S&P”) upgraded the financial strength rating to “AA” from “AA-”

• October 16, 2019 - DBRS upgraded the financial strength rating to “AA” from “AA(low)”

• December 4, 2019 - A.M. Best affirmed the financial strength rating with a stable outlook

20    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

 G. Performance by Business Group

Sun Life’s business is well-diversified across geographies and business types, supported by our four pillar strategy and our diversified offerings of insurance and wealth products.

(1) Excludes Corporate Support.

($ millions, unless otherwise noted)	2019			2018			2017
Reported net income (loss)
Canada		883			942			963
U.S.(1)		163			52			(144	)
Asset Management		897			909			653
Asia(1)		520			555			778
Corporate		155			64			(101	)
Total reported net income (loss)		2,618			2,522			2,149
Underlying net income (loss)(2)
Canada		1,012			1,036			949
U.S.(1)		532			514			376
Asset Management		1,004			925			812
Asia(1)		550			523			461
Corporate		(41	)		(51	)		(52	)
Total underlying net income (loss)(2)		3,057			2,947			2,546

(1) Effective January 1, 2018, we transferred our International business unit from the U.S. to Asia, and comparative figures have been changed to conform to the current year presentation.

(2) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

All factors discussed in this document that impact our underlying net income are also applicable to reported net income.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     21

1. Canada

Our Canada business segment is a leading provider of protection, health, and wealth solutions, providing products and services
that deliver value to over 6 million Clients. We are the largest provider of benefits and pensions in the workplace, and provide a
wide range of products to individuals via retail channels. Canada is a growth market for Sun Life and we are well-positioned to
help meet evolving Client needs with integrated solutions for savings, retirement, health care and insurance protection.

	Business Units
•   Individual Insurance & Wealth	•   Group Retirement Services	•   Group Benefits

2019 Highlights

Shaping the market

• Maintained #1 position in workplace solutions, reaching over $110 billion GRS assets under administration and $11 billion of business-in-force in Group Benefits (“GB”).

• Achieved sales of $1.9 billion in Defined Benefit Solutions (“DBS”) for the year, which included the largest same-day group annuities transaction in the Canadian market with a single insurer. DBS offers customized and innovative solutions assisting companies in de-risking their pension plans.

• Maintained #1 position in Individual insurance and health sales⁽¹⁾ by offering a wide-range of solutions, including the launch of a Universal Life product targeted to meet the needs of small business owners.

• Continued retail wealth momentum driving Sun Life Global Investments (“SLGI”) assets to $29 billion and with Sun GIF⁽²⁾ gross sales growing 7% over the prior year.

• For the 11th consecutive year, voted “Most Trusted Life Insurance Company” by Reader’s Digest.

• For the 12th consecutive year, received 100% on the Corporate Equality Index (“CEI”) and was awarded the “Best Place to Work for LGBTQ Workplace Equality”⁽³⁾.

• For the fifth consecutive year, recognized as one of “Canada’s Top Employers for Young People” in the editorial competition organized by the Canada’s Top 100 Employers project.

Putting the Client at the Centre, with Digital, Data and Analytics

• Continued to advance our digital capabilities, particularly our Client and supplier digital platform, Lumino Health, which provides Canadians with a single point of contact for a comprehensive range of health resources, with over 10 million health care provider user ratings and an average of approximately 10,000 user searches per day.

• Our highly rated Canadian mobile app, my Sun Life, enables Clients to search and connect with 150,000 Client-rated, paramedical health care providers across Canada, call for appointment bookings, submit health claims, check investment balances, take a picture to send and update forms, and connect with their financial advisor.

• Enhanced our use of data analytics to accelerate the underwriting process, which improved the Client and advisor experience, requiring fewer laboratory tests and issuing policies faster.

• Continued to be a leader in offering coverages that reflect changing demographics, society and social values. We were the first major group benefits provider to offer gender affirmation coverage, as we continue to evolve and diversify our health benefit plans, helping to meet the needs of all Canadians.

• Expanded our suite of available health care innovations to include pharmacogenomics, which helps medical practitioners identify the right medications and dosages for individuals based on their personal health profile and makeup, resulting in improved outcomes for our Clients.

• Launched SunUniversalLife Pro for small business owners, providing permanent insurance coverage to help them meet their business, personal and estate planning needs.

Strategy and Outlook

As the leading provider of group benefits, the market leader in the group retirement market and one of the largest players in individual insurance in the Canadian market, Sun Life is well-positioned to shape the market based on the complex and evolving needs of Canadians. Going forward, we will continue to leverage our market leadership position across our core businesses and distribution networks, to deliver on our Purpose to help our Clients achieve lifetime financial security and live healthier lives. Our focus for our Canadian businesses will be to:

Put the Client at the centre of everything we do

• Deliver a consistent best-in-class Client experience across all our Canadian businesses and continue to raise the bar, making it easier to do business with us. We have established the Client Experience Office (“CXO”), to drive change and share the best innovations in our organization.

• Continue to innovate to deliver a seamless, multi-channel experience, engaging Clients where, when and how they wish, while providing more proactive, personalized contact, leveraging our digital, data and analytics capabilities.

(1) LIMRA Sales Market Share as of third quarter 2019 year-to-date.

(2) Sun Life Guaranteed Investment Funds (“Sun GIF”).

(3) Human Rights Campaign Foundation’s Corporate Equality Index 2020 Report.

22    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

Shape the market enabled by leadership in core businesses

• Continue to support our industry-leading SLFD⁽¹⁾ network, and our third-party advisors, with new and enhanced products and services, while leveraging their capabilities by providing additional digital support in these channels. The advisor channels are well-positioned to help our Clients with customized financial plans and life and health insurance solutions.

• Advance new business models to shape and grow the market to meet our Clients’ health needs, including the advancement of our Digital Health Solutions (“DHS”) business and Lumino Health platform.

• Our strength in the worksite market and industry-leading technology positions us to implement innovations, such as aiding GB Clients in managing their organizations’ health needs from an employee wellness perspective, as well as providing solutions to help bend the medical cost curve. These kinds of initiatives will allow us to extend our high Client retention rate and our market leadership in the GB and GRS businesses.

• We are helping to shape the growing Canadian group annuities market by assisting employers manage the risk in their defined benefit plans, where we are the leading provider of customized solutions.

Leverage digital, data and analytics, and artificial intelligence to develop new business models

• Continue our journey to digitizing the Client and sponsor journey, with innovative capabilities to engage Clients in moments that matter.

• Ensure every Client across the country can have a distinctive, integrated, Client-centric digital experience across life, health, and wealth solutions platforms.

• Use Client insights to provide expanded proactive and personalized interactions, and deliver these through our Digital Benefits Assistant (“DBA”) and Ella platforms, which deliver personalized, relevant advice to our Clients.

• Continue to develop our highly-rated my Sun Life mobile app in Canada, making it easy and convenient for plan members to manage and use their pensions and benefits.

Outlook

We continue to evolve our business based on shifting demographics in the Canadian market, with aging cohorts at one end, and millennials, with a preference for digital interfaces, at the other end. All cohorts are focused on the need for financial security in retirement, and the impacts of the downloading of financial responsibility from governments and employers to individuals. With this, Canadians have two major preoccupations, their financial well-being, and their personal and loved ones’ health. Both of these drive the need for effective life and health protection and wealth advice, presenting opportunities for Sun Life to provide additional services to Canadians. As a trusted market leader with a full suite of solutions and advice and a strong presence at the worksite and in communities across Canada, we are well-positioned to continue to help our Clients in the right way, at the right time.

The Canadian market is facing several headwinds that present both challenges and opportunities for our business. Digital disruptors continue to emerge, regulatory focus and changes are impacting all business units, and the competitive environment continues to apply additional pressure on achieving our objectives. To address these headwinds, we are actively investing in innovative digital solutions to provide more proactive personalized contact with our Clients to shape the industry in response to their needs. We continue to adjust and adapt our plans to drive momentum across our core businesses and accelerate growth through our CXO. We continue to build on our leadership at the worksite, reach out to Clients through our multi-channel distribution, and explore new offerings in the wealth and health spaces to help our Clients achieve lifetime financial security and healthier lives.

  Business Units

Business	Description	Market position
Individual  Insurance &  Wealth	•  Provides holistic advice to individuals to help them and their families achieve lifetime financial security, and live healthier lives, leveraging a broad suite of life and health insurance and investment products •  Products distributed via multi-channel distribution model consisting of the SLFD, third-party channels, including independent brokers and broker-dealers, and direct to consumer for certain products	•  1st place market position by premiums within the individual life and health market(1) •  1st in fixed product sales(1) and 4th place market position by total wealth deposits and premiums(1)
Group  Benefits	•  Provides group insurance products in Canada, including life, dental, extended health care, disability and critical illness, to employers of all sizes •  Leverages our worksite advantage to offer voluntary benefits solutions to individual plan members, including post-employment life and health plans •  Products distributed by sales representatives in collaboration with independent advisors, benefits consultants and the SLFD	•  1st place group benefits provider in Canada for the 7th consecutive year(2)
Group  Retirement  Services	•  Provides defined contribution pension plans and defined benefit solutions in Canada to employers of all sizes •  Leverages our worksite advantage to offer voluntary savings plans, including post-employment plans, to those members exiting their employer-sponsored plans •  Defined Benefit Solutions offers an expanding range of innovative de-risking solutions for defined benefit pension plans •  Products distributed by sales representatives in collaboration with a multi-channel distribution network of pension consultants and advisors	•  GRS ranked 1st in the defined contribution market based on total Capital Accumulation Plan assets for the 17th consecutive year(3) and is an industry leader in the defined benefit solutions annuity market

(1) LIMRA Sales Market Share as of third quarter 2019 year-to-date.

(2) Based on revenue for year ended December 2018 from 2019 Benefits Canada Report.

(3) Based on the 2018 Fraser Pension Universe Report.

(1) Sun Life Financial Distribution—our proprietary career advisory network.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     23

  Financial and Business Results

($ millions)	2019		2018		2017
Individual Insurance & Wealth	282		328		415
Group Benefits	253		282		332
Group Retirement Services	348		332		216
Reported net income	883		942		963
Less: Market-related impacts(1)	(111	)	(117	)	8
Assumption changes and management actions(1)	(17	)	23		22
Other adjustments(1)(2)	(1	)	–		(16	)
Underlying net income(3)	1,012		1,036		949
Reported ROE (%)(3)	12.6	%	13.8	%	12.6	%
Underlying ROE (%)(3)	14.4	%	15.2	%	12.4	%
Insurance sales(3)	988		984		1,125
Wealth sales(3)	16,114		15,286		14,976
Assets under management(3)	199,840		177,436		176,417

(1) Represents an adjustment made to arrive at a non-IFRS measure. See section L - Non-IFRS Financial Measures in this document for a breakdown of components within this adjustment.

(2) Mainly comprised of certain hedges in Canada that do not qualify for hedge accounting and acquisition, integration and restructuring costs. For further information, see section L - Non-IFRS Financial Measures in this document for a breakdown of components within this adjustment.

(3) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

Profitability Canada’s reported net income decreased by $59 million or 6% in 2019 compared to 2018, reflecting unfavourable ACMA impacts. Underlying net income decreased by $24 million or 2%, reflecting unfavourable morbidity experience in GB, interest on par seed capital of $75 million in 2018, unfavourable credit experience, a mortgage impairment and lower new business gains, partially offset by business growth, favourable expense experience, higher AFS and investing activity gains, higher net benefits from tax-related items and favourable mortality experience.   Growth Canada insurance sales in 2019 were in line with 2018. Canada individual insurance sales were $389 million in 2019, a decrease of $7 million or 2% compared to 2018, driven by lower life insurance sales. Sales in GB were $599 million in 2019, an increase of $11 million or 2% compared to 2018.

Canada wealth sales increased by $0.8 billion or 5% in 2019 compared to 2018. Individual wealth sales were $6.4 billion in 2019, an increase of $0.1 billion or 2% compared to 2018, driven by increased mutual fund and segregated fund sales, partially offset by lower fixed annuity sales. GRS sales were $9.8 billion in 2019, an increase of $0.7 billion or 8% compared to 2018, driven by improved sales across all products.

One of our key initiatives is to continue growing our individual wealth manufactured products, including SLGI mutual funds and Sun GIF segregated funds. AUM for our wealth businesses, including GRS, was $136.6 billion as at December 31, 2019, an increase of $16.4 billion or 14% compared to December 31, 2018, driven by improved markets and net inflows.

Profitability and Growth by Business Unit

Individual Insurance & Wealth

Individual Insurance & Wealth’s reported net income decreased by $46 million or 14% in 2019 compared to 2018, reflecting interest on par seed capital of $75 million in 2018, more unfavourable ACMA impacts and unfavourable credit experience, partially offset by business growth, favourable mortality experience and higher investing activity gains.

Individual life and health insurance product sales were $389 million in 2019, a decrease of $7 million or 2% compared to 2018. As noted above, the decrease was due to lower life insurance sales. Individual wealth product sales were $6.4 billion in 2019, an increase of $0.1 billion or 2% compared to 2018, driven by increased mutual fund and segregated fund sales, partially offset by lower fixed annuity sales.

Group Benefits

GB’s reported net income decreased by $29 million or 10% in 2019 compared to 2018, reflecting unfavourable morbidity experience, partially offset by favourable expense experience, business growth and less unfavourable ACMA impacts.

GB sales were $599 million in 2019, an increase of $11 million or 2% compared to 2018. Group Benefits maintained the #1 market share position for overall revenue in Canada with $11 billion in business-in-force, while continuing to focus on Client service and productivity.

Group Retirement Services

GRS’s reported net income increased by $16 million or 5% in 2019, compared to 2018, reflecting investing activity gains and business growth, partially offset by less favourable ACMA impacts.

GRS sales were $9.8 billion in 2019, an increase of $0.7 billion or 8% in 2019 compared to 2018, including the result of the largest same-day group annuities transaction in the Canadian market with a single insurer. Assets under administration was $111.8 billion as at December 31, 2019, an increase of $14.5 billion or 15% compared to December 31, 2018 driven by improved markets and net inflows.

24    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

2. U.S.

Our U.S. business group is one of the largest group benefits providers in the U.S. market, serving employees and their families at more than 55,000 workplaces of all sizes across the country with employer-sponsored insurance products and solutions. In addition, our U.S. business manages an in-force block of more than 100,000 individual life insurance policies.

Business Units
•   Group Benefits	•   In-force Management

2019 Highlights

Growth and profitability

• Our total Group Benefits sales of over one billion U.S. dollars (US$1,043 million) reached a new high, and an increase of 4% over 2018. Business-in-force of US$4.3 billion as of December 31, 2019 was up 7% over the previous year.

• Achieved an after-tax profit margin for U.S. Group Benefits of 7.3% as of the fourth quarter of 2019, up from 6.7% as of the fourth quarter of 2018.

• Completed remaining major milestones of integration of the employee benefits business acquired in 2016, including reaching our full target of $100 million pre-tax run-rate synergies as scheduled.

Advanced our strategies to simplify benefits administration and close coverage gaps

• Leveraged our Maxwell Health acquisition to launch a combined benefits administration platform, providing employers and employees with an intuitive digital experience, access to the complete portfolio of Sun Life benefits and the ability to enroll in health insurance from third parties. By year-end, over 10,000 families were enrolled on this new platform.

• Helped members safeguard their finances by providing employers auto-enrollment for income-protecting disability coverage, and by adding dental plan options with higher maximums that reduce out-of-pocket costs for dental and orthodontic benefits.

• Helped our In-force Management Clients achieve their estate planning goals by offering them an individual life product extension beyond age 100 for policies that would have otherwise expired.

• Deployed robotics to streamline processes, enhance efficiency and provide better Client experiences, including OrthoTron, our digital enhancement which helps calculate and pay orthodontic claims quickly and accurately.

Grew our leading medical stop-loss presence in the marketplace

• Increased our business-in-force by 17% in 2019, advancing our position as the largest independent stop-loss provider in the U.S.

• Analyzed our deep database of medical claims for our annual high-cost claims and injectable drug trends report, which showed specialty drugs, extended hospital stays and complex treatments as major cost drivers in million-dollar and plus claims, providing employers actionable information to help bend the medical cost curve on their self-funded health plans.

• Generated millions of dollars in cost savings for both ourselves and our medical stop-loss Clients through our Clinical 360 program that combines clinical experts with tailored data analysis.

• Our business-in-force through our captive relationships has nearly doubled during the year. Captive relationships allow employers to pool together to share a portion of their self-funded risk, which is a good option for small- and medium-sized employers looking to self-fund their medical benefits.

Launched offerings that grow our core business and help Clients manage absence

• Introduced paid family and medical leave offerings in select states to help employers provide fully-insured and self-insured paid leave programs, and continued our leadership working with lawmakers, regulators and advocates to help expand access to these benefits for more Americans through their employers.

• Introduced a new FullscopeRMS offering for an integrated absence solution for industry partners and gained traction in the marketplace with our new medical stop-loss offering for health plans.

Strategy and Outlook

In the U.S., we continue to execute core strategies and expand further into health care to achieve our goal of building the best benefits company in America. We are focused on closing our members’ insurance coverage gaps through our life, disability, absence management, dental, vision, voluntary, and supplemental health offerings. We are also helping self-funded employers and health plans solve for rising health care costs through our leading medical stop-loss business, and we are well-positioned to expand in the health care space where we deliver unique value due to our strong market position and expertise. Our strategy goes to the heart of our Purpose of helping our Clients achieve lifetime financial security and live healthier lives.

Executing in our core Group Benefits businesses to deliver profitable growth

• Continue to maintain our progress on margins and growth of our business-in-force in our employee benefits business by improving sales and retention through outstanding Client experiences, investing in claims management, leveraging our voluntary business and building on our broker relationships.

• Advance our national accounts capabilities in absence management and continue to focus on creating a magnetic Client experience with proactive contact and enhanced employer on-boarding.

• Increase market share in our industry-leading medical stop-loss business by providing deep data insights, expertise and flexible risk management options to protect self-funded employers from the impact of high-cost claims.

• Expand the FullscopeRMS portfolio of turnkey solutions for industry partners into new product lines, in order to drive growth of this business.

Helping employers manage claims and absence for both paid and unpaid leaves

• Expand the roll-out of products and capabilities to help employers meet the requirements of federal and state leave laws while giving more Americans access to paid leave.

• Advance claim automation capabilities that enhance tracking and reporting for Clients.

• Continue leadership in advocating for paid family and medical leave legislation that includes a role for private insurers.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     25

Enhancing the Client experience and making it easier to do business with us

• Introduce more automated digital capabilities and predictive analytics that enable a personal experience, a high-touch claims approach and quicker service time.

• Build new data and infrastructure capabilities to help us provide better service and deeper insights.

• Expand our clinical approach for long-term disability claims.

• Improve training and tools to better integrate plain language throughout our Client communications and service.

Expanding in the health care market through our medical stop-loss business

• Leverage our data and analytics capabilities to identify opportunities to reduce health care costs for Clients through products and programs, such as our Clinical 360 program.

• Create insights into pharmacy cost drivers and emerging treatments to help Clients understand the trends that impact their medical benefits and costs.

• Build additional self-funded health plan solutions for employers who have an increasing need to share risk and control health care and pharmacy costs.

Helping Clients close coverage gaps and select the right benefits

• Continue to innovate on the Sun Life + Maxwell Health insurtech platform, providing an intuitive, digital enrollment platform using data to drive proactive outreach and to nudge Clients on coverage options they should consider.

• Help brokers and employers access our voluntary and supplemental health products with simple, digital support tools that guide employees as their needs evolve, and help them to fund out-of-pocket medical costs.

• Expand our digital distribution by adding relationships and data exchange capabilities with key administration and enrollment providers to ensure we can meet the needs of our wide range of employer and broker stakeholders.

Optimizing the value of our In-force Management business

• Continue to provide excellent service to our individual insurance policy-owners.

• Evaluate opportunities to improve profitability, including expense efficiencies and alternative investment strategies.

• Effectively manage risk and capital through reinsurance and product offerings for converting or maturing policies.

Outlook

The group benefits market in the U.S. continues a steady pace of growth as employers seek to offer competitive benefits in a currently tight labour market. The health insurance market, which we serve via our medical stop-loss & health products, is growing at a faster pace due to medical inflation and increasing demand. In the current environment, we are leveraging our medical stop-loss analytics to help self-funded employers manage health care costs and develop further insights into prescription drug cost drivers. The high cost of health care creates opportunities to educate members about their coverage needs as they reach different milestones in their lives, particularly as high-deductible health plans create financial gaps that our supplemental health products can fill. Our growth strategies incorporate these factors to help Clients manage their health benefit costs.

Paid family and medical leave continues to be a trend in the U.S. with legislation at both the state and federal levels. In states with paid-leave laws that allow employers to use private insurance to meet these requirements, Sun Life is beginning to offer products to support employers, as well as to provide options for more generous plans. We see an opportunity to educate employers on the need for disability insurance to complement state-required benefits, and we continue to be a leader in working with lawmakers, regulators and advocates to communicate the valuable role private insurers can play in expanding access to paid family and medical leave to more Americans through their employers.

We see the potential for regulatory headwinds with the increasing focus on consumer data and privacy rights coupled with developing interest in the risks posed by data analytics and predictive modeling. These trends have the potential to benefit the business by establishing industry standards, but may also increase costs and limit the scope of business initiatives. We are enhancing our internal governance controls framework around these initiatives, and monitoring and providing input into regulatory developments through trade group participation and peer group networking.

  Business Units

Business	Description	Market position
Group  Benefits	•  Provides group insurance products and services, including life, long-term and short-term disability, absence management, medical stop-loss, dental, vision, voluntary and supplemental health insurance such as accident and critical illness •  Stop-loss insurance provides employers who self-insure their employee health plans with protection against large claims •  Products distributed through more than 31,000 independent brokers and benefits consultants, supported by more than 200 employed sales representatives •  Serves more than 55,000 employers in small, medium and large workplaces across the U.S. •  FullscopeRMS, which includes Disability RMS, provides turnkey solutions for disability, absence management, life, stop-loss and supplemental health coverages and capabilities including underwriting services, claims administration, product development, actuarial and policy administration	•  Largest independent medical stop-loss provider(1) •  Largest turnkey disability provider(2) •  One of the largest preferred provider organization (“PPO”) dental networks with 130,000 unique dentists(3) •  Top ten group life, disability and voluntary benefits provider(4)
In-force  Management	•  Provides more than 100,000 individual life insurance policies, primarily universal life and participating whole life insurance

(1) Ranking compiled by Sun Life based on data contained in the 2018 Accident and Health Policy Experience Report from the National Association of Insurance Commissioners (“NAIC”). An independent stop-loss carrier is defined as a stop-loss carrier that does not also sell medical claim administration services.

(2) Based on annual 2018 NAIC Accident and Health Policy Experience Report and DRMS market expertise.

(3) Based on September 2019 data from the NetMinder Report; based on unique dentist count.

(4) Based on LIMRA 2018 Annual U.S. Sales & In-Force Reports for group term life, group short-term disability and long-term disability insurance and the annual LIMRA 2018 U.S. Voluntary In Force report for combined group voluntary life and supplemental health products.

26    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

  Financial and Business Results

(US$ millions)(1)	2019			2018			2017
Group Benefits		187			217			140
In-force Management		(65	)		(176	)		(247	)
Reported net income (loss)		122			41			(107	)
Less: Market-related impacts(2)		(40	)		(21	)		(44	)
Assumption changes and management actions(2)(3)		(221	)		(302	)		(210	)
Acquisition, integration and restructuring(2)(4)		(16	)		(32	)		(52	)
U.S. tax reform(2)(3)		–			–			(90	)
Underlying net income (loss)(5)		399			396			289
Reported ROE (%)(5)		4.5	%		1.5	%		(4.1	)%
Underlying ROE (%)(5)		14.7	%		14.6	%		11.1	%
After-tax profit margin for Group Benefits (%)(5)		7.3	%		6.7	%		5.0	%
Insurance sales(5)		1,043			999			863
(C$ millions)
Reported net income (loss)		163			52			(144	)
Underlying net income (loss)(5)		532			514			376

(1) Effective January 1, 2018, we transferred our International business unit from the U.S. to Asia, and comparative figures have been changed to conform to the current year presentation.

(2) Represents an adjustment made to arrive at a non-IFRS measure. See section L - Non-IFRS Financial Measures in this document for a breakdown of components within this adjustment.

(3) ACMA in 2017 excludes the US$(231) million ($(293) million) charge that is included in U.S. tax reform, shown separately.

(4) Acquisition, integration and restructuring amounts related to the acquisition costs of the U.S. employee benefits business acquired in 2016 and Maxwell Health acquired in 2018.

(5) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

Profitability U.S.’s reported net income increased by US$81 million ($111 million) in 2019 compared to 2018, driven by improved impacts from ACMA and lower integration costs as the integration of the U.S. employee benefits business acquired in 2016 was completed, partially offset by unfavourable market-related impacts, predominantly from changes in the fair value of investment properties. Underlying net income was in line with 2018, reflecting business growth, improved mortality experience, improved lapse and policyholder behaviour experience as well as improved expense experience, offset by interest on par seed capital of US$28 million ($35 million) in 2018, and lower investing activity and AFS gains. The impacts of foreign exchange translation increased reported net income and underlying net income by $4 million and $12 million, respectively.   The after-tax profit margin for Group Benefits⁽¹⁾ was 7.3% as of the fourth quarter of 2019, compared to 6.7% as of the fourth quarter of 2018.   Growth U.S.’s insurance sales of over one billion U.S. dollars (US$1,043 million) reached a new high, up US$44 million or 4% in 2019 compared to 2018, primarily driven by growth in medical stop-loss in Group Benefits. Medical stop-loss business-in-force increased to US$1.9 billion, an increase of 17% compared to 2018, advancing our leadership position as the largest independent medical stop-loss provider.

Profitability by Business Unit

Group Benefits

Group Benefits’ reported net income decreased by US$30 million or 14% in 2019 compared to 2018, reflecting unfavourable ACMA impacts, partially offset by favourable mortality experience, business growth and lower integration costs as the integration of the U.S. employee benefits business acquired in 2016 was completed.

In-Force Management

In-force Management’s reported net loss improved by US$111 million or 63% in 2019 compared to 2018, reflecting less unfavourable ACMA impacts, improved lapse and policyholder behaviour experience as well as improved expense experience, partially offset by unfavourable market-related impacts, interest on par seed capital of US$28 million ($35 million) in 2018, lower investing activity gains and unfavourable mortality experience.

(1) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     27

3. Asset Management

Our Asset Management business group is comprised of MFS and SLC Management. MFS is a premier global asset management firm which offers a comprehensive selection of financial products and services that deliver superior value and actively manages assets for retail and institutional investors around the world. SLC Management is an institutional investment management business that delivers liability driven investing, alternative fixed income and real estate solutions to Clients, with operations around the world.

Business Units
•   MFS Investment Management	•   SLC Management

2019 Highlights

• We ended 2019 with $768.8 billion in assets under management consisting of $684.8 billion (US$527.4 billion) from MFS and $84.0 billion from SLC Management.

MFS

• Strong investment performance of MFS’s U.S. retail mutual fund assets ranked in the top half of their Lipper categories based on ten-, five- and three-year performance, with 93%, 93% and 98%, respectively, as at December 31, 2019.

• MFS opened offices in Milan as part of its new ”in-country” retail strategy, which deepens relationships with local professional buyers, and as a result, sales increased 45% in 2019, compared to the previous year.

• MFS recorded four consecutive quarters of positive retail net flows in 2019, driven by retail net inflows from both equity and fixed income products in the U.S. Despite the industry trend of net outflows, MFS U.S.’s retail equity sector experienced net inflows, demonstrating that MFS’s performance and brand presence are resonating with retail investors seeking active fund managers with strong long-term performance.

• Fixed income gross sales were up 38% in 2019 over the previous year.

SLC Management

• We completed the BGO acquisition, which was the product of the merger of the Bentall Kennedy group of companies and GreenOak Real Estate, a global investment firm. The acquisition expands the capabilities of SLC Management by increasing our global real estate investment footprint, while adding organizational depth and a full spectrum of solutions including equity and debt real estate strategies.

• We announced our intention to acquire a majority stake in InfraRed Capital Partners, a global infrastructure and real estate investment manager. InfraRed advises institutional and pooled fund clients on approximately $16 billion (US$12 billion) in assets under management as of September 30, 2019. InfraRed is headquartered in London, UK and has more than 175 partners and staff. InfraRed will form part of SLC, and the acquisition is integral to Sun Life’s strategy of broadening its asset management pillar by extending the capabilities of SLC to the benefit of existing and prospective clients.

Strategy and Outlook

Our strategy is to design and deliver investment products through MFS and SLC Management that will deliver growth in traditional active asset management as well as LDI and alternative asset classes. MFS competes primarily in the global institutional and U.S. retail markets. SLC Management leverages Sun Life’s long-standing expertise in LDI and private asset class investments to offer customized investment solutions to third-party institutional investors.

MFS: Continue to deliver superior investment performance to our Clients while building a world-class fixed income platform

MFS’s active management strategy focuses on delivering value to our Clients over the long term. Our strong relative performance puts us in a competitive position over other asset managers:

• With increasing market volatility and a successful track record, MFS is well-positioned to attract flows from all Client sectors that are seeking risk-managed capital appreciation over the long term based on our disciplined, long-term approach. We are engaging Clients to align with MFS on longer investment horizons, to leverage our proven ability to deliver over benchmark performance through a market cycle, as well as our leadership on environmental, social, and governance (“ESG”) analytics.

• Build out fixed income and product and sales capabilities, and continue our non-U.S. retail initiatives.

• MFS strives to maintain margins in the top quartile of active managers’ margins while maintaining our commitment to provide long-term value to clients.

• MFS is piloting its “in-country” distribution model in Italy, which leverages MFS’s capabilities to meet local Client needs by deepening relationships with professional buyers.

SLC Management: Help institutional investors meet their goals by offering a broad suite of fixed income strategies and alternative asset classes

We are well-positioned to take advantage of three key trends in our target markets through:

• Increased allocations to fixed income by pension funds looking to de-risk.

• Outsourcing of asset management by insurance companies, and consolidation of investment manager relationships by institutional investors.

• Increased demand for investment alternatives due to low nominal interest rates.

Our strategy is to continue to deliver superior investment performance, expand our distribution capabilities and product lineup with offerings that leverage our existing investment capabilities, and continue to investigate potential acquisitions that fit our strategic targets. We offer our Clients a compelling suite of solutions, including:

• Income-related and total return capabilities across key asset classes including public and private fixed income.

• Deep real estate equity and debt expertise.

• Differentiated investment strategies.

28    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

Outlook

We will continue to see industry consolidation in the asset management industry as changes are driving clients and platforms to consolidate assets into fewer investment firms. While we continue to see a historical bull market run, we believe the inevitable market correction will accelerate consolidation of less skilled and sub-scale active managers, providing us with opportunities to establish new Client relationships. Within this context, we believe that we have the scale, proven long-term track records and broad product portfolios to take advantage of this opportunity to gain market share.

Active asset management businesses are facing headwinds as demand for passive and alternative strategies grows faster than the overall market, as well as slow downward pressure on fees, from technology, new market entrants, regulation and increased transparency.

To address these headwinds, we will continue to position our active asset manager to serve the large pool of alpha-seeking assets in both the retail and institutional markets, bringing our scale, and proven track record to the service of our global Clients. We will leverage our data analytics capabilities to continue to improve our distribution capabilities. Even with some investors choosing a passive strategy, as a well-positioned and skilled active manager we will have the opportunity to grow.

In a low yield environment, our Clients are increasingly looking for strategies that best match the liability profile of their business and that offer additional yield and return. SLC Management meets these needs through an array of fixed income strategies and alternative assets. These strategies are often consistent with our own approach for managing the general account of Sun Life Financial, resulting in an alignment of interests with our Clients, enabling opportunities for co-investing.

  Business Units

Business	Description	Market position
MFS	•  Actively manages assets for retail and institutional investors, including pension plans, sovereign wealth funds, monetary authorities, and endowments and foundations •  Retail products are distributed through financial advisors, brokerages and other professionals •  Institutional products are distributed by an internal sales force, which is aided by a network of independent consultants	•  Over US$527 billion in AUM •  The 11th largest U.S. Retail funds manager(1)
SLC  Management	•  SLC Management delivers LDI, alternative fixed income and real estate solutions to Clients through a portfolio of companies, including: •  BGO, a global real estate investment manager •  SLC Management (U.S.)(2), a U.S. institutional asset manager specializing in customized fixed income portfolio and LDI for U.S. insurance companies and pension plans •  SLC Management (Canada), a Canadian institutional asset manager that provides investment expertise in alternative asset classes and LDI to pension funds and other institutional investors •  Institutional products are distributed by an internal sales force, which is aided by a network of independent consultants	•  Over $84.0 billion in AUM

(1) As reported by Strategic insight based on AUM as at December 31, 2019.

(2) Ryan Labs Asset Management Inc., Prime Advisors, Inc. and Sun Life Capital Management (U.S.) LLC merged effective January 1, 2020, keeping the name Sun Life Capital Management (U.S.) LLC.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     29

  Financial and Business Results

Asset Management (C$ millions)	2019		2018		2017
Reported net income	897		909		653
Less: Fair value adjustments on MFS’s share-based payment awards(1)	(64	)	(5	)	(81	)
Other(1)(2)(3)	(43	)	(11	)	(78	)
Underlying net income(4)	1,004		925		812
Assets under management (C$ billions)(4)	768.8		649.7		677.6
Gross sales (C$ billions)(4)	134.5		111.4		117.3
Net sales (C$ billions)(4)	(12.2	)	(37.3	)	(22.4	)
MFS (C$ millions)
Reported net income	909		893		612
Less: Fair value adjustments on MFS’s share-based payment awards(1)	(64	)	(5	)	(81	)
U.S. tax reform(1)(3)	–		–		(95	)
Underlying net income(4)	973		898		788
Assets under management (C$ billions)(4)	684.8		584.2		618.3
Gross sales (C$ billions)(4)	125.0		104.3		106.5
Net sales (C$ billions)(4)	(15.8	)	(38.5	)	(28.5	)
MFS (US$ millions)
Reported net income	685		689		471
Less: Fair value adjustments on MFS’s share-based payment awards(1)	(48	)	(4	)	(64	)
U.S. tax reform(1)(3)	–		–		(75	)
Underlying net income(4)	733		693		610
Pre-tax net operating profit margin ratio(4)	39	%	38	%	38	%
Average net assets (US$ billions)(4)	484.0		477.5		460.5
Assets under management (US$ billions)(4)	527.4		428.4		491.6
Gross sales (US$ billions)(4)	94.2		80.6		82.1
Net sales (US$ billions)(4)	(11.8	)	(29.7	)	(21.8	)
Asset appreciation (depreciation) (US$ billions)	110.8		(33.5	)	87.8
S&P 500 Index (daily average)	2,914		2,744		2,448
MSCI EAFE Index (daily average)	1,892		1,965		1,886
SLC Management (C$ millions)
Reported net income	(12	)	16		41
Less: Other(1)(2)(3)	(43	)	(11	)	17
Underlying net income(4)	31		27		24
Assets under management (C$ billions)(4)	84.0		65.5		59.3
Gross sales (C$ billions)(4)	9.5		7.0		10.8
Net sales (C$ billions)(4)	3.6		1.2		6.1

(1) Represents an adjustment made to arrive at a non-IFRS measure. See section L - Non-IFRS Financial Measures in this document for a breakdown of components within this adjustment.

(2) Amounts include acquisition costs for our acquisition of a majority stake in BentallGreenOak and the pending InfraRed transaction, which includes the unwinding of the discount for the Put option and Deferred payments liability of $16 million.

(3) In the fourth quarter of 2017, the U.S. tax reform of $(78) million consists of a charge of $32 million relating to the revaluation of its deferred tax balances, consisting of a charge of $49 million for MFS, partially offset by a benefit of $17 million for SLC Management, and a one-time charge on the deemed repatriation of foreign earnings of $46 million for MFS in the fourth quarter of 2017.

(4) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

Profitability Asset Management’s reported net income decreased by $12 million or 1% in 2019 compared to 2018, reflecting higher fair value adjustments on MFS’s share-based payment awards and higher acquisition and integration costs related to the BGO acquisition and the pending InfraRed transaction. Underlying net income increased by $79 million or 9%, primarily driven by higher average net assets (“ANA”), expense management and investment income including returns on seed capital in MFS. The impacts of foreign exchange translation in 2019 increased reported net income and underlying net income by $21 million and $23 million, respectively.   Growth Asset Management’s AUM increased by $119.1 billion or 18% as at December 31, 2019 compared to December 31, 2018, primarily driven by asset appreciation of $151.2 billion, partially offset by the impacts of foreign exchange translation of $33.4 billion and net outflows of $12.2 billion.

30    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

Profitability and Growth by Business Unit

MFS

In U.S. dollars, MFS’s reported net income in 2019 was in line with 2018, reflecting higher fair value adjustments on MFS’s share-based payment awards. Underlying net income increased by US$40 million or 6%, driven by the impacts of higher ANA, expense management and investment income including returns on seed capital.

MFS’s AUM increased by US$99.0 billion or 23% as at December 31, 2019 compared to December 31, 2018, primarily driven by asset appreciation of US$110.8 billion, partially offset by net outflows of US$11.8 billion.

SLC Management

SLC Management’s reported net loss was $12 million in 2019 compared to an income of $16 million in 2018, reflecting higher acquisition and integration costs related to the BGO acquisition and the pending InfraRed transaction. Underlying net income increased by $4 million or 15%, driven by net income from the BGO acquisition that closed in July 2019, partially offset by an increase in expenses.

SLC Management’s AUM increased by $18.5 billion or 28% as at December 31, 2019 compared to December 31, 2018, primarily driven by the BGO acquisition of $12.6 billion, asset appreciation of $4.1 billion and net inflows of $3.6 billion, partially offset by the impacts of foreign exchange translation of $2.7 billion.

4. Asia

Our Asia segment consists of two business units: Insurance and Wealth and International. Our Insurance and Wealth business unit operates in seven local markets, delivering value to over 23 million Clients by providing life, health, wealth and asset management solutions through a multi-channel distribution approach. Our International business unit focuses on high-net-worth insurance and wealth products. Asia’s presence in the local markets provides us with a strong foothold to take advantage of the high growth prospects in this region.

Business Units
•   Insurance and Wealth	•   International

2019 Highlights

Growth in scale and distribution

• We ended 2019 with $52.0 billion in total AUM in our wealth and asset management businesses, including $15.0 billion from our Hong Kong Mandatory Provident Fund (“MPF”) pension business, the second fastest growing MPF business⁽¹⁾, and the fourth largest in terms of AUM, and $23.2 billion from our asset management joint venture in India.

• Expanded our distribution network through two new bancassurance agreements in Vietnam and Indonesia as well as launching a new broker channel in Vietnam.

• Grew our elite agency development programs, providing advisors with the necessary skills and tools required to provide Clients with world-class service and advice, with the result that the number of MDRT⁽²⁾ qualifiers has nearly doubled in the last 3 years to over 2,000.

• Conducted e-distribution experiments with strategic partners such as U Mobile Sdn Bhd and Lazada E-Services Philippines Inc., and piloted a new online sales channel in China, resulting in strong sales growth for the businesses.

Digital transformation progress

• Client mobile applications are now available in all seven of our local markets and point-of-sales (“POS”) systems continue to be rolled out across our businesses, powering greater Client experiences across a variety of platforms.

• Modernized our back office systems, including the launch of a new cloud-based platform for e-distribution which accelerated speed-to-market, allowing on-boarding of new partners in as little as 3 weeks.

• Optimized internal processes resulting in more efficient claims processing and payments, with claims turned around in as little as 24 hours.

• Bowtie Life Insurance Company, the first virtual insurer⁽³⁾, in which we have a strategic investment, began selling their Voluntary Health Insurance Scheme in Hong Kong.

Strategy and Outlook

In order to achieve our ambitious growth objectives in earnings, sales and value of new business, we will need to grow scale in all of our markets, with world-class distribution capabilities and operational excellence, while investing in the right talent. Our areas of focus for Asia are to:

Build world-class distribution

• Extend our reach across channels and segments to serve the growing insurance markets in Asia and to help more Clients through expanding our health and wellness offerings, with targeted expansion in local markets.

• Deliver a multi-channel experience engaging Clients where, when and how they wish.

• Create a unique distribution differentiator in each market by continuing to build on our Most Respected Advisor (“MRA”) principles to create the next generation of elite distribution leaders.

• Use data and analytics to drive advancement in Client retention, advisor productivity, quality recruitment and training and development.

(1) Gain Miles MPF Market Analysis, December 2019.

(2) Million Dollar Round Table (“MDRT”).

(3) First virtual insurer under the Hong Kong Insurance Authority’s Fast Track.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     31

Transform our operations and business model

• Digitize our business and use common technology platforms to improve operational efficiency to enhance the Client experience by making it easier to do business with us and ensure a seamless experience in all our markets in Asia.

• Better engage prospective and existing Clients by being more personal, proactive and predictive through the use of data and analytics.

Continue to build scale in each of our markets

• Achieve scale in each market and offer a holistic set of solutions to help our Clients achieve lifetime financial security and live healthier lives.

• To grow our scale, we will focus on both organic and inorganic approaches, which include opportunities that bring distribution capabilities and are accretive to Sun Life’s earnings.

Outlook

We believe our diversified business, with a multi-country presence and a multi-channel distribution, positions us to capture opportunities as they arise, and protects our business as a whole against adverse economic or regulatory cycles in any one market. We expect that the region’s economic growth will continue, with predictions that 90% of the next billion entrants into the middle class in the world will come from Asia⁽¹⁾, allowing us to deliver financial security and healthier lives to different segments of the population. With these strong demographics, and low penetration rates for insurance, we expect to see sustained growth across all of our distribution channels.

Competition and economic and geopolitical uncertainty continue to pose challenges to our businesses. However, our current market positions, key strategic relationships, and our ability to leverage our global expertise position us well for the future. As governments continue to download responsibilities in both the retirement and health spaces, we are well-equipped to offer current and potential Clients sound solutions.

  Business Markets

Business	Description	Market Position
Insurance  and Wealth
Philippines(1)	•  Individual and group life and health insurance products to individuals and businesses through a multi-channel distribution network •  Mutual funds to individual and institutional Clients through agency, brokerage, bancassurance and digital partners	•  #1 ranked insurance company(2) •  2nd largest mutual fund operation in the country(3)
Hong Kong	•  MPF and pension administration to individuals and businesses through agency and brokerage distribution •  Individual and group life and health insurance to individuals and businesses through agency and brokerage distribution	•  4th largest provider based on AUM, 2nd based on net inflows(4) •  Top 10 in Agency for Life Insurance(5)
Indonesia	•  Individual life and health insurance and creditor life insurance through agency, telco arrangements and bancassurance, including a bancassurance partnership with CIMB Niaga, the 5th largest bank in the country	•  Ranked in the Top 10 overall(6)
Vietnam	•  Individual insurance and pensions distributed through agency, corporate sales, and digital distribution channels and partnerships including a bancassurance agreement with TPBank, a digital leader in Vietnamese banking	•  Ranked in the Top 15 overall(7)
Malaysia(8)	•  Individual and group insurance through banks and telco arrangements, including an exclusive bancassurance agreement with CIMB Bank, Malaysia’s 2nd largest bank, and an agency force in partnership with Principal Asset Management	•  3rd in bancassurance sales(9)
India(10)	•  Individual and group insurance, savings and retirement products through agency, brokerage and bancassurance channels •  Mutual fund products to both individual and institutional investors through independent financial advisors, banks, and direct distribution channels	•  8th largest life insurance company in India(11) •  4th largest mutual fund operation in the country(12)
China(13)	•  Individual and group life and health insurance and savings products distributed through agency, brokerage, bancassurance and digital channels •  Institutional asset management, passive third-party asset management and debt financing business through direct distribution	•  Top 10 life insurance company in China among multinationals(14)
International	•  Individual life insurance solutions for high-net-worth individuals and families residing outside the U.S. and Canada •  Manages a block of International wealth investment products closed to new sales	•  A leader in international high-net-worth life insurance business

(1) Philippines: Includes a joint venture with the Yuchengco Group - Sun Life Grepa Financial, Inc. (49%).

(2) Insurance Commission of the Philippines, based on third quarter 2019 year-to-date total premium income for Sun Life of Canada (Philippines).

(3) Philippine Investment Funds Association, based on November 2019 ending AUM.

(4) Gain Miles MPF Market Analysis, December 2019.

(5) Insurance Authority of Hong Kong, Provisional Statistics on Hong Kong Long Term Insurance Business, based on third quarter 2019 year-to-date annualized first year premiums.

(6) Indonesia Life Insurance Association industry report, based on third quarter 2019 year-to-date first year premiums.

(7) 2019 annualized first year premiums based on data shared among industry players.

(8) Malaysia: Joint ventures with Khazanah Nasional Berhad and CIMB Group Holdings Berhad - Sun Life Malaysia Assurance Berhad (49%), Sun Life Malaysia Takaful Berhad (49%).

(9) Life Insurance Association of Malaysia and Insurance Services Malaysia Berhad, based on the third quarter 2019 year-to-date annualized first year premium for conventional and takaful business.

(10) India: Joint ventures with the Aditya Birla Group - Aditya Birla Sun Life Insurance Company Limited (49%), Aditya Birla Sun Life Asset Management Company Limited (“Aditya Birla Sun Life AMC Limited”) (49%).

(11) Insurance Regulatory Authority of India, based on 2019 first year premiums among private players.

(12) Association of Mutual Funds in India, based on average AUM for the quarter ended December 31, 2019.

(13) China: Joint ventures with the China Everbright Group: Sun Life Everbright Life Insurance Company Limited (24.99%), Sun Life Everbright Asset Management Co., Ltd (24.74%).

(14) China Insurance Regulatory Commission, based on gross premiums for November 2019 year-to-date (excluding universal and variable universal life insurance deposits and pension companies).

(1) The Unprecedented Expansion of the Global Middle Class: An Update, Feb 2017, Brookings, Homi Kharas

32    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

  Financial and Business Results

($ millions)	2019		2018		2017
Insurance and Wealth	506		381		326
International(1)	14		174		452
Reported net income	520		555		778
Less: Market-related impacts(2)	(66	)	(30	)	38
Assumption changes and management actions(2)	37		76		284
Other(2)(3)	(1	)	(14	)	(5	)
Underlying net income(4)	550		523		461
Reported ROE (%)(4)(5)	9.5	%	11.3	%	14.4	%
Underlying ROE (%)(4)(5)	10.0	%	10.6	%	8.5	%
Insurance Sales(4)	1,154		898		811
Wealth Sales(4)	8,373		10,101		13,056

(1) Effective January 1, 2018, we transferred our International business unit from the U.S. to Asia, and comparative figures have been changed to conform to the current year presentation.

(2) Represents an adjustment made to arrive at a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document for a breakdown of components within this adjustment.

(3) In 2018, Other amounts pertains to a distribution arrangement in India for asset management.

(4) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

(5) As a result of a revision of the capital allocation model for Asia, reported and underlying ROEs increased by 1.5% for the year ended 2018 and 2019, relative to 2017.

Profitability Asia’s reported net income decreased by $35 million or 6% in 2019 compared to 2018, reflecting less favourable ACMA and unfavourable market-related impacts, predominantly from interest rates, partially offset by higher acquisition, integration and restructuring costs in 2018. Underlying net income increased by $27 million or 5%, driven by business growth, improved lapse and policyholder behaviour experience and higher AFS gains, partially offset by unfavourable joint venture experience and higher new business strain primarily in International. The impacts of foreign exchange translation increased reported net income and underlying net income by $15 million.   Growth Asia insurance sales increased by 26%, excluding the favourable impacts of foreign exchange translation of $20 million in 2019 compared to 2018. Individual insurance sales were $1,102 million, an increase of 27%, excluding the favourable impacts of foreign exchange translation of $20 million, driven by growth in all local insurance markets, partially offset by lower sales in International.   Asia wealth sales decreased by 18%, excluding the favourable impacts of foreign exchange translation of $120 million, in 2019 compared to 2018, as a result of lower mutual fund sales in India due to weak market sentiment, partially offset by money market sales in the Philippines and growth in the pension business in Hong Kong.

Profitability by Business Unit and Growth by Business Market

Insurance and Wealth

Insurance and Wealth’s reported net income increased by $125 million or 33% in 2019 compared to 2018, driven by favourable ACMA impacts, business growth, higher acquisition, integration and restructuring costs in 2018 and favourable lapse and other policyholder behaviour experience, partially offset by unfavourable joint venture experience and unfavourable market-related impacts, predominantly from interest rates.

We continued to build our agency and alternate distribution channels, leverage a more balanced product portfolio and increase efficiency and productivity, while maintaining Client focus.

Philippines - On a local currency basis, individual insurance sales increased by 18% in 2019 compared to 2018. Mutual and managed fund AUM was $2.0 billion as at December 31, 2019, an increase of 43% compared to 2018, measured in local currency, reflecting strong money market sales.

Agency headcount reached approximately 21,000 at the end of 2019, 31% higher than 2018.

Hong Kong - On a local currency basis, individual insurance sales increased by 54% in 2019 compared to 2018, with growth in both the agency and broker channels. AUM in our pension business reached $15.0 billion as at December 31, 2019, an increase of 31% compared to 2018, measured in local currency, and pension net flows increased by 8% compared to 2018.

Agency headcount grew 5% from 2018 to approximately 2,400 at the end of 2019.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     33

Indonesia - On a local currency basis, individual life insurance sales in Indonesia increased by 16% in 2019 compared to 2018, with growth across all channels.

Agency headcount was at approximately 5,900 in 2019, a reduction from the previous year end, as we focused on quality and terminated inactive agents.

Vietnam - On a local currency basis, individual insurance sales increased by 19% in 2019 compared to 2018, driven by the new broker channel and growth in the agency channel.

Agency headcount was almost 4,300 at the end of 2019, 9% lower than 2018.

Malaysia - On a local currency basis, individual insurance sales in Malaysia increased by 19% in 2019 compared to 2018, driven primarily by growth in the bancassurance channel.

Malaysia’s agency force, newly established in 2018, surpassed 750 agents.

India - On a local currency basis, individual life insurance sales increased by 24% in 2019 compared to 2018, driven by growth in bancassurance through establishment of our relationship with HDFC Bank Limited.

India’s agency headcount exceeded 75,000 at the end of 2019, 8% higher than 2018.

On a local currency basis, gross sales of equity and fixed income funds decreased by 41% due to weak market sentiment and volatility.

Total AUM as at December 31, 2019 was $47.3 billion, of which $23.2 billion is reported in our AUM, a decrease of 4% compared to 2018.

China - On a local currency basis, sales of individual insurance products by Sun Life Everbright Life Insurance Company Limited (“SLEB”) increased by 46% in 2019 compared to 2018, driven by strong performance across all channels except telemarketing.

Agency headcount was almost 13,400 at the end of 2019, 77% higher than 2018.

International

International’s reported net income decreased by $160 million in 2019 compared to 2018, reflecting unfavourable ACMA and market-related impacts and lower new business gains, partially offset by improved lapse and other policyholder behaviour experience. Market-related impacts included unfavourable impacts from interest rates and changes in the fair value of investment properties, partially offset by favourable impacts from equity markets.

International life insurance sales were $73 million in 2019, a decrease of $9 million or 11% compared to 2018, due to the competitive environment and market shifts in the first half of 2019.

5. Corporate

Corporate includes the results of our UK business and Corporate Support.

  Business Units

Business	Description
UK	•  UK has a run-off block of business consisting of approximately 554,000 in-force life and pension policies, with approximately £11 billion of AUM. Since December 2010, UK has been closed to new business and focuses on supporting existing Clients. Most administrative functions have been outsourced to external service providers which are managed by an in-house management team.
Corporate Support	•  Corporate Support operations consist of the expenses, debt charges, investment income, capital and other items not allocated to Sun Life’s other business segments, as well as the Company’s Run-off reinsurance business. Coverage in our Run-off reinsurance business includes long-term care, medical coverage, and guaranteed minimum income and death benefit coverage. The block also includes group long-term disability and personal accident policies which are 100% retroceded.

34    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

  Financial and Business Results

($ millions)	2019		2018		2017
UK	379		250		181
Corporate Support	(224	)	(186	)	(282	)
Reported net income (loss)	155		64		(101	)
Less: Market-related impacts(1)	(2	)	(15	)	5
Assumption changes and management actions(1)(2)	225		140		55
Acquisition, integration and restructuring(1)(3)	(27	)	(10	)	(55	)
U.S. tax reform(1)(2)	–		–		(54	)
Underlying net income (loss)(4)	(41	)	(51	)	(52	)

(1) Represents an adjustment made to arrive at a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document for a breakdown of components within this adjustment.

(2) ACMA in 2017 excludes the $5 million change that is included in U.S. tax reform, shown separately.

(3) In 2017, the amount consists primarily of the impact of a restructuring amount in the fourth quarter of 2017 pertaining to the Company’s plan to enhance business processes and organizational structures and capabilities.

(4) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

Profitability

Corporate’s reported net income increased by $91 million in 2019 compared to 2018, driven by the impacts of favourable ACMA predominantly in the UK, improved market-related impacts, primarily from interest rates, and lower integration costs, partially offset by restructuring costs. Underlying net loss improved by $10 million or 20%, driven by higher net benefits from tax-related items, partially offset by lower earnings from the run-off businesses, higher project spend including the adoption of IFRS 17, unfavourable lapse and other policyholder behaviour experience in the UK and unfavourable expense experience. The impacts of foreign exchange translation decreased reported net income by $7 million and increased underlying net loss by $3 million.

Profitability by Business Unit

UK

UK’s reported net income increased by $129 million or 52% in 2019 compared to 2018, driven predominantly by favourable ACMA impacts.

Corporate Support

Corporate Support’s reported net loss increased by $38 million or 20% in 2019 compared to 2018, reflecting unfavourable expense experience, the impacts of favourable ACMA relating to the termination of assumed business in 2018, higher project spend including the adoption of IFRS 17 and restructuring costs, partially offset by higher net benefits from tax-related items and lower integration costs.

 H. Investments

The Company strives to ensure that all general fund investments are properly aligned with business objectives including meeting policyholder obligations and maintaining adequate liquidity at all times. Consideration is given in our investment process to a wide range of factors, including ensuring attractive risk and return profiles, appropriate diversification by asset type, credit exposure and sector, financial condition of issuers and borrowers, quality and value of underlying security and macro- and micro-economic developments and trends including prospects for specific industry sectors. The Risk & Conduct Review Committee of the Board of Directors (“Risk & Conduct Review Committee”) approves policies that contain prudent standards and procedures for the investment of our general fund assets. These policies include requirements, restrictions and limitations for interest rate, credit, equity market, real estate market, liquidity, concentration, currency, and derivative risks. Compliance with these policies is monitored on a regular basis and reported annually to the Risk & Conduct Review Committee. The Governance, Nomination & Investment Committee of the Board of Directors monitors the Company’s Investment Plan and investment performance, oversees practices, procedures and controls related to the management of the general fund investment portfolio, and reviews corporate governance guidelines and processes.

1. Investment Profile

We had total general fund invested assets of $161.6 billion as at December 31, 2019, compared to $151.7 billion as at December 31, 2018. The increase in general fund invested assets was primarily due to an increase in operating activities and net fair value, offset by the impacts of foreign exchange translation. Our general fund invested assets are well-diversified across investment types, geographies and sectors with the majority of our portfolio invested in fixed income high-quality assets.

Additional detail on our investments is provided in Notes 5 and 6 in our 2019 Annual Consolidated Financial Statements.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     35

The following chart sets out the composition of our general fund invested assets.⁽¹⁾

(1) The values and ratios presented are based on the carrying value of the respective asset categories. Generally, the carrying values for invested assets are equal to their fair values; however our mortgages and loans are generally carried at amortized cost. As at December 31, 2019, the fair value of mortgages and loans was $52.0 billion ($48.4 billion as at December 31, 2018) and the carrying value of mortgages and loans was $48.2 billion ($46.8 billion as at December 31, 2018). For invested assets supporting insurance contracts, in the event of default, if the amounts recovered are insufficient to satisfy the related insurance contract liability cash flows that the assets are intended to support, credit exposure may be greater than the carrying value of the assets.

(2) Consists of: Other invested assets (3%), Policy loans (2%), Derivative assets (1%) for both 2019 and 2018.

2. Debt Securities

Our debt securities portfolio is actively managed through a regular program of purchases and sales aimed at optimizing yield, quality and liquidity, while ensuring that it remains well-diversified and duration-matched to insurance contract liabilities. With the exception of certain countries where we have business operations, including Canada, the United States, the United Kingdom and the Philippines, our exposure to debt securities from any single country did not exceed 1% of total invested assets in our 2019 Annual Consolidated Financial Statements.

Debt Securities by Issuer and Industry Sector

	December 31, 2019				December 31, 2018
($ millions)		Total	% of Total			Total	% of Total
Debt securities issued or guaranteed by:
Canadian federal government		6,446	8	%		5,576	7	%
Canadian provincial and municipal government		14,965	18	%		13,065	18	%
U.S. government and agency		3,111	4	%		2,907	4	%
Other foreign government		5,917	7	%		5,646	8	%
Total government issued or guaranteed debt securities		30,439	37	%		27,194	37	%
Corporate debt securities by industry sector:(1)
Financials		10,926	13	%		9,860	13	%
Utilities		7,258	9	%		6,881	9	%
Industrials		5,429	7	%		4,643	6	%
Energy		4,232	5	%		3,968	5	%
Communication services		3,546	4	%		3,307	4	%
Real estate		2,963	4	%		3,016	4	%
Health care		2,122	3	%		2,033	3	%
Consumer staples		1,924	2	%		1,882	3	%
Materials		1,543	2	%		1,481	2	%
Consumer discretionary		1,487	2	%		1,581	2	%
Information technology		1,335	2	%		1,231	2	%
Total corporate debt securities		42,765	53	%		39,883	53	%
Asset-backed securities		8,402	10	%		7,366	10	%
Total debt securities		81,606	100	%		74,443	100	%

(1) Our grouping of debt securities by sector is based on the Global Industry Classification Standard and S&P Dow Jones Indices.

36    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

Debt Securities by Credit Rating

The credit risk ratings in the following chart were established in accordance with the internal rating process described in this MD&A under the heading J - Risk Management - 9 - Risk Categories - Credit Risk Management Governance and Control.

Our debt securities with a credit rating of “A” or higher represented 74% of the total debt securities as at December 31, 2019, compared to 72% as at December 31, 2018. Debt securities with a credit rating of “BBB” or higher represented 99% of total debt securities as at December 31, 2019, consistent with December 31, 2018.

Debt Securities by Geography

The carrying value of FVTPL and AFS debt securities by geographic location is presented in the following table.

	December 31, 2019									December 31, 2018
($ millions)	FVTPL debt securities		AFS debt securities		Total		% of Total			FVTPL debt securities		AFS debt securities		Total		% of Total
Debt securities
Canada		28,221		5,031		33,252		41	%		25,091		4,217		29,308		38	%
United States		24,224		5,822		30,046		37	%		21,329		5,917		27,246		37	%
Europe		8,827		1,178		10,005		12	%		8,840		1,278		10,118		14	%
Asia		4,074		573		4,647		6	%		3,673		445		4,118		6	%
Other		2,548		1,108		3,656		4	%		2,469		1,184		3,653		5	%
Total debt securities		67,894		13,712		81,606		100	%		61,402		13,041		74,443		100	%

Our gross unrealized losses as at December 31, 2019 for FVTPL and AFS debt securities were $0.1 billion and $0.1 billion, respectively, compared with $1.4 billion and $0.2 billion, respectively, as at December 31, 2018. The decrease in gross unrealized losses was largely due to the impact from declining interest rates and the narrowing of credit spreads.

3. Equities

Our equity portfolio is well-diversified with approximately 45% of our portfolio invested in exchange-traded funds as at December 31, 2019, compared to 50% as at December 31, 2018. Exchange-traded fund holdings are primarily in the TD Emerald U.S. Market Index Fund and S&P/Toronto Stock Exchange (“TSX”) 60 Index Fund. The carrying value of equities by issuer geography as at December 31, 2019 is set out in the following table.

Equities by Issuer Geography

	December 31, 2019									December 31, 2018
($ millions)	FVTPL equities		AFS equities		Total		% of Total			FVTPL equities		AFS equities		Total		% of Total
Equity securities
Canada		2,813		22		2,835		60	%		2,651		15		2,666		58	%
United States		550		137		687		14	%		508		388		896		19	%
Europe		381		6		387		8	%		371		10		381		8	%
Asia		713		148		861		18	%		469		206		675		15	%
Other		17		–		17		–	%		15		1		16		–	%
Total equity securities		4,474		313		4,787		100	%		4,014		620		4,634		100	%

Excluding exchange-traded funds and mutual funds, there were no issuers exceeding 1% of the equity portfolio as at December 31, 2019.

4. Mortgages and Loans

Mortgages and loans in this section are presented at their carrying value in our 2019 Annual Consolidated Financial Statements. Our mortgage portfolio consisted almost entirely of first mortgages and our loan portfolio consisted of private placement loans.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     37

Mortgages and Loans by Geography

The carrying value of mortgages and loans by geographic location is presented in the following table.⁽¹⁾

	December 31, 2019									December 31, 2018
($ millions)	Mortgages		Loans		Total		% of Total			Mortgages		Loans		Total		% of Total
Canada		9,310		13,249		22,559		47	%		8,557		13,238		21,795		46	%
United States		6,915		11,994		18,909		39	%		7,876		11,458		19,334		41	%
Europe		–		4,561		4,561		9	%		–		3,628		3,628		8	%
Asia		–		352		352		1	%		–		332		332		1	%
Other		–		1,841		1,841		4	%		–		1,733		1,733		4	%
Total		16,225		31,997		48,222		100	%		16,433		30,389		46,822		100	%

(1) The geographic location for mortgages is based on the location of the property and for loans it is based on the country of the creditor’s parent.

Mortgage Portfolio

As at December 31, 2019, we held $16.2 billion of mortgages, compared to $16.4 billion as at December 31, 2018. Our mortgage portfolio consists entirely of commercial mortgages, as presented in the following table.

	December 31, 2019									December 31, 2018
($ millions)	Insured			Uninsured			Total			Insured			Uninsured			Total
Mortgages
Retail		–			3,902			3,902			–			4,202			4,202
Office		–			3,922			3,922			–			4,228			4,228
Multi-family residential		3,613			2,078			5,691			3,196			2,179			5,375
Industrial and land		–			1,898			1,898			–			1,906			1,906
Other		353			459			812			341			381			722
Total mortgages		3,966			12,259			16,225			3,537			12,896			16,433
% of Total mortgages		24	%		76	%		100	%		22	%		78	%		100	%

As at December 31, 2019, 35% of our commercial mortgage portfolio consisted of multi-family residential mortgages; there are no single-family residential mortgages. Our uninsured commercial portfolio had a weighted average loan-to-value ratio of approximately 55% as at December 31, 2019, consistent with December 31, 2018. While we generally limit the maximum loan-to-value ratio to 75% at issuance, we may invest in mortgages with a higher loan-to-value ratio in Canada if the mortgage is insured by the Canada Mortgage and Housing Corporation (“CMHC”). The estimated weighted average debt service coverage for our uninsured commercial portfolio is 1.76 times. Of the $3.9 billion of multi-family residential mortgages in the Canadian commercial mortgage portfolio, 93% were insured by the CMHC.

Loan Portfolio

As at December 31, 2019, we held $32.0 billion of loans, compared to $30.4 billion as at December 31, 2018. Private placement loans provide diversification by type of loan, industry segment and borrower credit quality. The private placement loan portfolio consists of senior secured and unsecured loans to large- and mid-market sized corporate borrowers, securitized lease/loan obligations secured by a variety of assets, and project finance loans in sectors such as power and infrastructure. The growth in the portfolio is consistent with our strategy to increase our investments in private placement loans.

The credit risk ratings in the following chart were established in accordance with the internal rating process described in this MD&A under the heading J - Risk Management - 9 - Risk Categories - Credit Risk Management Governance and Control. As at December 31, 2019, 96% of our total loan portfolio is investment grade, consistent with December 31, 2018.

38    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

Mortgages and Loans Past Due or Impaired

The gross carrying value and allowance for mortgages and loans past due or impaired are presented in the following table.

December 31, 2019

Gross carrying value

Allowance for losses

($ millions)

Mortgages

Loans

Total

Mortgages

Loans

Total

Not past due

16,148

31,911

48,059

–

–

–

Past due:

Past due less than 90 days

–

–

–

–

–

–

Past due 90 days or more

–

–

–

–

–

–

Impaired

147

133

280

70

(1)

47

117

Total

16,295

32,044

48,339

70

47

117

December 31, 2018

Gross carrying value

Allowance for losses

($ millions)

Mortgages

Loans

Total

Mortgages

Loans

Total

Not past due

16,427

30,332

46,759

–

–

–

Past due:

Past due less than 90 days

–

14

14

–

–

–

Past due 90 days or more

–

–

–

–

–

–

Impaired

31

93

124

25

(1)

50

75

Total

16,458

30,439

46,897

25

50

75

(1) Includes $20 million of sectoral provisions as at December 31, 2019, and $21 million of sectoral provisions as at December 31, 2018.

Our impaired mortgages and loans, net of allowances for losses, were $163 million as at December 31, 2019, compared to $49 million as at December 31, 2018.

5. Derivatives

The fair value of derivative assets held by the Company was $1,548 million, while the fair value of derivative liabilities was $2,040 million as at December 31, 2019, compared to a fair value of derivative assets of $1,112 million and a fair value of derivative liabilities of $2,295 million as at December 31, 2018.

We use derivative instruments to manage risks related to interest rate, equity market and currency fluctuations and in replication strategies to reproduce permissible investments. Our use of derivatives in these risk mitigation strategies does not mitigate all risk exposure; rather, they are used to keep us within our risk tolerance limits.

In addition to the general policies and monitoring, we use a variety of tools in counterparty risk management. Over-the-counter (“OTC”) derivative transactions are executed under International Swaps and Derivatives Association (“ISDA”) Master Agreements. A Credit Support Annex accompanies most of the ISDAs, which establish requirements for collateral.

Derivative Financial Instruments

The values associated with our derivative instruments are presented in the following table. Notional amounts serve as the basis for payments calculated under derivatives contracts and are not exchanged.

($ millions)	2019			2018
As at December 31
Net fair value		(492	)		(1,183	)
Total notional amount		62,131			59,198

The net fair value of derivatives was a liability of $492 million as at December 31, 2019, compared to a liability of $1,183 million as at December 31, 2018. The change in net fair value was primarily due to the impact from changes in foreign exchange rates and swap curves.

The total notional amount of our derivatives increased to $62.1 billion as at December 31, 2019 from $59.2 billion as at December 31, 2018. The change in notional amount is mainly attributable to an increase of $5.6 billion in foreign exchange contracts used for hedging foreign currency assets, an increase of $1.3 billion in equity contracts to hedge equity price fluctuations, partially offset by a decrease of $4.0 billion in interest rate contracts primarily due to a reduction in interest rate exposed assets.

Certain of our derivatives are designated in qualifying hedging relationships for accounting purposes, and represented $1.4 billion, or 2.3% of the total notional amount. Derivatives are designated in hedging relationships for accounting purposes to minimize accounting mismatches. These hedging relationships are documented at inception and hedge effectiveness is assessed on a quarterly basis.

Our derivatives designated in qualifying hedging relationships for accounting purposes include interest rate swaps, foreign exchange agreements, equity forwards and, previously, currency swaps. We designate certain interest rate swaps in fair value hedging relationships to hedge interest rate exposure on AFS assets. We also designate certain foreign exchange agreements in fair value and cash flow hedging relationships to manage foreign currency fluctuations associated with AFS assets. Additionally, we designate certain equity forwards in cash flow hedging relationships for anticipated payments of awards under certain stock-based compensation plans.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     39

Credit Equivalent Amount

As the regulator of the Canadian insurance industry, OSFI provides guidelines to quantify the use of derivatives. The credit equivalent amount, a measure used to approximate the potential credit exposure, is determined as the replacement cost of the derivative contracts with a positive fair value plus an amount representing the potential future credit exposure.

The risk-weighted credit equivalent amount is a measure used to determine the amount of capital necessary to support derivative transactions for certain Canadian regulatory purposes. It is determined by weighting the credit equivalent amount according to the nature of the derivative and the creditworthiness of the counterparties.

	2019				2018
($ millions)	Credit equivalent amount (“CEA”)(1)		Risk weighted CEA(1)		Credit equivalent amount(1)		Risk weighted CEA(1)
Foreign exchange contracts		666		14		433		12
Interest rate contracts		79		2		98		3
Equity and other contracts		51		1		11		–
Total		796		17		542		15

(1) Amounts presented are net of collateral received.

Credit Default Swaps By Underlying Financial Instrument Credit Rating

Credit default swaps (“CDS”) are derivative contracts that transfer credit risk related to an underlying referenced financial instrument from one counterparty to another. The purchaser receives protection against the decline in the value of the referenced financial instrument as a result of specified credit events such as default or bankruptcy. The Company sells credit protection through CDS to replicate credit exposure of an underlying reference security and enhance investment returns. The credit risk ratings of the underlying reference securities for single name contracts were established in accordance with the internal rating process described in section J - Risk Management - 9 - Risk Categories - Credit Risk Management Governance and Control.

The following table provides a summary of the credit default swap protection sold by credit rating of the underlying reference security.

	2019				2018
($ millions)	Notional amount		Fair value		Notional amount		Fair value
Single name credit default swap contracts
AA		45		1		48		1
A		574		9		611		9
BBB		608		19		674		13
Total single name credit default swap contracts		1,227		29		1,333		23
Credit default swap index contracts		–		–		23		–
Total credit default swap contracts sold		1,227		29		1,356		23

Additional detail on our derivative portfolio by derivative type is provided in Note 6.A.iv in our 2019 Annual Consolidated Financial Statements.

6. Investment Properties

Office, retail and industrial properties are the major components of our investment properties portfolio, representing approximately 78% as at December 31, 2019. The increase in our investment property portfolio is predominantly driven by market appraisal gains, partially offset by the impacts of foreign exchange translation and net sales in the year.

Investment Properties by Type and Geography

	December 31, 2019
($ millions)	Office		Industrial		Retail		Multi-family residential		Other		Total		% of Total
Canada		1,958		1,405		967		1,064		460		5,854		80	%
United States		772		269		273		–		72		1,386		19	%
Europe		22		13		30		–		1		66		1	%
Total		2,752		1,687		1,270		1,064		533		7,306		100	%
	December 31, 2018
($ millions)	Office		Industrial		Retail		Multi-family residential		Other		Total		% of Total
Canada		1,937		1,119		1,092		900		378		5,426		76	%
United States		847		358		338		–		109		1,652		23	%
Europe		25		14		38		–		2		79		1	%
Total		2,809		1,491		1,468		900		489		7,157		100	%

40    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

7. Impaired Assets

Financial assets that are classified as FVTPL, which represented 47% of our invested assets as at December 31, 2019, do not have allowances for losses since changes in the fair value of these assets are recorded to income and the assets are recorded at fair value in our 2019 Annual Consolidated Financial Statements. In the event of default, if the amounts recovered are insufficient to satisfy the related insurance contract liability cash flows that the assets are intended to support, credit exposure may be greater than the carrying value of the asset.

In the absence of objective evidence of impairment, impairment losses are not recognized on AFS debt securities, equity securities and other invested assets. If the cost of these assets is greater than their fair values, unrealized losses are recognized in other comprehensive income. Unrealized losses may be due to interest rate fluctuations or depressed fair values in sectors which have experienced strong negative market performance.

Additional detail on our impairment policy is provided in Note 1.iii in our 2019 Annual Consolidated Financial Statements.

8. Asset Default Provision

We make provisions for possible future credit events in the determination of our insurance contract liabilities. The amount of the provision for asset default included in insurance contract liabilities is based on possible reductions in future investment yields that vary by factors such as type of asset, asset credit quality (rating), duration and country of origin. To the extent that an asset is written off, or disposed of, any amounts that were set aside in our insurance contract liabilities for possible future asset defaults in respect of that asset are released.

Our asset default provision reflects the provision relating to future credit events for fixed income assets currently held by the Company that support our insurance contract liabilities. Our asset default provision as at December 31, 2019 was $2,637 million for losses related to possible future credit events for fixed income assets currently held by the Company that support our insurance contract liabilities. This represents 2.3% of the fixed income assets supporting insurance contract liabilities reported on our Consolidated Statements of Financial Position as at December 31, 2019.

Our asset default provision as at December 31, 2019 was $248 million higher than the provision as at December 31, 2018, primarily due to increases in the provisions for assets purchased net of dispositions, partially offset by the release of provisions on fixed income assets supporting our insurance contract liabilities and the impacts of foreign exchange translation.

The following table sets out the changes in our asset default provision for existing fixed income investments.

($ millions)	2019			2018
Opening balance		2,389			2,288
Purchases, dispositions and net asset movement(1)		612			205
Changes in assumptions and methodologies		(53	)		–
Changes in ratings		57			47
Release of provisions(2)		(293	)		(266	)
Currency		(75	)		115
Closing balance		2,637			2,389

(1) Net movement reflects the fluctuation in the value of FVTPL assets arising from movements in interest rates, credit spreads and other factors that impact the market value of fixed income investments.

(2) This amount represents the orderly release of provisions for future credit events held in insurance contract liabilities.

 I. Capital and Liquidity Management

Capital and liquidity management is core to our business as an insurance company. We ensure adequate capital for the protection of our policyholders, Clients and creditors, while managing capital adequacy and allocation across our businesses for the benefit of our shareholders. In addition, we maintain strong financial flexibility by ensuring that sufficient liquid assets are available to cover our anticipated payment obligations and funding requirements. We invest in various types of assets with a view to matching them with liabilities of various durations.

The regulatory environments in which we operate are expected to evolve as governments and regulators work to develop the appropriate level of financial regulation required to ensure that capital, liquidity and risk management practices are sufficient to withstand severe economic downturns.

1. Capital

We have a capital risk policy designed to maintain a strong capital position and to provide the flexibility necessary to take advantage of growth opportunities, to support the risk associated with our businesses and to optimize shareholder return. Our capital risk policy is also intended to provide 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 and its subsidiaries to take advantage of opportunities for expansion. Our capital base is structured to exceed minimum regulatory and internal capital targets and to maintain strong credit and financial strength ratings, while maintaining a capital-efficient structure. Capital is managed both on a consolidated basis under principles that consider all the risks associated with the business as well as at the business group level under the principles appropriate to the jurisdictions in which we operate. The capital of our foreign subsidiaries is managed on a local statutory basis in a manner commensurate with their individual risk profiles.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     41

Sun Life, including all of its business groups, engages in a capital planning process annually in which capital deployment options, capital raising and dividend recommendations are presented to the Board of Directors. Capital reviews are regularly conducted which consider the potential impacts under various business, interest rate and equity market scenarios. Relevant components of these capital reviews, including dividend recommendations, are presented to the Risk & Conduct Review Committee on a quarterly basis. The Board of Directors is responsible for the approval of our annual capital plan and quarterly shareholder dividends.

The Company’s capital risk policy establishes policies, operating guidelines and procedures that govern the management of capital. The capital risk policy is reviewed annually by the Risk & Conduct Review Committee and any changes are approved by the Board of Directors. Our Corporate Treasury and Risk Management functions are responsible for the development and implementation of the capital risk policy.

The Company’s capital base consists mainly of common shareholders’ equity. Other sources of capital include preferred shareholders’ equity, non-controlling interests, participating policyholders’ equity and subordinated debt issued by SLF Inc. and Sun Life Assurance. For Canadian regulatory purposes, our capital also includes innovative capital instruments issued by Sun Life Capital Trust and Sun Life Capital Trust II.

The following table summarizes the sources of our capital and our capital position over the past two years. Notes 13, 14, 15 and 21 to our 2019 Annual Consolidated Financial Statements include additional details on our capital.

($ millions)	2019			2018
Subordinated debt		3,538			3,039
Innovative capital instruments(1)		200			699
Equity
Preferred shareholders’ equity		2,257			2,257
Common shareholders’ equity		21,141			21,449
Participating policyholders’ equity		1,091			864
Non-controlling interests’ equity		19			–
Total equity		24,508			24,570
Total capital		28,246			28,308
Financial leverage ratio(2)		21.2	%		21.2	%

(1) Innovative capital instruments are presented net of associated transaction costs and consist of SLEECS, which were issued by Sun Life Capital Trust and Sun Life Capital Trust II. SLEECS qualify as capital for Canadian regulatory purposes. However, under IFRS they are reported as Senior debentures in our Annual and Interim Consolidated Financial Statements.

(2) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

Our total capital consists of subordinated debt and other capital instruments, participating policyholders’ equity, non-controlling interests and total shareholders’ equity, which includes common shareholders’ equity and preferred shareholders’ equity.

Common shareholders’ equity was $21.1 billion as at December 31, 2019, compared with $21.4 billion as at December 31, 2018. The decrease of $0.3 billion was primarily due to common share dividend payments, the impact related to the BGO acquisition⁽¹⁾, shares repurchased and cancelled, and other comprehensive loss, largely offset by common shareholders’ net income.

(1) For additional information, refer to Note 3 in our 2019 Annual Consolidated Financial Statements.

42    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

The table below provides the earliest par call and maturity dates for our subordinated debt, innovative capital instruments and preferred shares outstanding as at December 31, 2019.

Description	Interest Rate		Earliest Par Call Date/Redemption Date(1)	Maturity	Principal/ Face Amount ($ millions)
Subordinated Debt Issued by Sun Life Assurance
6.30% Debentures, Series 2		6.30%	n/a	2028		150
Subordinated Debt Issued by SLF Inc.
Series 2007-1		5.40%	May 29, 2037	2042		400
Series 2015-1		2.60%	September 25, 2020	2025		500
Series 2016-1		3.10%	February 19, 2021	2026		350
Series 2016-2		3.05%	September 19, 2023	2028		1,000
Series 2017-1		2.75%	November 23, 2022	2027		400
Series 2019-1		2.38%	August 13, 2024	2029		750
Trust Units Issued by Sun Life Capital Trust
SLEECS - Series B		7.09%	June 30, 2032	Perpetual		200
Class A Preferred Shares Issued by SLF Inc.
Series 1		4.75%	Any time	Perpetual		400
Series 2		4.80%	Any time	Perpetual		325
Series 3		4.45%	Any time	Perpetual		250
Series 4		4.45%	Any time	Perpetual		300
Series 5		4.50%	Any time	Perpetual		250
Series 8R(2)		2.275%	June 30, 2020	Perpetual		130
Series 9QR(3)		Floating	June 30, 2020(5)	Perpetual		150
Series 10R(2)		2.842%	September 30, 2021	Perpetual		173
Series 11QR(4)		Floating	September 30, 2021(5)	Perpetual		27
Series 12R(2)		3.806%	December 31, 2021	Perpetual		300

(1) The earliest date on which the Company has the option, but not the obligation, to call securities for redemption at their par value.

(2) On the earliest redemption date and every five years thereafter, the dividend rate will reset to an annual rate equal to the 5-year Government of Canada bond yield plus a spread specified for each series. The specified spread for Class A shares is: Series 8R - 1.41%, Series 10R - 2.17% and Series 12R - 2.73%. On the earliest redemption date and every five years thereafter, holders will have the right, at their option, to convert their shares into the series that is one number higher than their existing series.

(3) Holders of Series 9QR Shares will be entitled to receive quarterly floating rate non-cumulative dividends at an annual rate equal to the then 3-month Government of Canada treasury bill yield plus 1.41%. Holders of the Series 9QR Shares will have the right, at their option, to convert their Series 9QR Shares into Series 8R Shares on June 30, 2020, and on June 30 every five years thereafter.

(4) Holders of Series 11QR Shares will be entitled to receive quarterly floating rate non-cumulative dividends at an annual rate equal to the then 3-month Government of Canada treasury bill yield plus 2.17%. Holders of the Series 11QR Shares will have the right, at their option, to convert their Series 11QR Shares into Series 10R Shares on September 30, 2021, and on September 30 every five years thereafter.

(5) Redeemable on the redemption date and every five years thereafter, in whole or in part, at par, and on any other date at $25.50 per share.

The following table shows the number of common shares and stock options outstanding of SLF Inc. for the last two years.

Number of Common Shares Outstanding
(in millions)	2019			2018
Balance, beginning of year		598.5			610.5
Stock options exercised		0.8			0.4
Common shares repurchased and cancelled		(11.5	)		(12.5	)
Shares issued as consideration for business acquisition		–			0.1
Balance, end of year		587.8			598.5
Number of Stock Options Outstanding
(in millions)	2019			2018
Balance, beginning of year		3.1			3.0
Options issued		0.8			0.5
Options exercised, forfeited or expired		(0.8	)		(0.4	)
Balance, end of year		3.1			3.1

Under our DRIP, Canadian-resident common and preferred shareholders may choose to have their dividends automatically reinvested in common shares of SLF Inc. and may also purchase common shares through our DRIP with cash. For dividend reinvestments, we may, at our option, issue common shares of SLF Inc. from treasury at a discount of up to 5% to the volume-weighted average trading price or direct that common shares be purchased on behalf of participants on the open market through the TSX and alternative Canadian trading platforms (collectively, the “Exchanges”) at the market price. Common shares of SLF Inc. acquired by participants through optional cash purchases may also be issued from treasury or purchased through the Exchanges at SLF Inc.’s option, in either case at no discount. Commencing with the

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     43

dividends payable on March 31, 2016 and until further notice, common shares purchased under the Plan were purchased on the open market. There are no applicable discounts because the common shares are being purchased on the open market and are not being issued from treasury.

SLF Inc. grants stock options to certain employees. These options are granted at the closing price of SLF Inc.’s common shares on the TSX on the grant date.

As at January 31, 2020, SLF Inc. had 587,902,789 common shares, 3,014,865 options to acquire SLF Inc. common shares and 92,200,000 Class A Shares outstanding.

2. Capital Adequacy

OSFI has indicated that it will review the effectiveness of the LICAT guideline and update it to keep abreast of development in the life insurance industry and evolving risk measurement and management practices.

SLF Inc.

SLF Inc. is a non-operating insurance company and was subject to OSFI’s LICAT guideline as at December 31, 2019. In accordance with this guideline, SLF Inc. manages its capital in a manner commensurate with its risk profile and control environment, and SLF Inc.’s regulated subsidiaries comply with the capital adequacy requirements imposed in the jurisdictions in which they operate. SLF Inc.’s consolidated capital position is above its internal target. As at December 31, 2019, SLF Inc.’s LICAT ratio was 143%. For additional information, refer to section F - Financial Strength in this document.

Sun Life Assurance

Sun Life Assurance, SLF Inc.’s principal operating life insurance subsidiary in Canada, was subject to OSFI’s LICAT guideline as at December 31, 2019. With a LICAT ratio of 130% as at December 31, 2019, Sun Life Assurance’s capital ratio is well above OSFI’s supervisory ratio of 100% and regulatory minimum ratio of 90%. The LICAT guideline uses a risk-based approach for measuring specific life insurer risks and for aggregating the results to calculate the amount of a life insurer’s regulatory required capital to support these risks. Certain of these risk components, along with available capital, are sensitive to changes in equity markets and interest rates as outlined in the section J - Risk Management of this document. For additional information, refer to section F - Financial Strength in this document.

The following table shows the components of Sun Life Assurance’s LICAT ratio for 2019 and 2018.

Sun Life Assurance LICAT Ratio
($ millions)	2019			2018
Capital resources
Retained earnings and contributed surplus		13,731			13,338
Adjusted accumulated other comprehensive income		1,226			1,405
Common and preferred shares		5,945			5,945
Innovative capital instruments and subordinated debt		350			849
Other		45			59
Less:
Goodwill		2,433			2,552
Non-life investments and other		2,348			2,791
Available capital		16,516			16,253
Surplus allowance and eligible deposits		9,359			8,799
Total Capital resources		25,875			25,052
Capital requirements
Credit, market and insurance risks		20,223			19,887
Less: Diversification and other credits		4,010			4,292
Segregated fund guarantee risk		906			983
Operational risk		1,785			1,646
Total before scalar		18,904			18,224
Base solvency buffer (Total before scalar x 1.05)		19,849			19,136
LICAT ratio		130	%		131	%

Foreign Life Insurance Companies

Foreign subsidiaries and foreign operations of SLF Inc. must comply with local capital or solvency requirements in the jurisdictions in which they operate. Our operations maintained capital levels above the minimum local regulatory requirements during 2019 and 2018. Additional information on capital and regulatory requirements for our foreign subsidiaries and foreign operations is provided in SLF Inc.’s AIF under the heading Regulatory Matters.

In the U.S., as at December 31, 2019, we have two internal reinsurance arrangements with affiliated reinsurance companies, in Delaware and Vermont, relating to our closed block of individual universal life insurance products with no-lapse guarantee benefits issued in the U.S. The Delaware reinsurance structure was established in 2013 and finances excess U.S. statutory reserves for certain universal life policies issued between January 2000 and February 2006. The financing of U.S. statutory reserve requirements in excess of those required under IFRS for the

44    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

Delaware reinsurance company is supported by a guarantee from SLF Inc. The Vermont reinsurance structure was established in 2007 for certain policies issued between March 2006 and December 2008. Under the Vermont reinsurance structure, the related excess U.S. statutory reserve requirements are funded through a long-term financing arrangement established with an unrelated financial institution.

3. Shareholder Dividends

The declaration, amount and payment of dividends by SLF Inc. is subject to the approval of our Board of Directors and is dependent on our results of operations, our reported net income, financial condition, cash requirements and contractual restrictions. Capital management activities, as well as regulatory considerations and macro-economic factors including the economic outlook for the jurisdictions in which we do business, are also considered along with other factors. The Board of Directors reviews the level of dividends on a quarterly basis.

A regular and appropriate level of dividend payout and growth provides a stable source of return to common shareholders.

We target a dividend payout ratio of between 40% and 50% based on underlying net income, except where circumstances and the factors noted above would suggest a different ratio.

During 2019, our dividend payout ratio to common shareholders based on our reported net income was 48% and on an underlying net income basis was 41%.

SLF Inc. increased its common shareholders’ dividend for the fourth quarter of 2019 to $0.550. Total common shareholder dividends declared in 2019 were $2.100 per share, compared to $1.905 in 2018.

Dividends declared
Amount per share	2019		2018		2017
Common shares		2.100		1.905		1.745
Class A preferred shares
Series 1		1.187500		1.187500		1.187500
Series 2		1.200000		1.200000		1.200000
Series 3		1.112500		1.112500		1.112500
Series 4		1.112500		1.112500		1.112500
Series 5		1.125000		1.125000		1.125000
Series 8R(1)(2)		0.568800		0.568800		0.568800
Series 9QR(3)		0.772500		0.656200		0.493900
Series 10R(1)(4)		0.710500		0.710500		0.710500
Series 11QR(5)		0.962500		0.846200		0.683900
Series 12R(1)(6)		0.951500		0.951500		0.951500

(1) On the redemption date and every five years thereafter, the dividend rate will reset to an annual rate equal to the 5-year Government of Canada bond yield plus a yield specified for each series. The specified yield for Class A shares is: Series 8R - 1.41%, Series 10R - 2.17% and Series 12R - 2.73%. On the earliest redemption date and every five years thereafter, holders will have the right, at their option, to convert their shares into the series that is one number higher than their existing series.

(2) The dividend rate was reset on June 30, 2015 to a fixed annual dividend rate of 2.275% until the redemption date June 30, 2020.

(3) Holders of the Series 9QR Shares are entitled to receive quarterly floating rate non-cumulative dividends at an annual rate equal to the then 3-month Government of Canada treasury bill yield plus 1.41%. Holders of the Series 9QR Shares will have the right, at their option, to convert their Series 9QR Shares into Series 8R Shares on June 30, 2020 and on June 30 every five years thereafter.

(4) The dividend rate was reset on September 30, 2016 to a fixed annual dividend rate of 2.842% until the redemption date September 30, 2021.

(5) Holders of the Series 11QR Shares are entitled to receive quarterly floating rate non-cumulative dividends at an annual rate equal to the then 3-month Government of Canada treasury bill yield plus 2.17%. Holders of the Series 11QR Shares will have the right, at their option, to convert their Series 11QR Shares into Series 10R Shares on September 30, 2021 and on September 30 every five years thereafter.

(6) The dividend rate was reset on December 31, 2016 to a fixed annual dividend rate of 3.806% until the redemption date December 31, 2021.

4. Principal Sources and Uses of Funds

Our primary source of funds is cash provided by operating activities, including premiums, investment management fees and net investment income. These funds are used primarily to pay policy benefits, dividends to policyholders, claims, commissions, operating expenses, interest expenses and shareholder dividends. Excess cash flows generated from operating activities are generally invested to support future payment requirements. We also raise funds from time to time, through borrowing and issuing of securities, to finance growth, acquisitions or other needs.

As at December 31, 2019, we maintained net cash, cash equivalents and short-term securities totaling $9.5 billion. In addition to providing for near-term funding commitments, cash, cash equivalents and short-term securities include amounts that support short-term payment obligations.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     45

Net cash, cash equivalents and short-term securities increased by $143 million in 2019. The table below outlines our principal sources and uses of cash.

($ millions)	2019			2018
Net cash provided by operating activities		2,547			3,834
Net cash provided by (used in) investing activities		(430	)		(280	)
Net cash provided by (used in) financing activities		(2,436	)		(2,566	)
Changes due to fluctuations in exchange rates		(190	)		250
Increase (decrease) in cash and cash equivalents		(509	)		1,238
Net cash and cash equivalents, beginning of year		7,194			5,956
Net cash and cash equivalents, end of year		6,685			7,194
Short-term securities, end of year		2,860			2,208
Net cash, cash equivalents and short-term securities, end of year		9,545			9,402

5. Liquidity

We generally maintain an overall asset liquidity profile that exceeds requirements to fund insurance contract liabilities under prescribed adverse liability demand scenarios. To strengthen our liquidity further, we actively manage and monitor our:

• Capital levels

• Asset levels

• Matching position

• Diversification and credit quality of investments

• Cash forecasts and actual amounts against established targets

We are subject to various regulations in the jurisdictions in which we operate. The ability of SLF Inc.’s subsidiaries to pay dividends and transfer funds is regulated in certain jurisdictions and may require local regulatory approvals and the satisfaction of specific conditions in certain circumstances. Through effective cash management and capital planning, SLF Inc. ensures that its subsidiaries, as a whole and on a stand-alone basis, are properly funded and maintain adequate liquidity to meet obligations, both individually and in aggregate.

SLF Inc. and its wholly-owned holding companies had $2.3 billion in cash and other liquid assets as at December 31, 2019. See section F - Financial Strength for more information.

We maintain various credit facilities for general corporate purposes, as set out in the table below. Unless otherwise noted, all amounts are in Canadian dollars.

($ millions)	December 31, 2019						December 31, 2018
Credit Facility	Amount		Utilized		Expiry		Amount		Utilized		Expiry
Committed	US $	400	US $	2		2021	US $	400	US $	2		2021
Committed	US $	600	US $	56		2021
Uncommitted	US $	100	US $	74		n/a	US $	100	US $	74		n/a
Uncommitted	$	227	$	105		n/a	$	225	$	110		n/a
Uncommitted	US $	25	US $	7		n/a	US $	25	US $	9		n/a

The agreements relating to our committed credit facilities contain typical covenants for investment grade companies regarding solvency, credit ratings and financial strength, all of which were met as at December 31, 2019. These covenants include, but are not limited to, the maintenance of total equity by SLF Inc. of at least $12 billion, tested as of the last day of each fiscal quarter. SLF Inc.’s total equity was $24.5 billion as at December 31, 2019.

Our failure to comply with the covenants under the committed credit facility would, subject to grace periods in the case of certain covenants, result in an event of default. This could require us to repay any outstanding borrowings or to cash collateralize letters of credit under the facility. A failure by SLF Inc. (or any of its subsidiaries) to pay an obligation due for an amount exceeding $250 million would also result in an event of default under the committed credit facility described above.

Based on our historical cash flows and liquidity management processes, we believe that the cash flows from our operating activities will continue to provide sufficient liquidity for us to satisfy debt service obligations and to pay other expenses as they fall due.

46    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

 J. Risk Management

1. Risk Management Framework

The Company has an established Risk Management Framework (“Risk Framework”) approved by the Board that prescribes a comprehensive set of protocols and programs that need to be followed in conducting business activities. The risks that arise when providing products and services to Clients, which are in line with our Purpose to help our Clients achieve lifetime financial security and live healthier lives, are managed within these protocols and programs. Effective risk management is critical to the overall profitability, competitive market positioning and long-term financial viability of the Company. While we can’t necessarily eliminate all risk, the Risk Framework seeks to ensure that risks to a business undertaking are appropriately managed to achieve the Company’s business objectives over time and are not expected to exceed pre-established boundaries for risk taking. The Risk Framework, corporate strategy and business objectives are all aligned and risk management protocols and programs are embedded within every business segment.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     47

2. Risk Governance

Our Risk Framework sets out lines of responsibility and authority for risk-taking, governance and control. These governance requirements are summarized below.

Board of Directors

The Board is responsible for ensuring the governance of all risks across the enterprise and has primary responsibility for taking action to ensure risk management policies, programs and practices are in place. By approving our Risk Framework and the Risk Appetite Policy and providing ongoing oversight of the risk management programs, the Board monitors that significant risks are appropriately identified and managed. The Board oversees business and strategic risk through review and approval of the business and strategic plans, and regularly discusses key themes, issues and risks emerging in connection with the design or implementation of these plans. The Board also monitors risk management activities of our subsidiaries and risks posed to the Company through its joint venture arrangements.

The Risk & Conduct Review Committee is a standing committee of the Board whose primary functions are to assist the Board with oversight of the management of current and emerging risks enterprise-wide, to ensure that management has policies in place, processes and controls designed to identify and effectively manage the significant risks to which the Company is exposed and has sufficient capital to underpin those risks. The Committee regularly monitors the Company’s risk profile to ensure it is within the agreed risk appetite and that the Company’s capital position is in compliance with regulatory capital requirements, and monitors and recommends to the Board for approval, the specific risk limits allocated to the businesses and the annual Capital Plan. The Risk & Conduct Review Committee meets with senior business and functional leaders who have first-hand knowledge of risks and the risk management programs, oversees the effectiveness of the risk management function, and obtains reports from Internal Audit on the effectiveness of risk controls within the business and risk function. It reviews and approves all risk management policies and reviews compliance with those policies. In addition, where the Board has allocated oversight of specific risk management programs to other committees of the Board (“Board Committees”), the Risk & Conduct Review Committee is tasked with providing the Board with an integrated view of oversight of all risk management programs across all Board committees. The committee also oversees compliance with legal and regulatory requirements and the identification and management of compliance risk.

The Governance, Nomination & Investment Committee of the Board is responsible for assisting the Board in: reviewing and monitoring the Company’s Investment Plan and investment performance; overseeing investment practices, procedures and controls related to the management of the general fund investment portfolio and the Company’s asset management businesses; and reviewing and approving transactions, either separately or jointly with the Risk & Conduct Review Committee, where the acquisition of individual investments for the General Account would, on their own, exceed certain limits or ranges in the Investment and Credit Risk Management Policy. In addition, the Committee is also responsible for developing effective corporate governance guidelines and processes including policies and processes to sustain ethical behaviour, and developing processes to assess the effectiveness of the Board and its Committees.

The Audit Committee of the Board is responsible for assisting the Board in overseeing the integrity of financial statements and related information provided to shareholders and others, compliance with financial regulatory requirements, adequacy and effectiveness of the internal controls implemented and maintained by management, and assessing the qualifications, independence and performance of the external auditor.

The Management Resources Committee of the Board is responsible for assisting the Board in ensuring we have the leadership resources for succession of senior executive positions and programs to effectively attract, retain, develop and reward executives for achieving our strategic

48    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

objectives. The Management Resources Committee reviews the design, approval and governance of material incentive programs to align business objectives and to ensure that these incentive programs do not encourage excessive risk taking, and reviews the implications of key enterprise risks, including human resources risks, on compensation design and human resources practices. In addition, the Management Resources Committee reviews and makes recommendations to the Board with respect to compensation matters, including the remuneration of executives who have a material impact on the risk exposure of the Company.

Senior Management Committees

The Executive Risk Committee (“ERC”) provides executive management oversight of the Company’s enterprise risk management activities. This includes the review and articulation of the risk appetite, review that the risk profile is within the agreed risk appetite and policies, processes and controls are in place to identify and effectively manage the significant risks in accordance with the risk appetite and the overall objective of promoting a balanced business and product model to achieve agreed upon risk-adjusted returns and allocate capital accordingly.

The Investment & Credit Risk Committee is responsible for reviewing matters related to the management of the Company’s general fund assets which includes providing oversight and direction on the current and potential credit and investment risk exposures facing the Company and mitigating strategies to ensure that effective credit risk management practices and controls are in place.

The Corporate Asset Liability Management Committee is responsible for providing executive oversight and direction for the effective measurement, control and management of the market and liquidity risks in the design and operation of general fund investment strategies for efficiently discharging the Company’s general fund liabilities.

The Operational Risk & Compliance Committee is responsible for providing oversight of the Company’s operational and compliance risk management practices, current and emerging operational risk exposures, and the processes to ensure ongoing identification of significant operational and compliance risks facing the Company.

The Insurance Risk Committee is responsible for providing oversight and direction on insurance risk exposures facing the Company and to ensure that effective insurance risk management practices and controls are in place. This includes reviewing the current and projected insurance risk profile against limits; engaging in review of topical insurance, reinsurance and underwriting risk issues; and reviewing and recommending changes to the insurance risk measurement methodology to the ERC.

Accountabilities

Primary accountability for risk management is delegated by the Board to our Chief Executive Officer (“CEO”), and the CEO further delegates responsibilities throughout the Company through management authorities and responsibilities. The CEO delegates accountability for risk management to our executive officers, who are accountable for ensuring the management of risks in the scope of their business accountability is in accordance with the Board-approved Risk Framework, Risk Appetite Policy and risk management policies.

3. Risk Universe

As a large financial services organization operating in a complex industry, the Company encounters a variety of risks. We are subject to financial and insurance risks that are connected to our liabilities and with the management and performance of our assets, including how we match returns from assets with the payment of liabilities to our Clients. We also face risks in formulating our business strategy and business objectives, in carrying on our business activities in the pursuit of our strategy and objectives, and from external factors such as changes in the economic, political, competitive, regulatory and environmental landscapes. The Risk Framework covers all risks and these have been grouped into six major categories: credit, market, insurance, business and strategic, operational and liquidity risks. The Risk Framework sets out the key risk management processes in the areas of risk: appetite, identification, measurement, management, monitoring and reporting. The Risk Framework sets out both qualitative and quantitative measures and processes to control the risk the Company will bear in respect of each of these categories of risk and in aggregate.

4. Risk Appetite

Our Risk Appetite Policy defines the amount and type of risk we are willing to accept in pursuit of our business objectives, and is approved by the Board. It is forward-looking and our strategic plan, capital plan, business plan and business objectives are established within its boundaries.

The Company’s risk appetite seeks to balance the various needs, expectations, risk and reward perspectives and investment horizons of key stakeholders. In particular, our risk appetite supports the pursuit of shareholder value while ensuring that the Company’s ability to pay claims and fulfill policyholder commitments is not compromised.

The Company’s risk appetite is the primary mechanism to communicate its risk philosophy and the boundaries of permissible risk-taking across the enterprise. It ensures that business activities are assessed against performance criteria that are appropriately risk-adjusted. Our risk appetite supports the objective of maintaining adequate capital, managing return on equity, managing earnings volatility, managing long-term profitability and managing liquidity. To accomplish this, our risk appetite includes a wide array of qualitative and quantitative standards that reflect the Company’s overall risk management principles and values.

We generally accept diversifiable risks and utilize risk pooling to create portfolios with relatively low liability volatility. We take risk where we have internal expertise such as actuarial, underwriting, claims management, investment or distribution or where reinsurance partners are able to supplement our internal expertise. We prefer risks where it is possible to diversify across various segments including products, geographies, distribution channels or asset classes in order to maximize diversification opportunities.

Our Risk Appetite Policy sets out specific constraints which define the aggregate level of risk that the Company is willing to accept. We translate our risk appetite constraints into specific risk limits by risk class and business segment. Our risk profile is measured, managed and monitored regularly to ensure that we operate within our risk appetite. Our risk appetite limits are reviewed periodically to reflect the risks and opportunities inherent in our evolving business strategies and operating environment.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     49

5. Risk Management Policies

In order to support the effective communication, implementation and governance of our Risk Framework, we have codified our processes and operational requirements in a comprehensive series of risk management policies and operating guidelines. These policies and guidelines promote the application of a consistent approach to managing risk exposures across our global business platform. The Board and Board Committees regularly review and approve significant changes to the risk management policies and regularly review management’s reporting and attestation on compliance to these policies.

6. Risk Management Process

The risk management process as set out in our Risk Framework is described below:

Risk Identification and Measurement

All business segments employ a common approach to identify and measure risks. Business segments have accountability for identifying and managing risks facing their business. We have a process to identify and monitor emerging risks that may have a material impact on our finances, operations or reputation. We evaluate potential correlations between various risk events and categories, and monitor emerging risks, regulatory and rating agency requirements, and industry developments.

Risk measurement involves determining and evaluating potential risk exposures, and includes a number of techniques such as monitoring key risk indicators, assessing probability and severity of risks, and conducting stress testing.

A robust stress testing program is an essential component of the Company’s Risk Framework used to measure, monitor and mitigate the Company’s risk exposures and to ensure ongoing capital adequacy under plausible stress events. Stress testing is performed on key metrics such as earnings, regulatory capital ratios and liquidity to identify and monitor potential vulnerabilities to key risk drivers and ensure that the Company is operating within its risk appetite.

We develop and test a range of scenarios based on our internal assessment and regulatory guidance. Sensitivity testing is conducted on a regular basis and measures the earnings and regulatory capital impact from changes in underlying risk factors. Sensitivity testing is performed for individual risks and for consolidated risk exposures at different levels of stress and at various levels of aggregation. Scenario testing involves changes to a number of risk factors to assess the impact of and interaction between these risk factors. These scenarios include integrated scenario testing, reverse scenario testing and key assumption sensitivity testing. We also use the Dynamic Capital Adequacy Testing (“DCAT”) process, as required by our regulator, to project income and capital for a five-year period under plausible adverse scenarios. In 2020 the Canadian Institute of Actuaries will replace DCAT with Financial Condition Testing (“FCT”). FCT, similar to DCAT, will continue to act as a stress testing technique for the organization. FCT’s testing is broader than DCAT and allows for harmonization with the Company’s Own Risk Solvency Assessment (“ORSA”).

Risk Management, Monitoring and Reporting

Risk management decisions are formed by evaluating how well the outcomes of the risk measurements and risk assessments for a business activity conform to our risk appetite, including an assessment of risk-adjusted return.

Monitoring processes include oversight by the Board, which is exercised through Board Committees and senior management committees described in the Risk Governance section of this MD&A.

Senior management committees, Board Committees and the Board regularly review reports that summarize our risk profile, including the exposures across our principal risks including any changes in risk trends and emerging risks. These committees also review the effectiveness of the mitigation strategies presented in the reports. On a regular basis, the Board and the Board Committees review and approve any significant changes to key policies for the management of risk and review compliance with these policies.

7. Three Lines of Defence

The Company has adopted the Three Lines of Defence (“LOD”) model to provide a consistent, transparent and clearly documented allocation of accountability and segregation of functional responsibilities. This segregation of responsibility helps to establish a robust control framework that promotes transparent and independent challenge of all risk taking activities, and that encourages all functions to engage in self-critical examination to foster continuous improvement of the management of risk in our business.

The first line of defence is represented by the business segment management who own the risks that are intrinsic to the business and have the primary responsibility to identify, measure, manage, monitor and report these risks. Some of the first LOD risk related responsibilities include:

• Identification of key and emerging risks;

• Management, mitigation and reporting on risk within their business operations;

• Accountability for business results and the risks taken to achieve those results; and

• Operating within risk appetite and according to risk management policies.

The second line of defence includes the Chief Risk Officer (“CRO”) and various functional heads who are responsible for providing independent oversight of our Company-wide risk management programs. The CRO is responsible for developing our Risk Framework and Risk Appetite Policy, and for overseeing the development and implementation of risk management strategies aimed at optimizing the risk-return profile of the Company. The CRO is supported by a network of business segment risk officers. The functional heads support the CRO in the implementation and communication of our Risk Framework and Risk Appetite Policy. Some of the key second LOD risk related responsibilities include:

• Establishment of the risk management framework and policies;

• Providing oversight and challenge of first line current and emerging risks; and

• Independent reporting to senior management committees and the Board on the risk profile as measured against stated risk appetite.

50    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

The third line of defence responsibilities are distinct from first and second LOD responsibilities. The Internal Audit function is the third LOD and is responsible for providing independent assurance to management, the Risk & Conduct Review Committee and OSFI on the design and operational effectiveness of the risk management practices carried out by first LOD and second LOD. Internal Audit provides a quarterly opinion on the effectiveness of internal controls, risk management and governance processes to the Risk & Conduct Review Committee. In addition, the Risk & Conduct Review Committee may engage third-party independent reviews to supplement the third LOD review of the effectiveness of the Company’s risk management programs.

8. Risk Culture and Philosophy

We have built a strong corporate culture on a foundation of ethical behaviour, high business standards, integrity and respect. The Board establishes the “tone from the top” and is accountable to ensure that the CEO and senior management create and sustain a culture of integrity throughout the organization. We work together through our focus on diversity, inclusion and sustainability to fulfill our purpose of helping our Clients to achieve lifetime financial security and to live healthier lives.

Risk culture relates to how we behave and respond, in addition to the requirements we set. It enables and rewards taking the right risks in an informed manner. It enables effective challenge and transparency regarding risks and outcomes without fear of reprisal. It drives us to understand Client needs and preferences so that we can act in their best interests. In order to support employees in fulfilling their role, we have taken action to ensure our risk protocols and procedures are well defined and embedded in our day-to-day business activities, assess that appropriate resources and training are provided, establish and communicate a common risk philosophy and a high bar for integrity and conduct, and encourage every employee to openly identify risk exposures and communicate escalating risk concerns. The following six elements support our Risk Culture:

• Establishing tone from the top;

• Encouraging transparency in risk-taking;

• Performing effective challenge in conducting business decisions;

• Aligning incentives and risk management practices;

• Effectively communicating the risk culture expectations; and

• Establishing clear accountabilities.

A key premise of our culture is that all employees have an important role to play in managing the Company’s risks. Risk Management is embedded in the Company’s culture, which encourages ownership and responsibility for risk management at all levels. Our compensation programs are aligned to the organization’s risk management practices through our governance structure for the design and approval of incentive compensation plans and processes used to support the alignment of compensation and risk management. We continuously reinforce and embed the culture through communication and training on risk culture elements at various forums and across various levels through training on the Code of Conduct annually, reinforcing accountability through performance reviews and compensation, and through defining roles, responsibilities and expectations in the risk management policies.

The Company’s risk philosophy includes the following core principles:

Strategic Alignment

Our corporate strategy and business objectives are required to be established within the boundaries set out in the Risk Framework and the Risk Appetite Policy. This requires us to consider whether a business activity will result in a risk profile that we are willing to accept and which we are prepared to manage. We have established a range of explicit risk appetite limits and control points for credit, market, insurance, operational and liquidity risks. Business and strategic risk is managed through our strategic and business planning process and through controls over the implementation of these strategic and business plans. Risks associated with activities outside our risk appetite or outside the acceptable defined risks are avoided.

Stakeholder Interests

Our Risk Appetite Policy considers the interests of a large number of key stakeholders, including Clients, policyholders, shareholders, debt-holders, employees, regulators, distributors, rating agencies and other capital markets participants. The policy describes how to balance the needs, expectations, risk and reward perspectives, and investment horizons of these different stakeholders.

Effective risk management requires that objectives and incentives be aligned to ensure management’s decisions are consistent with the Company’s risk philosophy and risk appetite. To ensure this, the business plans and strategies are independently tested to ensure that they operate within the boundaries and requirements set out in the Risk Framework and the Risk Appetite Policy, and the results of this testing are reported to the Board. Compensation programs for employees are approved by the Board and the Board Committees and are aligned with the Company’s risk philosophy, values, business and risk management strategies, and the long-term interests of stakeholders. In establishing annual performance objectives, we consider risk management goals to ensure that business decisions are consistent with the desired risk and return profile of the Company.

Capability Alignment

We seek out profitable risk-taking opportunities in those areas where we have established risk management skills and capabilities. Conversely, we endeavour to avoid or transfer risks that are beyond our risk-taking capability. Our ability to measure and evaluate risks, the quality of our risk governance and control environment, the depth and quality of our risk responses and the robustness of our pricing strategies are particularly important capabilities that we assess.

Portfolio Perspective

In evaluating a particular risk, consideration is given to a portfolio perspective of risk and return including the explicit recognition of the impacts of diversification and concentration and how different risks interact with each other. This perspective is extended to the development of risk mitigation and pricing strategies, recognizing that often the most cost-effective way of managing risk involves utilizing available relationships already inherent in our business.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     51

Risk-Adjusted Returns

The financial return metrics which are used to assess business activities are required to be risk-adjusted. Financial return metrics are developed in consideration of the constraints set out in the Risk Appetite Policy, and reflect the expected costs of mitigation and the cost of risk capital required to support the risk taking activity.

Company Culture

Our Company Culture is the sum of the shared assumptions, values and beliefs that create the unique character of an organization. Our company culture provides a framework that encourages behaviour aligned with goals for long-term value creation. It defines the appropriate behaviour for any given situation, governs the interaction with Clients and affects how employees identify with the organization. Our company culture has significant potential to impact our risk profile. An organization’s culture impacts its ability to create value and to protect value. Maintaining the right balance of risk-taking and risk control activities is a key organizational capability and fundamental to Sun Life’s long-term sustainable success.

9. Risk Categories

The shaded text and tables in the following section of this MD&A represent our disclosure on credit, market and liquidity risks in accordance with IFRS 7 Financial Instruments - Disclosures and includes a discussion on how we measure risk and our objectives, policies and methodologies for managing these risks. The shaded text and tables represent an integral part of our audited annual Consolidated Financial Statements for the year ended December 31, 2019. The shading in this section does not imply that these disclosures are of any greater importance than non-shaded tables and text, and the Risk Management disclosure should be read in its entirety. This information should be considered carefully together with other information in this MD&A and in the 2019 AIF, our Consolidated Financial Statements and other reports and materials that we file with securities regulators.

In this section, segregated funds include segregated fund guarantees, variable annuities and investment products, and includes Run-off reinsurance in Corporate.

Our Risk Framework has grouped all risks into six major risk categories: market, insurance, credit, business and strategic, operational and liquidity risks.

i. Market Risk

Risk Description

We are exposed to financial and capital market risk, which is defined as the risk that the fair value or future cash flows of an insurance contract or financial instrument will fluctuate because of changes or volatility in market prices. Market risk includes equity, interest rate and spread, real estate and foreign currency risks.

Market Risk Management Governance and Control

We employ a wide range of market risk management practices and controls as outlined below:

• Market risk governance practices are in place, including independent monitoring and review and reporting to senior management and the Risk & Conduct Review Committee.

• Risk appetite limits have been established for equity, interest rate, real estate and foreign currency risks.

• Income and regulatory capital sensitivities are monitored, managed and reported against pre-established risk limits.

• Comprehensive asset-liability management and hedging policies, programs and practices are in place.

• Regulatory solvency requirements include risk-based capital requirements and are monitored regularly.

• Product Design and Pricing Policy requires a detailed risk assessment and pricing provisions for material risks.

• Stress-testing techniques, such as DCAT, are used to measure the effects of large and sustained adverse market movements.

• Insurance contract liabilities are established in accordance with Canadian actuarial standards of practice.

• Internal capital targets are established at an enterprise level to cover all risks and are above minimum regulatory and supervisory levels. Actual capital levels are monitored to ensure they exceed internal targets.

Specific market risks and our risk management strategies are discussed below in further detail.

Equity Risk

Equity risk is the potential for financial loss arising from declines or volatility in equity market prices. We are exposed to equity risk from a number of sources. A portion of our exposure to equity risk arises in connection with benefit guarantees on segregated fund contracts and variable annuities. These benefit guarantees may be triggered upon death, maturity, withdrawal or annuitization. The cost of providing for these guarantees is uncertain and will depend upon a number of factors, including general capital market conditions, underlying fund performance, policyholder behaviour and mortality experience, which may result in negative impacts on our net income and capital.

We generate revenue in our asset management businesses and from certain insurance and annuity contracts where fees are levied on account balances that are affected directly by equity market levels. Accordingly, we have further exposure to equity risk as adverse fluctuations in the market value of such assets will result in corresponding adverse impacts on our revenue and net income. In addition, declining and volatile equity markets may have a negative impact on sales and redemptions (surrenders) in these businesses, and this may result in further adverse impacts on our net income and financial position.

We also have direct exposure to equity markets from the investments supporting other general account liabilities, surplus, and employee benefit plans. These exposures fall within our risk-taking philosophy and appetite, and are therefore generally not hedged.

52    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

Interest Rate and Spread Risk

Interest rate and spread risk is the potential for financial loss arising from changes or volatility in interest rates or spreads when asset cash flows and the policy obligations they support are not matched. This may result in the need to either sell assets to meet policy payments and expenses or reinvest excess asset cash flows in unfavourable interest rate or spread environments. The impact of changes or volatility in interest rates or spreads is reflected in the valuation of our financial assets and liabilities for insurance contracts.

Our primary exposure to interest rate and spread risk arises from certain general account products and segregated fund contracts which contain investment guarantees in the form of minimum crediting rates, guaranteed premium rates, settlement options and benefit guarantees. If investment returns fall below guaranteed levels, we may be required to increase liabilities or capital in respect of these contracts. The guarantees attached to these products may be applicable to both past premiums collected and future premiums not yet received. Segregated fund contracts provide benefit guarantees that are linked to underlying fund performance and may be triggered upon death, maturity, withdrawal or annuitization. These products are included in our asset-liability management program and the residual interest rate exposure is managed within our risk appetite limits.

Declines in interest rates or narrowing spreads can result in compression of the net spread between interest earned on investments and interest credited to policyholders. Declines in interest rates or narrowing spreads may also result in increased asset calls, mortgage prepayments, and net reinvestment of positive cash flows at lower yields, and therefore adversely impact our profitability and financial position. Negative interest rates may additionally result in losses on our cash deposits and low or negative returns on our fixed income assets impacting our profitability. In contrast, increases in interest rates or a widening of spreads may have a material impact on the value of fixed income assets, resulting in depressed market values, and may lead to lower LICAT ratios or losses in the event of the liquidation of assets prior to maturity.

Significant changes or volatility in interest rates or spreads could have a negative impact on sales of certain insurance and annuity products, and adversely impact the expected pattern of redemptions (surrenders) on existing policies. Increases in interest rates or widening spreads may increase the risk that policyholders will surrender their contracts, potentially forcing us to liquidate assets at a loss and accelerate recognition of certain acquisition expenses. While we have established hedging programs in place and our insurance and annuity products often contain surrender mitigation features, these may not be sufficient to fully offset the adverse impact of the underlying losses.

We also have direct exposure to interest rates and spreads from investments supporting other general account liabilities, surplus and employee benefit plans. Lower interest rates or a narrowing of spreads will result in reduced investment income on new fixed income asset purchases. Conversely, higher interest rates or wider spreads will reduce the value of our existing assets. These exposures fall within our risk-taking philosophy and appetite and are therefore generally not hedged.

A sustained low interest rate environment may adversely impact our earnings, regulatory capital requirements and our ability to implement our business strategy and plans in several ways, including:

• Lower sales of certain insurance and wealth products, which can in turn pressure our operating expense levels;

• Shifts in the expected pattern of redemptions (surrenders) on existing policies;

• Higher new business strain reflecting lower new business profitability;

• Reduced return on new fixed income asset purchases, and higher hedging costs;

• The impact of changes in actuarial assumptions;

• Impairment of goodwill; and

• Additional valuation allowances against our deferred tax assets.

Market Risk Sensitivities

We utilize a variety of methods and measures to quantify our market risk exposures. These include duration management, key rate duration techniques, convexity measures, cash flow gap analysis, scenario testing, and sensitivity testing of earnings and regulatory capital ratios versus risk appetite limits.

Our net income⁽¹⁾ is affected by the determination of policyholder obligations under our annuity and insurance contracts. These amounts are determined using internal valuation models and are recorded in our Annual Consolidated Financial Statements, primarily as Insurance contract liabilities. The determination of these obligations requires management to make assumptions about the future level of equity market performance, interest rates, credit and swap spreads and other factors over the life of our products. Differences between our actual experience and our best estimate assumptions are reflected in our Annual Consolidated Financial Statements. Refer to Additional Cautionary Language and Key Assumptions Related to Sensitivities in this section for important additional information regarding these estimates.

The market value of our investments in fixed income and equity securities fluctuates based on movements in interest rates and equity markets. The market value of fixed income assets designated as AFS that are held primarily in our surplus segment increases with declining interest rates and decreases with rising interest rates. The market value of equities designated as AFS and held primarily in our surplus segment increases with rising equity markets and decreases with declining equity markets. Changes in the market value of AFS assets flow through other comprehensive income (“OCI”) and are only recognized in net income when realized upon sale, or when considered impaired. The amount of realized gains (losses) recorded in net income in any period is equal to the unrealized gains (losses) or OCI position at the start of the period plus the change in market value during the current period up to the point of sale for those securities that were sold during the period. The sale or impairment of AFS assets held in surplus can therefore have the effect of modifying our net income sensitivity.

We realized $64 million (pre-tax) in net gains on the sale of AFS assets during the fourth quarter of 2019 and $167 million in 2019 ($25 million pre-tax in the fourth quarter of 2018, and $121 million in 2018). The net unrealized (losses) gains or OCI position on AFS fixed income and equity assets were $251 million and $62 million, respectively, after-tax as at December 31, 2019 ($(98) million and $43 million, respectively, after-tax as at December 31, 2018).

(1) Net income in section J - Risk Management in this document refers to common shareholders’ net income.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     53

Equity Market Sensitivities

The following table sets out the estimated immediate impact on, or sensitivity of, our net income and OCI and Sun Life Assurance’s LICAT ratio to certain instantaneous changes in equity market prices as at December 31, 2019 and December 31, 2018.

As at December 31, 2019  ($ millions, unless otherwise noted)
Change in Equity Markets(1)		25% decrease			10% decrease			10% increase		25% increase
Potential impact on net income(2)(3)	$	(350	)	$	(150	)	$	100	$	250
Potential impact on OCI(3)	$	(50	)	$	(50	)	$	50	$	50
Potential impact on LICAT(2)(4)		0.5% point decrease			0.0% point decrease			0.0% point increase		0.0% point increase
As at December 31, 2018  ($ millions, unless otherwise noted)
Change in Equity Markets(1)		25% decrease			10% decrease			10% increase		25% increase
Potential impact on net income(2)(3)	$	(300	)	$	(100	)	$	100	$	250
Potential impact on OCI(3)	$	(100	)	$	(50	)	$	50	$	100
Potential impact on LICAT(2)(4)		2.0% point decrease			1.0% point decrease			0.5% point increase		1.0% point increase

(1) Represents the respective change across all equity markets as at December 31, 2019 and December 31, 2018. Assumes that actual equity exposures consistently and precisely track the broader equity markets. Since in actual practice equity-related exposures generally differ from broad market indices (due to the impact of active management, basis risk, and other factors), realized sensitivities may differ significantly from those illustrated above. Sensitivities include the impact of re-balancing equity hedges for dynamic hedging programs at 2% intervals (for 10% changes in equity markets) and at 5% intervals (for 25% changes in equity markets).

(2) The market risk sensitivities include the estimated mitigation impact of our hedging programs in effect as at December 31, 2019 and December 31, 2018, and include new business added and product changes implemented prior to such dates.

(3) Net income and OCI sensitivities have been rounded to the nearest $50 million. The sensitivities exclude the market impacts on the income from our joint ventures and associates, which we account for on an equity basis.

(4) The LICAT sensitivities illustrate the impact on Sun Life Assurance as at December 31, 2019 and December 31, 2018. LICAT ratios are rounded to the nearest 0.5%.

Interest Rate Sensitivities

The following table sets out the estimated immediate impact on, or sensitivity of, our net income and OCI and Sun Life Assurance’s LICAT ratio to certain instantaneous changes in interest rates as at December 31, 2019 and December 31, 2018.

Sun Life Assurance’s LICAT ratio generally decreases with rising interest rates and increases with declining interest rates, which is opposite to our net income sensitivity. Increases to interest rates will reduce the value of our assets and margins in our actuarial liabilities, resulting in a lower LICAT ratio, while decreases to interest rates will increase the value of our assets and margins in our actuarial liabilities. However, our sensitivity to interest rates may be non-linear, and can change, due to the interrelationships between market rates, actuarial assumptions and LICAT calculations. In particular, changes to market conditions can shift the interest rate scenario applied in the LICAT formula causing a discontinuity where capital requirements change materially.

($ millions, unless otherwise noted)	As at December 31, 2019						As at December 31, 2018
Change in Interest Rates(1)		50 basis point decrease			50 basis point increase			50 basis point decrease			50 basis point increase
Potential impact on net income(2)(3)(4)	$	(150	)	$	50		$	(100	)	$	50
Potential impact on OCI(3)	$	250		$	(250	)	$	250		$	(250	)
Potential impact on LICAT(2)(5)		2.0% point increase			3.0% point decrease			2.5% point increase			1.5% point decrease

(1) Interest rate sensitivities assume a parallel shift in assumed interest rates across the entire yield curve as at December 31, 2019 and December 31, 2018 with no change to the Actuarial Standards Board (“ASB”) promulgated Ultimate Reinvestment Rate (“URR”). Variations in realized yields based on factors such as different terms to maturity and geographies may result in realized sensitivities being significantly different from those illustrated above. Sensitivities include the impact of re-balancing interest rate hedges for dynamic hedging programs at 10 basis point intervals (for 50 basis point changes in interest rates).

(2) The market risk sensitivities include the estimated mitigation impact of our hedging programs in effect as at December 31, 2019 and December 31, 2018, and include new business added and product changes implemented prior to such dates.

(3) Net income and OCI sensitivities have been rounded to the nearest $50 million. The sensitivities exclude the market impacts on the income from our joint ventures and associates, which we account for on an equity basis.

(4) The majority of interest rate sensitivity, after hedging, is attributed to individual insurance products. We also have interest rate sensitivity, after hedging, from our fixed annuity and segregated funds products.

(5) The LICAT sensitivities illustrate the impact on Sun Life Assurance as at December 31, 2019 and December 31, 2018. LICAT ratios are rounded to the nearest 0.5%.

The above sensitivities were determined using a 50 basis point change in interest rates and a 10% change in our equity markets because we believe that these market shocks were reasonably possible as at December 31, 2019. We have also disclosed the impact of a 25% change in equity markets to illustrate that significant changes in equity market levels may result in other than proportionate impacts on our sensitivities.

Credit Spread and Swap Spread Sensitivities

We have estimated the immediate impact or sensitivity of our net income attributable to certain instantaneous changes in credit and swap spreads. The credit spread sensitivities reflect the impact of changes in credit spreads on our asset and liability valuations (including non-sovereign fixed income assets, provincial governments, corporate bonds, and other fixed income assets). The swap spread sensitivities reflect the impact of changes in swap spreads on swap-based derivative positions and liability valuations.

54    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

($ millions, unless otherwise noted)	Credit Spread Sensitivities(1)				Swap Spread Sensitivities
Net income sensitivity(2)		50 basis point decrease		50 basis point increase		20 basis point decrease		20 basis point increase
December 31, 2019	$	(75)	$	50	$	50	$	(50)
December 31, 2018	$	(75)	$	75	$	25	$	(25)

(1) In most instances, credit spreads are assumed to revert to long-term insurance contract liability assumptions generally over a five-year period.

(2) Sensitivities have been rounded to the nearest $25 million.

The credit and swap spread sensitivities assume a parallel shift in the indicated spreads across the entire term structure. Variations in realized spread changes based on different terms to maturity, geographies, asset classes and derivative types, underlying interest rate movements, and ratings may result in realized sensitivities being significantly different from those provided above. The credit spread sensitivity estimates exclude any credit spread impact that may arise in connection with asset positions held in segregated funds. Spread sensitivities are provided for the consolidated entity and may not be proportional across all reporting segments. Refer to Additional Cautionary Language and Key Assumptions Related to Sensitivities in this section for important additional information regarding these estimates.

Market Risk Management Strategies

Market risk is managed at all stages during the product life cycle including product design and development, ongoing review and positioning of our suite of products, and ongoing asset-liability management and hedge re-balancing.

We have implemented asset-liability management and hedging programs involving regular monitoring and adjustment of market risk exposures using assets, derivative instruments and repurchase agreements to maintain market risk exposures within our risk appetite. The general availability and cost of these hedging instruments may be adversely impacted by a number of factors including changes in interest rates, increased volatility in capital markets, and changes in the general market and regulatory environment within which these hedging programs operate. In particular, regulations for OTC derivatives could impose additional costs and could affect our hedging strategy. In addition, these programs may themselves expose us to other risks.

Our market risk management strategies are developed based on policies and operating guidelines at the enterprise level, business segment level and product level. Liabilities having a similar risk profile are grouped together and a customized investment and hedging strategy is developed and implemented to optimize return within our risk appetite limits.

In general, market risk exposure is mitigated by the assets supporting our products. This includes holdings of fixed income assets such as bonds and mortgages. Derivative instruments may supplement these assets to reduce the risk from cash flow mismatches and mitigate the market risk associated with liability features and optionality. The following table sets out the use of derivatives across a number of our products as at December 31, 2019.

Asset-Liability Management Applications for Derivative Usage

The primary uses of derivatives are set out in the table below.

Products/Application	Uses of Derivative	Derivatives Used
General asset-liability management - interest rate risk exposure for most insurance and annuity products	To manage the sensitivity of the duration gap between assets and liabilities to interest rate changes	Interest rate swaps, swaptions, floors and bond futures
Guarantees on insurance and annuity contracts - minimum interest rate guarantees, guaranteed surrender values and guaranteed annuitization options	To limit potential financial losses from significant reductions in asset earned rates relative to contract guarantees	Interest rate swaps, swaptions, floors and bond futures
Segregated fund guarantees	To manage the exposure of product guarantees sensitive to movement in equity market and interest rate levels and currency fluctuations	Put options, call options, futures and swaps on equity indices, interest rate swaps and bond futures, and foreign exchange forwards
Currency exposure in relation to asset-liability management	To reduce the sensitivity to currency fluctuations by matching the value and cash flows of specific assets denominated in one currency with the value and cash flows of the corresponding liabilities denominated in another currency	Currency swaps and forwards
Credit exposure	To replicate credit exposures and enhance investment returns	Credit default swaps

General Account Insurance and Annuity Products

Most of our expected sensitivity to changes in interest rates and about two-thirds of our expected sensitivity to changes in equity markets are derived from our general account insurance and annuity products. We have implemented market risk management strategies to mitigate a portion of the market risk related to our general account insurance and annuity products.

Individual insurance products include universal life and other long-term life and health insurance products. Major sources of market risk exposure for individual insurance products include the reinvestment risk related to future premiums on regular premium policies, asset reinvestment risk on both regular premium and single premium policies and the guaranteed cost of insurance. Interest rate risk for individual

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     55

insurance products is typically managed on a duration basis, within tolerance ranges set out in the applicable investment policy or guidelines. Targets and limits are established so that the level of residual exposure is commensurate with our risk appetite. Exposures are monitored frequently, and assets are re-balanced as necessary to maintain compliance within policy limits using a combination of assets and derivative instruments. A portion of the longer-term cash flows are backed with equities and real estate.

For participating insurance products and other insurance products with adjustability features, the investment strategy objective is to provide a total rate of return given a constant risk profile over the long term.

Fixed annuity products generally provide the policyholder with a guaranteed investment return or crediting rate. Interest rate risk for these products is typically managed on a duration basis, within tolerance ranges set out in the applicable investment guidelines. Targets and limits are established such that the level of residual exposure is commensurate with our risk appetite. Exposures are monitored frequently, and are re-balanced as necessary to maintain compliance within prescribed tolerances using a combination of fixed income assets and derivative instruments.

Certain insurance and annuity products contain minimum interest rate guarantees. Market risk management strategies are implemented to limit potential financial loss due to reductions in asset earned rates relative to contract guarantees. These typically involve the use of hedging strategies utilizing interest rate derivatives such as interest rate floors, swaps and swaptions.

Certain insurance and annuity products contain features which allow the policyholders to surrender their policy at book value. Market risk management strategies are implemented to limit the potential financial loss due to changes in interest rate levels and policyholder behaviour. These typically involve the use of hedging strategies such as dynamic option replication and the purchase of interest rate swaptions.

Certain products have guaranteed minimum annuitization rates. Market risk management strategies are implemented to limit the potential financial loss and typically involve the use of fixed income assets, interest rate swaps, and swaptions.

Segregated Fund Guarantees

Approximately one-third of our equity market sensitivity and a small amount of interest rate risk sensitivity as at December 31, 2019 are derived from segregated fund products. These products provide benefit guarantees, which are linked to underlying fund performance and may be triggered upon death, maturity, withdrawal or annuitization. The cost of providing these guarantees is uncertain and depends upon a number of factors including general capital market conditions, our hedging strategies, policyholder behaviour and mortality experience, each of which may result in negative impacts on net income and capital.

The following table provides information with respect to the guarantees provided for our segregated fund products by business group.

Segregated Fund Risk Exposures ($ millions)

December 31, 2019
	Fund value	Amount at Risk(1)	Value of guarantees(2)	Insurance contract liabilities(3)
Canada	12,131	362	10,678	505
Asia	2,337	212	2,380	99
Corporate(4)	2,302	207	1,063	228
Total	16,770	781	14,121	832

December 31, 2018
	Fund value	Amount at Risk(1)	Value of guarantees(2)	Insurance contract liabilities(3)
Canada	11,202	792	10,742	552
Asia	2,798	444	3,165	147
Corporate(4)	2,215	277	1,219	255
Total	16,215	1,513	15,126	954

(1) The Amount at Risk represents the excess of the value of the guarantees over fund values on all policies where the value of the guarantees exceeds the fund value. The Amount at Risk is not currently payable as the guarantees are only payable upon death, maturity, withdrawal or annuitization if fund values remain below guaranteed values.

(2) For guaranteed lifetime withdrawal benefits, the value of guarantees is calculated as the present value of the maximum future withdrawals assuming market conditions remain unchanged from current levels. For all other benefits, the value of guarantees is determined assuming 100% of the claims are made at the valuation date.

(3) The insurance contract liabilities represent management’s provision for future costs associated with these guarantees and include a provision for adverse deviation in accordance with Canadian actuarial standards of practice.

(4) Corporate includes Run-off reinsurance, a closed block of reinsurance. The Run-off reinsurance business includes risks assumed through reinsurance of variable annuity products issued by various North American insurance companies between 1997 and 2001.

The movement of the items in the table above from December 31, 2018 to December 31, 2019 primarily resulted from the following factors:

(i) the total fund values increased due to an increase in equity markets, which was partially offset by net redemptions from products closed to new business;

(ii) the total amount at risk decreased due to an increase in equity markets and net redemptions from products closed to new business;

(iii) the total value of guarantees decreased due to net redemptions from products closed to new business and the weakening of the U.S. dollar against the Canadian dollar; and

(iv) the total insurance contract liabilities decreased due to an increase in equity markets, which was partially offset by a decrease in interest rates.

56    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

Segregated Fund Hedging

Our hedging programs use derivative instruments to mitigate the interest and equity related exposure of our segregated fund contracts. As at December 31, 2019, over 90% of our segregated fund contracts, as measured by associated fund values, were included in a hedging program. While a large percentage of contracts are included in the hedging program, not all of our market risk exposure related to these contracts is hedged. For those segregated fund contracts included in the hedging program, we generally hedge the value of expected future net claims costs and associated margins.

The following table illustrates the impact of our hedging program related to our sensitivity to a 50 basis point decrease in interest rates and a 10% and 25% decrease in equity markets for segregated fund contracts as at December 31, 2019 and December 31, 2018.

Impact of Segregated Fund Hedging

December 31, 2019
($ millions)	Changes in interest rates(3)			Changes in equity markets(4)
Net income sensitivity(1)(2)		50 basis point decrease			10% decrease		25% decrease
Before hedging		(150	)		(150	)	(400	)
Hedging impact		150			100		300
Net of hedging		–			(50	)	(100	)
December 31, 2018
($ millions)	Changes in interest rates(3)			Changes in equity markets(4)
Net income sensitivity(1)(2)		50 basis point decrease			10% decrease		25% decrease
Before hedging		(150	)		(150	)	(450	)
Hedging impact		150			100		350
Net of hedging		–			(50	)	(100	)

(1) Net income sensitivities have been rounded to the nearest $50 million.

(2) Since the fair value of benefits being hedged will generally differ from the financial statement value (due to different valuation methods and the inclusion of valuation margins in respect of financial statement values), this will result in residual volatility to interest rate and equity market shocks in net income and capital. The general availability and cost of these hedging instruments may be adversely impacted by a number of factors, including volatile and declining equity and interest rate market conditions.

(3) Represents a parallel shift in assumed interest rates across the entire yield curve as at December 31, 2019 and December 31, 2018, with no change to the ASB promulgated URR. Variations in realized yields based on factors such as different terms to maturity and geographies may result in realized sensitivities being significantly different from those illustrated above. Sensitivities include the impact of re-balancing interest rate hedges for dynamic hedging programs at 10 basis point intervals (for 50 basis point changes in interest rates).

(4) Represents the change across all equity markets as at December 31, 2019 and December 31, 2018. Assumes that actual equity exposures consistently and precisely track the broader equity markets. Since in actual practice equity-related exposures generally differ from broad market indices (due to the impact of active management, basis risk, and other factors), realized sensitivities may differ significantly from those illustrated above. Sensitivities include the impact of re-balancing equity hedges for dynamic hedging programs at 2% intervals (for 10% changes in equity markets) and at 5% intervals (for 25% changes in equity markets).

Our hedging strategy is applied both at the line of business or product level and at the Company level using a combination of longer-dated put options and dynamic hedging techniques (i.e., frequent re-balancing of short-dated interest rate and equity derivative contracts). We actively monitor our overall market exposure and may implement tactical hedge overlay strategies in order to align expected earnings sensitivities with risk management objectives.

Real Estate Risk

Real estate risk is the potential for financial loss arising from fluctuations in the value of, or future cash flows from, our investments in real estate. We are exposed to real estate risk and may experience financial losses resulting from the direct ownership of real estate investments or indirectly through fixed income investments secured by real estate property, leasehold interests, ground rents, and purchase and leaseback transactions. Real estate price risk may arise from external market conditions, inadequate property analysis, inadequate insurance coverage, inappropriate real estate appraisals, or from environmental risk exposures. We hold direct real estate investments that support general account liabilities and surplus, and fluctuations in value will impact our profitability and financial position. A material and sustained increase in interest rates may lead to deterioration in real estate values. An instantaneous 10% decrease in the value of our direct real estate investments as at December 31, 2019 would decrease net income⁽¹⁾ by approximately $275 million ($275 million decrease as at December 31, 2018). Conversely, an instantaneous 10% increase in the value of our direct real estate investments as at December 31, 2019 would increase net income by approximately $275 million ($275 million increase as at December 31, 2018).

Foreign Currency Risk

Foreign currency risk is the result of mismatches in the currency of our assets and liabilities (inclusive of capital), and cash flows. This risk may arise from a variety of sources such as foreign currency transactions and services, foreign currency hedging, investments denominated in foreign currencies, investments in foreign subsidiaries and net income from foreign operations. Changes or volatility in foreign exchange rates, including a change to currencies that are fixed in value to another currency, could adversely affect our financial condition and results of operations.

As an international provider of financial services, we operate in a number of countries, with revenues and expenses denominated in several local currencies. In each country in which we operate, we generally maintain the currency profile of assets to match the currency of aggregate liabilities and required surplus. This approach provides an operational hedge against disruptions in local operations caused by currency fluctuations. Foreign currency derivative contracts such as currency swaps and forwards are used as a risk management tool to manage the currency exposure in accordance with our Asset Liability Management Policy. As at December 31, 2019 and December 31, 2018, the Company did not have a material foreign currency risk exposure on a functional currency basis.

(1) Net income sensitivities have been rounded to the nearest $25 million.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     57

Changes in exchange rates can affect our net income and surplus when financial results in functional currencies are translated into Canadian dollars. Net income earned outside of Canada is generally not currency hedged and a weakening in the local currency of our foreign operations relative to the Canadian dollar can have a negative impact on our net income reported in Canadian currency. A strengthening in the local currency of our foreign operations relative to the Canadian dollar would have the opposite effect. Regulatory capital ratios could also be impacted by changes in exchange rates.

Additional Cautionary Language and Key Assumptions Related to Sensitivities

Our market risk sensitivities are measures of our estimated change in net income and OCI for changes in interest rates and equity market price levels described above, based on interest rates, equity market prices and business mix in place as at the respective calculation dates. These sensitivities are calculated independently for each risk factor, generally assuming that all other risk variables stay constant. The sensitivities do not take into account indirect effects such as potential impacts on goodwill impairment or valuation allowances on deferred tax assets. The sensitivities are provided for the consolidated entity and may not be proportional across all reporting segments. Actual results can differ materially from these estimates for a variety of reasons, including differences in the pattern or distribution of the market shocks, the interaction between these risk factors, model error, or changes in other assumptions such as business mix, effective tax rates, policyholder behaviour, currency exchange rates and other market variables relative to those underlying the calculation of these sensitivities. The extent to which actual results may differ from the indicative ranges will generally increase with larger capital market movements. Our sensitivities as at December 31, 2018 have been included for comparative purposes only.

We have also provided measures of our net income sensitivity to instantaneous changes in credit spreads, swap spreads, real estate price levels, and capital sensitivities to changes in interest rates and equity price levels. The real estate sensitivities are non-IFRS financial measures. For additional information, see section L - Non-IFRS Financial Measures in this document. The cautionary language which appears in this section is also applicable to the credit spread, swap spread, real estate, and LICAT ratio sensitivities. In particular, these sensitivities are based on interest rates, credit and swap spreads, equity market, and real estate price levels as at the respective calculation dates and assume that all other risk variables remain constant. Changes in interest rates, credit and swap spreads, equity market, and real estate prices in excess of the ranges illustrated may result in other-than-proportionate impacts.

As these market risk sensitivities reflect an instantaneous impact on net income, OCI and Sun Life Assurance’s LICAT ratio, they do not include impacts over time such as the effect on fee income in our asset management businesses.

The sensitivities reflect the composition of our assets and liabilities as at December 31, 2019 and December 31, 2018, respectively. Changes in these positions due to new sales or maturities, asset purchases/sales, or other management actions could result in material changes to these reported sensitivities. In particular, these sensitivities reflect the expected impact of hedging activities based on the hedge programs in place as at the December 31 calculation dates. The actual impact of hedging activity can differ materially from that assumed in the determination of these indicative sensitivities due to ongoing hedge re-balancing activities, changes in the scale or scope of hedging activities, changes in the cost or general availability of hedging instruments, basis risk (i.e., the risk that hedges do not exactly replicate the underlying portfolio experience), model risk, and other operational risks in the ongoing management of the hedge programs or the potential failure of hedge counterparties to perform in accordance with expectations.

The sensitivities are based on methods and assumptions in effect as at December 31, 2019 and December 31, 2018, as applicable. Changes in the regulatory environment, accounting or actuarial valuation methods, models, or assumptions (including changes to the ASB promulgated URR) after those dates could result in material changes to these reported sensitivities. Changes in interest rates and equity market prices in excess of the ranges illustrated may result in other than proportionate impacts.

Our hedging programs may themselves expose us to other risks, including basis risk (i.e., the risk that hedges do not exactly replicate the underlying portfolio experience), volatility risk, derivative counterparty credit risk, and increased levels of liquidity risk, model risk and other operational risks. These factors may adversely impact the net effectiveness, costs, and financial viability of maintaining these hedging programs and therefore adversely impact our profitability and financial position. While our hedging programs are intended to mitigate these effects (e.g., hedge counterparty credit risk is managed by maintaining broad diversification, dealing primarily with highly-rated counterparties, and transacting through OTC contracts cleared through central clearing houses, exchange-traded contracts or bilateral OTC contracts negotiated directly between counterparties that include credit support annexes), residual risk, potential reported earnings and capital volatility remain.

For the reasons outlined above, our sensitivities should only be viewed as directional estimates of the underlying sensitivities of each factor under these specialized assumptions, and should not be viewed as predictors of our future net income, OCI, and capital. Given the nature of these calculations, we cannot provide assurance that actual impact will be consistent with the estimates provided.

Information related to market risk sensitivities and guarantees related to segregated fund products should be read in conjunction with the information contained in the sections in this MD&A under the section M - Accounting and Control Matters - 1 - Critical Accounting Policies and Estimates. Additional information on market risk can be found in Note 6 of our 2019 Annual Consolidated Financial Statements and the Risk Factors section in the AIF.

ii. Insurance Risk

Risk Description

Insurance risk is the uncertainty of product performance due to actual experience emerging differently than expected in the areas of policyholder behaviour, mortality, morbidity and longevity. In addition, product design and pricing, expense and reinsurance risks impact multiple risk categories, including insurance risk.

Insurance Risk Management Governance and Control

We employ a wide range of insurance risk management practices and controls, as outlined below:

• Insurance risk governance practices are in place, including independent monitoring and review and reporting to senior management and the Risk & Conduct Review Committee.

• Risk appetite limits have been established for policyholder behaviour, mortality and morbidity, and longevity risks.

58    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

• Income and regulatory capital sensitivities are monitored, managed and reported against pre-established risk limits.

• Comprehensive Insurance Risk Policy, guidelines and practices are in place.

• The global underwriting manual aligns underwriting practices with our corporate risk management standards and ensures a consistent approach in insurance underwriting.

• Board-approved maximum retention limits are in place. Amounts issued in excess of these limits are reinsured.

• Detailed procedures, including criteria for approval of risks and for claims adjudication are established and monitored for each business segment.

• Underwriting and risk selection standards are established and overseen by the corporate underwriting and claims risk management function.

• Diversification and risk pooling is managed by aggregation of exposures across product lines, geography and distribution channels.

• The Insurance Risk Policy and Investment & Credit Risk Policy establish acceptance criteria and protocols to monitor the level of reinsurance ceded to any single reinsurer or group of reinsurers.

• Reinsurance counterparty risk is monitored, including annual reporting of reinsurance exposure to the Risk & Conduct Review Committee.

• Concentration risk exposure is monitored on group policies in a single location to avoid a catastrophic event occurrence resulting in a significant impact.

• Various limits, restrictions and fee structures are introduced into plan designs in order to establish a more homogeneous policy risk profile and limit potential for anti-selection.

• Regulatory solvency requirements include risk-based capital requirements and are monitored regularly.

• The Product Design and Pricing Policy requires detailed risk assessment and pricing provision for material risks.

• Company specific and industry level experience studies and sources of earnings analysis are monitored and factored into valuation, renewal and new business pricing processes.

• Stress-testing techniques, such as DCAT, are used to measure the effects of large and sustained adverse movements in insurance risk factors. In 2020, the Canadian Institute of Actuaries will replace DCAT with FCT. FCT, similar to DCAT, will continue to act as a key stress-testing technique for the organization. FCT’s testing is broader than DCAT and allows for harmonization with the Company’s ORSA.

• Insurance contract liabilities are established in accordance with Canadian actuarial standards of practice.

• Internal capital targets are established at an enterprise level to cover all risks and are above minimum regulatory and supervisory levels. Actual capital levels are monitored to ensure they exceed internal targets.

We use reinsurance to limit losses, minimize exposure to significant risks and to provide additional capacity for growth. Our Insurance Risk Policy sets maximum global retention limits and related management standards and practices that are applied to reduce our exposure to large claims. Amounts in excess of the Board-approved maximum retention limits are reinsured. Effective January 1, 2019, we updated our single life or joint-first-to-die basis retention limit to $40 ($25 in 2018) in Canada and US$40 (US$25 in 2018) outside of Canada. For survivorship life insurance, our maximum global retention limit is $50 ($30 in 2018) in Canada and US$50 (US$30 in 2018) outside of Canada. In certain markets and jurisdictions, retention levels below the maximum are applied. Reinsurance is utilized for numerous products in most business segments, and placement is done on an automatic basis for defined insurance portfolios and on a facultative basis for individual risks with certain characteristics.

Our reinsurance coverage is well diversified and controls are in place to manage exposure to reinsurance counterparties. Reinsurance exposures are monitored to ensure that no single reinsurer represents an undue level of credit risk. This includes performing periodic due diligence on our reinsurance counterparties as well as internal credit assessments on counterparties with which we have material exposure. While reinsurance arrangements provide for the recovery of claims arising from the liabilities ceded, we retain primary responsibility to the policyholders.

Specific insurance risks and our risk management strategies are discussed below in further detail.

Policyholder Behaviour Risk

We can incur losses due to adverse policyholder behaviour relative to the assumptions used in the pricing and valuation of products with regard to lapse of policies or exercise of other embedded policy options.

Uncertainty in policyholder behaviour can arise from several sources including unexpected events in the policyholder’s life circumstances, the general level of economic activity (whether higher or lower than expected), changes in the financial and capital markets, changes in pricing and availability of current products, the introduction of new products, changes in underwriting technology and standards, as well as changes in our financial strength or reputation. Uncertainty in future cash flows affected by policyholder behaviour can be further exacerbated by irrational behaviour during times of economic turbulence or at key option exercise points in the life of an insurance contract.

Various types of provisions are built into many of our products to reduce the impact of uncertain policyholder behaviour. These provisions include:

• Surrender charges that adjust the payout to the policyholder by taking into account prevailing market conditions.

• Limits on the amount that policyholders can surrender or borrow.

• Restrictions on the timing of policyholders’ ability to exercise certain options.

• Restrictions on both the types of funds Clients can select and the frequency with which they can change funds.

• Policyholder behaviour risk is also mitigated through reinsurance on some insurance contracts.

Internal experience studies are used to monitor, review and update policyholder behaviour assumptions as needed which could result in updates to policy liabilities.

Mortality and Morbidity Risk

Mortality and morbidity risk is the risk that future experience could be worse than the assumptions used in the pricing and valuation of products. 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 could also occur through systemic anti-selection, which could arise due to poor plan design, or underwriting process failure or the development of investor-owned and secondary markets for life insurance policies.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     59

The risk of adverse morbidity experience also increases during economic slowdowns, especially with respect to disability coverage, as well as with increases in high medical treatment costs and growth in utilization of specialty drugs. This introduces the potential for adverse financial volatility in our financial results. External factors could adversely affect our life insurance, health insurance, critical illness, disability, long-term care insurance and annuity businesses. Adverse trends in morbidity experience, such as higher disability incidence, increases in high medical treatment costs and growth in utilization of specialty drugs, introduce the potential for adverse volatility in our financial results.

Detailed uniform underwriting procedures have been established to determine the insurability of applicants and to manage exposure to large claims. These underwriting requirements are regularly scrutinized against industry guidelines and oversight is provided through a corporate underwriting and claim management function.

Mortality and morbidity concentration risk is the risk of a catastrophic event, such as natural environmental disasters (for example, earthquakes), human-made disasters (for example, acts of terrorism, military actions, and inadvertent introduction of toxic elements into the environment) as well as pandemics that could occur in geographic locations where there is significant insurance coverage. We do not have a high degree of concentration risk to single individuals or groups due to our well-diversified geographic and business mix. The largest portion of mortality risk within the Company is in North America. Individual and group insurance policies are underwritten prior to initial issue and renewals, based on risk selection, plan design, and rating techniques.

The Insurance Risk Policy approved by the Risk & Conduct Review Committee includes limits on the maximum amount of insurance that may be issued under one policy and the maximum amount that may be retained. These limits vary by geographic region and amounts in excess of limits are reinsured to ensure there is no exposure to unreasonable concentration of risk.

Longevity Risk

Longevity risk is the potential for economic loss, accounting loss or volatility in earnings arising from adverse changes in rates of mortality improvement relative to the assumptions used in the pricing and valuation of products. This risk can manifest itself slowly over time as socioeconomic conditions improve and medical advances continue. It could also manifest itself more quickly, for example, due to medical breakthroughs that significantly extend life expectancy. Longevity risk affects contracts where benefits or costs are based upon the likelihood of survival (for example, annuities, pensions, pure endowments, reinsurance, segregated funds, and specific types of health contracts). Additionally, our longevity risk exposure is increased for certain annuity products such as guaranteed annuity options by an increase in equity market levels.

To improve management of longevity risk, we monitor research in the fields that could result in a change in expected mortality improvement. Stress-testing techniques are used to measure and monitor the impact of extreme mortality improvement on the aggregate portfolio of insurance and annuity products as well as our own pension plans.

Product Design and Pricing Risk

Product design and pricing risk is the risk a product does not perform as expected, causing adverse financial consequences. This risk may arise from deviations in realized experience versus assumptions used in the pricing of products. Risk factors include uncertainty concerning future investment yields, policyholder behaviour, mortality and morbidity experience, sales levels, mix of business, expenses and taxes. Although some of our products permit us 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 our profitability and capital position.

Our Product Design and Pricing Policy, approved by the Risk & Conduct Review Committee, establishes the framework governing our product design and pricing practices and is designed to align our product offerings with our strategic objectives and risk-taking philosophy. Consistent with this policy, product development, design and pricing processes have been implemented throughout the Company. New products follow a stage-gate process with defined management approvals based on the significance of the initiative, and each initiative is subject to a risk assessment process to identify key risks and risk mitigation requirements, and is reviewed by multiple stakeholders. Additional governance and control procedures are listed below:

• Pricing models, methods, and assumptions are subject to periodic internal peer reviews.

• Experience studies, sources of earnings analysis, and product dashboards are used to monitor actual experience against those assumed in pricing and valuation.

• On experience rated, participating, and adjustable products, emerging experience is reflected through changes in policyholder dividend scales as well as other policy adjustment mechanisms such as premium and benefit levels.

• Limits and restrictions may be introduced into the design of products to mitigate adverse policyholder behaviour or apply upper thresholds on certain benefits.

Expense Risk

Expense risk is the risk that future expenses are higher than the assumptions used in the pricing and valuation of products. This risk can arise from general economic conditions, unexpected increases in inflation, slower than anticipated growth, or reduction in productivity leading to increases in unit expenses. Expense risk occurs in products where we cannot or will not pass increased costs onto the Client and will manifest itself in the form of a liability increase or a reduction in expected future profits.

We closely monitor expenses through an annual budgeting process and ongoing monitoring of any expense gaps between unit expenses assumed in pricing and actual expenses.

Reinsurance Risk

We purchase reinsurance for certain risks underwritten by our various insurance businesses. Reinsurance risk is the risk of financial loss due to adverse developments in reinsurance markets (for example, discontinuance or diminution of reinsurance capacity, or an increase in the cost of reinsurance), insolvency of a reinsurer or inadequate reinsurance coverage.

Changes in reinsurance market conditions, including actions taken by reinsurers to increase rates on existing and new coverage and our ability to obtain appropriate reinsurance, may adversely impact the availability or cost of maintaining existing or securing new reinsurance capacity,

60    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

with adverse impacts on our business strategies, profitability and financial position. There is an increased possibility of rate increases or renegotiation of legacy reinsurance contracts by our reinsurers, as the global reinsurance industry continues to review and optimize their business models. In addition, changes to the regulatory treatment of reinsurance arrangements could have an adverse impact on our capital position.

We have an Insurance Risk Policy and an Investment & Credit Risk Policy approved by the Risk & Conduct Review Committee, which set acceptance criteria and processes to monitor the level of reinsurance ceded to any single reinsurer. These policies also set minimum criteria for determining which reinsurance companies qualify as suitable reinsurance counterparties having the capability, expertise, governance practices and financial capacity to assume the risks being considered. Additionally, these policies require that all agreements include provisions to allow action to be taken, such as recapture of ceded risk (at a potential cost to the Company), in the event that the reinsurer loses its legal ability to carry on business through insolvency or regulatory action. Periodic due diligence is performed on the reinsurance counterparties with which we do business and internal credit assessments are performed on reinsurance counterparties with which we have material exposure. Reinsurance counterparty credit exposures are monitored closely and reported annually to the Risk & Conduct Review Committee.

New sales of our products can be discontinued or changed to reflect developments in the reinsurance markets. Rates for our in-force reinsurance treaties can be either guaranteed or adjustable for the life of the ceded policy. In order to diversify reinsurance risk, there is generally more than one reinsurer supporting a reinsurance pool.

Additional information on insurance risk can be found in Note 7 to our 2019 Annual Consolidated Financial Statements and in the Risk Factors section in the AIF.

iii. Credit Risk

Risk Description

Credit risk is the possibility of loss from amounts owed by our borrowers or financial counterparties. We are subject to credit risk in connection with issuers of securities held in our investment portfolio, debtors, structured securities, reinsurers, counterparties (including derivative, repurchase agreement and securities lending counterparties), other financial institutions and other entities. 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 or risk profile otherwise deteriorates. Credit risk can also arise in connection with deterioration in the value of, or ability to realize, any underlying security that may be used as collateral for the debt obligation. Credit risk can occur as a result of broad economic conditions, challenges within specific sectors of the economy, or from issues affecting individual companies. Events that result in defaults, impairments or downgrades of the securities in our investment portfolio would cause the Company to record realized or unrealized losses and may cause an increase in our provisions for asset default, adversely impacting earnings.

Credit Risk Management Governance and Control

We employ a wide range of credit risk management practices and controls, as outlined below:

• Credit risk governance practices are in place, including independent monitoring and review and reporting to senior management and the Risk & Conduct Review Committee.

• Risk appetite limits have been established for credit risk.

• Income and regulatory capital sensitivities are monitored, managed and reported against pre-established risk limits.

• Comprehensive Investment and Credit Risk Management Policy, guidelines and practices are in place.

• Specific investment diversification requirements are in place, such as defined investment limits for asset class, geography, and industry.

• Risk-based credit portfolio, counterparty, and sector exposure limits have been established.

• Mandatory use of credit quality ratings for portfolio investments has been established and is reviewed regularly. These internal rating decisions for new fixed income investments and ongoing review of existing rating decisions are independently adjudicated by Corporate Risk Management.

• Comprehensive due diligence processes and ongoing credit analyses are conducted.

• Regulatory solvency requirements include risk-based capital requirements and are monitored regularly.

• Comprehensive compliance monitoring practices and procedures including reporting against pre-established investment limits are in place.

• Reinsurance exposures are monitored to ensure that no single reinsurer represents an undue level of credit risk.

• Stress-testing techniques, such as DCAT, are used to measure the effects of large and sustained adverse credit developments. In 2020, the Canadian Institute of Actuaries will replace DCAT with FCT. FCT, similar to DCAT, will continue to act as a key stress-testing technique for the organization. FCT’s testing is broader than DCAT and allows for harmonization with the Company’s ORSA.

• Insurance contract liabilities are established in accordance with Canadian actuarial standards of practice.

• Internal capital targets are established at an enterprise level to cover all risks and are above minimum regulatory and supervisory levels. Actual capital levels are monitored to ensure they exceed internal targets.

Our core principles of credit risk management include asset diversification, fundamental research and analysis of cash flows, proactive and continuous risk monitoring, active management and relative value assessment, all with the objective of optimizing risk-adjusted returns, with due consideration for the impacts of capital and taxation.

We rate fixed income investments primarily through the use of internally developed scorecards which combine an estimated probability of default and loss given default to determine an expected loss and credit risk rating. This rating is expressed using a 22-point scale that is generally consistent with those used by external rating agencies, and is based on detailed examination of the borrower’s, or issuer’s, credit quality and the characteristics of the specific instrument. The probability of default assessment is based on borrower-level or issuer-level analysis, which encompasses an assessment of industry risk, business strategy, competitiveness, strength of management and other financial information. The loss given default assessment is based on instrument-level analysis, which considers the impact of guarantees, covenants, liquidity and other structural features. These scorecards provide input to stochastic value-at-risk models and are used to stress test the portfolio, which provide insight into the distribution and characteristics of credit risk within our portfolios. In accordance with our policies and under normal circumstances, our ratings cannot be higher than the highest rating provided by certain Nationally Recognized Statistical Rating Organizations (“NRSROs”). Certain assets, including those in our sovereign debt and asset-backed securities portfolios, are assigned a rating based on ratings provided by NRSROs using a priority sequence order of Standard & Poor’s, Moody’s, Fitch and DBRS Limited.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     61

Additional information on credit risk can be found in Note 6 to our 2019 Annual Consolidated Financial Statements and in the Risk Factors section in the AIF.

iv. Business and Strategic Risk

Risk Description

Business and strategic risk includes risks related to changes in the economic or political environment, distribution channels or Client behaviour, environmental risks, competitive, legal or regulatory environment and risks relating to the design or implementation of our business strategy.

Business and Strategic Risk Management Governance and Control

We employ a wide range of business and strategic risk management practices and controls, as outlined below:

• Business and strategic risk governance practices are in place, including independent monitoring and review and reporting to senior management, the Board and the Board Committees.

• Business and strategic risk is managed through our strategic and business planning process and controls over the implementation of these plans. These plans are reviewed and discussed at the executive level and the key themes, issues and risks emerging are discussed by the Board and the Board Committees.

• Our business and strategic plans are subject to approval by the Board, which also receives regular reviews of implementation progress against key business plan objectives.

• Comprehensive policies including the Risk Framework, Risk Appetite Policy, Product Design and Pricing Policy, and Capital Risk Policy are in place.

• Our corporate strategy and business objectives are established within the boundaries of the Risk Appetite Policy. Our business strategies and plans are designed to align with our risk appetite, our capital position and our financial performance objectives.

• Our risk appetite is periodically assessed, taking into consideration the economic and regulatory environments in which we operate.

• Merger, acquisition, strategic investments and divestiture transactions are governed by a Board-approved merger and acquisition risk management policy and significant transactions require the approval of the Board.

• Stress-testing techniques, such as DCAT, are used to measure the effects of large and sustained adverse scenarios. In 2020, the Canadian Institute of Actuaries will replace DCAT with FCT. FCT, similar to DCAT, will continue to act as a key stress-testing technique for the organization. FCT’s testing is broader than DCAT and allows for harmonization with the Company’s ORSA.

• Key and emerging risks are identified, monitored and reported, including emerging regulatory changes that may have a material impact on our finances, operations or reputation.

• Internal capital targets are established at an enterprise level to cover all risks and are above minimum regulatory and supervisory levels. Actual capital levels are monitored to ensure they exceed internal targets.

We regularly review and adapt our business strategies and plans to take account of changes in the external business, economic, political and regulatory environments in which we operate. Our business strategies and plans are designed to align with our risk appetite, our capital position and our financial performance objectives. We periodically reassess our risk appetite taking into consideration the economic, regulatory and competitive environment in which we operate.

Specific business and strategic risks are discussed below in further detail.

Economic and Political Risk

We operate in various geographies and our business and financial operations are susceptible to regional and global economic, political and regulatory changes. We may be affected by economic and capital markets conditions and economic shocks around the globe as a result of increasingly connected global markets. Factors such as changes in interest rates, foreign exchange rates, market volatility, housing prices, consumer spending, saving and debt, business investment and inflation around the globe can affect the business and economic environments in which we operate. Continued economic and political uncertainty may give rise to increased business and strategic risks including those associated with industry restructuring, mergers and acquisitions, changing competitive dynamics and changes in the legal, regulatory and tax regimes in which our businesses operate. In addition, adverse economic conditions often arise in conjunction with volatile and deteriorating capital markets conditions, which can have an adverse impact on Client behaviour and in turn on our sales and profitability, credit and financial strength ratings, and capital and liquidity positions.

Implementation of Business Strategy

Our business strategies and plans are dependent on the successful execution of organizational and strategic initiatives designed to support the growth of our business. Our ability to manage the execution of these initiatives effectively and prioritize initiatives directly affects our ability to execute our strategies. Identifying and implementing the right set of initiatives is critical to achieving our business plan targets. Failure to implement these initiatives could also lead to cost structure challenges.

Distribution Risk

Failure to achieve planned distribution scale or appropriate and compliant distribution of products could materially impact our financial and strategic objectives. This includes the inability to attract and retain intermediaries and agents at a cost that is financially feasible to the Company, or to develop digital sales and Client support capabilities and technologies. Distribution risk may also be influenced where our distribution or product strategy and related services (including digital sales and Client support capabilities and technologies) are not developed, modified or executed in line with our strategic objectives or in consideration of the changes in Client behaviour or our regulatory environment. In addition, the lack of a well-diversified distribution model in the jurisdictions in which we do business may cause over-reliance on agency channel or key partners.

Competition Risk

Competition from insurance companies, banks, asset managers, mutual fund companies, financial planners and other service providers (including new entrants and non-traditional financial services companies) is intense, and could adversely affect our business in certain countries.

62    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

The businesses in which we engage are highly competitive and our ability to sell our products is dependent on many factors, including scale, price and yields offered, distribution channels, digital capabilities, financial strength ratings, range of product lines and product quality, brand strength, investment performance, historical dividend levels and the ability to provide value added services to distributors and Clients. In certain markets, some of our competitors may be superior to us on one or more of these factors. Our competitors have significant potential to disrupt our business through targeted strategies to reduce our market share which may include targeting our key people or bancassurance partners and other distributors or aggressively pricing their products. Our ability to achieve our business plans and strategies depends significantly upon our capacity to anticipate and respond quickly to these competitive pressures.

Technology is driving rapid change in the financial services sector and is enabling new entrants to compete or offer services to our competitors to enhance their ability to compete in certain segments of the insurance, wealth and asset management markets. The emergence of new technologies such as robotic process automation, artificial intelligence, blockchain and advanced analytics may have an impact on the financial services sector and how companies interact with their stakeholders. Our current competitors or new entrants may use these or other new technologies to provide services in various areas such as customized pricing, proactive outreach to Clients and targeted marketing in order to strengthen their Client relationships and influence Client behaviour. The impact of disruption from changing technology and innovation by traditional and non-traditional competitors who may offer a better user experience, functionality or lower priced products and may have lower distribution costs will require us to adapt at a more rapid pace and may create margin pressures. The risk of disruption may also impact our distribution models as new and low cost digital-based business models emerge in connection with the distribution of financial services and products, such as insurtechs and robo-advisors. These risks are evolving rapidly with an increasing number of digital users and are difficult to anticipate and respond to proactively, and may adversely impact our profitability and financial position.

Investment Performance

Investment performance risk is the possibility that we fail to achieve the desired return objectives on our investment portfolio, or that our asset management businesses fail to design or execute investment strategies in order to achieve competitive returns on the products and managed accounts offered by these businesses. Failure to achieve investment objectives may adversely affect our revenue and profitability through slower growth prospects and adverse impacts on policyholder or Client behaviour.

Changes in Legal and Regulatory Environment

Most of our businesses are subject to extensive regulation and supervision. Changes to legislation, regulations or government policies, or the manner in which they are interpreted or enforced, may require that we make significant changes to our strategy, may result in increased implementation costs and diversion of resources to manage the change, could impact financial reporting, accounting processes and capital requirements, and could impact the ability of sales intermediaries to distribute our products, all of which could have an adverse effect on our business and operations. Our failure to comply with existing and evolving regulatory requirements could also result in regulatory sanctions and could affect our relationships with regulatory authorities and our ability to execute our business strategies and plans.

These changes could impact our capital requirements, the regulatory framework for our products and services, the regulation of selling practices, sales intermediaries (such as bancassurance) and product offerings (such as coverage for prescription drugs), solvency requirements, executive compensation, corporate governance practices and could impose restrictions on our foreign operations, which may include changes to the limits on foreign ownership of local companies.

Environmental Risk

Our financial performance may be adversely affected if we do not adequately prepare for the direct or indirect negative impacts of environmental events and developments, including those related to impacts of climate change and the transition to a lower-carbon economy. These events and developments may include increased frequency and severity of natural or human-made environmental disasters, longer-term shifts in climate patterns, emerging regulatory and public policy developments, and their impacts on our operations, invested assets, suppliers, Clients and reputation. External factors such as stakeholder expectations around environmental performance, resource constraints and costs associated with adaptation are also potential sources of environmental risk. Risks that affect our Clients and our suppliers could have a negative impact on our operations and performance. These risks are considered in our key risk assessments.

A transition to a lower carbon economy could affect public and private fixed income asset values. Existing portfolio investments in coal, oil sands producers, related fossil fuel industries, railways and pipelines, as well as geographic markets which are dependent on these industries, may pose financial risk as a result of changes in consumer preferences and competition from renewable energy companies leading to stranded assets and lower overall profitability. We incorporate a number of different analyses into our assessment of climate risks through both stand-alone analysis of physical risks by geographic region and through the assessment of carbon transition risks, depending on the industry.

An environmental issue on a property owned, leased or managed by us or on any property with which we are affiliated could have financial or reputational impacts.

We maintain an environmental risk management program to help monitor and manage investment assets (primarily real estate, mortgage and certain private fixed income assets) from losses due to environmental issues and to help ensure compliance with applicable laws. We maintain insurance policies to cover certain environmental risks on owned assets.

Existing and potential environmental risks are incorporated into initial and ongoing reviews and assessments of public fixed income, private fixed income, real estate and commercial mortgage investments and this process is overseen by our Sustainable Investment Council. Our International Sustainability Council convenes on broader environmental and sustainability issues. We report on environmental management annually in our Sustainability Report reviewed by the Governance, Nomination & Investment Committee

We are a supporter of the Task Force on Climate-related Financial Disclosures, and engage in and monitor environmental and climate change developments through membership and participation in the United Nations Environment Programme - Finance Initiative; United Nations-supported Principles for Responsible Investment; and CDP (formerly the Carbon Disclosure Project), as both a signatory and responding company to the annual CDP climate change information request.

Additional information on business and strategic risk can be found in the Risk Factors section in our AIF.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     63

v. Operational Risk

Risk Description

Operational risk is the risk of loss (financial and non-financial) resulting from inadequate or failed internal processes, people and systems or from external events. Operational risk is present in all of our business activities and encompasses a broad range of risks as described below. Operational risk is embedded in the practices utilized to manage other risks and, therefore, if not managed effectively, operational risk can impact our ability to manage other key risks.

Operational Risk Management Governance and Control

We employ a wide range of operational risk management practices and controls, as outlined below:

• Operational risk governance practices are in place, including independent monitoring and review and reporting to senior management and the Board Committees.

• Risk appetite limits have been established in Operational Risk.

• Comprehensive Operational Risk Management Framework, Policies, guidelines and practices are in place.

• Our governance practices, corporate values, Code of Conduct and Company-wide approach to managing risk set the foundation for mitigating operational risks.

• Our Code of Conduct sets the tone for a strong ethical culture, and we regularly review and update the Code of Conduct to ensure that it continues to meet the expectations of regulators and other stakeholders. All our directors and employees must reconfirm annually their understanding of and commitment to comply with the Code of Conduct.

• We have established appropriate internal controls and systems for talent acquisition, rewards and development programs that attract, build and retain top talent and create strong succession plans as well as compensation programs, and we provide ongoing training to our people.

• We conduct regular monitoring of employee engagement to ensure we create and maintain a work environment where all employees are welcome and able to contribute effectively.

• Stress-testing techniques, such as DCAT, are used to measure the effects of large and sustained adverse scenarios. In 2020, the Canadian Institute of Actuaries will replace DCAT with FCT. FCT, similar to DCAT, will continue to act as a key stress-testing technique for the organization. FCT’s testing is broader than DCAT and allows for harmonization with the Company’s ORSA.

• We mitigate a portion of our operational risk exposure through our corporate insurance program by purchasing insurance coverage that seeks to provide insurance against unexpected material losses resulting from events such as criminal activity, property loss or damage and liability exposures, or that satisfies legal requirements and contractual obligations.

• Internal capital targets are established at an enterprise level to cover all risks and are above minimum regulatory and supervisory levels. Actual capital levels are monitored to ensure they exceed internal targets.

Specific operational risks and our risk management strategies are discussed below in further detail and in the Risk Factor section in the AIF.

Information Security and Privacy Risks

Information and technology are used in almost all aspects of our business and operations. As part of our Client strategy, we continue to enhance the digital side of our business to support and enable new business models and processes, that are more personal, proactive and predictive.

Our business and the successful implementation of our digital strategy are dependent on various factors including maintaining a secure environment for our Clients, employees and other parties’ information. This requires the effective and secure use, management and oversight of information and physical assets. We engage with various stakeholders and leverage emerging technologies, including digital, mobile applications, cloud computing, artificial intelligence and robotic process automation. These technologies are used to collect, process and maintain information relating to business transactions and financial reporting, as well as the personal information of our Clients and employees. We also obtain services from a wide range of third-party service providers and have outsourced some business and information technology functions in various jurisdictions.

We continue investing in people, processes and technology to strengthen our abilities to respond to the evolving threat landscape. Sun Life’s Information Security framework is overseen by the Chief Information Security Officer, supported by senior leadership and by our Operational Risk Management Framework. Our information security framework and governance controls (policies, procedures, training) are aligned with recognized industry standards and are compliant with applicable laws and regulations.

Our well-established security controls and processes are intent on protecting our information and computer systems and the information entrusted to us by our Clients and employees. Our protection strategy leverages information security risk assessments and privacy impact assessments to evaluate potential risks. The security framework also includes technology and process safeguards and regularly promotes secure behavioural practices. As part of our layered security approach, we deliver general security awareness training sessions to all employees every year that is reinforced with regular awareness resources and activities.

Many jurisdictions in which we do business are developing and implementing cyber security reporting requirements and more stringent consumer privacy legislation. Our global privacy program monitors adherence to our global privacy commitments, local laws and local privacy policies. We have also established a network of privacy officers across the Company who monitor emerging privacy legislation and provide guidance on handling personal information and help manage, report and resolve any privacy incidents that may occur. We also conduct privacy training, provide regular monitoring and reporting and carry cyber risk insurance to help mitigate the impact of privacy incidents.

Human Resources Risk

Our ability to achieve business objectives can be adversely affected if we are unable to attract, retain or effectively deploy resources with the in-depth knowledge and necessary skills required, or are unable to design compensation programs that effectively drive employee behaviour. Failure to manage Human Resources risk can also lead to direct financial and reputational loss including losses arising from activity that is inconsistent with Human Rights or employment laws or health and safety regulations.

64    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

To mitigate this risk, we have comprehensive Human Resource policies, practices and programs in place to ensure compliance with employment legislation, minimize the risk of employee misconduct, and proactively develop employee skills, capabilities and behaviours to meet future business needs.

Regulatory Compliance, Legal and Conduct Risk

We are subject to extensive regulatory oversight by insurance and financial services regulators in the jurisdictions in which we conduct business. In recent years, there has been an increased focus by regulators globally on Client fairness, conduct, anti-money laundering, privacy and data governance. Failure to comply with applicable laws or to conduct our business consistent with changing regulatory or public expectations could adversely impact our reputation and may lead to regulatory investigations, examinations, proceedings, settlements, penalties, fines, restrictions on our business, litigation or an inability to carry out our business strategy.

Our Chief Compliance Officer oversees our comprehensive Company-wide compliance framework, which is consistent with regulatory guidance from OSFI and other regulators. This framework promotes proactive, risk-based management of compliance and regulatory risk, and includes Company-wide and business segment policies, standards and operating guidelines, programs to promote awareness of laws and regulations that impact us, ongoing monitoring of emerging legal issues and regulatory changes and training programs. There are also new employee orientation programs that include anti-money laundering and anti-terrorist financing, anti-bribery and corruption, privacy and information security risk management. To ensure effective oversight and implementation, the framework is supported by a network of compliance officers and the general counsel in each business segment. The Chief Compliance Officer reports regularly to the Board and Board Committees on the state of compliance, key compliance risks, emerging regulatory trends, escalation of key issues and key risk indicators.

Execution and Integration Risks Relating to Mergers, Acquisitions, Strategic Investments and Divestitures

We regularly explore opportunities to acquire other financial services businesses or to divest ourselves of all or part of certain businesses, in support of our growth and strategy goals. Any transaction that we enter into introduces the risks related to completing the transactions as planned including effective separation and integration of the transferred businesses, effective or efficient integration, restructuring or reorganization of the businesses after the transactions have closed, and motivating and retaining personnel to effectively execute these transactions. In addition, the integration of operations and differences in organizational culture may require the dedication of significant management resources, which may distract management’s attention from our day-to-day business. These risks could have an impact on our business relationship with various stakeholders including future employees, Clients, distributors and partners. Anticipated cost synergies or other expected benefits may not materialize due to a failure to successfully integrate the acquired business with our existing operations.

To mitigate this risk, we have established procedures to oversee the execution and integration of merger and acquisition transactions. Regular updates on the execution and integration risks relating to these transactions are provided to the Board, Board Committees and senior management committees, as appropriate.

Information Technology Risk

The use of technology and computer systems is essential in supporting and maintaining business operations. We use technology to support virtually all aspects of our business and operations. The rapidly changing business environment increases the risk of our technology strategy not being agile enough to adapt to new business demands in a timely manner leading to financial losses, increased costs and the inability to meet Client needs.

To manage the risks associated with our technology infrastructure and applications, we have implemented a number of policies, directives and controls through our technology approval and risk governance model to ensure ongoing systems availability, stability and currency.

Third-Party Risk

We engage in a variety of third-party relationships, including with distributors, independent contractors, outsourcing service providers and suppliers. Our profitability or reputation could be impacted if these third parties are unable to meet their ongoing service commitments or fail to perform to expected standards.

To manage these risks, we have established Company-wide policies and guidelines which are consistent with OSFI’s and other local regulatory requirements, and which set out Sun Life’s requirements to identify, assess, manage, monitor and report on third-party risks. Sun Life’s program includes third-party risk assessments and enhanced due diligence if a supplier will have access to any personal data and/or Sun Life confidential information or access to non-public Sun Life systems. The key elements and risks associated with the third party are documented in the form of a written agreement, and the company monitors performance of its third parties in a manner that is commensurate to the size, risk, scope and complexity of the third-party relationship.

Business Disruption Risk

Our businesses are dependent on the availability of trained employees, physical locations to conduct operations and access to technology. A significant business disruption to our operations can result if one or more of these key elements are negatively impacted. System disruptions as well as unanticipated events, including pandemics, can negatively affect staff, preventing them from getting to work or from operating business processes.

To manage this risk, we have implemented a business continuity program to facilitate the recovery of critical business operations. This program encompasses business continuity, crisis management and disaster recovery planning. Our policy, guidelines and operating procedures establish consistent processes designed to ensure that key business functions can continue and normal operations can resume effectively and efficiently should a major disruption occur. In addition, to regularly update and test business continuity plans for critical business operations, we conduct mandatory business continuity awareness training for all employees annually and have off-site backup facilities and failover capability designed to minimize downtime and accelerate recovery time in the event of a major disruption.

Model Risk

We use complex models to support many business functions including product development and pricing, capital management, valuation, financial reporting, planning, hedging, asset-liability management, risk management and advanced analytics (such as artificial intelligence, predictive modeling and decision making algorithms). Model risk is the risk of loss, either in the form of financial loss, inappropriate or poor business decisions, damage to reputation, or other adverse impact, arising from inaccurate model outputs or incorrect use or interpretation of model outputs.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     65

To manage model risk, we have established robust, Company-wide model risk management procedures over the models’ life cycle with respect to building, using, changing and retiring models. The policy and operating guidelines set out minimum, risk-based requirements to ensure that models are effectively controlled, maintained and appropriately understood by users.

Information Management Risk

As an international provider of financial services, we deal with extensive information across a number of countries. Information management risk is the inability to capture, manage, retain and appropriately dispose of business records, the inability to provide data that is fit for purpose, accurate, complete or timely to support business decisions, and the inability to manage data location and cross-border appropriately. Failure to manage these risks could have financial or reputational impacts, and may lead to regulatory proceedings, penalties and litigation.

To manage and monitor information management risk, we have an internal control framework, data governance and record management practices in place. Additional information on operational risk can be found in the Risk Factors section in the AIF.

vi. Liquidity Risk

Risk Description

Liquidity risk is the possibility that we will not be able to fund all cash outflow commitments and collateral requirements as they fall due. This includes the risk of being forced to sell assets at depressed prices resulting in realized losses on sale. This risk also includes restrictions on our ability to efficiently allocate capital among our subsidiaries due to various market and regulatory constraints on the movement of funds. Our funding obligations arise in connection with the payment of policyholder benefits, expenses, reinsurance settlements, asset purchases, investment commitments, interest on debt, and dividends on common and preferred shares. Sources of available cash flow include general fund premiums and deposits, investment related inflows (such as maturities, principal repayments, investment income and proceeds of asset sales), proceeds generated from financing activities, and dividends and interest payments from subsidiaries. We have various financing transactions and derivative contracts under which we may be required to pledge collateral or to make payments to our counterparties for the decline in market value of specified assets. The amount of collateral or payments required may increase under certain circumstances (such as changes to interest rates, credit spreads, equity markets or foreign exchange rates), which could adversely affect our liquidity.

Liquidity Risk Management Governance and Control

We generally maintain a conservative liquidity position and employ a wide range of liquidity risk management practices and controls, which are described below:

• Liquidity risk governance practices are in place, including independent monitoring and review and reporting to senior management and the Risk & Conduct Review Committee.

• Liquidity is managed in accordance with our Asset Liability Management Policy and operating guidelines.

• Liquidity contingency plans are maintained for the management of liquidity in a liquidity event.

• Stress testing is performed by comparing liquidity coverage risk metrics under a one-month stress scenario to our policy thresholds. These liquidity coverage risk metrics are measured and managed at the enterprise and legal entity levels.

• Stress testing of our collateral is performed by comparing collateral coverage ratios to our policy threshold.

• Cash Management and asset-liability management programs support our ability to maintain our financial position by ensuring that sufficient cash flow and liquid assets are available to cover potential funding requirements. We invest in various types of assets with a view of matching them to our liabilities of various durations.

• Internal capital targets are established at an enterprise level to cover all risks and are above minimum regulatory and supervisory levels. Actual capital levels are monitored to ensure they exceed internal targets.

• We actively manage and monitor our capital and asset levels, and the diversification and credit quality of our investments.

• Various credit facilities for general corporate purposes are maintained.

66    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

The following table summarizes the contractual maturities of our significant financial liabilities and contractual commitments as at December 31, 2019 and 2018:

Financial Liabilities and Contractual Obligations

December 31, 2019  ($ millions)		Within 1 year		1 year to 3 years		3 years to 5 years		Over 5 years		Total
Insurance and investment contract liabilities(1)	$	11,931	$	7,983	$	8,737	$	282,336	$	310,987
Senior debentures and unsecured financing(2)		79		439		131		3,179		3,828
Subordinated debt(2)		114		229		229		4,208		4,780
Bond repurchase agreements		1,850		–		–		–		1,850
Accounts payable and accrued expenses		6,114		–		–		–		6,114
Lease liabilities(3)		153		268		230		463		1,114
Secured borrowings from mortgage securitization		169		426		355		969		1,919
Borrowed funds(2)		77		57		20		234		388
Total liabilities	$	20,487	$	9,402	$	9,702	$	291,389	$	330,980
Contractual commitments:(4)
Contractual loans, equities and mortgages	$	869	$	1,039	$	546	$	1,129	$	3,583
Total contractual commitments	$	869	$	1,039	$	546	$	1,129	$	3,583
December 31, 2018  ($ millions)	Within 1 year		1 year to 3 years		3 years to 5 years		Over 5 years		Total
Insurance and investment contract liabilities(1)	$	11,950	$	8,388	$	8,653	$	264,246	$	293,237
Senior debentures and unsecured financing(2)		438		556		234		4,880		6,108
Subordinated debt(2)		103		207		207		3,724		4,241
Bond repurchase agreements		1,824		–		–		–		1,824
Accounts payable and accrued expenses		5,971		–		–		–		5,971
Secured borrowings from mortgage securitization		182		435		187		817		1,621
Borrowed funds(2)		55		49		45		68		217
Total liabilities	$	20,523	$	9,635	$	9,326	$	273,735	$	313,219
Contractual commitments:(4)
Contractual loans, equities and mortgages	$	1,157	$	1,044	$	536	$	1,063	$	3,800
Operating leases		138		230		182		506		1,056
Total contractual commitments	$	1,295	$	1,274	$	718	$	1,569	$	4,856

(1) These amounts represent the undiscounted estimated cash flows of insurance and investment contract liabilities on our Consolidated Statements of Financial Position. These cash flows include estimates related to the timing and payment of death and disability claims, policy surrenders, policy maturities, annuity payments, minimum guarantees on segregated fund products, policyholder dividends, amounts on deposit, commissions and premium taxes offset by contractual future premiums and fees on in-force contracts. These estimated cash flows are based on the best estimated assumptions used in the determination of insurance and investment contract liabilities. Due to the use of assumptions, actual cash flows will differ from these estimates.

(2) Payments due based on maturity dates and include expected interest payments. Actual redemption of certain securities may occur sooner as some include an option for the issuer to call the security at par at an earlier date.

(3) Lease liabilities are included on the Consolidated Statements of Financial Position due to the implementation of IFRS 16.

(4) Contractual commitments and operating lease commitments are not reported on our Consolidated Financial Statements. Additional information on these commitments is included in Note 23 of our 2019 Annual Consolidated Financial Statements.

Additional information on liquidity risk can be found in Note 6 to our 2019 Annual Consolidated Financial Statements and the Risk Factors section in the AIF.

vii. Other Risks

International Operations

The future success of our businesses in our international operations depends in large part on our ability to grow and compete in the markets where we operate. Challenges in these markets pose strategic and execution risk including our ability to attract and retain qualified employees and executives with local experience and critical skills, political, legal, economic, competition or other risks, risks associated with joint venture operations, developing and executing our risk management practices, and our ability to attract, retain, expand and diversify distribution channels.

Mergers, Acquisitions, Divestitures and Strategic Investments

We regularly explore opportunities to selectively acquire other financial services businesses or to divest ourselves of all or part of certain businesses, in support of our growth and strategic objectives. These transactions introduce the risk of financial loss due to a potential failure to achieve the expected financial or other strategic objectives. There is a risk that we may be unable to make an appropriate acquisition in a desired market or business line or are unable to realize the financial and strategic benefits of the transactions due to competitive factors, regulatory requirements or other factors. These risks could adversely impact our ability to achieve our financial and strategic objectives.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     67

 K. Additional Financial Disclosure

1. Items related to Statement of Operations

i. Business Group Summary Statement of Operations

	2019																	2018
($ millions, after-tax)	Canada			U.S.			Asset Management		Asia			Corporate			Total			Total
Net premiums		12,595			5,176			–		2,408			109			20,288			18,642
Net investment income		6,474			2,802			83		2,865			916			13,140			2,389
Fee income		1,320			86			4,309		531			5			6,251			5,966
Revenue		20,389			8,064			4,392		5,804			1,030			39,679			26,997
Gross claims and benefits paid and Changes in insurance/investment contract liabilities(1)		16,953			7,012			–		3,926			497			28,388			16,056
Operating expenses, commissions and other expenses(2)		3,536			1,621			3,229		1,424			379			10,189			9,451
Reinsurance expenses (recoveries)		(1,172	)		(755	)		–		(178	)		(26	)		(2,131	)		(2,021	)
Total benefits and expenses		19,317			7,878			3,229		5,172			850			36,446			23,486
Income tax expense (benefit)		15			28			262		51			(70	)		286			597
Preferred shareholders’ dividends		–			–			–		–			95			95			94
Non-controlling interests and participating policyholders’ income in net income of subsidiaries		174			(5	)		4		61			–			234			298
Reported net income (loss)		883			163			897		520			155			2,618			2,522

(1) Includes changes in reinsurance assets and net transfer to (from) segregated funds.

(2) Includes premium taxes and interest expense.

Canada

Canada’s revenue increased by $5.3 billion or 35%, driven by higher net investment income, primarily from increases in the changes in fair value of FVTPL assets in Individual Insurance & Wealth and GRS, and higher net premiums in GB.

U.S.

U.S.’s revenue increased by $2.9 billion or 56%, driven by higher net investment income, primarily from increases in the changes in fair value of FVTPL assets, and higher net premiums in Group Benefits.

Asset Management

Asset Management’s revenue increased by $0.3 billion or 6%, driven by higher fee income.

Asia

Asia’s revenue increased by $3.3 billion, driven by higher net investment income, primarily from increases in the fair value changes of FVTPL assets, and higher net premiums in Hong Kong.

Corporate

Corporate’s revenue increased by $0.9 billion, driven by higher investment income, primarily from increases in the changes in fair value of FVTPL assets.

ii. Revenue

Revenue includes: (i) premiums received on life and health insurance policies and fixed annuity products, net of premiums ceded to reinsurers; (ii) net investment income comprised of income earned on general fund assets, realized gains and losses on AFS assets and changes in the value of derivative instruments and assets designated as FVTPL and the impacts of foreign exchange translation on assets and liabilities; and (iii) fee income received for services provided. Premium and deposit equivalents from ASO, as well as deposits received by the Company on investment contracts such as segregated funds, mutual funds and managed funds are not included in revenue; however, the Company does receive fee income from these contracts, which is included in revenue. Fee income and ASO premium and deposit equivalents are an important part of our business and as a result, revenue does not fully represent sales and other activity taking place during the respective periods.

Net investment income can experience volatility arising from the quarterly fluctuation in the value of FVTPL assets and foreign currency changes on assets and liabilities, which may in turn affect the comparability of revenue from period to period. The change in fair value of FVTPL assets is driven largely by market-related factors such as interest rates, credit spreads and equity returns. The debt and equity securities that support insurance contract liabilities are generally designated as FVTPL and changes in fair values of these assets are recorded in net

68    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

investment income in our Consolidated Statements of Operations. Changes in the fair values of the FVTPL assets supporting insurance contract liabilities are largely offset by a corresponding change in the liabilities.

Revenue  ($ millions)	2019			2018			2017
Premiums
Gross
Life insurance		9,470			8,677			8,831
Health insurance		9,908			9,121			8,519
Annuities		3,302			3,183			2,488
		22,680			20,981			19,838
Ceded
Life insurance		(1,570	)		(1,521	)		(1,659	)
Health insurance		(511	)		(489	)		(2,554	)
Annuities		(311	)		(329	)		(344	)
		(2,392	)		(2,339	)		(4,557	)
Net premiums		20,288			18,642			15,281
Net investment income (loss)
Interest and other investment income		5,855			5,641			5,413
Fair value(1) and foreign currency changes on assets and liabilities		7,118			(3,373	)		2,603
Net gains (losses) on AFS assets		167			121			195
Net investment income (loss)		13,140			2,389			8,211
Fee income		6,251			5,966			5,842
Total revenue		39,679			26,997			29,334
Adjusted revenue(2)		32,792			30,972			29,791

(1) Represents the change in FVTPL assets and liabilities.

(2) Adjusted revenue is a non-IFRS financial measure that excludes from revenue the impacts of Constant Currency Adjustment, FV Adjustment and Reinsurance in Canada’s Group Operations Adjustment as described in section L - Non-IFRS Financial Measures in this document.

Revenue increased by $12.7 billion or 47% in 2019 compared to 2018, primarily driven by increases in the fair value of FVTPL assets, predominantly due to the impact of interest rates as well as equity market movements, and increased net premium revenue in Canada, Asia and the U.S. The impacts of foreign exchange translation increased revenue by $422 million. Adjusted revenue increased by $1.8 billion or 6% in 2019 compared to 2018, driven by increased net premium revenue in Canada, Asia and the U.S.

Gross premiums increased by $1.7 billion or 8% in 2019 compared to 2018, driven by increases in Canada, Asia and the U.S.

Ceded premiums of $2.4 billion in 2019 were in line with 2018.

Net investment income increased by $10.8 billion in 2019 compared to 2018, driven by increases in the changes in fair value of FVTPL assets in Canada, Asia, the U.S. and Corporate.

Fee income increased by $0.3 billion or 5% in 2019, compared to 2018, driven by increases in Asset Management and Canada.

iii. Benefits and Expenses

($ millions)	2019			2018			2017
Benefits and Expenses
Gross claims and benefits paid		17,421			15,986			15,353
Changes in insurance/investment contract liabilities(1)		11,404			378			6,189
Reinsurance expenses (recoveries)		(2,131	)		(2,021	)		(4,373	)
Commissions		2,417			2,339			2,403
Operating expenses		7,033			6,432			6,410
Other(2)		302			372			563
Total benefits and expenses		36,446			23,486			26,545

(1) Includes increase (decrease) in insurance contract liabilities, decrease (increase) in reinsurance assets, increase (decrease) in investment contract liabilities.

(2) Other includes net transfer to (from) segregated funds, premium taxes and interest expense.

Total benefits and expenses increased by $13.0 billion or 55% in 2019 compared to 2018, primarily driven by increases in the changes in insurance/investment contract liabilities and gross claims and benefits paid.

Gross claims and benefits paid increased by $1.4 billion or 9% in 2019 compared to 2018, driven by increases in the U.S., Asia, and Canada.

Changes in insurance/investment contract liabilities and reinsurance assets increased by $11.0 billion in 2019 compared to 2018, reflecting increases in insurance contract liabilities, primarily due to increases in the changes in fair value of FVTPL assets.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     69

Commission expenses of $2.4 billion were largely unchanged compared to 2018.

Operating expenses increased by $0.6 billion or 9% in 2019 compared to 2018, reflecting higher expenses in line with business growth, and higher project spend, partially offset by lower incentive compensation costs. The impacts of foreign exchange translation increased operating expenses by $101 million. Additional information on operating expenses can be found in Note 18 in our 2019 Annual Consolidated Financial Statements.

Other decreased by $0.1 billion or 19% in 2019 compared to 2018, primarily driven by an increase in net transfers from segregated funds.

iv. Taxes

Income Taxes

In 2019, we had an income tax expense of $286 million on reported net income before taxes of $3,233 million, which resulted in an effective income tax rate of 8.8%. This compares to an income tax expense of $597 million on reported net income before taxes of $3,511 million and an effective income tax rate of 17.0% in 2018.

On an underlying basis⁽¹⁾, in 2019, we had an income tax expense of $525 million on our underlying net income before taxes of $3,717 million, representing an effective income tax rate of 14.1% which is below our expected range of 15% to 20% primarily due to the favourable resolution of Canadian tax matters and higher tax-exempt investment income. This compares to an income tax expense of $642 million on our underlying net income before taxes of $3,731 million and an effective income tax rate of 17.2% in 2018.

See section D - Profitability - v - Income taxes for additional information on our effective tax rates.

Other Taxes

In addition to income taxes, we pay various indirect taxes in jurisdictions in which we carry on business. Indirect taxes include premium taxes, investment income tax, payroll related taxes, property taxes, sales taxes, business taxes and other taxes, as follows:

($ millions)	2019			2018
Income tax expense		286			597
Indirect taxes
Premium taxes (net of premium taxes on ceded business)(1)		375			345
Payroll taxes		175			163
Property taxes		122			126
Goods and services tax (“GST”), harmonized tax (“HST”) and other sales taxes		117			122
Business taxes and other		43			38
Total indirect taxes		832			794
Total taxes		1,118			1,391
Reported effective income tax rate		8.8	%		17.0	%
Total taxes as a percentage of net income before deduction of total taxes		27.5	%		32.3	%

(1) Premium taxes include investment income tax.

2. Items related to Statement of Financial Position

i. Changes in Liabilities and Shareholders’ Equity

Insurance contract liabilities balances before Other policy liabilities of $123.9 billion as at December 31, 2019 increased by $9.0 billion compared to December 31, 2018, mainly due to changes in balances on in-force policies (which include fair value changes on FVTPL assets supporting insurance contract liabilities) and balances arising from new policies, partially offset by the impacts of foreign exchange translation.

Total shareholders’ equity, including preferred share capital, was $23.4 billion as at December 31, 2019, compared to $23.7 billion as at December 31, 2018. The decrease of $0.3 billion in total shareholders’ equity was primarily due to:

(i) common share dividend payments of $1,236 million;

(ii) the impact related to the BGO acquisition of $875 million;

(iii) a decrease of $592 million from the repurchase and cancellation of common shares; and

(iv) a decrease of $564 million from the impacts of foreign exchange translation; largely offset by

(v) shareholders’ net income of $2,713 million in 2019, before preferred share dividends of $95 million; and

(vi) net unrealized gains on AFS assets in OCI of $369 million.

ii. Off-Balance Sheet Arrangements

In the normal course of business, we are engaged in a variety of financial arrangements. The principal purposes of these arrangements are to earn management fees and additional spread on a matched book of business and to reduce financing costs.

While most of these activities are reflected on our balance sheet with respect to assets and liabilities, certain of them are either not recorded on our balance sheet or are recorded on our balance sheet in amounts that differ from the full contract or notional amounts. The types of off-balance sheet activities we undertake primarily include asset securitizations and securities lending.

(1) Our effective income tax rate on underlying net income is calculated using underlying net income and income tax expense associated with underlying net income, which excludes amounts attributable to participating policyholders.

70    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

Asset Securitizations

In the past, we sold mortgage or bond assets to non-consolidated structured entities, which may also purchase investment assets from third parties. Our securitized AUM held by these non-consolidated structured entities were less than $1 million as at December 31, 2019 and December 31, 2018.

However, the majority of our securitization activities are recorded on our Consolidated Statements of Financial Position. We securitize multi-residential mortgages under the National Housing Act Mortgage-Backed Securities program sponsored by the CMHC. The securitization of the multi-residential mortgages with the CMHC does not qualify for de-recognition and remains on our Consolidated Statements of Financial Position. Additional information on this program can be found in Note 5 to our 2019 Annual Consolidated Financial Statements.

Securities Lending

We lend securities in our investment portfolio to other institutions for short periods to generate additional fee income. We conduct our program only with well-established, reputable banking institutions that carry a minimum credit rating of “AA”. Collateral, which exceeds the fair value of the loaned securities, is deposited by the borrower with a lending agent, usually a securities custodian, and maintained by the lending agent until the underlying security has been returned to us. We monitor the fair value of the loaned securities on a daily basis with additional collateral obtained or refunded as the fair value fluctuates. Certain arrangements allow us to invest the cash collateral received for the securities loaned. Loaned securities are recognized in our Consolidated Statements of Financial Position as Invested Assets. As at December 31, 2019, we loaned securities with a carrying value of $2.0 billion for which the collateral held was $2.1 billion. This compares to loaned securities of $2.2 billion, with collateral of $2.3 billion as at December 31, 2018.

iii. Goodwill and Intangibles Impairment

The Company completed its annual goodwill and indefinite life intangible asset impairment testing in the fourth quarter of 2019. There were no goodwill impairment charges in 2019 or 2018. Impairment charges on intangible assets of $15 million were recognized in 2019 and there were no impairment charges in 2018.

iv. Commitments, Guarantees, Contingencies and Reinsurance Matters

In the normal course of business, we enter into leasing agreements, outsourcing arrangements and agreements involving indemnities to third parties. We are also engaged in arbitration proceedings from time to time with certain companies that have contracts to provide reinsurance to the Company. Information regarding our commitments, guarantees and contingencies are summarized in Note 23 to our 2019 Annual Consolidated Financial Statements. A table summarizing our significant financial liabilities and contractual obligations can be found in this MD&A in the section J - Risk Management - 9 - Risk Categories - vi - Liquidity Risk.

3. Fourth Quarter 2019 Profitability

The following table reconciles our net income measures and sets out the impacts that other notable items had on our net income in the fourth quarter of 2019 and 2018. All factors discussed in this document that impact our underlying net income are also applicable to reported net income.

	Q4’19			Q4’18
($ millions, after-tax)
Reported net income		719			580
Less: Market-related impacts(1)		18			(153	)
Assumption changes and management actions(1)		(15	)		13
Other adjustments(1)		(76	)		2
Underlying net income(2)		792			718
Reported ROE(2)		13.6	%		10.9	%
Underlying ROE(2)		15.0	%		13.6	%
Experience-related items(3)
Investing activity		34			28
Credit		47			23
Mortality		(3	)		(11	)
Morbidity		(47	)		(12	)
Lapse and other policyholder behaviour		(6	)		(4	)
Expenses		(45	)		(26	)
Other experience		(6	)		44

(1) Represents an adjustment made to arrive at a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document for a breakdown of components within this adjustment.

(2) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

(3) Experience-related items reflect the difference between actual experience during the reporting period and best estimate assumptions used in the determination of our insurance contract liabilities.

Reported net income increased by $139 million or 24% in the fourth quarter of 2019 compared to the same period in 2018, driven by favourable market-related impacts, primarily from equity markets, partially offset by higher fair value adjustments on MFS’s share-based payment awards, unfavourable ACMA impacts and higher acquisition, integration and restructuring costs. Underlying net income increased by $74 million or 10%, driven by business growth, tax benefits in Corporate and favourable credit experience, partially offset by unfavourable morbidity experience in Canada and unfavourable expense experience, predominantly resulting from higher incentive compensation costs reported in Corporate.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     71

In the fourth quarter of 2019, our effective income tax rates on reported net income and underlying net income were 10.8% and 13.9%, respectively.

Performance by Business Group - Fourth Quarter

We manage our operations and report our financial results in five business segments. The following section describes the operations and financial performance of Canada, U.S., Asset Management, Asia and Corporate.

The following table sets out the differences between our reported net income (loss) and underlying net income (loss) by business group.

	Q4’19
($ millions, after-tax)	Canada			U.S.			Asset Management			Asia			Corporate			Total
Reported net income (loss)		275			131			228			136			(51	)		719
Less: Market-related impacts(1)		6			–			–			5			7			18
Assumption changes and management actions(1)		(1	)		(3	)		–			(11	)		–			(15	)
Other adjustments(1)		6			(3	)		(53	)		(1	)		(25	)		(76	)
Underlying net income (loss)(2)		264			137			281			143			(33	)		792
	Q4’18
($ millions, after-tax)	Canada			U.S.			Asset Management			Asia			Corporate			Total
Reported net income (loss)		96			118			244			125			(3	)		580
Less: Market-related impacts(1)		(134	)		5			–			(22	)		(2	)		(153	)
Assumption changes and management actions(1)		(14	)		–			–			9			18			13
Other adjustments(1)		(1	)		(8	)		17			(2	)		(4	)		2
Underlying net income (loss)(2)		245			121			227			140			(15	)		718

(1) Represents an adjustment made to arrive at a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document for a breakdown of components within this adjustment.

(2) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

Canada

Canada’s reported net income increased by $179 million in the fourth quarter of 2019 compared to the same period in 2018, driven by favourable market-related impacts, predominantly from equity markets, and less unfavourable ACMA. Underlying net income increased by $19 million or 8%, driven by business growth, higher investing activity, favourable credit experience, higher AFS gains and favourable mortality experience, partially offset by unfavourable morbidity experience in GB and a mortgage impairment.

U.S.

U.S.’s reported net income increased by US$10 million ($13 million) or 11% (11%) in the fourth quarter of 2019 compared to the same period in 2018. Market-related impacts, ACMA and integration costs were in line with the same period last year. Underlying net income increased by US$13 million ($16 million) or 14% (13%), driven by favourable morbidity experience and higher AFS gains, partially offset by unfavourable mortality experience in In-force Management. The impacts of foreign exchange translation were in line with the prior year for reported net income and underlying net income.

The after-tax profit margin for Group Benefits⁽¹⁾ was 7.3% as of the fourth quarter of 2019, compared to 6.7% as of the fourth quarter of 2018.

Asset Management

Asset Management’s reported net income decreased by $16 million or 7% in the fourth quarter of 2019 compared to the same period in 2018, reflecting higher fair value adjustments on MFS’s share-based payment awards. Underlying net income increased by $54 million or 24%, driven by higher ANA in MFS and higher income in SLC Management from the BGO acquisition that closed in 2019. The impacts of foreign exchange translation were in line with the prior year for reported net income and underlying net income.

In U.S. dollars, MFS’s reported net income was US$173 million in the fourth quarter of 2019, a decrease of US$16 million or 8% compared to the same period in 2018, reflecting higher fair value adjustments on MFS’s share-based payment awards. Underlying net income was US$201 million in the fourth quarter of 2019, an increase of US$34 million or 20%, driven by higher ANA. Pre-tax net operating profit margin ratio for MFS⁽¹⁾ for the fourth quarter of 2019 was 40%, compared to 38% for the fourth quarter of 2018.

SLC Management’s reported net loss was $1 million in the fourth quarter of 2019, an improvement of $4 million compared to the same period in 2018, reflecting higher acquisition and integration costs related to the BGO acquisition and the pending InfraRed transaction. Underlying net income was $15 million in the fourth quarter of 2019, an increase of $9 million, driven by net income from the BGO acquisition that closed in 2019.

Asia

Asia’s reported net income increased by $11 million or 9% in the fourth quarter of 2019 compared to the same period in 2018, driven by favourable market-related impacts, predominantly from equity markets, largely offset by unfavourable ACMA impacts. Underlying net income

(1) Based on underlying net income, on a trailing four quarters basis, and which is described in section L - Non-IFRS Financial Measures in this document.

72    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

increased by $3 million or 2%, driven by business growth, favourable lapse and other policyholder behaviour experience and lower new business strain, partially offset by unfavourable joint venture experience and other investment-related experience. The impacts of foreign exchange translation increased reported net income and underlying net income by $1 million and $2 million, respectively.

Corporate

Corporate’s reported net loss increased by $48 million in the fourth quarter of 2019 compared to the same period in 2018, reflecting restructuring costs and the impacts of favourable ACMA in 2018 relating to the termination of assumed business, partially offset by favourable market-related impacts, predominantly from interest rates. Underlying net loss increased by $18 million, reflecting unfavourable expense experience, lower earnings from the run-off businesses and higher project spend including the adoption of IFRS 17, partially offset by tax benefits. The impacts of foreign exchange translation decreased reported net income by $1 million and were in line with the prior year for underlying net income.

4. Fourth Quarter 2019 Growth

Revenue was $8.5 billion in the fourth quarter of 2019, an increase of $345 million or 4% compared to the same period in 2018, driven by increased net premium revenue and fee income, partially offset by larger decreases in the fair value of FVTPL assets. For FVTPL assets, in the fourth quarter of 2019, equity markets were largely stable and the impact of interest rate increases was significant, whereas the fourth quarter of 2018 saw minimal losses as the impact from equity markets was largely offset by the impact of interest rate declines. The impacts of foreign exchange translation increased revenue by $9 million. Adjusted revenue was $10.0 billion in the fourth quarter of 2019, an increase of $1.6 billion or 19% compared to the same period in 2018, driven by increased net premium revenue in Canada, Asia and the U.S. and fee income.

Premiums and deposits was $51.4 billion in the fourth quarter of 2019, an increase of $9.9 billion or 24% compared to the same period in 2018, driven by increased mutual fund sales, managed fund sales, net premium revenue and segregated fund deposits. The impacts of foreign exchange translation increased total premiums and deposits by $3 million. Adjusted premiums and deposits was $51.5 billion in the fourth quarter of 2019, an increase of $9.9 billion or 24% compared to the same period in 2018, driven by increased mutual fund, managed fund sales, net premium revenue and segregated fund deposits.

5. Previous Quarters

The following table provides a summary of our results for the eight most recently completed quarters. A more complete discussion of our historical quarterly results can be found in our interim and annual MD&A for the relevant periods.

	Quarterly results
($ millions, unless otherwise noted)	Q4’19			Q3’19			Q2’19			Q1’19			Q4’18			Q3’18			Q2’18			Q1’18
Total revenue		8,525			9,616			10,146			11,392			8,180			5,998			6,826			5,993
Common shareholders’ net income (loss)
Reported		719			681			595			623			580			567			706			669
Underlying(1)		792			809			739			717			718			730			729			770
Diluted EPS ($)
Reported		1.22			1.15			1.00			1.04			0.96			0.93			1.16			1.09
Underlying(1)		1.34			1.37			1.24			1.20			1.19			1.20			1.20			1.26
Basic reported EPS ($)
Reported		1.22			1.15			1.00			1.04			0.96			0.94			1.16			1.10
Reported net income (loss) by segment
Canada		275			223			148			237			96			335			262			249
U.S.		131			(186	)		94			124			118			(267	)		105			96
Asset Management		228			221			229			219			244			241			214			210
Asia		136			170			134			80			125			164			133			133
Corporate		(51	)		253			(10	)		(37	)		(3	)		94			(8	)		(19	)
Total reported net income (loss)		719			681			595			623			580			567			706			669
Underlying net income (loss) by segment(1)
Canada(1)		264			268			243			237			245			251			245			295
U.S.(1)		137			135			110			150			121			139			125			129
Asset Management(1)		281			251			245			227			227			251			216			231
Asia(1)		143			138			147			122			140			110			145			128
Corporate(1)		(33	)		17			(6	)		(19	)		(15	)		(21	)		(2	)		(13	)
Total underlying net income (loss)(1)		792			809			739			717			718			730			729			770

(1) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

Third Quarter 2019

Reported net income increased by $114 million or 20% in the third quarter of 2019 compared to the same period in 2018, driven by improved impacts from ACMA, partially offset by unfavourable market-related impacts, predominantly from interest rates, and higher acquisition costs

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     73

related to our acquisition of a majority stake in BentallGreenOak. Underlying net income increased by $79 million or 11% in the third quarter of 2019, compared to the same period in 2018, which includes the favourable impact of tax matters from prior years of $78 million - $58 million in Corporate and $20 million in Canada. Underlying net income also reflected business growth, favourable credit experience, a gain from a mortgage investment prepayment in the U.S. and higher available-for-sale gains, offset by unfavourable morbidity experience in Canada and the U.S., and lower investing activity gains.

Second Quarter 2019

Reported net income of $595 million in the second quarter of 2019 decreased $111 million compared to the second quarter of 2018, primarily reflecting unfavourable market-related and ACMA impacts. Underlying net income in the second quarter of 2019 increased $10 million to $739 million compared to the same period in 2018, primarily driven by business growth, favourable expense experience and benefits from tax-related items primarily in the U.S., partially offset by unfavourable morbidity experience in Canada and the U.S., lower new business gains in International in Asia and lower AFS gains in the U.S.

First Quarter 2019

Reported net income of $623 million in the first quarter of 2019 decreased $46 million from the first quarter of 2018, while underlying net income decreased $53 million to $717 million. This variance was primarily due to interest on par seed capital of $110 million in the first quarter of 2018 and unfavourable credit experience, partially offset by favourable mortality, lapse and other policyholder behaviour, investing activity gains, morbidity experience and other experience.

Fourth Quarter 2018

Reported net income was $580 million in the fourth quarter of 2018, an increase compared to the same quarter in 2017, reflecting the $251 million charge in 2017 related to the enactment of the U.S. Tax Cuts and Jobs Act, positive impacts from other adjustments and ACMA, partially offset by market-related impacts. Underlying net income in the fourth quarter of 2018 increased to $718 million compared to 2017, driven by the effect of the lower income tax rate in the U.S., favourable expense experience that resulted from ongoing expense management and lower incentive compensation costs, and other experience, partially offset by mortality and morbidity experience.

Third Quarter 2018

Reported net income was $567 million in the third quarter of 2018, reflecting a $269 million unfavourable change in ACMA compared to the same quarter in 2017. Underlying net income was $730 million, primarily driven by strong business growth, the lower income tax rate in the U.S. and higher investment income on surplus assets, partially offset by new business strain.

Second Quarter 2018

Reported net income was $706 million in the second quarter of 2018, reflecting an $82 million favourable change in market-related impacts compared to the same quarter in 2017. Underlying net income was $729 million, primarily driven by strong business growth and favourable morbidity experience, partially offset by expenses, credit experience and the impacts of investment activity on insurance contract liabilities.

First Quarter 2018

Reported net income was $669 million in the first quarter of 2018, reflecting a $79 million unfavourable change in market-related impacts compared to the same quarter in 2017. Underlying net income was $770 million, primarily driven by interest on par seed capital of $110 million, strong business growth, the lower income tax rate in the U.S., as well as the impacts of investment activity on insurance contract liabilities, partially offset by weaker mortality and lapse experience.

 L. Non-IFRS Financial Measures

i. Underlying Net Income and Underlying EPS

Underlying net income (loss) and financial measures based on underlying net income (loss), including underlying EPS or underlying loss per share, and underlying ROE, are non-IFRS financial measures. Underlying net income (loss) removes from reported net income (loss) the impacts of the following items that create volatility in our results under IFRS and when removed assist in explaining our results from period to period:

(a) market-related impacts that differ from our best estimate assumptions, which include: (i) impacts of returns in equity markets, net of hedging, for which our best estimate assumptions are approximately 2% per quarter. This also includes the impact of the basis risk inherent in our hedging program, which is the difference between the return on underlying funds of products that provide benefit guarantees and the return on the derivative assets used to hedge those benefit guarantees; (ii) the impacts of changes in interest rates in the reporting period and on the value of derivative instruments used in our hedging programs including changes in credit and swap spreads, and any changes to the assumed fixed income reinvestment rates in determining the actuarial liabilities; and (iii) the impacts of changes in the fair value of investment properties in the reporting period;

(b) assumption changes and management actions, which include: (i) the impacts of revisions to the methods and assumptions used in determining our liabilities for insurance contracts and investment contracts and (ii) the impacts on insurance contracts and investment contracts of actions taken by management in the current reporting period, referred to as management actions which include, for example, changes in the prices of in-force products, new or revised reinsurance on in-force business, and material changes to investment policies for assets supporting our liabilities; and

(c) Other adjustments:

(i) certain hedges in Canada that do not qualify for hedge accounting - this adjustment enhances the comparability of our net income from period to period, as it reduces volatility to the extent it will be offset over the duration of the hedges;

(ii) fair value adjustments on MFS’s share-based payment awards that are settled with MFS’s own shares and accounted for as liabilities and measured at fair value each reporting period until they are vested, exercised and repurchased - this adjustment enhances the comparability of MFS’s results with publicly traded asset managers in the United States;

(iii) acquisition, integration and restructuring costs (including impacts related to acquiring and integrating acquisitions); and

(iv) other items that are unusual or exceptional in nature.

74    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

All factors discussed in this document that impact our underlying net income are also applicable to reported net income.

All EPS measures in this document refer to fully diluted EPS, unless otherwise stated. As noted below, underlying EPS excludes the dilutive impacts of convertible instruments.

The following table sets out the amounts that were excluded from our underlying net income (loss) and underlying EPS, and provides a reconciliation to our reported net income (loss) and EPS based on IFRS. A reconciliation of our underlying net income to our reported net income for the fourth quarters of 2019 and 2018 is provided in this MD&A in section K - Additional Financial Disclosure - 3 - Fourth Quarter 2019 Profitability.

Reconciliations of Select Net Income Measures

($ millions, unless otherwise noted)	2019			2018			2017
Reported net income		2,618			2,522			2,149
Market-related impacts
Equity market impacts
Impacts from equity market changes		120			(159	)		68
Basis risk impacts		7			(15	)		(6	)
Equity market impacts		127			(174	)		62
Interest rate impacts(1)
Impacts of interest rate changes		(307	)		(116	)		(79	)
Impacts of credit spread movements		(45	)		56			(54	)
Impacts of swap spread movements		4			(31	)		(24	)
Interest rate impacts		(348	)		(91	)		(157	)
Impacts of changes in the fair value of investment properties		(16	)		77			88
Less: Market-related impacts		(237	)		(188	)		(7	)
Less: Assumption changes and management actions		(46	)		(155	)		81
Other adjustments
Certain hedges in Canada that do not qualify for hedge accounting		(5	)		5			(16	)
Fair value adjustments on MFS’s share-based payment awards		(64	)		(5	)		(81	)
Acquisition, integration and restructuring(2)		(87	)		(82	)		(123	)
Less: Total of other adjustments		(156	)		(82	)		(220	)
Less: U.S. tax reform(3)		–			–			(251	)
Underlying net income		3,057			2,947			2,546
Reported EPS (diluted) ($)		4.40			4.14			3.49
Less: Market-related impacts ($)		(0.39	)		(0.31	)		(0.01	)
Assumption changes and management actions ($)		(0.08	)		(0.26	)		0.13
Certain hedges in Canada that do not qualify for hedge accounting ($)		(0.01	)		0.01			(0.03	)
Fair value adjustments on MFS’s share-based payment awards ($)		(0.11	)		(0.01	)		(0.13	)
Acquisition, integration and restructuring ($)		(0.15	)		(0.14	)		(0.20	)
U.S. tax reform ($)		–			–			(0.41	)
Impact of convertible securities on diluted EPS ($)		(0.02	)		(0.01	)		(0.01	)
Underlying EPS (diluted) ($)		5.16			4.86			4.15

(1) Our exposure to interest rates varies by product type, line of business, and geography. Given the long-term nature of our business, we have a higher degree of sensitivity in respect of interest rates at long durations.

(2) 2019 amounts includes acquisition costs for the BGO acquisition and the pending InfraRed transaction, which includes the unwinding of the discount for the Put option and Deferred payments liability of $16 million. As a result of various initiatives to simplify our organizational structure and drive efficiencies, we also recorded a restructuring charge of $25 million in the fourth quarter of 2019.

(3) The U.S. Tax Cuts and Jobs Act (“U.S. tax reform”) legislation signed into law on December 22, 2017, which took effect on January 1, 2018, included a reduction to the U.S. corporate tax rate from 35% to 21% for tax years beginning after 2017, and a number of base broadening measures including provisions limiting the deductibility of certain payments to related foreign taxpayers. Interpretive guidance on the base broadening provisions was issued by the U.S. Treasury late in 2018, however it is in the form of Proposed Regulations and is subject to change. As a result of this legislation, the Company recorded a net charge of $251 million ($444 million pre-tax) in the fourth quarter of 2017. This reflected an after-tax charge of $288 million ($444 million pre-tax) to ACMA, and a one-time charge on the deemed repatriation of foreign earnings of $46 million. These are partially offset by a benefit of $83 million relating to the revaluation of deferred tax balances from 35% to 21%, the $83 million excludes $(30) million relating to the net impact on deferred tax balances attributable to participating policyholders. ACMA in 2017 excludes the $(288) million change that is included in U.S. tax reform, shown separately.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     75

The following table shows the pre-tax amount of underlying net income adjustments:

($ millions, unless otherwise noted)	2019			2018			2017
Reported net income (after tax)		2,618			2,522			2,149
Underlying net income adjustments (pre-tax):
Less: Market-related impacts(1)		(383	)		(179	)		(79	)
Assumption changes and management actions(1)(2)		(127	)		(246	)		(61	)
Other adjustments(1)		(237	)		(150	)		(297	)
U.S. tax reform(1)(2)		–			–			(444	)
Total underlying net income adjustments (pre-tax)		(747	)		(575	)		(881	)
Tax-related to underlying net income adjustments		308			150			484
Underlying net income(3) (after tax)		3,057			2,947			2,546

(1) Represents an adjustment made to arrive at a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document for a breakdown of components within this adjustment.

(2) In 2017, U.S. tax reform of $(444) million (pre-tax) is shown separately, and is excluded from ACMA of $(61) million (pre-tax).

(3) Represents a non-IFRS financial measure. See section L - Non-IFRS Financial Measures in this document.

Tax related to underlying net income adjustments may vary from the expected effective tax rate range reflecting the mix of business based on the Company’s international operations. The aggregate tax effect depends on whether the underlying adjustment increases and reductions to pre-tax income occurred in high or low tax jurisdictions.

ii. Additional Non-IFRS Measures

Management also uses the following non-IFRS financial measures:

Return on equity. IFRS does not prescribe the calculation of ROE and therefore a comparable measure under IFRS is not available. To determine reported ROE and underlying ROE, respectively, reported net income (loss) and underlying net income (loss) is divided by the total weighted average common shareholders’ equity for the period. The quarterly ROE is annualized.

Financial leverage ratio. This total debt to total capital ratio is ratio of debt plus preferred shares to total capital, where debt consists of all capital qualifying debt securities. Capital qualifying debt securities consist of subordinated debt and innovative capital instruments.

Dividend payout ratio. This is the ratio of dividends paid per share to diluted underlying EPS for the period.

Sales. In Canada, insurance sales consist of sales of individual insurance and group benefits products; wealth sales consist of sales of individual wealth products and sales in GRS. In the U.S., insurance sales consist of sales by Group Benefits. In Asia, insurance sales consist of the individual and group insurance sales by our subsidiaries and joint ventures and associates, based on our proportionate equity interest, in the Philippines, Hong Kong, Indonesia, India, China, Malaysia, and Vietnam and sales from our International business unit; wealth sales consist of Hong Kong wealth sales, Philippines mutual fund sales, wealth sales by our India and China insurance joint ventures and associates, and Aditya Birla Sun Life AMC Limited’s equity and fixed income mutual fund sales based on our proportionate equity interest, including sales as reported by our bank distribution partners. Asset Management sales consist of gross sales (inflows) for retail and institutional Clients; unfunded commitments are not included in sales. Sales are also expressed on a constant currency basis, which is a measure of sales that provides greater comparability across reporting periods by excluding the impact of exchange rate fluctuations from the translation of functional currencies to the Canadian dollar. There is no directly comparable IFRS measure.

Value of New Business. VNB represents the present value of our best estimate of future distributable earnings, net of the cost of capital, from new business contracts written in a particular time period, except new business in our Asset Management pillar. The assumptions used in the calculations are generally consistent with those used in the valuation of our insurance contract liabilities except that discount rates used approximate theoretical return expectations of an equity investor. Capital required is based on the higher of Sun Life Assurance’s LICAT operating target and local (country specific) operating target capital. VNB is a useful metric to evaluate the present value created from new business contracts. There is no directly comparable IFRS measure.

Adjusted revenue. This measure is an alternative measure of revenue that provides greater comparability across reporting periods, by excluding the impacts of: (i) exchange rate fluctuations, from the translation of functional currencies to the Canadian dollar, for comparisons (“Constant Currency Adjustment”); (ii) Fair value and foreign currency changes on assets and liabilities (“FV Adjustment”); and (iii) reinsurance for the insured business in Canada’s GB operations (“Reinsurance in Canada’s GB Operations Adjustment”).

($ millions)	2019			2018			2017
Revenue		39,679			26,997			29,334
Less: Constant Currency Adjustment		349			–			(34	)
FV Adjustment		7,118			(3,373	)		2,603
Reinsurance in Canada’s GB Operations Adjustment		(580	)		(602	)		(3,026	)
Adjusted revenue		32,792			30,972			29,791

76    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

Adjusted premiums and deposits. This measure is an alternative measure of premiums and deposits that provides greater comparability across reporting periods by excluding the impacts of: (i) the Constant Currency Adjustment; and (ii) the Reinsurance in Canada’s GB Operations Adjustment.

($ millions)	2019			2018			2017
Premiums and deposits		183,946			160,108			164,680
Less: Constant Currency Adjustment		3,426			–			809
Reinsurance in Canada’s GB Operations Adjustment		(580	)		(602	)		(3,026	)
Adjusted premiums and deposits		181,100			160,710			166,897

Pre-tax net operating profit margin ratio for MFS. This ratio is a measure of the profitability of MFS, which excludes the impact of fair value adjustments on MFS’s share-based payment awards, investment income, and certain commission expenses that are offsetting. These commission expenses are excluded in order to neutralize the impact these items have on the pre-tax net operating profit margin ratio and have no impact on the profitability of MFS. There is no directly comparable IFRS measure.

After-tax profit margin for U.S. Group Benefits. This ratio assists in explaining our results from period to period and is a measure of profitability that expresses U.S. employee benefits and medical stop-loss underlying net income as a percentage of net premiums. This ratio is calculated by dividing underlying net income (loss) by net premiums for the trailing four quarters. There is no directly comparable IFRS measure.

Impacts of foreign exchange translation. Items impacting our Consolidated Statements of Operations, such as Revenue, Benefits and expenses, and Total net income (loss), are translated into Canadian dollars using average exchange rates for the respective period. For items impacting our Consolidated Statements of Financial Position, such as Assets and Liabilities, period end rates are used for currency translation purposes.

Several IFRS financial measures are presented on a constant currency adjusted basis to exclude the impacts of foreign exchange translation. These measures are calculated using the average or period end foreign exchange rates, as appropriate, in effect at the date of the comparative period.

Assumption changes and management actions. In this document, the impacts of ACMA on shareholders’ net income (after-tax) is included in reported net income and is excluded in calculating underlying net income, as described in Section D - Profitability in this document.

Note 10.A of our 2019 Annual Consolidated Financial Statements shows the pre-tax impacts of method and assumption changes on shareholders’ and participating policyholders’ insurance contract liabilities net of reinsurance assets, excluding changes in other policy liabilities and assets.

The view in this document of ACMA is the impacts on shareholders’ reported net income (after tax). The Annual Consolidated Financial Statement view is a component of the change in total company liabilities. The following table provides a reconciliation of the differences between the two measures:

($ millions)	2019			2018			2017
Impacts of method and assumption changes on insurance contract liabilities (pre-tax)(1)		(13	)		278			173
Less: Participating policyholders(2)		1			533			181
Impacts of method and assumption changes excluding participating policyholders (pre-tax)		(14	)		(255	)		(8	)
Less: Tax		(59	)		(90	)		(51	)
Impacts of method and assumption changes excluding participating policyholders (after-tax)		45			(165	)		43
Add: Management actions (after-tax)(3)		19			23			(243	)
Other (after-tax)(4)		(110	)		(13	)		(7	)
Assumption changes and management actions (after-tax)(5)(6)(7)		(46	)		(155	)		(207	)

(1) Note 10.A of our 2019 Annual Consolidated Financial Statements shows the pre-tax impacts of method and assumption changes on shareholders’ and participating policyholders’ Insurance contract liabilities net of reinsurance assets, excluding changes in other policy liabilities and assets. The amount shown in the table above is the shareholders’ income impacts related to the amount shown in Note 10.A of our 2019 Annual Consolidated Financial Statements.

(2) Adjustment to remove the pre-tax impacts of method and assumption changes on amounts attributed to participating policyholders.

(3) Adjustment to include the after-tax impacts of management actions on insurance contract liabilities and investment contract liabilities which include, for example, changes in the prices of in-force products, new or revised reinsurance on in-force business, and material changes to investment policies for assets supporting our liabilities. In the second quarter of 2017, management actions were mainly in U.S., primarily comprised of the expected impact of recapturing certain reinsurance treaties and the expected cost of reinsurance in certain other treaties.

(4) Adjustments to include the after-tax impacts of method and assumption changes on investment contracts and other policy liabilities.

(5) Includes the tax impacts of assumption changes and management actions on insurance contract liabilities and investment contract liabilities, reflecting the tax rates in the jurisdictions in which we do business.

(6) ACMA is included in reported net income and is excluded in calculating underlying net income, as described in section D - Profitability - 2019 vs. 2018 in this document.

(7) In 2017, the impact on reported net income of an increase of $81 million is presented as an adjustment to arrive at underlying net income as Assumption changes and management actions. The impact on reported net income of a decrease of $288 million ($444 million pre-tax) related to the U.S. tax legislation changes enacted on December 22, 2017, included in the $(207) million above, is included as part of the U.S. tax reform impact that is reported separately as an adjustment to arrive an underlying net income (see section L - Non-IFRS Financial Measures in this document).

Real estate market sensitivities. Real estate market sensitivities are non-IFRS financial measures for which there are no directly comparable measures under IFRS so it is not possible to provide a reconciliation of these amounts to the most directly comparable IFRS measures.

Other. Management also uses the following non-IFRS financial measures for which there are no comparable financial measures in IFRS: (i) ASO premium and deposit equivalents, mutual fund sales, managed fund sales, insurance sales, and total premiums and deposits; (ii) AUM, mutual fund assets, managed fund assets, other AUM, and assets under administration; (iii) the VNB, which is used to measure the estimated lifetime profitability of new sales and is based on actuarial calculations; and (iv) ACMA, which is a component of our sources of earnings disclosure. Sources of earnings is an alternative presentation of our Consolidated Statements of Operations that identifies and quantifies various sources of income. The Company is required to disclose its sources of earnings by its principal regulator, OSFI.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     77

 M. Accounting and Control Matters

1. Critical Accounting Policies and Estimates

Our significant accounting and actuarial policies are described in Notes 1, 2, 3, 5, 6, 7 and 10 of our 2019 Annual Consolidated Financial Statements. Management must make judgments involving assumptions and estimates, some of which may relate to matters that are inherently uncertain, under these policies. The estimates described below are considered particularly significant to understanding our financial performance. As part of our financial control and reporting, judgments involving assumptions and estimates are reviewed by the independent auditor and by other independent advisors on a periodic basis. Accounting policies requiring estimates are applied consistently in the determination of our financial results.

Benefits to Policyholders

General

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

In determining our liabilities for insurance contracts, assumptions must be made about mortality and morbidity rates, lapse and other policyholder behaviour, interest rates, equity market performance, asset default, inflation, expenses, and other factors over the life of our products. Most of these assumptions relate to events that are anticipated to occur many years in the future. Assumptions require significant judgment and regular review and, where appropriate, revision.

We use best estimate assumptions for expected future experience and apply margins for adverse deviations to provide for uncertainty in the choice of the best estimate assumptions. The amount of insurance contract liabilities related to the application of margins for adverse deviations to best estimate assumptions is called a provision for adverse deviations.

Best Estimate Assumptions

Best estimate assumptions are intended to be current, neutral estimates of the expected outcome as guided by Canadian actuarial standards of practice. The choice of best estimate assumptions takes into account current circumstances, past experience data (Company and/or industry), the relationship of past to expected future experience, anti-selection, the relationship among assumptions, and other relevant factors. For assumptions on economic matters, the assets supporting the liabilities and the expected policy for asset-liability management are relevant factors.

Margins for Adverse Deviations

The appropriate level of margin for adverse deviations on an assumption is guided by Canadian actuarial standards of practice. For most assumptions, the standard range of margins for adverse deviations is 5% to 20% of the best estimate assumption, and the actuary chooses from within that range based on a number of considerations related to the uncertainty in the determination of the best estimate assumption. The level of uncertainty, and hence the margin chosen, will vary by assumption and by line of business and other factors. Considerations that would tend to indicate a choice of margin at the high end of the range include:

• The statistical credibility of the Company’s experience is too low to be the primary source of data for choosing the best estimate assumption

• Future experience is difficult to estimate

• The cohort of risks lacks homogeneity

• Operational risks adversely impact the ability to estimate the best estimate assumption

• Past experience may not be representative of future experience and the experience may deteriorate

Provisions for adverse deviations in future interest rates are included by testing a number of scenarios of future interest rates, some of which are prescribed by Canadian actuarial standards of practice, and determining the liability based on the range of possible outcomes. A scenario of future interest rates includes, for each forecast period between the statement of financial position date and the last liability cash flow, interest rates for risk-free assets, premiums for asset default, rates of inflation, and an investment strategy consistent with the Company’s investment policy. The starting point for all future interest rate scenarios is consistent with the current market environment. If few scenarios are tested, the liability would be at least as great as the largest of the outcomes. If many scenarios are tested, the liability would be within a range defined by the average of the outcomes that are above the 60th percentile of the range of outcomes and the corresponding average for the 80th percentile.

Provisions for adverse deviations in future equity returns are included by scenario testing or by applying margins for adverse deviations. In blocks of business where the valuation of liabilities uses scenario testing of future equity returns, the liability would be within a range defined by the average of the outcomes that are above the 60th percentile of the range of outcomes and the corresponding average for the 80th percentile. In blocks of business where the valuation of liabilities does not use scenario testing of future equity returns, the margin for adverse deviations on common share dividends is between 5% and 20%, and the margin for adverse deviations on capital gains would be 20% plus an assumption that those assets reduce in value by 20% to 50% at the time when the reduction is most adverse. A 30% reduction is appropriate for a diversified portfolio of North American common shares and, for other portfolios, the appropriate reduction depends on the volatility of the portfolio relative to a diversified portfolio of North American common shares.

In choosing margins, we ensure that, when taken one at a time, each margin is reasonable with respect to the underlying best estimate assumption and the extent of uncertainty present in making that assumption, and also that, in aggregate, the cumulative impact of the margins for adverse deviations is reasonable with respect to the total amount of our insurance contract liabilities. Our margins are generally stable over time and are generally only revised to reflect changes in the level of uncertainty in the best estimate assumptions. Our margins tend to be at the high end of the range for expenses and in the mid-range or higher for other assumptions. When considering the aggregate impact of margins, the actuary assesses the consistency of margins for each assumption across each block of business to ensure there is no double

78    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

counting or omission and to avoid choosing margins that might be mutually exclusive. In particular, the actuary chooses similar margins for blocks of business with similar characteristics, and also chooses margins that are consistent with other assumptions, including assumptions about economic factors. The actuary is guided by Canadian actuarial standards of practice in making these professional judgments about the reasonableness of margins for adverse deviations.

The best estimate assumptions and margins for adverse deviations are reviewed at least annually and revisions are made when appropriate. The choice of assumptions underlying the valuation of insurance contract liabilities is subject to external actuarial peer review.

Critical Accounting Estimates

Significant factors affecting the determination of policyholders’ benefits, the methodology by which they are determined, their significance to the Company’s financial condition and results of operations are described below.

Non-fixed Income Market Movements

We are exposed to equity markets through our segregated fund products (including variable annuities) that provide guarantees linked to underlying fund performance and through insurance products where the insurance contract liabilities are supported by non-fixed income assets.

For segregated fund products (including variable annuities), we have implemented hedging programs involving the use of derivative instruments to mitigate a large portion of the equity market risk associated with the guarantees. The cost of these hedging programs is reflected in the liabilities. The equity market risk associated with anticipated future fee income is not hedged.

The majority of non-fixed income assets that are designated as FVTPL support our participating and universal life products where investment returns are passed through to policyholders through routine changes in the amount of dividends declared or in the rate of interest credited. In these cases, changes in non-fixed income asset values are largely offset by changes in insurance contract liabilities.

Interest Rates

We generally maintain distinct asset portfolios for each major line of business. In the valuation of insurance contract liabilities, the future cash flows from insurance contracts and the assets that support them are projected under a number of interest rate scenarios, some of which are prescribed by Canadian actuarial standards of practice. Reinvestments and disinvestments take place according to the specifications of each scenario, and the liability is set based on the range of possible outcomes.

For certain products, including participating insurance and certain forms of universal life policies and annuities, policyholders share investment performance through routine changes in the amount of dividends declared or in the rate of interest credited. These products generally have minimum interest rate guarantees.

Hedging programs are in place to help mitigate the impact of interest rate movements.

Mortality

Mortality refers to the rates at which death occurs for defined groups of people. Life insurance mortality assumptions are generally based on the past five to ten years of experience. Our experience is combined with industry experience where our own experience is insufficient to be statistically valid. Assumed mortality rates for life insurance and annuity contracts include assumptions about future mortality improvement based on recent trends in population mortality and our outlook for future trends.

Morbidity

Morbidity refers to both the rates of accident or sickness and the rates of recovery therefrom. Most of our disability insurance is marketed on a group basis. We offer critical illness policies on an individual basis in Canada and Asia, long-term care on an individual basis in Canada, and medical stop-loss insurance is offered on a group basis in the U.S. In Canada, group morbidity assumptions are based on our five-year average experience, modified to reflect any emerging trend in recovery rates. For long-term care and critical illness insurance, assumptions are developed in collaboration with our reinsurers and are largely based on their experience. In the U.S., our experience is used for both medical stop-loss and disability assumptions, with some consideration of industry experience.

Policy Termination Rates

Policyholders may allow their policies to lapse prior to the end of the contractual coverage period by choosing not to continue to pay premiums or by surrendering their policy for the cash surrender value. Assumptions for lapse experience on life insurance are generally based on our five-year average experience. Lapse rates vary by plan, age at issue, method of premium payment, and policy duration.

Premium Payment Patterns

For universal life contracts, it is necessary to set assumptions about premium payment patterns. Studies prepared by industry or the actuarial profession are used for products where our experience is insufficient to be statistically valid. Premium payment patterns usually vary by plan, age at issue, method of premium payment, and policy duration.

Expense

Future policy-related expenses include the costs of premium collection, claims adjudication and processing, actuarial calculations, preparation and mailing of policy statements, and related indirect expenses and overhead. Expense assumptions are mainly based on our recent experience using an internal expense allocation methodology. Inflationary increases assumed in future expenses are consistent with the future interest rates used in scenario testing.

Asset Default

As required by Canadian actuarial standards of practice, insurance contract liabilities include a provision for possible future default of the assets supporting those liabilities. The amount of the provision for asset default included in the insurance contract liabilities is based on possible reductions in future investment yield that vary by factors such as type of asset, asset credit quality (rating), duration, and country of origin. The asset default assumptions are comprised of a best estimate plus a margin for adverse deviations, and are intended to provide for loss of both principal and income. Best estimate asset default assumptions by asset category and geography are derived from long-term studies of industry

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     79

experience and the Company’s experience. Margins for adverse deviation are chosen from the standard range (of 25% to 100%) as recommended by Canadian actuarial standards of practice based on the amount of uncertainty in the choice of best estimate assumption. The credit quality of an asset is based on external ratings if available (public bonds) and internal ratings if not (mortgages and loans). Any assets without ratings are treated as if they are rated below investment grade.

In contrast to asset impairment provisions and changes in FVTPL assets arising from impairments, both of which arise from known credit events, the asset default provision in the insurance contract liabilities covers losses related to possible future (unknown) credit events. Canadian actuarial standards of practice require the asset default provision to be determined taking into account known impairments that are recognized elsewhere on the statement of financial position. The asset default provision included in the insurance contract liabilities is reassessed each reporting period in light of impairments, changes in asset quality ratings, and other events that occurred during the period.

Sensitivities to Best Estimate Assumptions

The sensitivities presented below are forward-looking statements. They include measures of our estimated shareholders’ net income sensitivity to changes in the best estimate assumptions in our insurance contract liabilities based on a starting point and business mix as at December 31, 2019 and as at December 31, 2018, reflecting the update of actuarial method and assumption changes described in this MD&A under the heading Assumption Changes and Management Actions and, where appropriate, taking into account hedging programs in place as at December 31, 2019 and December 31, 2018 described in this MD&A under the heading Market Risk. These sensitivities represent the Company’s estimate of changes in best estimate assumptions that are reasonably likely based on the Company’s and/or the industry’s historical experience and industry standards and best practices as at December 31, 2019 and December 31, 2018. We have also disclosed in the table below the impact of a 50 basis point change in risk free interest rates and 25% and 10% changes in equity markets to illustrate the impact of immediate market shocks.

Changes to the starting point for interest rates, equity market prices and business mix will result in different estimated sensitivities. Additional information regarding equity and interest rate sensitivities, including key assumptions, can be found under the heading J - Risk Management - 9 - Risk Categories - Market Risk Sensitivities in this document. The following table summarizes the impact these sensitivities would have on our shareholders’ net income.

Critical Accounting Estimate	Sensitivity	2019			2018
($ millions, after-tax)
Interest Rates	50 basis point parallel decrease in interest rates across the entire yield curve		(150	)		(100	)
	50 basis point parallel increase in interest rates across the entire yield curve		50			50
Equity Markets	25% decrease across all equity markets		(350	)		(300	)
	10% decrease across all equity markets		(150	)		(100	)
	10% increase across all equity markets		100			100
	25% increase across all equity markets		250			250
	1% reduction in assumed future equity and real estate returns		(665	)		(560	)
Mortality	2% increase in the best estimate assumption for insurance products - where higher mortality would be financially adverse		(35	)		(35	)
	2% decrease in the best estimate assumption for annuity products - where lower mortality would be financially adverse		(135	)		(120	)
Morbidity	5% adverse change in the best estimate assumption		(205	)		(185	)
Policy Termination Rates	10% decrease in the termination rate - where fewer terminations would be financially adverse		(265	)		(250	)
	10% increase in the termination rate - where more terminations would be financially adverse		(195	)		(195	)
Operating Expenses and Inflation	5% increase in unit maintenance expenses		(170	)		(175	)

Fair Value of Assets and Liabilities

Debt securities, equity securities and certain other invested assets are designated as FVTPL or AFS and are recorded at fair value in our Consolidated Statements of Financial Position. Changes in fair value of assets designated as FVTPL, and realized gains and losses on sale of FVTPL assets are recorded in income. Changes in fair value of AFS assets are recorded in OCI. For foreign currency translation, exchange differences calculated on the amortized cost of AFS debt securities are recognized in income and other changes in carrying amount are recognized in OCI. The exchange differences from the translation of AFS equity securities and other invested assets are recognized in OCI. Net impairment losses and realized gains and losses on sale of AFS assets are reclassified from OCI to income.

The fair value of government and corporate debt securities is determined using quoted prices in active markets for identical or similar securities. When quoted prices in active markets are not available, fair value is determined using market standard valuation methodologies, which include discounted cash flow analysis, consensus pricing from various broker dealers that are typically the market makers, or other similar techniques. The assumptions and valuation inputs in applying these market standard valuation methodologies are determined primarily using observable market inputs, which include, but are not limited to, benchmark yields, reported trades of identical or similar instruments, broker-dealer quotes, issuer spreads, bid prices, and reference data including market research publications. In limited circumstances, non-binding broker quotes are used.

The fair value of asset-backed securities is determined using quoted prices in active markets for identical or similar securities, when available, or valuation methodologies and valuation inputs similar to those used for government and corporate debt securities. Additional valuation inputs include structural characteristics of the securities, and the underlying collateral performance, such as prepayment speeds and delinquencies. Expected prepayment speeds are based primarily on those previously experienced in the market at projected future interest rate levels. In instances where there is a lack of sufficient observable market data to value the securities, non-binding broker quotes are used.

80    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

The fair value of equity securities is determined using quoted prices in active markets for identical securities or similar securities. When quoted prices in active markets are not available, fair value is determined using equity valuation models, which include discounted cash flow analysis and other techniques that involve benchmark comparison. Valuation inputs primarily include projected future operating cash flows and earnings, dividends, market discount rates, and earnings multiples of comparable companies.

Mortgages and loans are generally carried at amortized cost. The fair value of mortgages and loans, for disclosure purposes, is determined by discounting the expected future cash flows using a current market interest rate applicable to financial instruments with a similar yield, credit quality and maturity characteristics. Valuation inputs typically include benchmark yields and risk-adjusted spreads from current lending activities or loan issuances. The risk-adjusted spreads are determined based on the borrower’s credit and liquidity, as well as term and other loan-specific features. Long-term mortgages and loans are generally categorized in Level 3 of the fair value hierarchy. The significant unobservable input is a portion of these risk adjusted spreads at or beyond the 20 year point for mortgages and at or beyond the 10 year point for loans.

Derivative financial instruments are recorded at fair value with changes in fair value recorded in income unless the derivative is part of a qualifying hedging relationship for accounting purposes. The fair value of derivative financial instruments depends upon derivative types. The fair value of exchange-traded futures and options is determined using quoted prices in active markets, while the fair value of OTC derivatives is determined using pricing models, such as discounted cash flow analysis or other market standard valuation techniques, with primarily observable market inputs. Valuation inputs used to price OTC derivatives may include swap interest rate curves, foreign exchange spot and forward rates, index prices, the value of underlying securities, projected dividends, volatility surfaces, and in limited circumstances, counterparty quotes.

The fair value of OTC derivative financial instruments also includes credit valuation adjustments to reflect the credit risk of both the derivative counterparty and ourselves as well as the impact of contractual factors designed to reduce our credit exposure, such as collateral and legal rights of offset under master netting agreements. Inputs into determining the appropriate credit valuation adjustments are typically obtained from publicly available information and include credit default swap spreads when available, credit spreads derived from specific bond yields, or published cumulative default experience data adjusted for current trends when credit default swap spreads are not available.

The fair value of other invested assets is determined using quoted prices in active markets for identical securities or similar securities. When quoted prices in active markets are not available, fair value is determined using equity valuation models, which include discounted cash flow analysis and other techniques that involve benchmark comparison. Valuation inputs primarily include projected future operating cash flows and earnings, dividends, market discount rates, and earnings multiples of comparable companies.

Investment properties are recorded at fair value with changes in fair value recorded in income. The fair value of investment properties is generally determined using property valuation models that are based on expected capitalization rates and models that discount expected future net cash flows at current market interest rates reflective of the characteristics, location, and market of each property. Expected future net cash flows include contractual and projected cash flows and forecasted operating expenses, and take into account interest, rental and occupancy rates derived from market surveys. The estimates of future cash inflows, in addition to expected rental income from current leases, include projected income from future leases based on significant assumptions that are consistent with current market conditions. The future rental rates are estimated based on the location, type and quality of the properties, and take into account market data and projections at the valuation date. The fair values are typically compared to market-based information for reasonability, including recent transactions involving comparable assets. The methodologies and inputs used in these models are in accordance with real estate industry valuation standards. Valuations are prepared externally or internally by professionally accredited real estate appraisers.

The fair value of short-term securities is approximated by their carrying amount adjusted for credit risk where appropriate.

Due to their nature, the fair value of policy loans and cash are assumed to be equal to their carrying values, which is the amount these assets are recorded at in our Consolidated Statements of Financial Position.

Investments for accounts of segregated fund holders are recorded at fair value with changes in fair value recorded in net realized and unrealized gains (losses) within the segregated fund and are not recorded in our Consolidated Statements of Operations. The fair value of investments for accounts of segregated fund holders is determined using quoted prices in active markets or independent valuation information provided by investment managers. The fair value of direct investments within investments for accounts of segregated fund holders, such as short-term securities and government and corporate debt securities, is determined according to valuation methodologies and inputs described above in the respective asset type sections. The fair value of the secured borrowings from mortgage securitization is based on the methodologies and assumptions as described above for asset-backed securities.

The methodologies and assumptions for determining the fair values of investment contract liabilities are included in Note 10.B of our 2019 Annual Consolidated Financial Statements.

We categorize our assets and liabilities carried at fair value, based on the priority of the inputs to the valuation techniques used to measure fair value, into a three-level fair value hierarchy as follows:

Level 1: Fair value is based on the unadjusted quoted prices for identical assets or liabilities in an active market. The types of assets and liabilities classified as Level 1 generally include cash and cash equivalents, certain U.S. government and agency securities, exchange-traded equity securities, and certain segregated and mutual fund units held for account of segregated fund holders.

Level 2: Fair value is based on quoted prices for similar assets or liabilities traded in active markets, or prices from valuation techniques that use significant observable inputs, or inputs that are derived principally from or corroborated with observable market data through correlation or other means. The types of assets and liabilities classified as Level 2 generally include Canadian federal, provincial and municipal government, other foreign government and corporate debt securities, certain asset-backed securities, OTC derivatives, and certain segregated and mutual fund units held for account of segregated fund holders.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     81

Level 3: Fair value is based on valuation techniques that require one or more significant inputs that are not based on observable market inputs. These unobservable inputs reflect our expectations about the assumptions market participants would use in pricing the asset or liability. The types of assets and liabilities classified as Level 3 generally include certain corporate bonds, certain other invested assets, and investment properties.

As pricing inputs become more or less observable, assets are transferred between levels in the hierarchy. Total gains and losses in income and OCI are calculated assuming transfers into or out of Level 3 occur at the beginning of the period. For a financial instrument that transfers into Level 3 during the reporting period, the entire change in fair value for the period is included in the Level 3 reconciliation schedule in Note 5 to our 2019 Annual Consolidated Financial Statements. For transfers out of Level 3 during the reporting period, the change in fair value for the period is excluded from the Level 3 reconciliation schedule in Note 5 to our 2019 Annual Consolidated Financial Statements. Transfers into Level 3 occur when the inputs used to price the financial instrument lack observable market data and as a result, no longer meet the Level 1 or 2 criteria at the reporting date. Transfers out of Level 3 occur when the pricing inputs become more transparent and satisfy the Level 1 or 2 criteria at the reporting date.

Transfers into and out of Level 3 for financial assets were $15 million and $304 million for the year ended December 31, 2019, respectively, compared to $14 million and $380 million, respectively, for the year ended December 31, 2018. The total amount of the net realized/unrealized gains (losses) related to financial instruments transferred out of Level 3 during the period, which were excluded from the Level 3 reconciliation, was a gain of $1 million as at December 31, 2019 compared to a loss of $9 million as at December 31, 2018.

Additional information on the fair value measurement of investments can be found in Note 5 of our 2019 Annual Consolidated Financial Statements.

Impairment

Management assesses debt and equity securities, mortgages and loans and other invested assets for objective evidence of impairment at each reporting date. Financial assets are impaired and impairment losses are incurred if there is objective evidence of impairment as a result of one or more loss events that have an impact on the estimated future cash flows that can be reliably estimated. Objective evidence of impairment generally includes significant financial difficulty of the issuer, including actual or anticipated bankruptcy or defaults and delinquency in payments of interest or principal or disappearance of an active market for the financial assets. All equity instruments in an unrealized loss position are reviewed to determine if objective evidence of impairment exists. Objective evidence of impairment for an investment in an equity instrument or other invested asset also includes, but is not limited to, the financial condition and near-term prospects of the issuer, including information about significant changes with adverse effects that have taken place in the technological, market, economic or legal environment in which the issuer operates, and a significant or prolonged decline in the fair value of an equity instrument or other invested asset below its cost.

Additional information on the impairment of financial assets can be found in Notes 1 and 6 of our 2019 Annual Consolidated Financial Statements.

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable tangible and intangible assets of the acquired businesses. Goodwill is carried at original cost less any impairment subsequently incurred. Goodwill is assessed for impairment annually or more frequently if events or circumstances occur that may result in the recoverable amount of a cash generating unit (“CGU”) falling below its carrying value. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of cash inflows from other groups of assets. The goodwill balances are allocated to either individual or groups of CGUs that are expected to benefit from the synergies of the business combination. Goodwill impairment is quantified by comparing a CGU’s or a group of CGU’s carrying value to its recoverable amount, which is the higher of fair value less cost to sell and value in use. Impairment losses are recognized immediately and cannot be reversed in future periods.

No impairment charges were recognized in 2019. We had a carrying value of $5.8 billion in goodwill as at December 31, 2019. Additional information on goodwill can be found in Note 9 of our 2019 Annual Consolidated Financial Statements.

Intangible Assets

Intangible assets consist of finite life and indefinite life intangible assets. Finite life intangible assets are amortized on a straight-line basis or using a units-of-production method, over the useful economic lives which are varying periods of up to 40 years. Amortization is charged through operating expenses. The useful lives of finite life intangible assets are reviewed annually, and the amortization is adjusted as necessary. Indefinite life intangibles are not amortized, and are assessed for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. Impairment is assessed by comparing the carrying values of the indefinite life intangible assets to their recoverable amounts. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. If the carrying values of the indefinite life intangibles exceed their recoverable amounts, these assets are considered impaired, and a charge for impairment is recognized in our Consolidated Statements of Operations. The recoverable amount of intangible assets is determined using various valuation models, which require management to make certain judgments and assumptions that could affect the estimates of the recoverable amount. Impairment charges on intangible assets of $15 million were recognized in 2019 and there were no impairment charges in 2018.

As at December 31, 2019 our finite life intangible assets had a carrying value of $1.4 billion, which reflected the value of the field force, asset administration contracts, and Client relationships acquired as part of the Clarica, CMG Asia, Genworth EBG, Ryan Labs, Prime Advisors, Bentall Kennedy, and the U.S. employee benefits business acquisitions, as well as software costs. Our indefinite life intangible assets had a carrying value of $0.6 billion as at December 31, 2019. The value of the indefinite life intangible assets reflected fund management contracts of MFS and BGO.

Income Taxes

Income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. Deferred income tax is provided using the liability method. Our provision for income taxes is calculated based on the tax rates and tax laws that have been enacted or substantially enacted by the end of the reporting period.

82    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

As a multinational organization, we are subject to taxation in numerous jurisdictions. We seek to operate in a tax efficient manner while ensuring that we are in compliance with all laws and regulations. The determination of the required provision for current and deferred income taxes requires that we interpret tax legislation in the jurisdictions in which we operate and that we make assumptions about the expected timing of realization of deferred income tax assets and liabilities. Tax laws are complex and their interpretation requires significant judgment. The provision for income taxes reflects management’s interpretation of the relevant tax laws and its best estimate of the income tax implications of the transactions and events during the period. We believe that our provisions for uncertain tax positions appropriately reflect the risk of tax positions that are under audit, dispute or appeal with tax authorities, or which are otherwise considered to involve uncertainty. The adequacy of our tax provision is reviewed at the end of each reporting period. To the extent that our interpretations differ from those of tax authorities or the timing of realization is not as expected, the provision for income taxes may increase or decrease in future periods to reflect actual experience. The amount of any increase or decrease cannot be reasonably estimated.

Deferred income tax assets are recognized for all deductible temporary differences, carry forward of unused tax losses and unused tax credits to the extent that it is probable that taxable profit will be available against which the temporary differences, unused tax losses and unused tax credits can be utilized. At each reporting period, we assess all available evidence, both positive and negative, to determine the amount of deferred income tax assets to be recorded. If it is probable that the benefit of tax losses and tax deductions will not be realized, a deferred income tax asset is not recognized. The assessment requires significant estimates and judgment about future events based on the information available at the reporting date.

From time to time, local governments, in countries in which we operate, enact changes to statutory corporate income tax rates. These changes require us to review and re-measure our deferred tax assets and liabilities as of the date of enactment. As at December 31, 2019, our net deferred tax asset in the Consolidated Statements of Financial Position was $1,049 million, primarily in Canada. Any future tax rate reductions in jurisdictions where we carry a net deferred tax asset, could result in a reduction in the carrying value of the deferred tax asset and a corresponding income tax expense at the time of substantial enactment of a rate reduction.

Pension Plans and Other Post-Retirement Benefits

The Company sponsors defined benefit pension plans and defined contribution plans for eligible employees. All of our material defined benefit plans worldwide are closed to new entrants with new hires participating in defined contribution plans. Our defined benefit pension plans offer benefits based on length of service and final average earnings and certain plans offer some indexation of benefits. We maintain certain supplementary non-contributory defined benefit pension arrangements for eligible employees, which are primarily for benefits which are in excess of local tax limits. In addition to these plans, in some countries the Company sponsors certain post-retirement benefit plans (for medical, dental and/or life insurance benefits) for eligible qualifying employees and their dependents who meet certain requirements.

In Canada, since January 1, 2009, all new employees participate in a defined contribution plan, while existing employees continue to accrue future benefits in the prior plan which provides a defined benefit plan and an optional contributory defined contribution plan.

With the closure of the Canadian defined benefit plans to new entrants, the volatility associated with future service accruals for active members has been limited and will decline over time. As at December 31, 2019, there are no active members in the UK and no active employees accruing future service benefits in the U.S. defined benefit plans.

The major risks remaining in relation to past service obligations are increases in liabilities due to a decline in discount rates, greater life expectancy than assumed and adverse asset returns. We have significantly de-risked the investments of our material defined benefit pension plans Company-wide by systematically shifting the pension asset mix towards liability matching investments. The target for our significant plans is to minimize volatility in funded status arising from changes in discount rates and exposure to equity markets.

Due to the long-term nature of these defined benefit plans, the calculation of benefit expenses and accrued benefit obligations depends on various assumptions, including discount rates, rates of compensation increases, health care cost trend rates, retirement ages, mortality rates and termination rates. Based upon consultation with external pension actuaries, management determines the assumptions used for these plans on an annual basis. The discount rate used for our material defined benefit plans is determined with reference to market yields of high-quality corporate bonds that are denominated in the same currency in which the benefits will be paid, and that have terms to maturity approximating the terms of obligations.

Actual experience may differ from that assumed, which would impact the valuation of defined benefit plans and the level of benefit expenses recognized in future years. Details of our pension and post-retirement benefit plans and the key assumptions used for the valuation these plans are included in Note 25 of our 2019 Annual Consolidated Financial Statements.

2. Changes in Accounting Policies

We have included in this section a summary of changes in accounting policies. Where there are references to Notes, these are part of our 2019 Annual Consolidated Financial Statements.

New and Amended International Financial Reporting Standards Adopted in 2019

The following new and amended IFRS are effective for annual periods beginning on or after January 1, 2019, and did not have a material impact on our Consolidated Financial Statements:

i. IFRS 16 Leases (“IFRS 16”)

In January 2016, the International Accounting Standards Board (“IASB”) issued IFRS 16, which replaces IAS 17 Leases (“IAS 17”) and related interpretations. IFRS 16 sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. For lessees, IFRS 16 removes the classification of leases as either operating or financing and requires that all leases be recognized on the statement of financial position, with certain exemptions allowed by this new standard. The accounting for lessors is substantially unchanged. We adopted IFRS 16 on a modified retrospective basis as at January 1, 2019 and recognized transition adjustments in retained earnings.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     83

We assess whether a contract is, or contains, a lease at the inception of the contract. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. For leases where we act as the lessee, we recognize a right-of-use asset and a lease liability at the commencement date of the lease. The right-of-use asset is initially measured at cost, which is comprised of the initial amount of the lease liability with certain adjustments, and subsequently depreciated using the straight-line method, with depreciation expense included in Operating expenses in the Consolidated Statements of Operations. The lease liability is initially measured at the present value of lease payments over the term of the lease using a discount rate that is based on our incremental borrowing rate. The discount rate is specific to each lease and is determined by various factors, such as the lease term and currency. The lease term includes the non-cancellable period and the optional period where it is reasonably certain we will exercise or not exercise an extension or termination option, considering various factors that create an economic incentive to do so. Subsequently, the lease liability is measured at amortized cost using the effective interest method, with interest charged to Interest expense in the Consolidated Statements of Operations. Lease liabilities and right-of-use assets are remeasured upon lease modifications.

As a result of the adoption of IFRS 16, we recognized right-of-use assets of $744 million and lease liabilities of $880 million, reported in Other assets and Other liabilities, respectively, on our Consolidated Statements of Financial Position. Together with the de-recognition of deferred balances of $105 million previously recognized under IAS 17 and deferred tax impact of $9 million, the adoption of IFRS 16 reduced opening retained earnings by $22 million on an after-tax basis as at January 1, 2019.

On transition to IFRS 16, we applied the practical expedient to use hindsight when determining the lease term of contracts containing extension or termination options. Our weighted-average incremental borrowing rate applied to lease liabilities as at January 1, 2019 was 3.3%. The difference between our lease liabilities at January 1, 2019 of $880 million and our operating lease commitments at December 31, 2018 of $1,056 million is primarily due to the time value of money.

ii. Other New and Amended IFRS

In June 2017, the IASB issued IFRIC 23 Uncertainty over Income Tax Treatments (“IFRIC 23”), which was developed by the IFRS Interpretations Committee. IFRIC 23 clarifies how to apply the recognition and measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments, and requires an entity to determine whether tax treatments should be considered collectively or independently. In addition, IFRIC 23 addresses the assumptions an entity should make about the examination of tax treatments by taxation authorities, as well as how an entity should consider changes in facts and circumstances. IFRIC 23 also provides guidance on how to determine taxable profit (tax loss), tax bases, unused tax losses, unused tax credits, and tax rates, based on whether it is probable that a tax authority will accept an uncertain tax treatment used, or proposed to be used, by an entity in its income tax filings. We adopted IFRIC 23 on a cumulative retrospective basis. Adoption of IFRIC 23 did not have a material impact on our Consolidated Financial Statements.

In October 2017, the IASB issued narrow-scope amendments to IAS 28 Investments in Associates and Joint Ventures. The amendments clarify that long-term interests in an associate or joint venture to which the equity method is not applied should be accounted for following the requirements of IFRS 9 Financial Instruments (“IFRS 9”). These amendments are required to be applied retrospectively with certain exceptions. As we qualified for and have elected to take the IFRS 9 deferral approach, we will continue to apply IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”) to the long-term interests in associates or joint ventures covered by these amendments.

In December 2017, the IASB issued Annual Improvements to IFRSs 2015-2017 Cycle, which includes minor amendments to four IFRS standards. These amendments were applied prospectively.

In February 2018, the IASB issued Plan Amendment, Curtailment or Settlement which amends IAS 19 Employee Benefits (“IAS 19”). Under IAS 19, when an amendment, curtailment or settlement of a defined benefit pension plan occurs, the net defined benefit liability or asset is remeasured. The amendments require an entity to use the updated assumptions from this remeasurement to determine current service cost and net interest for reporting periods after the change to the plan. These amendments were applied to plan amendments, curtailments or settlements occurring on or after January 1, 2019.

New and Amended International Financial Reporting Standards to be Adopted in 2020

The following new and amended IFRS were issued by the IASB and are expected to be adopted by us in 2020:

In March 2018, the IASB issued a revised Conceptual Framework for Financial Reporting (“Conceptual Framework”), which replaces the Conceptual Framework for Financial Reporting issued in 2010. The revised Conceptual Framework includes revised definitions of an asset and a liability, as well as new guidance on measurement, derecognition, presentation and disclosure. The revised Conceptual Framework is effective for annual periods beginning on or after January 1, 2020. We do not expect the adoption of this guideline to have a material impact on our Consolidated Financial Statements.

In October 2018, the IASB issued Definition of a Business, which amends IFRS 3 Business Combinations. The amendments clarify the definition of a business to assist entities in determining whether a transaction represents a business combination or an acquisition of assets. The amendments are effective for annual periods beginning on or after January 1, 2020, to be applied prospectively. We do not expect the adoption of these amendments to have a material impact on our Consolidated Financial Statements.

In October 2018, the IASB issued Definition of Material (Amendments to IAS 1 and IAS 8). The amendments clarify the definition of material and provide guidance to improve consistency in its application in IFRS standards. The amendments are effective for annual periods beginning on or after January 1, 2020. We do not expect the adoption of these amendments to have a material impact on our Consolidated Financial Statements.

In September 2019, the IASB issued the Interest Rate Benchmark Reform, which includes amendments to IFRS 9, IAS 39, and IFRS 7 Financial Instruments: Disclosures. The amendments clarify that entities can continue to apply certain hedge accounting requirements assuming that the interest rate benchmark on which the hedged cash flows and cash flows from the hedging instrument are based will not be altered as a result of interest rate benchmark reform. The amendments are effective for annual periods beginning on or after January 1, 2020. We are currently assessing the impact of adoption on our Consolidated Financial Statements.

84    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

New and Amended International Financial Reporting Standards to be Adopted in 2021 or Later

The following new and amended standards were issued by the IASB and are expected to be adopted by us in 2021 or later:

In July 2014, the IASB issued the final version of IFRS 9, which replaces IAS 39. IFRS 9 includes guidance on the classification and measurement of financial instruments, impairment of financial assets, and hedge accounting. Financial asset classification is based on the cash flow characteristics and the business model in which an asset is held. The classification determines how a financial instrument is accounted for and measured. IFRS 9 also introduces an impairment model for financial instruments not measured at fair value through profit or loss that requires recognition of expected losses at initial recognition of a financial instrument and the recognition of full lifetime expected losses if certain criteria are met. In addition, a new model for hedge accounting was introduced to achieve better alignment with risk management activities. This standard is effective for annual periods beginning on or after January 1, 2018. In October 2017, the IASB issued narrow-scope amendments to IFRS 9. The amendments clarify the classification of certain prepayable financial assets and the accounting of financial liabilities following modification. The amendments are effective for annual periods beginning on or after January 1, 2019. However, pursuant to the aforementioned amendments to IFRS 4, we elected the deferral approach permitted under IFRS 4 Insurance Contracts (“IFRS 4”) to continue to apply IAS 39. We are currently assessing the impact that IFRS 9, along with these amendments, will have on our Consolidated Financial Statements.

In May 2017, the IASB issued IFRS 17 Insurance Contracts, which replaces IFRS 4. IFRS 17 establishes the principles for the recognition, measurement, presentation, and disclosure of insurance contracts. IFRS 17 is effective for annual periods beginning on or after January 1, 2021. In June 2019, the IASB issued an exposure draft (“ED”) that proposes targeted amendments to IFRS 17 for public consultation. As part of the ED, the IASB has proposed to defer the effective date by one year to January 1, 2022 as well as extend the deferral option of IFRS 9 for insurers to that same date. The IASB will continue to discuss comments received on the proposals, including comments on the deferral, before finalizing the amendments later in 2020.

IFRS 17 will affect how we account for our insurance contracts and how we report our financial performance in our Consolidated Statements of Operations. Any regulatory and tax regimes that are dependent upon IFRS accounting values will also be impacted. In particular, the introduction of IFRS 17 will require revisions to OSFI’s LICAT guideline. OSFI has indicated that, in developing the revisions to align the LICAT guideline with the accounting standard, they intend to maintain capital frameworks with current capital policies and minimize the potential industry-wide capital impacts.

The adoption of IFRS 17 will be a significant change for us and for the industry. In order to ensure effective implementation, we have established a transition program for IFRS 17 and dedicated significant resources to the implementation. IFRS 17 requires a more expansive set of data, calculations, external disclosure, analyses and controls than the current accounting standard. This necessitates new technologies to support computational aspects and controls relevant to managing the business under IFRS 17. As a result, the project to implement IFRS 17 is a multi-year suite of enterprise-wide actions, technology upgrades, policy and process changes, education and change management initiatives. The program is also dependent on external factors, such as the finalization of the proposed amendments to IFRS 17 and the readiness of a tested solution for the Contractual Service Margin (“CSM”). At this point, we cannot reasonably estimate the effect that IFRS 17 will have on our Consolidated Financial Statements.

We continue to assess both the potential financial statement and business implications of the standard and have regular discussions on application and interpretation of IFRS 17 with our peers in Canada through industry and professional associations. We are also monitoring and participating in international developments related to the adoption and interpretation of this standard.

3. Disclosure Controls and Procedures

The Company has established disclosure controls and procedures that are designed to provide reasonable assurance that all relevant information is gathered and reported to senior management, including the Company’s President and CEO, Executive Vice-President and Chief Financial Officer (“CFO”), and Executive Vice-President, Chief Legal Officer and Public Affairs, on a timely basis so that appropriate decisions can be made regarding public disclosure.

An evaluation of the effectiveness of our disclosure controls and procedures, as defined under rules adopted by the Canadian securities regulatory authorities and the SEC, as at December 31, 2019, was carried out under the supervision of and with the participation of the Company’s management, including the CEO and the CFO. Based on our evaluation, the CEO and the CFO concluded that the design and operation of these disclosure controls and procedures were effective as at December 31, 2019.

Management’s Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial statements in accordance with IFRS.

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

We conducted an assessment of the effectiveness of our internal control over financial reporting, as of December 31, 2019, based on the framework and criteria established in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, we have concluded that our internal control over financial reporting was effective as of December 31, 2019.

Our internal control over financial reporting, as of December 31, 2019, has been audited by the Company’s external auditor, Deloitte LLP, Independent Registered Public Accounting Firm, who also audited our Annual Consolidated Financial Statements for the year ended December 31, 2019. As stated in the Report of Independent Registered Public Accounting Firm, they have expressed an unqualified opinion on our internal control over financial reporting as of December 31, 2019.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     85

Changes in Internal Control over Financial Reporting

No changes were made in our internal control over financial reporting for the period which began on January 1, 2019 and ended December 31, 2019 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

  N. Legal and Regulatory Proceedings

We are regularly involved in legal actions, both as a defendant and as a plaintiff. Information on legal and regulatory proceedings can be found in Note 23 of our 2019 Annual Consolidated Financial Statements.

  O. Forward-looking Statements

From time to time, the Company makes written or oral forward-looking statements within the meaning of certain securities laws, including the “safe harbour” provisions of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities legislation. Forward-looking statements contained in this document include statements (i) relating to our strategies, financial objectives, future results of operations, and strategic goals; (ii) concerning our medium-term financial objectives which are described in this MD&A under the heading B - Overview - 2 - Financial Objectives, (collectively, our “medium-term financial objectives”); (iii) relating to productivity and expense initiatives, growth initiatives, outlook, and other business objectives; (iv) relating to our expected tax range for future years; (v) relating to our acquisition of a majority stake in InfraRed; (vi) that are predictive in nature or that depend upon or refer to future events or conditions; (vii) set out in this document under the heading J - Risk Management - 9 - Risk Categories - Market Risk - Market Risk Sensitivities - Equity Market Sensitivities and Interest Rate Sensitivities; (viii) relating to cash flows, anticipated payment obligations, funding requirements and our ability to meet these obligations; (ix) relating to tax provisions; (x) relating to risks and uncertainties; and (xi) that include words such as “achieve”, “aim”, “ambition”, “anticipate”, “aspiration”, “assumption”, “believe”, “could”, “estimate”, “expect”, “goal”, “initiatives”, “intend”, “may”, “objective”, “outlook”, “plan”, “project”, “seek”, “should”, “strategy”, “strive”, “target”, “will” and similar expressions. Forward-looking statements include the information concerning our possible or assumed future results of operations. These statements represent our current expectations, estimates and projections regarding future events and are not historical facts. Forward-looking statements are not a guarantee of future performance and involve risks and uncertainties that are difficult to predict. Future results and shareholder value may differ materially from those expressed in these forward-looking statements due to, among other factors, the matters set out in this document under the headings B - Overview - 2 - Financial Objectives; D - Profitability - 2019 vs. 2018; I - Capital and Liquidity Management; J - Risk Management; and M - Accounting and Control Matters - 1 - Critical Accounting Policies and Estimates and in the AIF under the heading Risk Factors, and the factors detailed in SLF Inc.’s other filings with Canadian and U.S. securities regulators, which are available for review at www.sedar.com and www.sec.gov, respectively.

Medium-Term Financial Objectives

The Company’s medium-term financial objectives set out in B - Overview - 2 - Financial Objectives are forward-looking non-IFRS financial measures. Our ability to achieve those objectives is dependent on our success in achieving growth initiatives and business objectives and on certain key assumptions that include: (i) no significant changes in the level of interest rates; (ii) average total equity market return of approximately 8% per annum; (iii) credit experience in line with best estimate actuarial assumptions; (iv) no significant changes in the level of our regulatory capital requirements; (v) no significant changes to our effective tax rate; (vi) no significant increase in the number of shares outstanding; (vii) other key assumptions include: no material changes to our hedging program, hedging costs that are consistent with our best estimate assumptions, no material assumption changes including updates to the economic scenario generator and no material accounting standard changes; and (viii) our best estimate actuarial assumptions used in determining our insurance and investment contract liabilities. Our underlying ROE is dependent upon capital levels and options for deployment of excess capital. Our medium-term financial objectives do not reflect the indirect effects of interest rate and equity market movements including the potential impacts on goodwill or the current valuation allowance on deferred tax assets as well as other items that may be non-operational in nature.

Our target dividend payout ratio of 40%-50% of our underlying net income assumes that economic conditions and our results will enable us to maintain our payout ratio in the target range, while maintaining a strong capital position. The declaration, amount and payment of dividends is subject to the approval of SLF Inc.’s Board of Directors and our compliance with the capital requirements in the Insurance Companies Act (Canada). Additional information on dividends is provided in the section I - Capital and Liquidity Management - 3 - Shareholder Dividends in this MD&A.

Although considered reasonable by the Company, we may not be able to achieve our medium-term financial objectives as the assumptions on which these objectives were based may prove to be inaccurate. Accordingly, our actual results could differ materially from our medium-term financial objectives as described in the section B - Overview - 2 - Financial Objectives in this MD&A. Our medium-term financial objectives do not constitute guidance.

Risk Factors

Important risk factors that could cause our assumptions and estimates, and expectations and projections to be inaccurate and our actual results or events to differ materially from those expressed in or implied by the forward-looking statements contained in this document, including our medium-term financial objectives, are set out below. The realization of our forward-looking statements, including our ability to meet our medium-term financial objectives, essentially depends on our business performance which, in turn, is subject to many risks. Factors that could cause actual results to differ materially from expectations include, but are not limited to: market risks - related to the performance of equity markets; changes or volatility in interest rates or credit spreads or swap spreads; real estate investments; and fluctuations in foreign currency exchange rates; insurance risks - related to policyholder behaviour; mortality experience, morbidity experience and longevity; product design and pricing; the impact of higher-than-expected future expenses; and the availability, cost and effectiveness of reinsurance; credit risks - related to issuers of securities held in our investment portfolio, debtors, structured securities, reinsurers, counterparties, other

86    Sun Life Financial Inc.    Annual Report 2019                                         Management’s Discussion and Analysis

financial institutions and other entities; business and strategic risks - related to global economic and political conditions; the design and implementation of business strategies; changes in distribution channels or Client behaviour including risks relating to market conduct by intermediaries and agents; the impact of competition; the performance of our investments and investment portfolios managed for Clients such as segregated and mutual funds; changes in the legal or regulatory environment, including capital requirements and tax laws; the environment, environmental laws and regulations; operational risks - related to breaches or failure of information system security and privacy, including cyber-attacks; our ability to attract and retain employees; legal, regulatory compliance and market conduct, including the impact of regulatory inquiries and investigations; the execution and integration of mergers, acquisitions, strategic investments and divestitures; our information technology infrastructure; a failure of information systems and Internet-enabled technology; dependence on third-party relationships, including outsourcing arrangements; business continuity; model errors; information management; liquidity risks - the possibility that we will not be able to fund all cash outflow commitments as they fall due; and other risks - tax matters, including estimates and judgments used in calculating taxes; our international operations, including our joint ventures; market conditions that affect our capital position or ability to raise capital; downgrades in financial strength or credit ratings; and the impact of mergers, acquisitions and divestitures.

The following risk factors are related to our acquisition of a majority stake in InfraRed that could have a material adverse effect on our forward-looking statements: (1) the ability of the parties to complete the transaction; (2) failure of the parties to obtain necessary consents and approvals or to otherwise satisfy the conditions to the completion of the transaction in a timely manner, or at all; (3) our ability to realize the financial and strategic benefits of the transaction; (4) the impact of the announcement of the transaction on Sun Life and InfraRed. These risks all could have an impact on our business relationships (including with future and prospective employees, Clients, distributors and partners) and could have a material adverse effect on our current and future operations, financial conditions and prospects.

The Company does not undertake any obligation to update or revise its forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events, except as required by law.

Management’s Discussion and Analysis                                         Sun Life Financial Inc.    Annual Report 2019     87

CONSOLIDATED

FINANCIAL STATEMENTS

AND NOTES

FINANCIAL REPORTING RESPONSIBILITIES	89
APPOINTED ACTUARY’S REPORT	90
INDEPENDENT AUDITOR’S REPORT	91
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM	94
CONSOLIDATED FINANCIAL STATEMENTS	97
Consolidated Statements of Operations	97
Consolidated Statements of Comprehensive Income (Loss)	98
Consolidated Statements of Financial Position	99
Consolidated Statements of Changes in Equity	100
Consolidated Statements of Cash Flows	101
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS	102
Significant Accounting Policies      Note   1	102
Changes in Accounting Policies      Note   2	111
Acquisitions and Other      Note   3	112
Segmented Information      Note   4	114
Total Invested Assets and Related Net Investment Income      Note   5	116
Financial Instrument Risk Management       Note   6	124
Insurance Risk Management      Note   7	134
Other Assets      Note   8	137
Goodwill and Intangible Assets      Note   9	137
Insurance Contract Liabilities and Investment Contract Liabilities      Note 10	139
Reinsurance      Note 11	145
Other Liabilities      Note 12	146
Senior Debentures and Innovative Capital Instruments      Note 13	147
Subordinated Debt      Note 14	148
Share Capital      Note 15	149
Interests in Other Entities      Note 16	150
Fee Income      Note 17	152
Operating Expenses      Note 18	152
Share-Based Payments      Note 19	152
Income Taxes      Note 20	155
Capital Management      Note 21	157
Segregated Funds      Note 22	158
Commitments, Guarantees and Contingencies      Note 23	159
Related Party Transactions      Note 24	161
Pension Plans and Other Post-Retirement Benefits      Note 25	162
Earnings (Loss) Per Share      Note 26	165
Accumulated Other Comprehensive Income (Loss)      Note 27	166

88    Sun Life Financial Inc.    Annual Report 2019 Consolidated Financial Statements

Financial Reporting Responsibilities

Management is responsible for preparing the Consolidated Financial Statements. This responsibility includes selecting appropriate accounting policies and making estimates and other judgments consistent with International Financial Reporting Standards. The financial information presented elsewhere in the annual report to shareholders is consistent with these Consolidated Financial Statements.

The Board of Directors (“Board”) oversees management’s responsibilities for financial reporting. An Audit Committee of non-management directors is appointed by the Board to review the Consolidated Financial Statements and report to the Board prior to their approval of the Consolidated Financial Statements for issuance to shareholders. Other key responsibilities of the Audit Committee include reviewing the Company’s existing internal control procedures and planned revisions to those procedures, and advising the Board on auditing matters and financial reporting issues.

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

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting, as of December 31, 2019, based on the framework and criteria established in Internal Control – Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2019.

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

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

The Company’s Appointed Actuary, who is a member of management, is appointed by the Board to discharge the various actuarial responsibilities required under the Insurance Companies Act (Canada), and conducts the valuation of the Company’s actuarial liabilities. The role of the Appointed Actuary is described in more detail in Note 10. The report of the Appointed Actuary accompanies these Consolidated Financial Statements.

The Company’s external auditor, Deloitte LLP, Independent Registered Public Accounting Firm, has audited the Company’s internal control over financial reporting as of December 31, 2019, in addition to auditing the Company’s Consolidated Financial Statements for the years ended December 31, 2019 and December 31, 2018. Its reports to the Board and shareholders express unqualified opinions and accompany these Consolidated Financial Statements. Deloitte LLP meets separately with both management and the Audit Committee to discuss the results of its audit.

Dean A. Connor	Kevin D. Strain, CPA, CA
President and Chief Executive Officer	Executive Vice-President and Chief Financial Officer

Toronto, Ontario, Canada

February 12, 2020

Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    89

Appointed Actuary’s Report

THE SHAREHOLDERS AND DIRECTORS OF SUN LIFE FINANCIAL INC.

I have valued the policy liabilities and reinsurance recoverables of Sun Life Financial Inc. and its subsidiaries for its Consolidated Statements of Financial Position at December 31, 2019 and December 31, 2018 and their change in the Consolidated Statements of Operations for the year ended December 31, 2019 in accordance with accepted actuarial practice in Canada, including selection of appropriate assumptions and methods.

In my opinion, the amount of policy liabilities net of reinsurance recoverables makes appropriate provision for all policy obligations and the Consolidated Financial Statements fairly present the results of the valuation.

Kevin Morrissey

Fellow, Canadian Institute of Actuaries

Toronto, Ontario, Canada

February 12, 2020

90    Sun Life Financial Inc.    Annual Report 2019 Appointed Actuary’s Report

Independent Auditor’s Report

To the Shareholders and the Board of Directors of Sun Life Financial Inc.

Opinion

We have audited the consolidated financial statements of Sun Life Financial Inc. (the “Company”), which comprise the consolidated statements of financial position as at December 31, 2019 and 2018, and the consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows for the years then ended, and notes to the consolidated financial statements, including a summary of significant accounting policies (collectively referred to as the “financial statements”).

In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2019 and 2018, and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”).

Basis for Opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards (“Canadian GAAS”). Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in Canada, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Key Audit Matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements for the year ended December 31, 2019. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our audit opinion thereon, and we do not provide a separate opinion on these matters.

Insurance Contract Liabilities - Refer to Notes 1 and 10 to the Financial Statements

Key Audit Matter Description

The Company has significant insurance contract liabilities representing the majority of its total liabilities. Application of different assumptions may result in different measurement of the insurance contract liabilities. There is insurance risk from the uncertainty of product performance due to differences between the actual experience and expected experience. The Company also uses various actuarial models to determine insurance contract liabilities some of which involve high levels of complexity.

While there are many assumptions which management makes, the assumptions with the greatest uncertainty are those related to lapse and other policyholder behaviour. These assumptions required subjective and complex auditor judgment in certain circumstances where (i) there is limited Company and industry experience data, (ii) the historical experience may not be a good indicator of the future, and (iii) the lapse and other policyholder behaviour may be irrational. Auditing of certain actuarial models and lapse and other policyholder behaviour required a high degree of auditor judgment and an increased extent of audit effort, including the need for the integral involvement of actuarial specialists.

How the Key Audit Matter Was Addressed in the Audit

Our audit procedures related to actuarial models and assumptions of lapse and other policyholder behaviour included the following, among others:

• Evaluating the effectiveness of controls over actuarial models and the determination of the lapse and other policyholder behaviour assumptions used in the calculation of insurance contract liabilities as well as access and change management controls over those actuarial models.

• With the assistance of actuarial specialists, testing the reasonableness of key lapse and policyholder behaviour assumptions, by:

• Evaluating management’s methods and assumptions in accordance with actuarial principles and practices under the Canadian actuarial standards of practice.

• Testing experience studies and other inputs used in the determination of the lapse and other policyholder behaviour assumptions.

• Analyzing management’s interpretation of its experience study results, evaluating triggers and drivers for revisions of assumptions, assessing reasonable possible alternative assumptions, and considering industry and other external sources of data, where applicable.

• With the assistance of actuarial specialists, testing the appropriateness of actuarial models used in the estimation process by:

• Calculating an independent estimate of the insurance contract liability for a sample of insurance policies and comparing the results to the Company’s results.

• Testing the accuracy of a sample of actuarial models for changes in key assumptions.

Valuation of Investment Properties - Refer to Notes 1 and 5 to the Financial Statements

Key Audit Matter Description

Investment properties are accounted for at fair value. The fair value of investment properties is generally determined using property valuation models that are based on expected capitalization rates and models that discount expected future net cash flows at current market interest rates reflective of the characteristics, location, and market of each property. Expected future net cash flows include contractual and projected cash flows and forecasted operating expenses, and take into account interest, rental, and occupancy rates derived from market surveys. The estimates of future cash inflows in addition to expected rental income from current leases, include projected income from future leases based on significant assumptions that are consistent with current market conditions.

While there are many assumptions which management makes, the assumptions with the greatest uncertainty are the discount rates, terminal capitalization rates and future rental rates. Performing audit procedures to evaluate valuation models and inputs required a high degree of auditor judgment and an increased extent of audit effort, including the need for the integral involvement of fair value specialists.

Independent Auditor’s Report Sun Life Financial Inc.    Annual Report 2019    91

How the Key Audit Matter Was Addressed in the Audit

Our audit procedures related to valuation models and assumptions including discount rates, terminal capitalization rates, and future rental rates included the following, among others:

• Evaluating the effectiveness of controls over the fair value process for investment properties. These controls include an assessment and approval by senior management of the discount rates, terminal capitalization rates, and future rental rates assumptions used in the calculation of the valuation of investment properties and an assessment of the valuation model used.

• With the assistance of fair value specialists, evaluating on a sample basis the reasonableness of the discount rates, terminal capitalization rates, and future rental rates assumptions and the valuation model by calculating an independent estimate and comparing those to the discount rates, terminal capitalization rates and future rental rates selected by management.

BentallGreenOak Put Option Liability - Refer to Note 3 to the Financial Statements

Key Audit Matter Description

The Company, through its subsidiary Bentall Kennedy group of companies (“Bentall Kennedy”), acquired a 56% interest of GreenOak Real Estate (“GreenOak”) on July 1, 2019, to form BentallGreenOak (“BGO”). The consideration for the acquisition was a combination of cash and shares in Bentall Kennedy. The acquisition involved multiple contractual arrangements including a put option whereby, if exercised, the Company would acquire the remaining outstanding shares in BGO commencing in 2027.

While there are multiple contractual arrangements, the arrangement with the most judgment was the put option liability. The determination of the present value of the put option liability necessitated significant management judgment in selecting inputs related to the future earnings before interest, tax, depreciation and amortization (“EBITDA”) and weighting of forecasted scenarios. Given the nature of the put option liability, which gave rise to complex accounting, performing audit procedures to determine the appropriateness of the accounting required a high degree of specialized accounting knowledge. Performing audit procedures to evaluate the reasonableness of the inputs and the complex accounting required a high degree of auditor judgment and increased extent of effort including the need for the integral involvement of fair value specialists.

How the Key Audit Matter Was Addressed in the Audit

Our audit procedures related to the future EBITDA, weighting of forecasted scenarios and selection of discount rate used to value the put option liability, as well as the complex accounting of the put option liability included the following, among others:

• Evaluating the effectiveness of controls over the review of the appropriateness of the accounting.

• Evaluating the effectiveness of controls over the valuation of the put option liability including controls over the inputs, including future EBITDA, weighting of forecasted scenarios and the selection of discount rate.

• Assessing the reasonableness of management’s forecasts of future EBITDA by comparing the projections to historical results and certain peer companies.

• Examining the contractual arrangements to ensure that the put option liability was accounted for appropriately.

• With the assistance of fair value specialists, evaluating the weighting of forecasted scenarios to assess the reasonableness given the range of possible future outcomes relating to the put option liability.

Other Information

Management is responsible for the other information. The other information comprises:

• Management’s Discussion and Analysis

• The information, other than the financial statements and our auditor’s reports thereon, in the Annual Report.

Our opinion on the financial statements does not cover the other information and we do not and will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated.

We obtained Management’s Discussion and Analysis prior to the date of this auditor’s report. If, based on the work we have performed on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact in this auditor’s report. We have nothing to report in this regard.

The Annual Report is expected to be made available to us after the date of the auditor’s reports. If, based on the work we will perform on this other information, we conclude that there is a material misstatement of this other information, we are required to report that fact to those charged with governance.

Responsibilities of Management and Those Charged with Governance for the Financial Statements

Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so.

Those charged with governance are responsible for overseeing the Company’s financial reporting process.

92    Sun Life Financial Inc.    Annual Report 2019 Independent Auditor’s Report

Auditor’s Responsibilities for the Audit of the Financial Statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Canadian GAAS will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

As part of an audit in accordance with Canadian GAAS, we exercise professional judgment and maintain professional skepticism throughout the audit. We also:

• Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

• Obtain an understanding of internal control relevant to the audit in order to design 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.

• Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management.

• Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may cause the Company to cease to continue as a going concern.

• Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation.

• Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Company to express an opinion on the financial statements. We are responsible for the direction, supervision and performance of the group audit. We remain solely responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards.

The engagement partner on the audit resulting in this independent auditor’s report is William A. Cunningham.

/s/ Deloitte LLP

Chartered Professional Accountants

Licensed Public Accountants

Toronto, Ontario, Canada

February 12, 2020

Independent Auditor’s Report Sun Life Financial Inc.    Annual Report 2019    93

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Sun Life Financial Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated statements of financial position of Sun Life Financial Inc. and subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income (loss), changes in equity and cash flows, for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and its financial performance and its cash flows for each of the two years in the period ended December 31, 2019, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 12, 2020, expressed an unqualified opinion on the Company’s internal control over financial reporting.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Insurance Contract Liabilities - Refer to Notes 1 and 10 to the Financial Statements

Critical Audit Matter Description

The Company has significant insurance contract liabilities representing the majority of its total liabilities. Application of different assumptions may result in different measurement of the insurance contract liabilities. There is insurance risk from the uncertainty of product performance due to differences between the actual experience and expected experience. The Company also uses various actuarial models to determine insurance contract liabilities some of which involve high levels of complexity.

While there are many assumptions which management makes, the assumptions with the greatest uncertainty are those related to lapse and other policyholder behaviour. These assumptions required subjective and complex auditor judgment in certain circumstances where (i) there is limited Company and industry experience data, (ii) the historical experience may not be a good indicator of the future, and (iii) the lapse and other policyholder behaviour may be irrational. Auditing of certain actuarial models and lapse and other policyholder behaviour required a high degree of auditor judgment and an increased extent of audit effort, including the need for the integral involvement of actuarial specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to actuarial models and assumptions of lapse and other policyholder behaviour included the following, among others:

• Evaluating the effectiveness of controls over actuarial models and the determination of the lapse and other policyholder behaviour assumptions used in the calculation of insurance contract liabilities as well as access and change management controls over those actuarial models.

• With the assistance of actuarial specialists, testing the reasonableness of key lapse and policyholder behaviour assumptions, by:

• Evaluating management’s methods and assumptions in accordance with actuarial principles and practices under the Canadian actuarial standards of practice.

• Testing experience studies and other inputs used in the determination of the lapse and other policyholder behaviour assumptions.

• Analyzing management’s interpretation of its experience study results, evaluating triggers and drivers for revisions of assumptions, assessing reasonable possible alternative assumptions, and considering industry and other external sources of data, where applicable.

• With the assistance of actuarial specialists, testing the appropriateness of actuarial models used in the estimation process by:

• Calculating an independent estimate of the insurance contract liability for a sample of insurance policies and comparing the results to the Company’s results.

• Testing the accuracy of a sample of actuarial models for changes in key assumptions.

94    Sun Life Financial Inc.    Annual Report 2019 Report of Independent Registered Public Accounting Firm

Valuation of Investment Properties - Refer to Notes 1 and 5 to the Financial Statements

Critical Audit Matter Description

Investment properties are accounted for at fair value. The fair value of investment properties is generally determined using property valuation models that are based on expected capitalization rates and models that discount expected future net cash flows at current market interest rates reflective of the characteristics, location, and market of each property. Expected future net cash flows include contractual and projected cash flows and forecasted operating expenses, and take into account interest, rental, and occupancy rates derived from market surveys. The estimates of future cash inflows in addition to expected rental income from current leases, include projected income from future leases based on significant assumptions that are consistent with current market conditions.

While there are many assumptions which management makes, the assumptions with the greatest uncertainty are the discount rates, terminal capitalization rates and future rental rates. Performing audit procedures to evaluate valuation models and inputs required a high degree of auditor judgment and an increased extent of audit effort, including the need for the integral involvement of fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to valuation models and assumptions including discount rates, terminal capitalization rates, and future rental rates included the following, among others:

• Evaluating the effectiveness of controls over the fair value process for investment properties. These controls include an assessment and approval by senior management of the discount rates, terminal capitalization rates, and future rental rates assumptions used in the calculation of the valuation of investment properties and an assessment of the valuation model used.

• With the assistance of fair value specialists, evaluating on a sample basis the reasonableness of the discount rates, terminal capitalization rates, and future rental rates assumptions and the valuation model by calculating an independent estimate and comparing those to the discount rates, terminal capitalization rates and future rental rates selected by management.

BentallGreenOak Put Option Liability - Refer to Note 3 to the Financial Statements

Critical Audit Matter Description

The Company, through its subsidiary Bentall Kennedy group of companies (“Bentall Kennedy”), acquired a 56% interest of GreenOak Real Estate (“GreenOak”) on July 1, 2019, to form BentallGreenOak (“BGO”). The consideration for the acquisition was a combination of cash and shares in Bentall Kennedy. The acquisition involved multiple contractual arrangements including a put option whereby, if exercised, the Company would acquire the remaining outstanding shares in BGO commencing in 2027.

While there are multiple contractual arrangements, the arrangement with the most judgment was the put option liability. The determination of the present value of the put option liability necessitated significant management judgment in selecting inputs related to the future earnings before interest, tax, depreciation and amortization (“EBITDA”) and weighting of forecasted scenarios. Given the nature of the put option liability, which gave rise to complex accounting, performing audit procedures to determine the appropriateness of the accounting required a high degree of specialized accounting knowledge. Performing audit procedures to evaluate the reasonableness of the inputs and the complex accounting required a high degree of auditor judgment and increased extent of effort including the need for the integral involvement of fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the future EBITDA, weighting of forecasted scenarios and selection of discount rate used to value the put option liability, as well as the complex accounting of the put option liability included the following, among others:

• Evaluating the effectiveness of controls over the review of the appropriateness of the accounting.

• Evaluating the effectiveness of controls over the valuation of the put option liability including controls over the inputs, including future EBITDA, weighting of forecasted scenarios and the selection of discount rate.

• Assessing the reasonableness of management’s forecasts of future EBITDA by comparing the projections to historical results and certain peer companies.

• Examining the contractual arrangements to ensure that the put option liability was accounted for appropriately.

• With the assistance of fair value specialists evaluating the weighting of forecasted scenarios to assess the reasonableness given the range of possible future outcomes relating to the put option liability.

/s/ Deloitte LLP

Chartered Professional Accountants

Licensed Public Accountants

Toronto, Ontario, Canada

February 12, 2020

We have served as the Company’s auditor since 1875.

Report of Independent Registered Public Accounting Firm Sun Life Financial Inc.    Annual Report 2019    95

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of Sun Life Financial Inc.

Opinion on Internal Control over Financial Reporting

We have audited the internal control over financial reporting of Sun Life Financial Inc. and subsidiaries (the “Company”) as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by COSO.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2019, of the Company and our report dated February 12, 2020, expressed an unqualified opinion on those financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Financial Reporting Responsibilities report. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control over Financial Reporting

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 generally accepted accounting principles. A company’s internal control over financial reporting includes those 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 generally accepted accounting principles, 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.

/s/ Deloitte LLP

Chartered Professional Accountants

Licensed Public Accountants

Toronto, Ontario, Canada

February 12, 2020

96    Sun Life Financial Inc.    Annual Report 2019 Report of Independent Registered Public Accounting Firm

 CONSOLIDATED STATEMENTS OF OPERATIONS

For the years ended December 31, (in millions of Canadian dollars except for per share amounts)	2019			2018
Revenue
Premiums
Gross	$	22,680		$	20,981
Less: Ceded		2,392			2,339
Net premiums		20,288			18,642
Net investment income (loss):
Interest and other investment income (Note 5)		5,855			5,641
Fair value and foreign currency changes on assets and liabilities (Note 5)		7,118			(3,373	)
Net gains (losses) on available-for-sale assets		167			121
Net investment income (loss)		13,140			2,389
Fee income (Note 17)		6,251			5,966
Total revenue		39,679			26,997
Benefits and expenses
Gross claims and benefits paid (Note 10)		17,421			15,986
Increase (decrease) in insurance contract liabilities (Note 10)		11,367			312
Decrease (increase) in reinsurance assets (Note 10)		(28	)		97
Increase (decrease) in investment contract liabilities (Note 10)		65			(31	)
Reinsurance expenses (recoveries) (Note 11)		(2,131	)		(2,021	)
Commissions		2,417			2,339
Net transfer to (from) segregated funds (Note 22)		(437	)		(308	)
Operating expenses (Note 18)		7,033			6,432
Premium taxes		406			375
Interest expense		333			305
Total benefits and expenses		36,446			23,486
Income (loss) before income taxes		3,233			3,511
Less: Income tax expense (benefit) (Note 20)		286			597
Total net income (loss)		2,947			2,914
Less: Net income (loss) attributable to participating policyholders (Note 21)		230			298
Less: Net income (loss) attributable to non-controlling interests		4			–
Shareholders’ net income (loss)		2,713			2,616
Less: Preferred shareholders’ dividends		95			94
Common shareholders’ net income (loss)	$	2,618		$	2,522
Average exchange rates during the reporting periods:
U.S. dollars		1.33			1.30
Earnings (loss) per share (Note 26)
Basic earnings (loss) per share	$	4.42		$	4.16
Diluted earnings (loss) per share	$	4.40		$	4.14
Dividends per common share	$	2.100		$	1.905

The attached notes form part of these Consolidated Financial Statements.

Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    97

 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

For the years ended December 31, (in millions of Canadian dollars)	2019			2018
Total net income (loss)	$	2,947		$	2,914
Other comprehensive income (loss), net of taxes:
Items that may be reclassified subsequently to income:
Change in unrealized foreign currency translation gains (losses):
Unrealized gains (losses)		(564	)		911
Change in unrealized gains (losses) on available-for-sale assets:
Unrealized gains (losses)		489			(313	)
Reclassifications to net income (loss)		(120	)		(89	)
Change in unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses)		33			(10	)
Reclassifications to net income (loss)		(19	)		–
Share of other comprehensive income (loss) in joint ventures and associates:
Unrealized gains (losses)		(9	)		7
Total items that may be reclassified subsequently to income		(190	)		506
Items that will not be reclassified subsequently to income:
Remeasurement of defined benefit plans		(42	)		84
Total items that will not be reclassified subsequently to income		(42	)		84
Total other comprehensive income (loss)		(232	)		590
Total comprehensive income (loss)		2,715			3,504
Less: Participating policyholders’ comprehensive income (loss) (Note 21)		227			303
Less: Non-controlling interests’ comprehensive income (loss)		4			–
Shareholders’ comprehensive income (loss)	$	2,484		$	3,201

 INCOME TAXES INCLUDED IN OTHER COMPREHENSIVE INCOME (LOSS)

For the years ended December 31, (in millions of Canadian dollars)	2019			2018
Income tax benefit (expense):
Items that may be reclassified subsequently to income:
Unrealized foreign currency translation gains (losses)	$	–		$	(56	)
Unrealized gains (losses) on available-for-sale assets		(110	)		58
Reclassifications to net income for available-for-sale assets		31			31
Unrealized gains (losses) on cash flow hedges		(13	)		4
Reclassifications to net income for cash flow hedges		8			–
Total items that may be reclassified subsequently to income		(84	)		37
Items that will not be reclassified subsequently to income:
Remeasurement of defined benefit plans		21			(17	)
Total items that will not be reclassified subsequently to income		21			(17	)
Total income tax benefit (expense) included in other comprehensive income (loss)	$	(63	)	$	20

The attached notes form part of these Consolidated Financial Statements.

98    Sun Life Financial Inc.    Annual Report 2019 Consolidated Financial Statements

 CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

As at December 31, (in millions of Canadian dollars)	2019		2018
Assets
Cash, cash equivalents and short-term securities (Note 5)	$	9,575	$	9,506
Debt securities (Notes 5 and 6)		81,606		74,443
Equity securities (Notes 5 and 6)		4,787		4,634
Mortgages and loans (Notes 5 and 6)		48,222		46,822
Derivative assets (Notes 5 and 6)		1,548		1,112
Other invested assets (Note 5)		5,357		4,830
Policy loans (Note 5)		3,218		3,222
Investment properties (Note 5)		7,306		7,157
Invested assets		161,619		151,726
Other assets (Note 8)		5,216		4,498
Reinsurance assets (Notes 10 and 11)		4,024		4,141
Deferred tax assets (Note 20)		1,455		1,209
Intangible assets (Note 9)		2,083		1,779
Goodwill (Note 9)		5,832		5,412
Total general fund assets		180,229		168,765
Investments for account of segregated fund holders (Note 22)		116,973		103,062
Total assets	$	297,202	$	271,827
Liabilities and equity
Liabilities
Insurance contract liabilities (Note 10)	$	131,184	$	121,923
Investment contract liabilities (Note 10)		3,116		3,164
Derivative liabilities (Notes 5 and 6)		2,040		2,295
Deferred tax liabilities (Note 20)		406		322
Other liabilities (Note 12)		14,937		12,153
Senior debentures (Note 13)		500		1,299
Subordinated debt (Note 14)		3,538		3,039
Total general fund liabilities		155,721		144,195
Insurance contracts for account of segregated fund holders (Note 22)		110,269		96,663
Investment contracts for account of segregated fund holders (Note 22)		6,704		6,399
Total liabilities	$	272,694	$	247,257
Equity
Issued share capital and contributed surplus	$	10,619	$	10,749
Shareholders’ retained earnings and accumulated other comprehensive income		12,779		12,957
Total shareholders’ equity		23,398		23,706
Participating policyholders’ equity		1,091		864
Non-controlling interests’ equity		19		–
Total equity	$	24,508	$	24,570
Total liabilities and equity	$	297,202	$	271,827
Exchange rates at the end of the reporting periods:
U.S. dollars		1.30		1.36

The attached notes form part of these Consolidated Financial Statements.

Approved on behalf of the Board of Directors on February 12, 2020.

Dean A. Connor	Sara Grootwassink Lewis
President and Chief Executive Officer	Director

Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    99

 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

For the years ended December 31, (in millions of Canadian dollars)	2019			2018
Shareholders:
Preferred shares (Note 15)
Balance, beginning and end of year	$	2,257		$	2,257
Common shares (Note 15)
Balance, beginning of year		8,419			8,582
Stock options exercised		28			16
Common shares purchased for cancellation		(158	)		(183	)
Common shares issued as consideration for business acquisition		–			4
Balance, end of year		8,289			8,419
Contributed surplus
Balance, beginning of year		73			72
Share-based payments		5			4
Stock options exercised		(5	)		(3	)
Balance, end of year		73			73
Retained earnings
Balance, beginning of year		11,267			10,305
Adjustment for change in accounting policy (Note 2)		(22	)		(44	)
Balance, beginning of year, after change in accounting policy		11,245			10,261
Net income (loss)		2,713			2,616
Dividends on common shares		(1,236	)		(1,147	)
Dividends on preferred shares		(95	)		(94	)
Common shares purchased for cancellation (Note 15)		(434	)		(458	)
Transfer from participating policyholders’ equity (Note 21)		–			89
Changes attributable to acquisition (Note 3)		(875	)		–
Balance, end of year		11,318			11,267
Accumulated other comprehensive income (loss), net of taxes (Note 27)
Balance, beginning of year		1,690			1,105
Total other comprehensive income (loss) for the year		(229	)		585
Balance, end of year		1,461			1,690
Total shareholders’ equity, end of year	$	23,398		$	23,706
Participating policyholders:
Balance, beginning of year	$	864		$	650
Net income (loss) (Note 21)		230			298
Total other comprehensive income (loss) for the year (Note 27)		(3	)		5
Transfer to retained earnings (Note 21)		–			(89	)
Total participating policyholders’ equity, end of year	$	1,091		$	864
Non-controlling interests:
Balance, beginning of year	$	–		$	–
Changes attributable to acquisition (Note 3)		15			–
Net income (loss)		4			–
Total non-controlling interests’ equity, end of year	$	19		$	–
Total equity	$	24,508		$	24,570

The attached notes form part of these Consolidated Financial Statements.

100    Sun Life Financial Inc.    Annual Report 2019 Consolidated Financial Statements

 CONSOLIDATED STATEMENTS OF CASH FLOWS    

For the years ended December 31, (in millions of Canadian dollars)	2019			2018
Cash flows provided by (used in) operating activities
Income (loss) before income taxes	$	3,233		$	3,511
Adjustments:
Interest expense related to financing activities		249			247
Increase (decrease) in insurance and investment contract liabilities		11,432			281
Decrease (increase) in reinsurance assets		(28	)		97
Realized and unrealized (gains) losses and foreign currency changes on invested assets		(7,285	)		3,252
Sales, maturities and repayments of invested assets		59,162			62,387
Purchases of invested assets		(64,165	)		(65,353	)
Income taxes received (paid)		(698	)		(307	)
Mortgage securitization (Note 5)		264			96
Other operating activities		383			(377	)
Net cash provided by (used in) operating activities		2,547			3,834
Cash flows provided by (used in) investing activities
Net (purchase) sale of property and equipment		(114	)		(85	)
Investment in and transactions with joint ventures and associates (Note 16)		19			(64	)
Dividends received from joint ventures and associates (Note 16)		45			34
Acquisitions, net of cash and cash equivalents (Note 3)(1)		(167	)		–
Other investing activities		(213	)		(165	)
Net cash provided by (used in) investing activities		(430	)		(280	)
Cash flows provided by (used in) financing activities
Increase in (repayment of) borrowed funds		132			(40	)
Issuance of subordinated debt, net of issuance costs (Note 14)		747			–
Redemption of senior debentures and subordinated debt (Notes 13 and 14)		(1,050	)		(400	)
Issuance of common shares on exercise of stock options		23			13
Common shares purchased for cancellation (Note 15)		(592	)		(641	)
Dividends paid on common and preferred shares		(1,318	)		(1,227	)
Payment of lease liabilities		(125	)		–
Interest expense paid		(253	)		(271	)
Net cash provided by (used in) financing activities		(2,436	)		(2,566	)
Changes due to fluctuations in exchange rates		(190	)		250
Increase (decrease) in cash and cash equivalents		(509	)		1,238
Net cash and cash equivalents, beginning of year		7,194			5,956
Net cash and cash equivalents, end of year		6,685			7,194
Short-term securities, end of year		2,860			2,208
Net cash, cash equivalents and short-term securities, end of year (Note 5)	$	9,545		$	9,402

(1) Consists of total cash consideration paid of $192 ($nil in 2018), less cash and cash equivalents acquired of $25 ($nil in 2018).

The attached notes form part of these Consolidated Financial Statements.

Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    101

 Notes to the Consolidated Financial Statements

(Amounts in millions of Canadian dollars except for per share amounts and where otherwise stated. All amounts stated in U.S. dollars are in millions.)

 1. Significant Accounting Policies

Description of Business

Sun Life Financial Inc. (“SLF Inc.”) is a publicly traded company domiciled in Canada and is the holding company of Sun Life Assurance Company of Canada (“Sun Life Assurance”). Both companies are incorporated under the Insurance Companies Act (Canada), and are regulated by the Office of the Superintendent of Financial Institutions, Canada (“OSFI”). SLF Inc. and its subsidiaries are collectively referred to as “us”, “our”, “ours”, “we”, or “the Company”. We are an internationally diversified financial services organization providing savings, retirement and pension products, and life and health insurance to individuals and groups through our operations in Canada, the United States (“U.S.”), Asia, and the United Kingdom (“UK”). We also operate mutual fund and investment management businesses, primarily in Canada, the U.S., and Asia.

Statement of Compliance

We prepared our Consolidated Financial Statements in accordance with International Financial Reporting Standards (“IFRS”) as issued and adopted by the International Accounting Standards Board (“IASB”). Our accounting policies have been applied consistently within our Consolidated Financial Statements.

Basis of Presentation

Our Consolidated Statements of Financial Position are presented in the order of liquidity and each statement of financial position line item includes both current and non-current balances, as applicable.

We have defined our reportable business segments and the amounts disclosed for those segments based on our management structure and the manner in which our internal financial reporting is conducted. Transactions between segments are executed and priced on an arm’s-length basis in a manner similar to transactions with third parties.

The significant accounting policies used in the preparation of our Consolidated Financial Statements are summarized below and are applied consistently by us.

Estimates, Assumptions and Judgments

The application of our accounting policies requires estimates, assumptions and judgments as they relate to matters that are inherently uncertain. We have established procedures to ensure that our accounting policies are applied consistently and that the processes for changing methodologies for determining estimates are controlled and occur in an appropriate and systematic manner.

Use of Estimates and Assumptions

The preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the application of our policies and the reported amounts of assets, liabilities, revenue and expenses. Key sources of estimation uncertainty include the measurement of insurance contract liabilities and investment contract liabilities, determination of fair value, impairment of financial instruments, determination and impairment of goodwill and intangible assets, determination of provisions and liabilities for pension plans, other post-retirement benefits, income taxes, and the determination of fair value of share-based payments. Actual results may differ from our estimates thereby impacting our Consolidated Financial Statements. Information on our use of estimates and assumptions are discussed in this Note.

Judgments

In preparation of these Consolidated Financial Statements, we use judgments to select assumptions and determine estimates as described above. We also use judgment when applying accounting policies and when determining the classification of insurance contracts, investment contracts and service contracts; the substance of whether our relationship with a structured entity, subsidiary, joint venture or associate constitutes control, joint control or significant influence; functional currencies; contingencies; acquisitions; deferred income tax assets; and the determination of cash generating unit (“CGU”).

102    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

Significant estimates and judgments have been made in the following areas and are discussed as noted:

Insurance contract and investment contract assumptions and measurement	Note 1 Insurance Contract Liabilities and Investment Contract Liabilities
	Note 10 Insurance Contract Liabilities and Investment Contract Liabilities
Determination of fair value	Note 1 Basis of Consolidation
	Note 1 Determination of Fair Value
	Note 3 Acquisitions and Other
	Note 5 Total Invested Assets and Related Net Investment Income
Impairment of financial instruments	Note 1 Financial Assets Excluding Derivative Financial Instruments
	Note 6 Financial Instrument Risk Management
Income taxes	Note 1 Income Taxes
	Note 20 Income Taxes
Pension plans	Note 1 Pension Plans and Other Post-Retirement Benefits
	Note 25 Pension Plans and Other Post-Retirement Benefits
Goodwill and intangible assets on acquisition and impairment	Note 1 Goodwill
	Note 1 Intangible Assets
	Note 3 Acquisitions and Other
	Note 9 Goodwill and Intangible Assets
Determination of control for purpose of consolidation	Note 1 Basis of Consolidation
	Note 16 Interests in Other Entities
Share-based payments	Note 19 Share-Based Payments

Basis of Consolidation

Our Consolidated Financial Statements include the results of operations and the financial position of subsidiaries, which includes structured entities controlled by us, after intercompany balances and transactions have been eliminated. Subsidiaries are fully consolidated from the date we obtain control, and deconsolidated on the date control ceases. The acquisition method is used to account for the acquisition of a subsidiary from an unrelated party at the date that control is obtained, with the difference between the consideration transferred and the fair value of the subsidiary’s net identifiable assets acquired recorded as goodwill. Judgment is required to determine fair value of the net identifiable assets acquired in a business combination.

We control an entity when we have power over an entity, exposure to or rights to variable returns from our involvement with an entity, and the ability to affect our returns through our power over an entity. Power exists when we have rights that give us the ability to direct the relevant activities, which are those activities that could significantly affect the entity’s returns. Power can be obtained through voting rights or other contractual arrangements. Judgment is required to determine the relevant activities and which party has power over these activities. When we have power over and variable returns from an entity, including an investment fund that we manage, we also apply significant judgment in determining whether we are acting as a principal or agent. To make this determination, we consider factors such as how much discretion we have regarding the management of the investment fund and the magnitude and extent of variability associated with our interests in the fund. If we determine we are the principal rather than the agent, we would consolidate the assets and liabilities of the fund. Interests held by external parties in investment funds that we consolidate are recorded as third-party interest in consolidated investment funds in Other liabilities. If we lose control of an entity, the assets and liabilities of that entity are derecognized from our Consolidated Statements of Financial Position at the date at which control is lost and any investment retained is remeasured to fair value.

A joint venture exists when SLF Inc., or one of its subsidiaries, has joint control of a joint arrangement and has rights to the net assets of the arrangement. Joint control is the contractually agreed sharing of control and exists only when the decisions about the relevant activities require the unanimous consent of the parties sharing control. Associates are entities over which SLF Inc. or its subsidiaries are able to exercise significant influence. Significant influence is the power to participate in the financial and operating policy decisions of an investee but not have control or joint control over those decisions. Significant influence is generally presumed to exist when SLF Inc. or its subsidiaries holds greater than 20% of the voting power of the investee but does not have control or joint control. The equity method is used to account for our interests in joint ventures and associates. A joint operation exists when SLF Inc., or one of its subsidiaries, has joint control of an arrangement that gives it rights to the assets and obligations for the liabilities of the operation, rather than the net assets of the arrangement. For joint operations, we record our share of the assets, liabilities, revenue and expenses of the joint operation. Judgment is required to determine whether contractual arrangements between multiple parties results in control, joint control or significant influence, with consideration of the relevant activities of the entity, voting rights, representation on boards of directors and other decision-making factors. Judgment is also required to determine if a joint arrangement is a joint venture or joint operation, with consideration of our rights and obligations and the structure and legal form of the arrangement.

Determination of Fair Value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value is measured using the assumptions that market participants would use when pricing an asset or liability. We determine fair value by using quoted prices in active markets for identical or similar assets or liabilities. When quoted prices in active markets are not available, fair value is determined using valuation techniques that maximize the use of observable inputs. When observable valuation inputs are not available, significant judgment is required to determine fair value by assessing the valuation techniques and valuation inputs. The use of alternative valuation techniques or valuation inputs may result in a different fair value. A description of the fair value methodologies, assumptions, valuation techniques, and valuation inputs by type of asset is included in Note 5.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    103

Foreign Currency Translation

Translation of Transactions in Foreign Currencies

The financial results of SLF Inc. and its subsidiaries, joint ventures and associates are prepared in the currency in which they conduct their ordinary course of business, which is referred to as functional currency. Transactions occurring in currencies other than the functional currency are translated to the functional currency using the spot exchange rates at the dates of the transactions.

Monetary assets and liabilities in foreign currencies are translated to the functional currency at the exchange rate at the statement of financial position date. Non-monetary assets and liabilities in foreign currencies that are held at fair value are translated using the exchange rate at the statement of financial position date, while non-monetary assets and liabilities that are measured at historical cost are translated using the exchange rate at the date of the transaction.

The resulting exchange differences from the translation of monetary items and non-monetary items held at fair value, with changes in fair value recorded to income, are recognized in our Consolidated Statements of Operations. For monetary assets classified as available-for-sale (“AFS”), translation differences calculated on amortized cost are recognized in our Consolidated Statements of Operations and other changes in carrying amount are recognized in other comprehensive income (“OCI”). The exchange differences from the translation of non-monetary items classified as AFS are recognized in OCI.

Translation to the Presentation Currency

In preparing our Consolidated Financial Statements, the financial statements of foreign operations are translated from their respective functional currencies to Canadian dollars, our presentation currency. Assets and liabilities are translated at the closing exchange rate at the statement of financial position date, and income and expenses are translated using the average exchange rates. The accumulated gains or losses arising from translation of functional currencies to the presentation currency, net of the effect of any hedges, are included as a separate component of OCI within equity. Upon disposal of a foreign operation that includes loss of control, significant influence or joint control, the cumulative exchange gain or loss related to that foreign operation is recognized in income.

Invested Assets

Financial Assets Excluding Derivative Financial Instruments

Financial assets include cash, cash equivalents and short-term securities, debt securities, equity securities, mortgages and loans, financial assets included in other invested assets and policy loans. Financial assets are designated as financial assets at fair value through profit or loss (“FVTPL”) or AFS assets, or are classified as loans and receivables at initial recognition.

The following table summarizes the financial assets included in our Consolidated Statements of Financial Position and the asset classifications applicable to these assets:

Cash, cash equivalents and short-term securities	FVTPL
Debt securities	FVTPL and AFS
Equity securities	FVTPL and AFS
Mortgages and loans	Loans and receivables
Other invested assets	FVTPL and AFS
Policy loans	Loans and receivables

Mortgages and loans include mortgages, loans and debt securities not quoted in an active market. Financial assets included in Other invested assets include investments in limited partnerships, segregated funds and mutual funds. Cash equivalents are highly liquid instruments with a term to maturity of three months or less, while short-term securities have a term to maturity exceeding three months but less than one year. Policy loans are fully secured by the policy values on which the loans are made. The accounting for each asset classification is described in the following sections.

i) Initial Recognition and Subsequent Measurement

Generally, debt securities, equity securities and other invested assets supporting our insurance contract liabilities or investment contract liabilities measured at fair value are designated as FVTPL, while debt securities, equity securities and other invested assets not supporting our insurance contract liabilities or that are supporting investment contract liabilities are measured at amortized cost or designated as AFS. Mortgages and loans and policy loans are classified as loans and receivables. Financial assets are recognized in the Consolidated Statements of Financial Position on their trade dates, which are the dates that we commit to purchase or sell the assets. Originated mortgages and loans are recognized in the Consolidated Statements of Financial Position on their funding dates.

Financial Assets at Fair Value Through Profit or Loss

Financial assets at FVTPL include financial assets that are held-for-trading (“HFT”), as well as financial assets that have been designated as FVTPL at initial recognition. A financial asset is classified as HFT if it is acquired principally for the purpose of selling in the near term. A financial asset can be designated as FVTPL if it eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring assets or liabilities or recognizing the gains and losses on them on different bases; or if a group of financial assets, financial liabilities or both, is managed and its performance is evaluated on a fair value basis. Cash equivalents and short-term securities have been classified as HFT.

Generally, debt securities, equity securities and other invested assets supporting insurance contract liabilities or investment contract liabilities measured at fair value have been designated as FVTPL. This designation has been made to eliminate or significantly reduce the measurement inconsistency that would arise due to the measurement of the insurance contract or investment contract liabilities, which are based on the carrying value of the assets supporting those liabilities. Because the carrying value of insurance contract liabilities is determined by reference to the assets supporting those liabilities, changes in the insurance contract liabilities generally offset changes in the fair value of debt securities classified as FVTPL, except for changes that are due to impairment. The majority of equity securities and other invested assets classified as FVTPL are held to support products where investment returns are passed through to policyholders and therefore, changes in the fair value of those assets are significantly offset by changes in insurance contract liabilities.

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Financial assets classified as FVTPL are recorded at fair value in our Consolidated Statements of Financial Position and transaction costs are expensed immediately. Changes in fair value as well as realized gains and losses on sale are recorded in Fair value and foreign currency changes on assets and liabilities in our Consolidated Statements of Operations. Interest income earned and dividends received are recorded in Interest and other investment income in our Consolidated Statements of Operations.

Available-for-Sale Financial Assets

Financial assets classified as AFS are recorded at fair value in our Consolidated Statements of Financial Position and transaction costs are capitalized on initial recognition. Transaction costs for debt securities are recognized in income using the effective interest method, while transaction costs for equity securities and other invested assets are recognized in income when the asset is derecognized. Changes in fair value are recorded to unrealized gains and losses in OCI. For foreign currency translation, exchange differences calculated on the amortized cost of AFS debt securities are recognized in income and exchange differences calculated on other changes in carrying amount are recognized in OCI. The exchange differences from the translation of AFS equity securities and other invested assets are recognized in OCI. Interest income earned and dividends received are recorded in Interest and other investment income in our Consolidated Statements of Operations. Net impairment losses and realized gains and losses on the sale of assets classified as AFS are reclassified from accumulated OCI to Net gains (losses) on available-for-sale assets in our Consolidated Statements of Operations.

Loans and Receivables

Loans and receivables are generally carried at amortized cost. Transaction costs for mortgages and loans are capitalized on initial recognition and are recognized in income using the effective interest method. Realized gains and losses on the sale of mortgages and loans, interest income earned, and fee income are recorded in Interest and other investment income in our Consolidated Statements of Operations.

Solely Payments of Principal and Interest (“SPPI”) Disclosures

In September 2016, the IASB issued Amendments to IFRS 4 to allow insurance entities whose predominant activities are to issue contracts within the scope of IFRS 4 an optional temporary exemption from applying IFRS 9 Financial Instruments (“IFRS 9”) (“deferral approach”). We qualify and have elected to take the deferral approach as our activities are predominantly connected with insurance and we will continue to apply IAS 39 Financial Instruments: Recognition and Measurement (“IAS 39”), the existing financial instrument standard.

To enable a comparison to entities applying IFRS 9 we disclose those invested assets that pass the SPPI test, excluding any that are managed and whose performance is evaluated on a fair value basis. Except for Debt securities designated as AFS and Mortgages and loans, our financial assets are managed and their performance is evaluated on a fair value basis. Please refer to Note 5.A.i for the related disclosure as at December 31, 2019 and 2018.

Financial assets that pass the SPPI test are assets with contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

ii) Derecognition

Financial assets are derecognized when our rights to contractual cash flows expire, when we transfer substantially all our risks and rewards of ownership, or when we no longer retain control.

iii) Impairment

Financial assets are assessed for impairment on a quarterly basis. Financial assets are impaired and impairment losses are incurred if there is objective evidence of impairment as a result of one or more loss events and that event has an impact on the estimated future cash flows that can be reliably estimated. Objective evidence of impairment generally includes significant financial difficulty of the issuer, including actual or anticipated bankruptcy or defaults and delinquency in payments of interest or principal or disappearance of an active market for that financial asset. Objective evidence of impairment for an investment in an equity instrument or other invested asset also includes, but is not limited to, the financial condition and near-term prospects of the issuer, including information about significant changes with adverse effects that have taken place in the technological, market, economic, or legal environment in which the issuer operates that may indicate that the carrying amount will not be recovered, and a significant or prolonged decline in the fair value of an equity instrument or other invested asset below its cost. Management exercises considerable judgment in assessing for objective evidence of impairment. Due to the inherent risks and uncertainties in our evaluation of assets or groups of assets for objective evidence of impairment, the actual impairment amount and the timing of the recognition of impairment may differ from management assessment. The impairment assessment process is discussed in Note 6.

Financial Assets at Fair Value Through Profit or Loss

Since financial assets classified as FVTPL are carried at fair value with changes in fair value recorded to income, any reduction in value of the assets due to impairment is already reflected in income. However, the impairment of assets classified as FVTPL generally impacts the change in insurance contract liabilities due to the impact of asset impairment on estimates of future cash flows.

Available-for-Sale Financial Assets

When there is objective evidence that a financial asset classified as AFS is impaired, the loss in accumulated OCI is reclassified to Net gains (losses) on available-for-sale assets in our Consolidated Statements of Operations. Following impairment loss recognition, a debt security continues to be carried at fair value with changes in fair value recorded in OCI, and it is assessed quarterly for further impairment loss or reversal. Subsequent losses on an impaired equity security or other invested asset, including losses relating to foreign currency changes, are reclassified from OCI to income in subsequent reporting periods until the asset is derecognized. Once an impairment loss on a debt security classified as AFS is recorded to income, any reversal of impairment loss through income occurs only when the recovery in fair value is objectively related to an event occurring after the impairment was recognized. Impairment losses on an equity security or other invested asset classified as AFS are not reversed through income.

Loans and Receivables

If an impairment loss on an individual mortgage or loan has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of the estimated future cash flows discounted at the asset’s original effective interest rate. For collateralized financial assets, the present value of the estimated future cash flows reflects the cash flows that may result from foreclosure less costs to sell, whether or not foreclosure is probable. If no evidence of impairment exists for an individually assessed mortgage or loan, it is included in a group of loans with similar credit risk characteristics and collectively assessed for impairment.

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When an impairment loss has been incurred, the carrying amount of the asset is reduced through the use of an allowance account, and the amount of the loss is recognized in income. If the impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the initial impairment charge was recognized, the previous impairment charge is reversed by adjusting the allowance account and the reversal is recognized in income. Interest income is recognized on impaired mortgages and loans using the effective interest rate method and it is based on the estimated future cash flows used to measure the impairment loss. Changes in the allowance account, other than write-offs net of recoveries, are charged against Interest and other investment income in our Consolidated Statements of Operations. Write-offs, net of recoveries, are deducted from the allowance account when there is no realistic prospect of recovery, which is typically not before derecognition of the asset through foreclosure or sale.

Collateral

Cash received (pledged) as collateral is recognized (derecognized) in our Consolidated Statements of Financial Position with corresponding amounts recognized in Other liabilities (Other assets), respectively. All other types of assets received (pledged) as collateral are not recognized (derecognized) in our Consolidated Statements of Financial Position.

Derivative Financial Instruments

All derivative financial instruments are recorded at fair value in our Consolidated Statements of Financial Position. Derivatives with a positive fair value are recorded as Derivative assets while derivatives with a negative fair value are recorded as Derivative liabilities.

The accounting for the changes in fair value of a derivative instrument depends on whether or not it is designated as a hedging instrument for hedge accounting purposes. Changes in (i) fair value of derivatives that are not designated for hedge accounting purposes, which are defined as derivative investments, and (ii) embedded derivatives that are bifurcated, are recorded in Fair value and foreign currency changes on assets and liabilities in our Consolidated Statements of Operations. Income earned or paid on these derivatives is recorded in Interest and other investment income in our Consolidated Statements of Operations. Hedge accounting is applied to certain derivatives to reduce income statement volatility. When certain qualification criteria are met, hedge accounting recognizes the offsetting effects of hedging instruments and hedged items in income or defers the effective portion of changes in fair value of hedging instruments in OCI until there is a recognition event, such as the occurrence of a forecasted transaction or the disposal of an investment in a foreign operation, or hedge accounting is discontinued. All hedging relationships are documented at inception and hedge effectiveness is assessed at inception and on a quarterly basis to determine whether the hedging instruments are highly effective in offsetting changes attributable to the hedged risk in the fair value or cash flows of the hedged items.

Fair Value Hedges

Certain interest rate swaps and foreign currency forwards are designated as hedging instruments in fair value hedges of the interest rate or foreign exchange rate risks associated with AFS assets. Changes in fair value of the derivatives are recorded in Interest and other investment income in our Consolidated Statements of Operations. The change in fair value of the AFS assets related to the hedged risk is reclassified from OCI to income. As a result, ineffectiveness, if any, is recognized in income to the extent that changes in fair value of the derivatives and AFS assets do not offset. Interest income earned and paid on the AFS assets and swaps in the fair value hedging relationships are recorded in Interest and other investment income in our Consolidated Statements of Operations.

Cash Flow Hedges

Certain equity and foreign currency forwards are designated as hedging instruments in cash flow hedges for anticipated payments of awards under certain share-based payment plans and for anticipated foreign currency purchases of foreign operations. Changes in the fair value of derivatives for the effective portion of the hedge are recognized in OCI, while the ineffective portion of the hedge and any items excluded from the hedging relationship, such as the spot-to-forward differential, are recognized in Interest and other investment income in our Consolidated Statements of Operations. A portion of the amount recognized in OCI related to the equity forwards is reclassified to income as a component of Operating expenses as the liabilities for the share-based payment awards are accrued over the vesting period. A portion of the amounts recognized in OCI related to the foreign currency forwards would be reclassified to income upon disposal or impairment of the foreign operations. All amounts recognized in, or reclassified from, OCI are net of related taxes.

Embedded Derivatives

An embedded derivative is a component of a host contract that modifies the cash flows of the host contract in a manner similar to a derivative, according to a specified interest rate, financial instrument price, foreign exchange rate, underlying index or other variable. We are required to separate embedded derivatives from the host contract, if an embedded derivative has economic and risk characteristics that are not closely related to the host contract, meets the definition of a derivative, and the combined contract is not measured at fair value with changes recognized in income. If an embedded derivative is bifurcated for accounting purposes from the host contract, it will be accounted for as a derivative. For further details on embedded derivatives in insurance contracts, see the Insurance Contract Liabilities accounting policy in this Note.

Investment Properties

Investment properties are real estate held to earn rental income, for capital appreciation, or both. Properties held to earn rental income or for capital appreciation that have an insignificant portion that is owner-occupied are classified as investment properties. Properties that do not meet these criteria are classified as property and equipment, included in Other assets as described below. Expenditures related to ongoing maintenance of properties incurred subsequent to acquisition are expensed. Investment properties are initially recognized at cost in our Consolidated Statements of Financial Position. Various costs incurred associated with the acquisition of an investment property are either capitalized or expensed depending on whether or not the acquisition is considered a business combination. Investment properties are subsequently measured at fair value with changes in value recorded to Fair value and foreign currency changes on assets and liabilities in our Consolidated Statements of Operations.

When the use of a property changes from owner-occupied to investment property, any gain arising on the remeasurement of the property to fair value at the date of transfer is recognized in our Consolidated Statements of Operations to the extent that it reverses a previous impairment loss. Any remaining increase is recognized in OCI.

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Other Invested Assets – Non-Financial Assets

Other invested assets also include non-financial assets such as investments in joint ventures and associates, which are accounted for using the equity method. Investments in joint ventures and associates are initially recorded at cost. The investment in joint ventures and associates is increased by our share of capital contributions and for purchases of additional interests and is reduced by distributions received. In addition, subsequent adjustments to the investment are made for our share of net income or loss and our share of OCI. Our share of net income is recorded in Interest and other investment income in our Consolidated Statements of Operations and our share of OCI is recorded in our Consolidated Statements of Comprehensive Income (Loss). Impairment losses on equity method investments are recognized when events or changes in circumstances indicate that they are impaired. The impairment loss recognized is the difference between the carrying amount and the recoverable amount.

Other Assets

Other assets, which are measured at amortized cost, include accounts receivable, investment income due and accrued, deferred acquisition costs, property and equipment, and lessee’s right-of-use assets. Deferred acquisition costs arising from service contracts or from service components of investment contracts are amortized over the expected life of the contracts based on the future expected fees. Owner-occupied properties are amortized to their residual value over 25 to 49 years. Furniture, computers, other office equipment, and leasehold improvements are amortized to their residual value over 2 to 20 years. The right-of-use asset is subsequently depreciated on a straight-line basis over the lease term.

Reinsurance Assets

In the normal course of business, we use reinsurance to limit exposure to large losses. We have a retention policy that requires that such arrangements be placed with well-established, highly-rated reinsurers. Reinsurance assets are measured consistently with the amounts associated with the underlying insurance contracts and in accordance with the terms of each reinsurance contract. Amounts due to or from reinsurers with respect to premiums received or paid claims are included in Other assets and Other liabilities in the Consolidated Statements of Financial Position. Premiums for reinsurance ceded are presented as premiums ceded in the Consolidated Statements of Operations. Reinsurance expenses (recoveries), as presented in our Consolidated Statements of Operations, represent reinsurance expenses and expense recoveries resulting from reinsurance agreements.

Reinsurance assets are subject to impairment testing. If impaired, the carrying value is reduced, and an impairment loss is recognized in Reinsurance expenses (recoveries) in our Consolidated Statements of Operations. Impairment occurs when objective evidence exists (as a result of an event) after the initial recognition of the reinsurance asset indicating that not all amounts due under the terms of the contract will be received, and the impairment can be reliably measured.

Reinsurance assumed is accounted for as an insurance, investment or service contract depending on the underlying nature of the agreement and if it meets the definition of an insurance, investment or service contract. For the accounting for these types of contracts, see the respective policy section in this Note.

Intangible Assets

Intangible assets consist of finite life and indefinite life intangible assets. Finite life intangible assets are amortized on a straight-line basis or using a units-of-production method, over the useful economic lives which are varying periods of up to 40 years. Amortization is charged through operating expenses. The useful lives of finite life intangible assets are reviewed annually, and the amortization is adjusted as necessary. Indefinite life intangibles are not amortized, and are assessed for impairment annually or more frequently if events or changes in circumstances indicate that the asset may be impaired. Impairment is assessed by comparing the carrying values of the indefinite life intangible assets to their recoverable amounts. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. If the carrying values of the indefinite life intangibles exceed their recoverable amounts, these assets are considered impaired, and a charge for impairment is recognized in our Consolidated Statements of Operations. The recoverable amount of intangible assets is determined using various valuation models, which require management to make certain judgments and assumptions that could affect the estimates of the recoverable amount.

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable tangible and intangible assets of the acquired businesses. It is carried at original cost less any impairment subsequently incurred. Goodwill is assessed for impairment annually or more frequently if events or circumstances occur that may result in the recoverable amount of a CGU or a group of CGUs falling below its carrying value. A CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of cash inflows from other groups of assets. We exercise significant judgment in determining our CGUs. The factors considered in determining our CGUs include product cash inflows, product distribution, target markets, and how management monitors and evaluates the operations.

The goodwill balances are allocated to either individual or groups of CGUs that are expected to benefit from the synergies of the business combination. Goodwill impairment is quantified by comparing a CGU’s or a group of CGUs’ carrying value to its recoverable amount, which is the higher of fair value less costs of disposal and value in use. Impairment losses are recognized immediately and cannot be reversed in future periods. Significant judgment is involved in estimating the model inputs used to determine the recoverable amount of our CGUs or group of CGUs, including those for discount rates, capital, the value of new business, expenses, cash flow projections, and market multiples, due to the uncertainty and the forward-looking nature of these inputs. The assumptions may differ from the actual experience, and estimates may change from period to period based on future events or revisions of assumptions. These key assumptions are discussed in Note 9.

Insurance Contract Liabilities

Insurance contracts are contracts under which we accept significant insurance risk from a policyholder by agreeing to compensate the policyholder if a specified uncertain future event adversely affects the policyholder. The presence of significant insurance risk in individual contracts is assessed by reviewing books of contracts with homogeneous risk features. Judgment is required to determine the classification of a contract as an insurance contract, investment contract or a service contract.

As discussed in the Segregated Funds section of this Note, certain insurance contracts under which the policyholder bears the risks associated with the underlying investments are classified as Insurance contracts for account of segregated fund holders in our Consolidated Statements of Financial Position.

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Insurance contract liabilities, including policy benefits payable and provisions for policyholder dividends, are determined in accordance with Canadian accepted actuarial practice and any requirements of OSFI. As confirmed by guidance provided by the Canadian Institute of Actuaries (“CIA”), the current Canadian Asset Liability Method (“CALM”) of valuation of insurance contract liabilities satisfies the IFRS 4 Insurance Contracts (“IFRS 4”) requirements for eligibility for use under IFRS. Under CALM, liabilities are set equal to the statement of financial position value of the assets required to support them.

Some insurance contracts contain discretionary participation features (“DPF”), whereby the policyholder has the right to receive potentially significant additional benefits based on the actual investments and other experience on a block of similar contracts. IFRS allows the non-guaranteed, or participating, elements of such contracts to be classified as either a liability or as equity, depending on the nature of our obligation to the policyholder. The contracts issued by us contain constructive obligations to the policyholder with respect to the DPF of the contracts. We have therefore elected to classify these features as a liability, consistent with accounting treatment under CALM, and in accordance with guidance provided by the CIA.

Derivatives embedded in insurance contracts are treated as separate derivatives and measured at fair value with changes in fair value recognized in income, except when the embedded derivative itself meets the definition of an insurance contract under IFRS, or when the risks and characteristics are closely related to those of the host contracts or when the derivative is the policyholder’s option to surrender an insurance contract for a fixed amount or an amount based on a fixed amount and an interest rate. The derivatives that have not been separated are accounted for as insurance contract liabilities.

Significant judgment is required in determining our liabilities for insurance contracts including the assumptions required for their determination. Application of different assumptions may result in different measurement of the insurance contract liabilities. Actual experience may differ from assumptions, and estimates may change from period to period based on future events or revisions of assumptions. Key assumptions and considerations in choosing assumptions are discussed in Note 10 and sensitivities are discussed in Note 7.

Financial Liabilities

Investment Contract Liabilities

Contracts issued by us that do not transfer significant insurance risk, but do transfer financial risk from the policyholder to us, are financial liabilities and are accounted for as investment contracts. Service components of investment contracts are treated as service contracts. For further details on how service components of investment contracts are treated, see the Service Contracts accounting policy in this Note.

Liabilities for investment contracts without DPF are measured at FVTPL or amortized cost. Contracts recorded at FVTPL are measured at fair value at inception and each subsequent reporting period. Contracts recorded at amortized cost are initially recognized at fair value, less transaction costs directly attributable to the issue of the contract. At each subsequent period, the contracts are measured at amortized cost using the effective interest method. Changes in fair value of investment contract liabilities recorded at FVTPL and amortization on contracts recorded at amortized cost are recorded as an Increase (decrease) in investment contract liabilities in our Consolidated Statements of Operations. Deposits collected from and payments made to contract holders are recorded as an increase and decrease in Investment contract liabilities in our Consolidated Statements of Financial Position. These liabilities are derecognized when the obligation of the contract is discharged, cancelled or expired.

As discussed in the Segregated Funds section of this Note, certain investment contracts under which the policyholder bears the risks associated with the underlying investments are classified as Investment contracts for account of segregated fund holders in the Consolidated Statements of Financial Position. The accounting for investment contracts that contain DPF is described in the Insurance Contract Liabilities section of this Note.

Other Liabilities

Other liabilities, which are measured at amortized cost, include accounts payable, lines of credit, repurchase agreements, accrued expenses and taxes, senior financing, provisions, lessee’s lease liabilities and a deferred payment liability. Liabilities for provisions, other than insurance contract liabilities and investment contract liabilities, are recognized for present legal or constructive obligations as a result of a past event if it is probable that they will result in an outflow of economic resources and the amount can be reliably estimated. The amounts recognized for these provisions are the best estimates of the expenditures required to settle the present obligations or to transfer them to a third party at the statement of financial position date, considering all the inherent risks and uncertainties, as well as the time value of money. These provisions are reviewed as relevant facts and circumstances change.

The lease liabilities are initially measured at the present value of lease payments over the term of the lease using a discount rate that is based on our incremental borrowing rate. Subsequently, the lease liabilities are measured at amortized cost using the effective interest method.

Other liabilities also include the Put option liability, which is measured at fair value. Upon initial recognition, the present value of the put option is calculated using our incremental borrowing rate. The subsequent interest expense recorded using the effective interest method as well as subsequent revisions to the expected exercise price payable for the put option will be recognized in the Consolidated Statements of Operations. If the put option expires unexercised or is cancelled, the carrying value of the financial liability will be released first to non-controlling interests (“NCI”), with excess amounts if any recognized against retained earnings.

Further details on the put option and deferred payment liabilities are included in Note 3.

Senior Debentures and Subordinated Debt

Senior debentures and subordinated debt liabilities are recorded at amortized cost using the effective interest method. Transaction costs are recorded as part of the liability and are recognized in income using the effective interest method. These liabilities are derecognized when the obligation of the contract is discharged, cancelled or expired.

Service Contracts

Contracts issued by us to customers that do not transfer significant insurance risk and do not transfer financial risk from the customer to us, including contracts for investment management service, are classified as service contracts. Service components of investment contracts are also accounted for as service contracts. Fee income earned from these contracts is described in the Premium and Fee Income Recognition accounting policy section of this Note. Deferred acquisition costs are described under the Other Assets accounting policy section of this Note. Where the cost of meeting the obligations of the contract exceed the economic benefits expected to be received under it, a provision is recognized in Other liabilities.

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Segregated Funds

Segregated funds are products for which we issue a contract where the benefit amount is directly linked to the fair value of the investments held in the particular segregated fund. Although the underlying assets are registered in our name and the segregated fund contract holder has no direct access to the specific assets, the contractual arrangements are such that the segregated fund policyholder bears the risks and rewards of the fund’s investment performance. In addition, certain contracts include guarantees from us. We derive fee income from segregated funds, which is included in Fee income in our Consolidated Statements of Operations. Policyholder transfers between general funds and segregated funds are included in Net transfer to (from) segregated funds in our Consolidated Statements of Operations. Deposits to segregated funds are reported as increases in segregated funds liabilities and are not reported as revenues in our Consolidated Statements of Operations.

Investments for Account of Segregated Fund Holders

Investments for account of segregated fund holders are recorded separately from the Total general fund assets in our Consolidated Statements of Financial Position and are carried at fair value. Fair values are determined using quoted market values or, where quoted market values are not available, estimated fair values as determined by us.

Insurance Contracts for Account of Segregated Fund Holders

Insurance contracts for account of segregated fund holders are recorded separately from the Total general fund liabilities in our Consolidated Statements of Financial Position. Insurance contracts under which the segregated fund holders bear the risks associated with the underlying investments are classified as Insurance contracts for account of segregated fund holders. The liabilities reported as Insurance contracts for account of segregated fund holders are measured at the aggregate of the policyholder account balances. Changes in the fair value of the invested assets of the segregated funds are recorded in net realized and unrealized gains (losses) within the segregated fund and are not recorded in our Consolidated Statements of Operations.

Other assets and liabilities associated with these insurance contracts, such as origination costs and the liabilities associated with guarantees provided by us, are included in general fund liabilities in Insurance contract liabilities in our Consolidated Statements of Financial Position.

Investment Contracts for Account of Segregated Fund Holders

Investment contracts for account of segregated fund holders are recorded separately from the Total general fund liabilities in our Consolidated Statements of Financial Position. Investment contracts under which the segregated fund holders bear the risks associated with the underlying investments are classified as Investment contracts for account of segregated fund holders. The liabilities reported as Investment contracts for account of segregated fund holders are measured at the aggregate of the policyholder account balances.

Other liabilities associated with these investment contracts, such as onerous contract provisions required for service components, are included in general fund liabilities in Investment contract liabilities in our Consolidated Statements of Financial Position.

Income Taxes

Current income tax assets and liabilities for the current and prior periods are measured at the amount expected to be recovered from or paid to the taxation authorities. Deferred income tax is provided using the liability method on temporary differences at the statement of financial position date between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes. Current and deferred income tax relating to items recognized in the current or previous period in OCI or directly in equity is accordingly recognized in OCI or equity and not in our Consolidated Statements of Operations. Interest and penalties payable to taxation authorities are recorded in Interest expense and Operating expenses, respectively, in our Consolidated Statements of Operations.

Deferred income tax assets and liabilities are calculated based on income tax rates and laws that are expected to apply when the liability is settled or the asset is realized, which are normally those enacted or considered substantively enacted at our Consolidated Statements of Financial Position dates. Deferred income tax assets are recognized for all deductible temporary differences, carry forward of unused tax credits and unused tax losses to the extent of the probability that future taxable profit will be available against which these assets can be utilized. At each reporting period, we assess all available evidence, both positive and negative, to determine the amount of deferred income tax assets to be recognized. The recognition of deferred income tax assets requires estimates and significant judgment about future events, such as projections of future taxable profits, based on the information available at the reporting date.

The determination of the required provision for current and deferred income taxes requires that we interpret tax legislation in the jurisdictions in which we operate. For each reporting period, our income tax provision reflects our best estimate, based on the information available at the reporting date, of tax positions that are under audit or appeal by relevant tax authorities. To the extent that our estimate of tax positions or the timing of realization of deferred income tax assets or liabilities are not as expected, the provision for income taxes may increase or decrease in the future to reflect the actual experience.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, joint ventures and associates, except where we control the timing of the reversal of the temporary difference and it is apparent that the temporary difference will not reverse in the foreseeable future. No deferred income tax asset or liability is recognized in relation to temporary differences that arise from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, did not affect either the accounting profit or taxable profit or loss. Deferred income tax assets and deferred income tax liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities, the deferred income taxes relate to the same taxable entity and the same taxation authority and we intend either to settle on a net basis, or to realize the asset and settle the liability simultaneously.

In determining the impact of taxes, we are required to comply with Canadian accepted actuarial practice and IFRS. CALM requires that all projected cash flows associated with insurance contract liabilities, including income taxes, be included in the determination of insurance contract liabilities. The insurance contract liabilities are therefore determined including all policy-related income tax effects on a discounted basis, and then adjusted for any related deferred income tax assets and liabilities held in accordance with IFRS. The net result of this adjustment is to leave the discounting effect of the deferred income taxes associated with temporary differences on policy-related tax items in the insurance contract liabilities.

Pension Plans and Other Post-Retirement Benefits

For defined benefit plans, the present value of the defined benefit obligation is calculated by independent actuaries using the projected unit credit method, and actuarial assumptions that represent best estimates of future variables that will affect the ultimate cost of these

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obligations. The discount rate used for our material defined benefit plans is determined with reference to market yields of high-quality corporate bonds that are denominated in the same currency in which the benefits will be paid, and that have terms to maturity approximating the terms of obligations. Plan assets are measured at fair value and are held in separate trustee administered funds or as qualifying insurance contracts. The difference between the fair value of the plan assets and the present value of the defined benefit obligation is recognized on the Consolidated Statements of Financial Position as an asset or liability in Other assets or Other liabilities, respectively.

Costs charged to our Consolidated Statements of Operations include current service cost, any past service costs, any gains or losses from curtailments or settlements, and interest on the net defined benefit liability (asset). Remeasurement of the net defined benefit liability (asset), which includes the impact of changes to the actuarial assumption underlying the liability calculations, liability experience gains or losses, the difference between the return on plan assets and the amount included in the interest on the net defined benefit liability (asset), is reflected immediately in OCI. The calculation of the defined benefit expenses and obligations requires judgment as the recognition is dependent on various actuarial assumptions such as discount rates, health care cost trend rates and projected compensation increases. These key assumptions are discussed in Note 25.

Dividends

Dividends payable to holders of shares of SLF Inc. are recognized in the period in which they are authorized or approved. Dividends that have been reinvested in additional common shares under the Dividend Reinvestment and Share Purchase Plan (“DRIP”) are also reflected as dividends within retained earnings. Where SLF Inc. has issued common shares from treasury under the DRIP, the additional shares have been reflected in common shares.

Premium and Fee Income Recognition

Gross premiums for all types of insurance contracts excluding segregated fund contracts are generally recognized as revenue when due.

Fee income is generated from insurance contracts and service contracts.

Fee income from insurance contracts includes fees from segregated fund contracts, guarantee fees and other fees associated with insurance contracts and is typically recognized as revenue when services are rendered.

Fee income from service contracts represents fees associated with non-insurance contracts with customers and includes Distribution fees, Fund management and other asset-based fees, and Administrative services and other fees. Distribution fees includes fees earned from the distribution of investment products and other intermediary activities. Fund management and other asset-based fees includes fees earned from investment management services. Administrative services and other fees includes fees earned from contract administration and other management services. Fee income from service contracts is typically recognized as revenue when services are rendered at either a point in time or over time. The majority of fee income from service contracts is comprised of variable consideration which is based on a percentage of assets under management or another variable metric and is recognized as revenue when it is highly probable that a significant reversal in the amount of the revenue recognized will not occur.

Share-Based Payments

Stock options of SLF Inc. granted to employees are accounted for as equity-settled share-based payment transactions. The total compensation expense for stock options is computed based on the fair value of the stock option at the date of grant and the estimated number of options expected to vest at the end of the vesting period. The expense is recognized over the vesting period as compensation expense in Operating expenses in our Consolidated Statements of Operations, with an offset to contributed surplus in our Consolidated Statements of Changes in Equity. When options are exercised, new common shares are issued, contributed surplus is reversed and the common shares issued are credited to common shares in our Consolidated Statements of Changes in Equity.

Other share-based payment plans based on the value of SLF Inc.’s common shares are accounted for as cash-settled share-based payment transactions. The total liabilities for these plans are computed based on the estimated number of awards expected to vest at the end of the vesting period. The liabilities are recomputed at the end of each reporting period and are measured at the fair value of the award at that reporting date. The liabilities are accrued and expensed on a straight-line basis over the vesting periods. The liabilities are settled in cash at the end of the vesting period.

Share-based payment awards within MFS Investment Management (“MFS”), which are based on their own shares, are accounted for as cash-settled share-based payment awards. The vested and unvested awards, as well as the shares that have been issued under these plans, are recognized as liabilities because MFS has a practice of purchasing the issued shares from employees after a specified holding period. The total liabilities for these plans are computed based on the estimated number of awards expected to vest at the end of the vesting period. The liabilities are accrued over the vesting period and are measured at fair value at each reporting period with the change in fair value recognized as compensation expense in Operating expenses in our Consolidated Statements of Operations. The liabilities are settled in cash when the shares are purchased from the employees.

Basic and Diluted Earnings Per Share (“EPS”)

Basic EPS is calculated by dividing the common shareholders’ net income by the weighted average number of common shares issued and outstanding.

Diluted EPS adjusts common shareholders’ net income and the weighted average number of common shares for the effects of all dilutive potential common shares under the assumption that convertible instruments are converted and that outstanding options are exercised. Diluted EPS is calculated by dividing the adjusted common shareholders’ net income by the adjusted weighted average number of common shares outstanding. For convertible instruments, common shareholders’ net income is increased by the after-tax expense on the convertible instrument while the weighted average common shares are increased by the number of common shares that would be issued at conversion. For stock options, it is assumed that the proceeds from the exercise of options whose exercise price is less than the average market price of common shares during the period are used to repurchase common shares at the average market price for the period. The difference between the number of common shares issued for the exercise of the dilutive options and the number of common shares that would have been repurchased at the average market price of the common shares during the period is adjusted to the weighted average number of common shares outstanding.

110    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

 2. Changes in Accounting Policies

2.A New and Amended International Financial Reporting Standards Adopted in 2019

2.A.i IFRS 16 Leases (“IFRS 16”)

In January 2016, the IASB issued IFRS 16, which replaces IAS 17 Leases (“IAS 17”) and related interpretations. IFRS 16 sets out the principles for the recognition, measurement, presentation, and disclosure of leases for both lessees and lessors. For lessees, IFRS 16 removes the classification of leases as either operating or financing and requires that all leases be recognized on the statement of financial position, with certain exemptions allowed by this new standard. The accounting for lessors is substantially unchanged. We adopted IFRS 16 on a modified retrospective basis as at January 1, 2019 and recognized transition adjustments in retained earnings. Our accounting policies under IFRS 16 are as follows:

We assess whether a contract is, or contains, a lease at the inception of the contract. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. For leases where we act as the lessee, we recognize a right-of-use asset and a lease liability at the commencement date of the lease. The right-of-use asset is initially measured at cost, which is comprised of the initial amount of the lease liability with certain adjustments, and subsequently depreciated using the straight-line method, with depreciation expense included in Operating expenses in the Consolidated Statements of Operations. The lease liability is initially measured at the present value of lease payments over the term of the lease using a discount rate that is based on our incremental borrowing rate. The discount rate is specific to each lease and is determined by various factors, such as the lease term and currency. The lease term includes the non-cancellable period and the optional period where it is reasonably certain we will exercise or not exercise an extension or termination option, considering various factors that create an economic incentive to do so. Subsequently, the lease liability is measured at amortized cost using the effective interest method, with interest charged to Interest expense in the Consolidated Statements of Operations. Lease liabilities and right-of-use assets are remeasured upon lease modifications.

As a result of the adoption of IFRS 16, we recognized right-of-use assets of $744 and lease liabilities of $880, reported in Other assets and Other liabilities, respectively, on our Consolidated Statements of Financial Position. Together with the de-recognition of deferred balances of $105 previously recognized under IAS 17 and deferred tax impact of $9, the adoption of IFRS 16 reduced opening retained earnings by $22 on an after-tax basis as at January 1, 2019.

On transition to IFRS 16, we applied the practical expedient to use hindsight when determining the lease term of contracts containing extension or termination options. Our weighted-average incremental borrowing rate applied to lease liabilities as at January 1, 2019 was 3.3%. The difference between lease liabilities as at January 1, 2019 of $880 and operating lease commitments as at December 31, 2018 of $1,056 is primarily due to the time value of money.

2.A.ii Other New and Amended IFRS

The following new and amended IFRS are effective for annual periods beginning on or after January 1, 2019, and did not have a material impact on our Consolidated Financial Statements:

In June 2017, the IASB issued IFRIC 23 Uncertainty over Income Tax Treatments (“IFRIC 23”), which was developed by the IFRS Interpretations Committee. IFRIC 23 clarifies how to apply the recognition and measurement requirements in IAS 12 Income Taxes when there is uncertainty over income tax treatments, and requires an entity to determine whether tax treatments should be considered collectively or independently. In addition, IFRIC 23 addresses the assumptions an entity should make about the examination of tax treatments by taxation authorities, as well as how an entity should consider changes in facts and circumstances. IFRIC 23 also provides guidance on how to determine taxable profit (tax loss), tax bases, unused tax losses, unused tax credits, and tax rates, based on whether it is probable that a tax authority will accept an uncertain tax treatment used, or proposed to be used, by an entity in its income tax filings. We adopted IFRIC 23 on a cumulative retrospective basis. Adoption of IFRIC 23 did not have a material impact on our Consolidated Financial Statements.

In October 2017, the IASB issued narrow-scope amendments to IAS 28 Investments in Associates and Joint Ventures. The amendments clarify that long-term interests in an associate or joint venture to which the equity method is not applied should be accounted for following the requirements of IFRS 9. These amendments are required to be applied retrospectively with certain exceptions. As we qualified for and have elected to take the IFRS 9 deferral approach, we will continue to apply IAS 39 to the long-term interests in associates or joint ventures covered by these amendments.

In December 2017, the IASB issued Annual Improvements to IFRSs 2015-2017 Cycle, which includes minor amendments to four IFRS standards. These amendments were applied prospectively.

In February 2018, the IASB issued Plan Amendment, Curtailment or Settlement which amends IAS 19 Employee Benefits (“IAS 19”). Under IAS 19, when an amendment, curtailment or settlement of a defined benefit pension plan occurs, the net defined benefit liability or asset is remeasured. The amendments require an entity to use the updated assumptions from this remeasurement to determine current service cost and net interest for reporting periods after the change to the plan. These amendments were applied to plan amendments, curtailments or settlements occurring on or after January 1, 2019.

2.B New and Amended International Financial Reporting Standards to be Adopted in 2020

The following new and amended IFRS were issued by the IASB and are expected to be adopted by us in 2020:

In March 2018, the IASB issued a revised Conceptual Framework for Financial Reporting (“Conceptual Framework”), which replaces the Conceptual Framework for Financial Reporting issued in 2010. The revised Conceptual Framework includes revised definitions of an asset and a liability, as well as new guidance on measurement, derecognition, presentation and disclosure. The revised Conceptual Framework is effective for annual periods beginning on or after January 1, 2020. We do not expect the adoption of this guideline to have a material impact on our Consolidated Financial Statements.

In October 2018, the IASB issued Definition of a Business, which amends IFRS 3 Business Combinations. The amendments clarify the definition of a business to assist entities in determining whether a transaction represents a business combination or an acquisition of assets. The amendments are effective for annual periods beginning on or after January 1, 2020, to be applied prospectively. We do not expect the adoption of these amendments to have a material impact on our Consolidated Financial Statements.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    111

In October 2018, the IASB issued Definition of Material (Amendments to IAS 1 and IAS 8). The amendments clarify the definition of material and provide guidance to improve consistency in its application in IFRS standards. The amendments are effective for annual periods beginning on or after January 1, 2020. We do not expect the adoption of these amendments to have a material impact on our Consolidated Financial Statements.

In September 2019, the IASB issued the Interest Rate Benchmark Reform, which includes amendments to IFRS 9, IAS 39, and IFRS 7 Financial Instruments: Disclosures. The amendments clarify that entities can continue to apply certain hedge accounting requirements assuming that the interest rate benchmark on which the hedged cash flows and cash flows from the hedging instrument are based will not be altered as a result of interest rate benchmark reform. The amendments are effective for annual periods beginning on or after January 1, 2020. We are currently assessing the impact of adoption on our Consolidated Financial Statements.

2.C New and Amended International Financial Reporting Standards to be Adopted in 2021 or Later

The following new and amended standards were issued by the IASB and are expected to be adopted by us in 2021 or later:

In July 2014, the IASB issued the final version of IFRS 9, which replaces IAS 39. IFRS 9 includes guidance on the classification and measurement of financial instruments, impairment of financial assets, and hedge accounting. Financial asset classification is based on the cash flow characteristics and the business model in which an asset is held. The classification determines how a financial instrument is accounted for and measured. IFRS 9 also introduces an impairment model for financial instruments not measured at fair value through profit or loss that requires recognition of expected losses at initial recognition of a financial instrument and the recognition of full lifetime expected losses if certain criteria are met. In addition, a new model for hedge accounting was introduced to achieve better alignment with risk management activities. This standard is effective for annual periods beginning on or after January 1, 2018. In October 2017, the IASB issued narrow-scope amendments to IFRS 9. The amendments clarify the classification of certain prepayable financial assets and the accounting of financial liabilities following modification. The amendments are effective for annual periods beginning on or after January 1, 2019. However, pursuant to the aforementioned amendments to IFRS 4, we elected the deferral approach permitted under IFRS 4 to continue to apply IAS 39. We are currently assessing the impact that IFRS 9, along with these amendments, will have on our Consolidated Financial Statements.

In May 2017, the IASB issued IFRS 17 Insurance Contracts (“IFRS 17”), which replaces IFRS 4. IFRS 17 establishes the principles for the recognition, measurement, presentation, and disclosure of insurance contracts. IFRS 17 requires entities to measure insurance contract liabilities at their current fulfillment values using one of three measurement models, depending on the nature of the contract. IFRS 17 is effective for annual periods beginning on or after January 1, 2021 and is to be applied retrospectively to each group of insurance contracts unless impracticable. If, and only if, it is impracticable to apply IFRS 17 retrospectively for a group of insurance contracts, an entity shall apply IFRS 17 using a modified retrospective approach or a fair value approach. In June 2019, the IASB issued an exposure draft (“ED”) that proposes targeted amendments to IFRS 17 for public consultation. As part of the ED, the IASB has proposed to defer the effective date by one year to January 1, 2022 as well as extend the deferral option of IFRS 9 for insurers to that same date. The IASB will continue to discuss comments received on the proposals, including comments on the proposed effective date, before finalizing the amendments later in 2020. IFRS 17 will affect how we account for our insurance contracts and how we report our financial performance in our Consolidated Statements of Operations. We are currently assessing the impact that IFRS 17 will have on our Consolidated Financial Statements.

 3. Acquisitions and Other

Acquisition of BentallGreenOak

On July 1, 2019, we acquired 56% of BentallGreenOak (“BGO”), which was the product of the merger of the Bentall Kennedy group of companies (“Bentall Kennedy”) and GreenOak Real Estate (“GreenOak”), a global real estate investment firm. The former GreenOak shareholders hold the remaining interest in BGO. Total consideration of $411 included approximately $192 in cash and 44% of our interest in Bentall Kennedy which, valued on a discounted cash flow basis, represents consideration of $219. The combined entity is reported in our Asset Management business segment.

The fair values of the identifiable assets and liabilities acquired were:

	As at July 1, 2019
Intangible assets	$	238
Net assets		23
Deferred tax liabilities		(48	)
Total identifiable net assets at fair value		213
Non-controlling interests(1)		(339	)
Goodwill arising on acquisition		537
Total consideration	$	411

(1) We have elected to measure NCI at fair value for this acquisition. The fair value was determined by calculating the proportionate share of the present value of future cash flows relating to NCI. Significant assumptions inherent in the valuation of NCI include the estimated after-tax cash flows expected to be received and an assessment of the appropriate discount rate.

The fair values of the identifiable assets and liabilities are subject to refinement and may be retroactively adjusted to reflect new information obtained about facts and circumstances that existed at the acquisition date during the measurement period.

This transaction has two additional components (“Additional components”):

A. We have the option to acquire the remaining outstanding shares in BGO commencing in 2026 (“call option”), and BGO minority shareholders have the option to require us to purchase their shares in 2027 (“put option”).

112    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

B. In addition to our 56% ownership interest in BGO, we have acquired the right to 75% of former GreenOak shareholders’ share of BGO’s earnings for the period from July 2019 to December 2027. Consideration is to be paid in quarterly instalments over that period (“deferred payments”).

The present values of the put option and deferred payments are calculated using our incremental borrowing rate; the subsequent interest expense recorded using the effective interest method will be recognized in the Consolidated Statements of Operations. Subsequent revisions to the expected exercise price payable for the put option will be recognized in the Consolidated Statements of Operations. If the put option expires unexercised or is cancelled, the carrying value of the financial liability will be released first to NCI, with excess amounts if any recognized against Retained earnings. If the call option is exercised, the liabilities relating to the Additional components will be extinguished and recognized against Retained earnings.

The Additional components are financial liabilities. Amounts were initially measured at the present value of $951 for the put option and $467 for the deferred payments in Other liabilities, with a corresponding reduction to NCI, limited to the original amount recorded upon the acquisition of BGO. Excess amounts were recognized against Retained earnings. At the date of acquisition, the impact to our assets, liabilities, and equity is as follows:

As at July 1, 2019	Share purchase			Additional components			Total
Cash consideration	$	(192	)	$	–		$	(192	)
Net assets		23			–			23
Intangible assets		238			–			238
Goodwill(1)		537			–			537
Total assets	$	606		$	–		$	606
Deferred tax liability	$	(48	)	$	–		$	(48	)
Put option liability		–			(951	)		(951	)
Deferred payments liability		–			(467	)		(467	)
Total liabilities	$	(48	)	$	(1,418	)	$	(1,466	)
Non-controlling interests – Bentall Kennedy	$	(171	)(2)	$	171		$	–
Non-controlling interests – GreenOak(3)		(339	)		324			(15	)
Retained earnings		(48	)(2)		923			875
Total equity	$	(558	)	$	1,418		$	860

(1) Goodwill of $537 reflects GreenOak’s non-contractual customer relationships. Approximately $285 of goodwill is tax-deductible.

(2) The aggregate amount of $219 represents the fair value of our interest in Bentall Kennedy transferred as consideration.

(3) The remaining $15 represents specifically identifiable assets where the risks and rewards accrue to the former GreenOak shareholders and are distributed through a separate class of shares.

Acquisitions and Other in Asia

On October 3, 2017, we completed the first stage of our acquisition of the pension business of FWD Life Insurance Company (Bermuda) Limited (“FWD”) for total consideration of approximately $105. The first stage included the acquisition of the Mandatory Provident Fund business and the commencement of an exclusive 15-year distribution agreement with FWD that allows Sun Life Hong Kong Limited to distribute its pension products through FWD’s agency force in Hong Kong. The completion of the second stage of the transaction involves the purchase of the Occupational Retirement Schemes Ordinance business of FWD, and is expected to close in 2020, subject to the receipt of regulatory approvals and satisfaction of customary closing conditions. These transactions will strengthen our position in the Hong Kong pension market and will be reported in our Asia business segment.

On October 17, 2019, we entered into a 15-year bancassurance partnership with Tien Phong Commercial Bank (“TPBank”). TPBank is fast growing with a strong Client focus, and is a digital leader in Vietnam. The new partnership aligns with our strategic priority to be a leader in Asia through distribution excellence. The agreement includes an initial payment of approximately $107, which will be funded with internal resources. The initial payment will be capitalized as an intangible asset and will be amortized over 15 years based on a units-of-production method.

Pending Acquisition

On December 17, 2019, we entered into an agreement with InfraRed Capital Partners (“InfraRed”), a global infrastructure and real estate investment manager, to purchase 80% of the entity and the ability to acquire the remaining interest in the future. InfraRed will form part of our Asset Management business segment. The transaction is expected to close during the first half of 2020, subject to receipt of regulatory approvals and satisfaction of customary closing conditions.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    113

 4. Segmented Information

We have five reportable business segments: Canada, U.S., Asset Management, Asia, and Corporate. Prior to 2019, these business segments were referred to as SLF Canada, SLF U.S., SLF Asset Management, SLF Asia, and Corporate.

These business segments operate in the financial services industry and reflect our management structure and internal financial reporting. Corporate includes the results of our UK business unit and our Corporate Support operations, which include run-off reinsurance operations as well as investment income, expenses, capital, and other items not allocated to our other business groups.

Revenues from our business segments are derived principally from life and health insurance, investment management and annuities, and mutual funds. Revenues not attributed to the strategic business units are derived primarily from Corporate investments and earnings on capital. Transactions between segments are executed and priced at an arm’s-length basis in a manner similar to transactions with third parties.

The expenses in each business segment may include costs or services directly incurred or provided on their behalf at the enterprise level. For other costs not directly attributable to one of our business segments, we use a management reporting framework that uses assumptions, judgments, and methodologies for allocating overhead costs, and indirect expenses to our business segments.

Intersegment transactions consist primarily of internal financing agreements which are measured at fair values prevailing when the arrangements are negotiated. Intersegment investment income consists primarily of interest paid by U.S. to Corporate. Intersegment fee income is primarily asset management fees paid by Canada and Corporate to Asset Management, and product distribution fees paid by Asset Management to Asia. Intersegment transactions are presented in the Consolidation adjustments column in the following tables.

Management considers its external Clients to be individuals and corporations. We are not reliant on any individual Client as none is individually significant to our operations.

114    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

Results by segment for the years ended December 31, are as follows:

	Canada		U.S.			Asset Management		Asia		Corporate			Consolidation adjustments			Total
2019
Gross premiums:
Annuities	$	3,276	$	1		$	–	$	2	$	23		$	–		$	3,302
Life insurance		5,178		1,605			–		2,597		90			–			9,470
Health insurance		5,629		4,232			–		31		16			–			9,908
Total gross premiums		14,083		5,838			–		2,630		129			–			22,680
Less: Ceded premiums		1,488		662			–		222		20			–			2,392
Net investment income (loss)		6,474		2,802			83		2,865		936			(20	)		13,140
Fee income		1,320		86			4,309		531		149			(144	)		6,251
Total revenue		20,389		8,064			4,392		5,804		1,194			(164	)		39,679
Less:
Total benefits and expenses		19,317		7,878			3,229		5,172		1,014			(164	)		36,446
Income tax expense (benefit)		15		28			262		51		(70	)		–			286
Total net income (loss)	$	1,057	$	158		$	901	$	581	$	250		$	–		$	2,947
Less:
Net income (loss) attributable to participating policyholders		174		(5	)		–		61		–			–			230
Net income (loss) attributable to non-controlling interests		–		–			4		–		–			–			4
Shareholders’ net income (loss)	$	883	$	163		$	897	$	520	$	250		$	–		$	2,713
2018
Gross premiums:
Annuities	$	3,261	$	–		$	–	$	1	$	(79	)	$	–		$	3,183
Life insurance		4,796		1,633			–		2,154		94			–			8,677
Health insurance		5,316		3,767			–		24		14			–			9,121
Total gross premiums		13,373		5,400			–		2,179		29			–			20,981
Less: Ceded premiums		1,487		597			–		232		23			–			2,339
Net investment income (loss)		1,942		305			13		76		79			(26	)		2,389
Fee income		1,240		73			4,111		514		154			(126	)		5,966
Total revenue		15,068		5,181			4,124		2,537		239			(152	)		26,997
Less:
Total benefits and expenses		13,497		5,183			2,930		1,919		109			(152	)		23,486
Income tax expense (benefit)		308		(19	)		284		51		(27	)		–			597
Total net income (loss)	$	1,263	$	17		$	910	$	567	$	157		$	–		$	2,914
Less:
Net income (loss) attributable to participating policyholders		321		(35	)		–		12		–			–			298
Shareholders’ net income (loss)	$	942	$	52		$	910	$	555	$	157		$	–		$	2,616

Assets and liabilities by segment are as follows:

	Canada		U.S.		Asset Management		Asia		Corporate		Consolidation adjustments			Total
As at December 31, 2019
Total general fund assets	$	94,909	$	34,711	$	5,666	$	31,285	$	13,930	$	(272	)	$	180,229
Investments for account of segregated fund holders	$	98,758	$	514	$	–	$	6,675	$	11,026	$	–		$	116,973
Total general fund liabilities	$	86,847	$	31,044	$	4,250	$	25,750	$	8,102	$	(272	)	$	155,721
As at December 31, 2018
Total general fund assets	$	86,697	$	34,584	$	4,468	$	28,855	$	14,378	$	(217	)	$	168,765
Investments for account of segregated fund holders	$	85,885	$	491	$	–	$	6,173	$	10,513	$	–		$	103,062
Total general fund liabilities	$	78,946	$	30,671	$	2,396	$	23,692	$	8,707	$	(217	)	$	144,195

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    115

The revenue and assets of our business segments differ from geographic segments primarily due to the geographic segmenting of our Asset Management and Corporate segments.

The following table shows revenue by country for Asset Management and Corporate:

	Asset Management				Corporate
For the years ended December 31,	2019		2018		2019		2018
Revenue:
United States	$	4,139	$	3,945	$	191	$	58
United Kingdom		32		–		903		142
Canada(1)		210		179		93		38
Other countries		11		–		7		1
Total revenue	$	4,392	$	4,124	$	1,194	$	239

(1) Consists of the Canadian operations of Bentall Kennedy and Sun Life Institutional Investments (Canada) Inc. for Asset Management.

The following table shows total assets by country for Asset Management and Corporate:

	Asset Management				Corporate
As at December 31,	2019		2018		2019		2018
Total general fund assets:
United States	$	4,770	$	4,147	$	2,329	$	2,550
United Kingdom		145		–		8,210		8,274
Canada(1)		534		321		3,202		3,384
Other countries		217		–		189		170
Total general fund assets	$	5,666	$	4,468	$	13,930	$	14,378
Investment for account of segregated fund holders:
United Kingdom	$	–	$	–	$	11,026	$	10,513
Total investment for account of segregated fund holders	$	–	$	–	$	11,026	$	10,513

(1) Consists of the Canadian operations of Bentall Kennedy and Sun Life Institutional Investments (Canada) Inc. for Asset Management.

 5. Total Invested Assets and Related Net Investment Income

5.A Fair Value of Invested Assets

5.A.i Carrying Value and Fair Value of Financial Assets

The carrying values and fair values of our financial assets are shown in the following table:

As at	December 31, 2019				December 31, 2018
	Carrying value		Fair value		Carrying value		Fair value
Assets
Cash, cash equivalents and short-term securities	$	9,575	$	9,575	$	9,506	$	9,506
Debt securities – fair value through profit or loss		67,894		67,894		61,402		61,402
Debt securities – available-for-sale(1)		13,712		13,712		13,041		13,041
Equity securities – fair value through profit or loss		4,474		4,474		4,014		4,014
Equity securities – available-for-sale		313		313		620		620
Mortgages and loans(1)		48,222		52,028		46,822		48,434
Derivative assets		1,548		1,548		1,112		1,112
Other invested assets – fair value through profit or loss(2)		3,016		3,016		2,701		2,701
Other invested assets – available-for-sale(2)		813		813		621		621
Policy loans		3,218		3,218		3,222		3,222
Total financial assets(3)	$	152,785	$	156,591	$	143,061	$	144,673

(1) As at December 31, 2019, the fair value of invested assets that have contractual cash flows that qualify as SPPI include $13,602 of Debt securities – AFS ($12,914 as at December 31, 2018), $47,398 of Mortgages and loans supporting insurance contract liabilities ($43,826 as at December 31, 2018), and $4,315 of Mortgages and loans not supporting insurance contract liabilities ($4,410 as at December 31, 2018).

(2) Other invested assets (FVTPL and AFS) include our investments in segregated funds, mutual funds and limited partnerships.

(3) Invested assets on our Consolidated Statements of Financial Position of $161,619 ($151,726 as at December 31, 2018) includes Total financial assets in this table, Investment properties of $7,306 ($7,157 as at December 31, 2018), and Other invested assets – non-financial assets of $1,528 ($1,508 as at December 31, 2018).

116    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

Our mortgages and loans are generally carried at amortized cost. The fair value of mortgages and loans, for disclosure purposes, is determined based on the methodology and assumptions described in Note 5.A.ii. As at December 31, 2019, $41,858 and $10,170 are categorized in Level 2 and Level 3, respectively, of the fair value hierarchy described in this Note ($40,730 and $7,704, respectively, as at December 31, 2018).

Derivative liabilities with a fair value of $2,040 ($2,295 as at December 31, 2018) are also included on the Consolidated Statements of Financial Position.

Policy loans are carried at their unpaid principal balances. The fair value of policy loans, for disclosure purposes, is approximated by their carrying value, as policy loans are fully secured by policy values on which the loans are made and are categorized in Level 2 of the fair value hierarchy.

5.A.ii Fair Value Methodologies and Assumptions

The fair value of government and corporate debt securities is determined using quoted prices in active markets for identical or similar securities. When quoted prices in active markets are not available, fair value is determined using market standard valuation methodologies, which include discounted cash flow analysis, consensus pricing from various broker dealers that are typically the market makers, or other similar techniques. The assumptions and valuation inputs in applying these market standard valuation methodologies are determined primarily using observable market inputs, which include, but are not limited to, benchmark yields, reported trades of identical or similar instruments, broker-dealer quotes, issuer spreads, bid prices, and reference data including market research publications. In limited circumstances, non-binding broker quotes are used.

The fair value of asset-backed securities is determined using quoted prices in active markets for identical or similar securities, when available, or valuation methodologies and valuation inputs similar to those used for government and corporate debt securities. Additional valuation inputs include structural characteristics of the securities, and the underlying collateral performance, such as prepayment speeds and delinquencies. Expected prepayment speeds are based primarily on those previously experienced in the market at projected future interest rate levels. In instances where there is a lack of sufficient observable market data to value the securities, non-binding broker quotes are used.

The fair value of equity securities is determined using quoted prices in active markets for identical securities or similar securities. When quoted prices in active markets are not available, fair value is determined using equity valuation models, which include discounted cash flow analysis and other techniques that involve benchmark comparison. Valuation inputs primarily include projected future operating cash flows and earnings, dividends, market discount rates, and earnings multiples of comparable companies.

The fair value of mortgages and loans is determined by discounting the expected future cash flows using a current market interest rate applicable to financial instruments with a similar yield, credit quality, and maturity characteristics. Valuation inputs typically include benchmark yields and risk-adjusted spreads from current lending activities or loan issuances. The risk-adjusted spreads are determined based on the borrower’s credit and liquidity, as well as term and other loan-specific features. Long-term mortgages and loans are generally categorized in Level 3 of the fair value hierarchy. The significant unobservable input is a portion of these risk-adjusted spreads at or beyond the 20-year point for mortgages and at or beyond the 10-year point for loans.

The fair value of derivative financial instruments depends upon derivative types. The fair value of exchange-traded futures and options is determined using quoted prices in active markets, while the fair value of over-the-counter (“OTC”) derivatives is determined using pricing models, such as discounted cash flow analysis or other market standard valuation techniques, with primarily observable market inputs. Valuation inputs used to price OTC derivatives may include swap interest rate curves, foreign exchange spot and forward rates, index prices, the value of underlying securities, projected dividends, volatility surfaces, and in limited circumstances, counterparty quotes. The fair value of OTC derivative financial instruments also includes credit valuation adjustments to reflect the credit risk of both the derivative counterparty and ourselves as well as the impact of contractual factors designed to reduce our credit exposure, such as collateral and legal rights of offset under master netting agreements. Inputs into determining the appropriate credit valuation adjustments are typically obtained from publicly available information and include credit default swap spreads when available, credit spreads derived from specific bond yields, or published cumulative default experience data adjusted for current trends when credit default swap spreads are not available.

The fair value of other invested assets is determined using quoted prices in active markets for identical securities or similar securities. When quoted prices in active markets are not available, fair value is determined using equity valuation models, which include discounted cash flow analysis and other techniques that involve benchmark comparison. Valuation inputs primarily include projected future operating cash flows and earnings, dividends, market discount rates, and earnings multiples of comparable companies.

The fair value of investment properties is generally determined using property valuation models that are based on expected capitalization rates and models that discount expected future net cash flows at current market interest rates reflective of the characteristics, location, and market of each property. Expected future net cash flows include contractual and projected cash flows and forecasted operating expenses, and take into account interest, rental, and occupancy rates derived from market surveys. The estimates of future cash inflows in addition to expected rental income from current leases, include projected income from future leases based on significant assumptions that are consistent with current market conditions. The future rental rates are estimated based on the location, type, and quality of the properties, and take into account market data and projections at the valuation date. The fair values are typically compared to market-based information for reasonability, including recent transactions involving comparable assets. The methodologies and inputs used in these models are in accordance with real estate industry valuation standards. Valuations are prepared externally or internally by professionally accredited real estate appraisers.

The fair value of short-term securities is approximated by their carrying amount, adjusted for credit risk where appropriate.

The fair value of investments for account of segregated fund holders is determined using quoted prices in active markets or independent valuation information provided by investment managers. The fair value of direct investments within investments for account of segregated fund holders, such as short-term securities and government and corporate debt securities, is determined according to valuation methodologies and inputs described above in the respective asset type sections.

The methodologies and assumptions for determining the fair values of investment contract liabilities are included in Note 10.B.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    117

5.A.iii Fair Value Hierarchy

We categorize our assets and liabilities carried at fair value, based on the priority of the inputs to the valuation techniques used to measure fair value, into a three-level fair value hierarchy as follows:

Level 1: Fair value is based on the unadjusted quoted prices for identical assets or liabilities in an active market. The types of assets and liabilities classified as Level 1 generally include cash and cash equivalents, certain U.S. government and agency securities, exchange-traded equity securities, and certain segregated and mutual fund units held for account of segregated fund holders.

Level 2: Fair value is based on quoted prices for similar assets or liabilities traded in active markets, or prices from valuation techniques that use significant observable inputs, or inputs that are derived principally from or corroborated with observable market data through correlation or other means. The types of assets and liabilities classified as Level 2 generally include Canadian federal, provincial and municipal government, other foreign government and corporate debt securities, certain asset-backed securities, OTC derivatives, and certain segregated and mutual fund units held for account of segregated fund holders.

Level 3: Fair value is based on valuation techniques that require one or more significant inputs that are not based on observable market inputs. These unobservable inputs reflect our expectations about the assumptions market participants would use in pricing the asset or liability. The types of assets and liabilities classified as Level 3 generally include certain corporate bonds, certain other invested assets, investment properties and the Put option liability.

118    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

Our assets and liabilities that are carried at fair value on a recurring basis by hierarchy level are as follows:

As at	December 31, 2019								December 31, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Cash, cash equivalents and short-term securities	$	9,044	$	531	$	–	$	9,575	$	8,926	$	580	$	–	$	9,506
Debt securities – fair value through profit or loss		1,641		66,005		248		67,894		1,253		59,776		373		61,402
Debt securities – available-for-sale		1,363		12,299		50		13,712		1,513		11,485		43		13,041
Equity securities – fair value through profit or loss		1,868		2,418		188		4,474		1,967		1,845		202		4,014
Equity securities – available-for-sale		152		126		35		313		398		186		36		620
Derivative assets		20		1,528		–		1,548		27		1,085		–		1,112
Other invested assets		1,000		384		2,445		3,829		898		183		2,241		3,322
Investment properties		–		–		7,306		7,306		–		–		7,157		7,157
Total invested assets measured at fair value	$	15,088	$	83,291	$	10,272	$	108,651	$	14,982	$	75,140	$	10,052	$	100,174
Investments for account of segregated fund holders		26,380		90,044		549		116,973		24,705		76,761		1,596		103,062
Total assets measured at fair value	$	41,468	$	173,335	$	10,821	$	225,624	$	39,687	$	151,901	$	11,648	$	203,236
Liabilities
Investment contract liabilities	$	–	$	–	$	2	$	2	$	–	$	–	$	3	$	3
Derivative liabilities		14		2,026		–		2,040		11		2,284		–		2,295
Put option liability		–		–		956		956		–		–		–		–
Total liabilities measured at fair value	$	14	$	2,026	$	958	$	2,998	$	11	$	2,284	$	3	$	2,298
Debt securities – fair value through profit or loss consist of the following:
As at	December 31, 2019								December 31, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Canadian federal government	$	–	$	3,875	$	15	$	3,890	$	–	$	3,815	$	15	$	3,830
Canadian provincial and municipal government		–		13,811		15		13,826		–		11,852		14		11,866
U.S. government and agency		1,641		106		1		1,748		1,253		125		2		1,380
Other foreign government		–		5,172		9		5,181		–		4,895		34		4,929
Corporate		–		37,508		173		37,681		–		34,665		205		34,870
Asset-backed securities:
Commercial mortgage-backed securities		–		1,753		6		1,759		–		1,464		3		1,467
Residential mortgage-backed securities		–		2,176		–		2,176		–		1,961		–		1,961
Collateralized debt obligations		–		157		–		157		–		143		–		143
Other		–		1,447		29		1,476		–		856		100		956
Total debt securities – fair value through profit or loss	$	1,641	$	66,005	$	248	$	67,894	$	1,253	$	59,776	$	373	$	61,402
Debt securities – available-for-sale consist of the following:
As at	December 31, 2019								December 31, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Canadian federal government	$	–	$	2,556	$	–	$	2,556	$	–	$	1,746	$	–	$	1,746
Canadian provincial and municipal government		–		1,139		–		1,139		–		1,199		–		1,199
U.S. government and agency		1,363		–		–		1,363		1,513		14		–		1,527
Other foreign government		–		735		1		736		–		716		1		717
Corporate		–		5,039		45		5,084		–		4,971		42		5,013
Asset-backed securities:
Commercial mortgage-backed securities		–		777		–		777		–		766		–		766
Residential mortgage-backed securities		–		362		–		362		–		386		–		386
Collateralized debt obligations		–		730		–		730		–		804		–		804
Other		–		961		4		965		–		883		–		883
Total debt securities – available-for-sale	$	1,363	$	12,299	$	50	$	13,712	$	1,513	$	11,485	$	43	$	13,041

During 2019 and 2018, we did not have any significant transfers between Level 1 and Level 2.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    119

The following table provides a reconciliation of the beginning and ending balances for assets and liabilities that are categorized in Level 3:

For the year ended	Debt securities – fair value through profit or loss			Debt securities – available-for- sale			Equity securities – fair value through profit or loss			Equity securities – available-for- sale			Other invested assets			Investment properties			Total invested assets measured at fair value			Investments for account of segregated fund holders			Total assets measured at fair value			Put option liability
December 31, 2019
Beginning balance	$	373		$	43		$	202		$	36		$	2,241		$	7,157		$	10,052		$	1,596		$	11,648		$	–
Acquisitions		–			–			–			–			13			–			13			–			13			951
Included in net income(1)(2)(3)		28			–			(2	)		(23	)		(80	)		238			161			45			206			11
Included in OCI(2)		–			4			–			2			13			–			19			–			19			–
Purchases		85			35			5			22			521			689			1,357			152			1,509			–
Sales / Payments		(49	)		–			(9	)		–			(122	)		(701	)		(881	)		(59	)		(940	)		–
Settlements		(40	)		–			–			–			–			–			(40	)		(1	)		(41	)		–
Transfers into Level 3(4)		15			–			–			–			–			–			15			–			15			–
Transfers (out) of Level 3(4)(5)		(159	)		(31	)		(4	)		–			(110	)		–			(304	)		(1,178	)		(1,482	)		–
Foreign currency translation(6)		(5	)		(1	)		(4	)		(2	)		(31	)		(77	)		(120	)		(6	)		(126	)		(6	)
Ending balance	$	248		$	50		$	188		$	35		$	2,445		$	7,306		$	10,272		$	549		$	10,821		$	956
Gains (losses) included in earnings relating to instruments still held at the reporting date(1)	$	4		$	–		$	(3	)	$	–		$	(78	)	$	272		$	195		$	25		$	220		$	–
December 31, 2018
Beginning balance	$	417		$	136		$	167		$	38		$	1,721		$	7,067		$	9,546		$	1,154		$	10,700		$	–
Included in net income(1)(2)(3)		(4	)		–			9			–			69			441			515			29			544			–
Included in OCI(2)		–			(5	)		–			(8	)		(9	)		–			(22	)		–			(22	)		–
Purchases		164			140			19			4			644			621			1,592			430			2,022			–
Sales / Payments		(49	)		(6	)		–			(1	)		(227	)		(1,113	)		(1,396	)		(31	)		(1,427	)		–
Settlements		(21	)		(4	)		–			(1	)		–			–			(26	)		(1	)		(27	)		–
Transfers into Level 3(4)		12			1			–			1			–			–			14			4			18			–
Transfers (out) of Level 3(4)		(159	)		(221	)		–			–			–			–			(380	)		(5	)		(385	)		–
Foreign currency translation(6)		13			2			7			3			43			141			209			16			225			–
Ending balance	$	373		$	43		$	202		$	36		$	2,241		$	7,157		$	10,052		$	1,596		$	11,648		$	–
Gains (losses) included in earnings relating to instruments still held at the reporting date(1)	$	5		$	–		$	9		$	–		$	69		$	331		$	414		$	27		$	441		$	–

(1) Included in Net investment income (loss) for Total invested assets measured at fair value in our Consolidated Statements of Operations.

(2) Total gains and losses in net income (loss) and OCI are calculated assuming transfers into or out of Level 3 occur at the beginning of the period. For an asset or liability that transfers into Level 3 during the reporting period, the entire change in fair value for the period is included in the table above. For transfers out of Level 3 during the reporting period, the change in fair value for the period is excluded from the table above.

(3) Investment properties included in net income is comprised of fair value changes on investment properties of $305 ($529 in 2018), net of amortization of leasing commissions and tenant inducements of $67 ($88 in 2018).

(4) Transfers into Level 3 occur when the inputs used to price the assets and liabilities lack observable market data, and as a result, no longer meet the Level 1 or 2 definitions at the reporting date. Transfers out of Level 3 occur when the pricing inputs become more transparent and satisfy the Level 1 or 2 criteria and are primarily the result of observable market data being available at the reporting date, thus removing the requirement to rely on inputs that lack observability.

(5) An update of certain specific criteria used to determine the leveling classification of the financial instruments was made in 2019 to align with industry practice. This resulted in transfers out of Level 3, including $1,178 for Investments for account of segregated fund holders as well as $110 for Other invested assets, and transferred into Level 2 based on the availability of observable inputs and other criteria.

(6) Foreign currency translation relates to the foreign exchange impact of translating Level 3 assets and liabilities of foreign subsidiaries from their functional currencies to Canadian dollars.

Unobservable Inputs and Sensitivity for Level 3 Assets and Liabilities

Our assets and liabilities categorized in Level 3 of the fair value hierarchy are primarily Investment properties, Debt securities, Other invested assets and the Put option liability.

The fair value of Investment properties is determined by using the discounted cash flow methodology as described in Note 5.A.ii. The key unobservable inputs used in the valuation of investment properties as at December 31, 2019 include the following:

• Estimated rental value: The estimated rental value is based on contractual rent and other local market lease transactions, net of reimbursable operating expenses. An increase (decrease) in the estimated rental value would result in a higher (lower) fair value. The estimated rental value varies depending on the property types, which include retail, office, and industrial properties. The estimated rental value (in dollars, per square foot, per annum) ranges from $12.00 to $76.00 for retail and office properties and from $3.00 to $15.00 for industrial properties.

• Rental growth rate: The rental growth rate is typically estimated based on expected market behaviour, which is influenced by the type of property and geographic region of the property. An increase (decrease) in the rental growth rate would result in a higher (lower) fair value. The rental growth rate (per annum) ranges from 0.00% to 3.00%, however the one- to two-year short-term rent curve is either below or above this range for select properties.

• Long-term vacancy rate: The long-term vacancy rate is typically estimated based on expected market behaviour, which is influenced by the type of property and geographic region of the property. An increase (decrease) in the long-term vacancy rate would result in a lower (higher) fair value. The long-term vacancy rate ranges from 2.00% to 10.00%.

• Discount rate: The discount rate is derived from market activity across various property types and geographic regions and is a reflection of the expected rate of return to be realized on the investment over the next 10 years. An increase (decrease) in the discount rate would result in a lower (higher) fair value. The discount rate ranges from 4.00% to 10.25%.

• Terminal capitalization rate: The terminal capitalization rate is derived from market activity across various property types and geographic regions and is a reflection of the expected rate of return to be realized on the investment over the remainder of its life after the 10-year period. An increase (decrease) in the terminal capitalization rate would result in a lower (higher) fair value. The terminal capitalization rate ranges from 4.25% to 8.75%.

120    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

Changes in the estimated rental value are positively correlated with changes in the rental growth rate. Changes in the estimated rental value are negatively correlated with changes in the long-term vacancy rate, the discount rate, and the terminal capitalization rate.

Our Debt securities categorized in Level 3, which are included in Debt securities – FVTPL and Debt securities – AFS in the Level 3 roll forward table, consist primarily of corporate bonds. The fair value of these corporate bonds is generally determined using broker quotes that cannot be corroborated with observable market transactions. Significant unobservable inputs for these corporate bonds would include issuer spreads, which are comprised of credit, liquidity, and other security-specific features of the bonds. An increase (decrease) in these issuer spreads would result in a lower (higher) fair value. Due to the unobservable nature of these broker quotes, we do not assess whether applying reasonably possible alternative assumptions would have an impact on the fair value of the Level 3 corporate bonds. The majority of our debt securities categorized in Level 3 are FVTPL assets supporting insurance contract liabilities. Changes in the fair value of these assets supporting insurance contract liabilities are largely offset by changes in the corresponding insurance contract liabilities under CALM. As a result, though using reasonably possible alternative assumptions may have an impact on the fair value of the Level 3 debt securities, it would not have a significant impact on our Consolidated Financial Statements.

The Other invested assets categorized in Level 3, which are included in Other invested assets – FVTPL and Other invested assets – AFS in the Level 3 roll forward table, consists primarily of limited partnership investments. The fair value of our limited partnership investments is based on net asset value (“NAV”) provided by management of the limited partnership investments. Based on the unobservable nature of these NAVs, we do not assess whether applying reasonably possible alternative assumptions would have an impact on the fair value of the Level 3 limited partnership investments.

The fair value of the Put option liability related to the BGO acquisition is determined by using the discounted cash flow methodology. After initial recognition, the discount rate will remain unchanged. The Put option liability categorized in Level 3 represents the present value of the estimated price we would pay to acquire the remaining outstanding shares in BGO if the put option is exercised by the BGO minority shareholders. The fair value of this liability is based on the average earnings before income tax, depreciation and amortization (“EBITDA”) for the preceding two years before the option’s exercise date and an EBITDA multiple in accordance with the put agreement. Changes in the EBITDA multiple are positively correlated with changes in EBITDA. A change in EBITDA would impact the fair value of the Put option liability and our net income (loss).

Sensitivity Analysis

The following table represents the sensitivity analysis of key assumptions relating to the Put option liability for 2019:

Change in EBITDA	10% decrease		10% increase
Potential impact on net income (loss)	$	130	$	(141	)

Valuation Process for Level 3 Assets and Liabilities

Our assets and liabilities categorized in Level 3 of the fair value hierarchy are primarily Investment properties, Debt securities, limited partnership investments included in Other invested assets, and the Put option liability. Our valuation processes for these assets are as follows:

The fair value of investment properties are based on the results of appraisals performed annually and reviewed quarterly for material changes. The valuation methodology used to determine the fair value is in accordance with the standards of the Appraisal Institute of Canada, the U.S., and the UK. Investment properties are appraised externally at least once every three years. Investment properties not appraised externally in a given year are reviewed by qualified appraisers. A management committee, including investment professionals, reviews the fair value of investment properties for overall reasonability.

The fair value of Debt securities is generally obtained by external pricing services. We obtain an understanding of inputs and valuation methods used by external pricing services. When fair value cannot be obtained from external pricing services, broker quotes, or internal models subject to detailed review and validation processes are used. The fair value of debt securities is subject to price validation and review procedures to ensure overall reasonability.

The fair value of limited partnership investments, included in Other invested assets, is based on NAV. The financial statements used in calculating the NAV are generally audited annually. We review the NAV of the limited partnership investments and perform analytical and other procedures to ensure the fair value is reasonable.

The fair value of the Put option liability is mainly based on the forecasted EBITDA of BGO at various multiples as stipulated in the put agreement. The financial results and forecasted EBITDA of BGO are reviewed annually, and we perform analytical procedures to ensure the fair value is reasonable.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    121

5.B Interest and Other Investment Income

Interest and other investment income presented in our Consolidated Statements of Operations consist of the following:

For the years ended December 31,	2019			2018
Interest income:
Cash, cash equivalents and short-term securities	$	164		$	131
Debt securities – fair value through profit or loss		2,395			2,312
Debt securities – available-for-sale		411			384
Mortgages and loans		2,208			2,050
Derivative investments		30			45
Policy loans		188			175
Total interest income		5,396			5,097
Equity securities – dividends on fair value through profit or loss		137			160
Equity securities – dividends on available-for-sale		8			14
Investment properties rental income(1)		575			594
Investment properties expenses		(252	)		(259	)
Other income		196			242
Investment expenses and taxes		(205	)		(207	)
Total interest and other investment income	$	5,855		$	5,641

(1) Includes operating lease rental income from investment properties.

5.C Fair Value and Foreign Currency Changes on Assets and Liabilities

Fair value and foreign currency changes on assets and liabilities presented in our Consolidated Statements of Operations consist of the following:

For the years ended December 31,	2019			2018
Fair value change:
Cash, cash equivalents and short-term securities	$	(2	)	$	8
Debt securities		5,686			(2,704	)
Equity securities		629			(401	)
Derivative investments		772			(1,295	)
Other invested assets		77			16
Total change in fair value through profit or loss assets and liabilities		7,162			(4,376	)
Fair value changes on investment properties		305			529
Foreign exchange gains (losses)(1)		(349	)		446
Realized gains (losses) on property and equipment(2)		–			28
Fair value and foreign currency changes on assets and liabilities	$	7,118		$	(3,373	)

(1) Primarily arises from the translation of foreign currency denominated AFS monetary assets and mortgage and loans. Any offsetting amounts arising from foreign currency derivatives are included in the fair value change on derivative investments.

(2) In 2018, we sold and leased back a property in Waterloo, Ontario. The transaction qualified as a sale and operating lease and as a result, we recognized a gain of $28.

5.D Cash, Cash Equivalents and Short-Term Securities

Cash, cash equivalents and short-term securities presented in our Consolidated Statements of Financial Position and Net cash, cash equivalents and short-term securities presented in our Consolidated Statements of Cash Flows consist of the following:

As at December 31,	2019		2018
Cash	$	1,656	$	2,089
Cash equivalents		5,059		5,209
Short-term securities		2,860		2,208
Cash, cash equivalents and short-term securities		9,575		9,506
Less: Bank overdraft, recorded in Other liabilities		30		104
Net cash, cash equivalents and short-term securities	$	9,545	$	9,402

122    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

5.E Derivative Financial Instruments and Hedging Activities

The fair values of derivative financial instruments by major class of derivatives are as follows:

As at December 31,	2019					2018
	Fair value					Fair value
	Assets		Liabilities			Assets		Liabilities
Interest rate contracts	$	1,198	$	(517	)	$	922	$	(440	)
Foreign exchange contracts		242		(1,516	)		130		(1,820	)
Other contracts		108		(7	)		60		(35	)
Total derivatives	$	1,548	$	(2,040	)	$	1,112	$	(2,295	)

The following table presents the fair values of derivative assets and liabilities categorized by type of hedge for accounting purposes and derivative investments:

As at December 31,	2019							2018
	Total notional amount		Fair value					Total notional amount		Fair value
			Assets		Liabilities					Assets		Liabilities
Derivative investments(1)	$	60,707	$	1,517	$	(1,831	)	$	58,268	$	1,101	$	(2,134	)
Fair value hedges		616		–		(208	)		779		–		(153	)
Cash flow hedges		808		31		(1	)		151		11		(8	)
Total derivatives	$	62,131	$	1,548		$    (2,040)		$	59,198	$	1,112		$    (2,295)

(1) Derivative investments are derivatives that have not been designated as hedges for accounting purposes.

We did not have any net investment hedges in 2019 or 2018.

Hedge ineffectiveness recognized in Interest and other investment income consists of the following:

For the years ended December 31,	2019			2018
Fair value hedging ineffectiveness:
Gains (losses) on the hedged items attributable to the hedged risk	$	71		$	(41	)
Gains (losses) on the hedging derivatives		(64	)		40
Net ineffectiveness on fair value hedges	$	7		$	(1	)

For cash flow hedges, we had hedge ineffectiveness of $1 in 2019 ($1 in 2018). We expect to reclassify a gain of $7 from accumulated OCI to net income within the next 12 months that relates to cash flow hedges of anticipated award payments under certain share-based payment plans that are expected to occur in 2020, 2021 and 2022. The reclassification of accumulated OCI to income relating to these foreign currency forwards occurs upon disposal or impairment of the foreign operation.

5.F Transfers of Financial Assets

We enter into transactions, including mortgage securitization, repurchase agreements and securities lending, where we transfer financial assets while retaining the risks and rewards of ownership of the assets. These transferred financial assets are not derecognized and remain on our Consolidated Statements of Financial Position. The carrying value of the transferred assets and the associated liabilities are described in the sections below.

5.F.i Mortgage Securitization

We securitize certain insured fixed-rate commercial mortgages through the creation of mortgage-backed securities under the National Housing Act Mortgage-Backed Securities (“NHA MBS”) Program sponsored by the Canada Mortgage and Housing Corporation (“CMHC”). The NHA MBS are then sold to Canada Housing Trust, a government-sponsored security trust that issues securities to third-party investors under the Canadian Mortgage Bond (“CMB”) program. The securitization of these assets does not qualify for derecognition as we have not transferred substantially all of the risks and rewards of ownership. Specifically, we continue to be exposed to pre-payment and interest rate risk associated with these assets. There are no expected credit losses on the securitized mortgages, as the mortgages were already insured by the CMHC prior to securitization. These assets continue to be recognized as Mortgages and loans in our Consolidated Statements of Financial Position. Proceeds from securitization transactions are recognized as secured borrowings and included in Other liabilities in our Consolidated Statements of Financial Position.

Receipts of principal on the securitized mortgages are deposited into a principal reinvestment account (“PRA”) to meet our repayment obligation upon maturity under the CMB program. The assets in the PRA are typically comprised of cash and cash equivalents and certain asset-backed securities. We are exposed to reinvestment risk due to the amortizing nature of the securitized mortgages relative to our repayment obligation for the full principal amount due at maturity. We mitigate this reinvestment risk using interest rate swaps.

The carrying value and fair value of the securitized mortgages as at December 31, 2019 are $1,587 and $1,592, respectively ($1,328 and $1,318, respectively, as at December 31, 2018). The carrying value and fair value of the associated liabilities as at December 31, 2019 are $1,715 and $1,734, respectively ($1,453 and $1,446, respectively, as at December 31, 2018). The carrying value of asset-backed securities in the PRA as at December 31, 2019 is $124 ($124 as at December 31, 2018). There are no cash and cash equivalents in the PRA as at December 31, 2019 and 2018.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    123

The fair value of the secured borrowings from mortgage securitization is based on the methodologies and assumptions for asset-backed securities described in Note 5.A.ii. The fair value of these liabilities is categorized in Level 2 of the fair value hierarchy as at December 31, 2019 and 2018.

5.F.ii Repurchase Agreements

We enter into repurchase agreements for operational funding and liquidity purposes. Repurchase agreements have maturities ranging from 8 to 365 days, averaging 87 days, and bear interest at an average rate of 1.81% as at December 31, 2019 (1.92% as at December 31, 2018). The carrying values of the transferred assets and the obligations related to their repurchase, which approximate their fair values, are $1,850 as at December 31, 2019 ($1,824 as at December 31, 2018). These liabilities are categorized in Level 2 of the fair value hierarchy. Collateral primarily consists of cash and cash equivalents as well as government guaranteed securities. Details on the collateral pledged are included in Note 6.A.ii.

5.F.iii Securities Lending

The Company engages in securities lending to generate additional income. Certain securities from its portfolio are lent to other institutions for short periods. Collateral exceeding the fair value of the securities lent is deposited by the borrower with a lending agent, usually a securities custodian, and maintained by the lending agent until the underlying security has been returned to us. The fair value of the securities lent is monitored on a daily basis with additional collateral obtained or refunded as the fair values fluctuate. Collateral primarily consists of Canadian federal and provincial government securities and cash and cash equivalents. Certain arrangements allow us to invest the cash collateral received for the securities lent. The carrying values of the securities lent approximate their fair values. The carrying values of the securities lent and the related collateral held are $2,006 and $2,128, respectively, as at December 31, 2019 ($2,217 and $2,338, respectively, as at December 31, 2018).

 6. Financial Instrument Risk Management

The significant risks related to financial instruments are credit risk, market risk (including equity risk, interest rate and spread risk, and foreign currency risk) and liquidity risk. The following sections describe how we manage these risks.

Some of our financial instruments risk management policies and procedures are described in our Annual Management’s Discussion and Analysis (“MD&A”) for the year ended December 31, 2019. The shaded text and tables in the Risk Management section of the MD&A represent part of our disclosures on credit, market and liquidity risks and include a description of how we measure our risk and our objectives, policies and methodologies for managing these risks. Therefore, the shaded text and tables are an integral part of these Consolidated Financial Statements.

We use derivative instruments to manage market risks related to equity market, interest rate and currency fluctuations and in replication strategies for permissible investments. We do not engage in speculative investment in derivatives. The gap in market sensitivities or exposures between liabilities and supporting assets is monitored and managed within defined tolerance limits, by using derivative instruments, where appropriate. We use models and techniques to measure the effectiveness of our risk management strategies.

6.A Credit Risk

Risk Description

Credit risk is the possibility of loss from amounts owed by our borrowers or financial counterparties. We are subject to credit risk in connection with issuers of securities held in our investment portfolio, debtors, structured securities, reinsurers, counterparties (including derivative, repurchase agreement and securities lending counterparties), other financial institutions and other entities. 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 or risk profile otherwise deteriorates. Credit risk can also arise in connection with deterioration in the value of, or ability to realize, any underlying security that may be used as collateral for the debt obligation. Credit risk can occur as a result of broad economic conditions, challenges within specific sectors of the economy, or from issues affecting individual companies. Events that result in defaults, impairments or downgrades of the securities in our investment portfolio would cause the Company to record realized or unrealized losses and may cause an increase in our provisions for asset default, adversely impacting earnings.

Credit Risk Management Governance and Control

We employ a wide range of credit risk management practices and controls, as outlined below:

• Credit risk governance practices are in place, including independent monitoring and review and reporting to senior management and the Risk & Conduct Review Committee.

• Risk appetite limits have been established for credit risk.

• Income and regulatory capital sensitivities are monitored, managed and reported against pre-established risk limits.

• Comprehensive Investment and Credit Risk Management Policy, guidelines and practices are in place.

• Specific investment diversification requirements are in place, such as defined investment limits for asset class, geography, and industry.

• Risk-based credit portfolio, counterparty, and sector exposure limits have been established.

• Mandatory use of credit quality ratings for portfolio investments has been established and is reviewed regularly. These internal rating decisions for new fixed income investments and ongoing review of existing rating decisions are independently adjudicated by Corporate Risk Management.

• Comprehensive due diligence processes and ongoing credit analyses are conducted.

• Regulatory solvency requirements include risk-based capital requirements and are monitored regularly.

• Comprehensive compliance monitoring practices and procedures including reporting against pre-established investment limits are in place.

• Reinsurance exposures are monitored to ensure that no single reinsurer represents an undue level of credit risk.

• Stress-testing techniques, such as Dynamic Capital Adequacy Testing (“DCAT”), are used to measure the effects of large and sustained adverse credit developments. In 2020, the Canadian Institute of Actuaries will replace DCAT with Financial Condition Testing (“FCT”). FCT, similar to DCAT, will continue to act as a key stress-testing technique for the organization. FCT’s testing is broader than DCAT and allows for harmonization with the Company’s Own Risk Solvency Assessment (“ORSA”).

124    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

• Insurance contract liabilities are established in accordance with Canadian actuarial standards of practice.

• Internal capital targets are established at an enterprise level to cover all risks and are above minimum regulatory and supervisory levels. Actual capital levels are monitored to ensure they exceed internal targets.

6.A.i Maximum Exposure to Credit Risk

Our maximum credit exposure related to financial instruments as at December 31 is the balance as presented in our Consolidated Statements of Financial Position as we believe that these carrying amounts best represent the maximum exposure to credit risk. The credit exposure for debt securities may be increased to the extent that the amounts recovered from default are insufficient to satisfy the actuarial liability cash flows that the assets are intended to support.

The positive fair value of derivative assets is used to determine the credit risk exposure if the counterparties were to default. The credit risk exposure is the cost of replacing, at current market rates, all derivative contracts with a positive fair value. Additionally, we have credit exposure to items not on the Consolidated Statements of Financial Position as follows:

As at December 31,	2019		2018
Off-balance sheet item:
Loan commitments(1)	$	2,175	$	2,460

(1) Loan commitments include commitments to extend credit under commercial and multi-family residential mortgages and private debt securities not quoted in an active market. Commitments on debt securities contain provisions that allow for withdrawal of the commitment if there is deterioration in the credit quality of the borrower.

6.A.ii Right of Offset and Collateral

We invest in financial assets which may be secured by real estate properties, pools of financial assets, third-party financial guarantees, credit insurance, and other arrangements.

For OTC derivatives, collateral is collected from and pledged to counterparties to manage credit exposure according to the Credit Support Annex (“CSA”), which forms part of the International Swaps and Derivatives Association’s (“ISDA”) master agreements. It is common practice to execute a CSA in conjunction with an ISDA master agreement. Under the ISDA master agreements for OTC derivatives, we have a right of offset in the event of default, insolvency, bankruptcy, or other early termination. In the ordinary course of business, bilateral OTC exposures under these agreements are substantially mitigated through associated collateral agreements with a majority of our counterparties.

For exchange-traded derivatives subject to derivative clearing agreements with the exchanges and clearinghouses, there is no provision for set-off at default. Initial margin is excluded from the table below as it would become part of a pooled settlement process.

For repurchase agreements and reverse repurchase agreements, assets are sold or purchased with a commitment to resell or repurchase at a future date. Additional collateral may be pledged to or collected from counterparties to manage credit exposure according to bilateral repurchase or reverse repurchase agreements. In the event of default by a counterparty, we are entitled to liquidate the assets we hold as collateral to offset against obligations to the same counterparty.

In the case of securities lending, assets are lent with a commitment from the counterparty to return at a future date. Cash or securities are received as collateral from the counterparty. In the event of default by the counterparty, we are entitled to liquidate the assets we hold as collateral to offset against obligations to the same counterparty.

We do not offset financial instruments in our Consolidated Statements of Financial Position, as our rights of offset are conditional. The following tables present the effect of conditional netting and similar arrangements. Similar arrangements include global master repurchase agreements, security lending agreements, and any related rights to financial collateral.

As at December 31,	2019												2018
	Financial instruments presented in the Consolidated Statements of Financial Position(1)			Related amounts not set off in the Consolidated Statements of Financial Position									Financial instruments presented in the Consolidated Statements of Financial Position(1)			Related amounts not set off in the Consolidated Statements of Financial Position
				Financial instruments subject to master netting or similar agreements			Financial collateral (received) pledged(2)			Net amount						Financial instruments subject to master netting or similar agreements			Financial collateral (received) pledged(2)			Net amount
Financial assets:
Derivative assets (Note 6.A.v)	$	1,548		$	(737	)	$	(730	)	$	81		$	1,112		$	(768	)	$	(298	)	$	46
Reverse repurchase agreements (Note 8)		3			(3	)		–			–			17			(17	)		–			–
Total financial assets	$	1,551		$	(740	)	$	(730	)	$	81		$	1,129		$	(785	)	$	(298	)	$	46
Financial liabilities:
Derivative liabilities	$	(2,040	)	$	737		$	937		$	(366	)	$	(2,295	)	$	768		$	1,132		$	(395	)
Repurchase agreements (Note 5.F.ii)		(1,850	)		3			1,847			–			(1,824	)		17			1,807			–
Total financial liabilities	$	(3,890	)	$	740		$	2,784		$	(366	)	$	(4,119	)	$	785		$	2,939		$	(395	)

(1) Net amounts of the financial instruments presented in our Consolidated Statements of Financial Position are the same as our gross recognized financial instruments, as we do not offset financial instruments in our Consolidated Statements of Financial Position.

(2) Financial collateral excludes overcollateralization and, for exchange-traded derivatives, initial margin. Total financial collateral, including initial margin and overcollateralization, received on derivative assets was $939 ($470 as at December 31, 2018), received on reverse repurchase agreements was $3 ($17 as at December 31, 2018), pledged on derivative liabilities was $1,706 ($1,726 as at December 31, 2018), and pledged on repurchase agreements was $1,850 ($1,824 as at December 31, 2018).

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    125

6.A.iii Concentration Risk

Concentrations of credit risk arise from exposures to a single debtor, a group of related debtors, or groups of debtors that have similar credit risk characteristics, such as groups of debtors in the same economic or geographic regions or in similar industries. Related issuers may have similar economic characteristics so that their ability to meet contractual obligations may be impacted similarly by changes in the economic or political conditions. We manage this risk by appropriately diversifying our investment portfolio through the use of concentration limits. In particular, we maintain policies which set counterparty exposure limits to manage the credit exposure for investments in any single issuer or to the same underlying credit. Exceptions exist for investments in securities which are issued or guaranteed by the Government of Canada, U.S. or UK and issuers for which the Risk & Conduct Review Committee have granted specific approval. Mortgages are collateralized by the related property, and generally do not exceed 75% of the value of the property at the time the original loan is made. Our mortgages and loans are diversified by type and location and, for mortgages, by borrower. Loans provide diversification benefits (name, industry and geography) and often provide stronger covenants and collateral than public debt securities, thereby providing both better credit protection and potentially higher recoveries in the event of default. The following tables provide details of the debt securities, mortgages and loans held by issuer country, geographic location and industry sector, where applicable.

The carrying value of debt securities by geographic location is shown in the following table. The geographic location is based on the country of the creditor’s parent.

As at December 31,	2019			2018
	Fair value through profit or loss	Available- for-sale	Total debt securities	Fair value through profit or loss	Available- for-sale	Total debt securities
Canada	$    28,221	$      5,031	$    33,252	$    25,091	$      4,217	$    29,308
United States	24,224	5,822	30,046	21,329	5,917	27,246
United Kingdom	4,874	528	5,402	5,092	565	5,657
Other	10,575	2,331	12,906	9,890	2,342	12,232
Balance	$    67,894	$    13,712	$    81,606	$    61,402	$    13,041	$    74,443

The carrying value of debt securities by issuer and industry sector is shown in the following table:

As at December 31,	2019						2018
	Fair value through profit or loss		Available- for-sale		Total debt securities		Fair value through profit or loss		Available- for-sale		Total debt securities
Debt securities issued or guaranteed by:
Canadian federal government	$	3,890	$	2,556	$	6,446	$	3,830	$	1,746	$	5,576
Canadian provincial and municipal government		13,826		1,139		14,965		11,866		1,199		13,065
U.S. government and agency		1,748		1,363		3,111		1,380		1,527		2,907
Other foreign government		5,181		736		5,917		4,929		717		5,646
Total government issued or guaranteed debt securities		24,645		5,794		30,439		22,005		5,189		27,194
Corporate debt securities by industry sector:
Financials		9,341		1,585		10,926		8,390		1,470		9,860
Utilities		6,693		565		7,258		6,353		528		6,881
Industrials		4,800		629		5,429		4,053		590		4,643
Energy		3,867		365		4,232		3,628		340		3,968
Communication services(1)		3,075		471		3,546		2,826		481		3,307
Real estate		2,595		368		2,963		2,640		376		3,016
Health care		1,886		236		2,122		1,734		299		2,033
Consumer staples		1,703		221		1,924		1,625		257		1,882
Materials		1,331		212		1,543		1,225		256		1,481
Consumer discretionary(1)		1,268		219		1,487		1,372		209		1,581
Information technology(1)		1,122		213		1,335		1,024		207		1,231
Total corporate debt securities		37,681		5,084		42,765		34,870		5,013		39,883
Asset-backed securities		5,568		2,834		8,402		4,527		2,839		7,366
Total debt securities	$	67,894	$	13,712	$	81,606	$	61,402	$	13,041	$	74,443

(1) Our grouping of debt securities by sector is based on the Global Industry Classification Standard and S&P Dow Jones Indices. During 2018, certain Consumer discretionary and Information technology debt securities were moved to the Communication services sector.

126    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

The carrying value of mortgages and loans by geographic location and type is shown in the following tables. The geographic location for mortgages is based on location of property, while for corporate loans it is based on the country of the creditor’s parent.

As at December 31, 2019	Canada		United States		United Kingdom		Other		Total
Mortgages:
Retail	$	1,981	$	1,921	$	–	$	–	$	3,902
Office		1,854		2,068		–		–		3,922
Multi-family residential		3,900		1,791		–		–		5,691
Industrial and land		861		1,037		–		–		1,898
Other		714		98		–		–		812
Total mortgages(1)	$	9,310	$	6,915	$	–	$	–	$	16,225
Loans	$	13,249	$	11,994	$	3,297	$	3,457	$	31,997
Total mortgages and loans	$	22,559	$	18,909	$	3,297	$	3,457	$	48,222

(1) $3,966 of mortgages in Canada are insured by the CMHC.

As at December 31, 2018	Canada		United States		United Kingdom		Other		Total
Mortgages:
Retail	$	1,921	$	2,281	$	–	$	–	$	4,202
Office		1,811		2,417		–		–		4,228
Multi-family residential		3,455		1,920		–		–		5,375
Industrial and land		752		1,154		–		–		1,906
Other		618		104		–		–		722
Total mortgages(1)	$	8,557	$	7,876	$	–	$	–	$	16,433
Loans	$	13,238	$	11,458	$	2,547	$	3,146	$	30,389
Total mortgages and loans	$	21,795	$	19,334	$	2,547	$	3,146	$	46,822

(1) $3,537 of mortgages in Canada are insured by the CMHC.

6.A.iv Contractual Maturities

The contractual maturities of debt securities are shown in the following table. Actual maturities could differ from contractual maturities because of the borrower’s right to call or extend or right to prepay obligations, with or without prepayment penalties.

As at December 31,	2019						2018
	Fair value through profit or loss		Available- for-sale		Total debt securities		Fair value through profit or loss		Available- for-sale		Total debt securities
Due in 1 year or less	$	2,094	$	2,025	$	4,119	$	2,189	$	1,175	$	3,364
Due in years 2-5		9,692		3,954		13,646		9,307		4,865		14,172
Due in years 6-10		9,655		3,301		12,956		10,080		2,580		12,660
Due after 10 years		46,453		4,432		50,885		39,826		4,421		44,247
Total debt securities	$	67,894	$	13,712	$	81,606	$	61,402	$	13,041	$	74,443

The carrying value of mortgages by scheduled maturity, before allowances for losses, is as follows:

As at December 31,	2019		2018
Due in 1 year or less	$	1,099	$	968
Due in years 2-5		5,255		5,118
Due in years 6-10		6,787		7,351
Due after 10 years		3,154		3,021
Total mortgages	$	16,295	$	16,458

The carrying value of loans by scheduled maturity, before allowances for losses, is as follows:

As at December 31,	2019		2018
Due in 1 year or less	$	1,834	$	1,425
Due in years 2-5		6,872		6,968
Due in years 6-10		5,449		5,183
Due after 10 years		17,889		16,863
Total loans	$	32,044	$	30,439

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    127

Notional amounts of derivative financial instruments are the basis for calculating payments and are generally not the actual amounts exchanged. The following table provides the notional amounts of derivative instruments outstanding by type of derivative and term to maturity:

As at December 31,	2019								2018
	Term to maturity								Term to maturity
	Under 1 Year		1 to 5 Years		Over 5 Years		Total		Under 1 Year		1 to 5 Years		Over 5 Years		Total
Over-the-counter contracts:
Interest rate contracts:
Forward contracts	$	50	$	–	$	–	$	50	$	–	$	–	$	–	$	–
Swap contracts		1,906		3,052		14,649		19,607		1,101		3,506		16,685		21,292
Options purchased		617		3,279		2,850		6,746		1,198		2,898		3,737		7,833
Options written(1)		357		474		–		831		477		648		225		1,350
Foreign exchange contracts:
Forward contracts		5,289		4,137		–		9,426		6,529		15		–		6,544
Swap contracts		867		3,723		12,366		16,956		532		4,451		9,210		14,193
Other contracts:
Options purchased		1,164		–		–		1,164		–		–		–		–
Forward contracts		128		176		–		304		127		158		–		285
Swap contracts		178		1		–		179		112		1		–		113
Credit derivatives		343		878		6		1,227		–		1,329		27		1,356
Exchange-traded contracts:
Interest rate contracts:
Futures contracts		2,917		–		–		2,917		3,669		–		–		3,669
Equity contracts:
Futures contracts		2,507		–		–		2,507		2,377		–		–		2,377
Options purchased		200		–		–		200		186		–		–		186
Options written		17		–		–		17		–		–		–		–
Total notional amount	$	16,540	$	15,720	$	29,871	$	62,131	$	16,308	$	13,006	$	29,884	$	59,198

(1) These are covered short derivative positions that may include interest rate options, swaptions, or floors.

The following table provides the fair value of derivative instruments outstanding by term to maturity:

As at December 31,	2019												2018
	Term to maturity												Term to maturity
	Under 1 Year			1 to 5 Years			Over 5 Years			Total			Under 1 Year			1 to 5 Years			Over 5 Years			Total
Derivative assets	$	180		$	231		$	1,137		$	1,548		$	100		$	150		$	862		$	1,112
Derivative liabilities	$	(73	)	$	(377	)	$	(1,590	)	$	(2,040	)	$	(240	)	$	(555	)	$	(1,500	)	$	(2,295	)

6.A.v Asset Quality

The following sections describe our assessment of the credit quality of our financial assets. We monitor credit quality based on internal risk ratings as well as ratings assigned by external rating agencies where available.

Debt Securities by Credit Rating

Investment grade debt securities are those rated BBB and above. Our debt security portfolio was 99% investment grade based on carrying value as at December 31, 2019 (99% as at December 31, 2018). The credit risk ratings were established in accordance with the internal rating process described in the Credit Risk Management Governance and Control section.

The following table summarizes our debt securities by credit quality:

As at December 31,	2019				2018
		Fair value through profit or loss	Available- for-sale	Total debt securities		Fair value through profit or loss	Available- for-sale	Total debt securities
Debt securities by credit rating:
AAA		$      11,097	$      6,630	$      17,727		$      9,728	$      5,919	$    15,647
AA		10,503	1,670	12,173		14,208	2,044	16,252
A		27,341	3,037	30,378		19,089	2,447	21,536
BBB		18,339	2,248	20,587		17,646	2,483	20,129
BB and lower		614	127	741		731	148	879
Total debt securities		$    67,894	$    13,712	$    81,606		$    61,402	$    13,041	$    74,443

128    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

Mortgages and Loans by Credit Rating

The credit quality of mortgages and loans is evaluated internally through regular monitoring of credit-related exposures. We use judgment and experience to determine what factors should be considered when assigning an internal credit rating, which is validated through the use of credit scoring models, to a particular mortgage or corporate loan. The internal credit ratings reflect the credit quality of the borrower as well as the value of any collateral held as security.

The following tables summarize our mortgages and loans by credit quality indicator:

As at December 31,	2019		2018
Mortgages by credit rating:
Insured	$	3,966	$	3,537
AAA		1		3
AA		2,087		2,209
A		5,481		4,841
BBB		3,943		4,925
BB and lower		670		912
Impaired		77		6
Total mortgages	$	16,225	$	16,433

As at December 31,	2019		2018
Loans by credit rating:
AAA	$	224	$	341
AA		5,044		4,659
A		12,516		11,483
BBB		12,920		12,766
BB and lower		1,207		1,097
Impaired		86		43
Total loans	$	31,997	$	30,389

Derivative Financial Instruments by Counterparty Credit Rating

Derivative instruments consist of bilateral OTC contracts negotiated directly between counterparties, OTC contracts cleared through central clearing houses or exchange-traded contracts. Since a counterparty failure in an OTC derivative transaction could render it ineffective for hedging purposes, we generally transact our derivative contracts with highly-rated counterparties. In limited circumstances, we enter into transactions with lower-rated counterparties if credit enhancement features are included.

We pledge and hold assets as collateral under CSAs for bilateral OTC derivative contracts. The collateral is realized in the event of early termination as defined in the agreements. The assets held and pledged are primarily cash and debt securities issued by the Canadian federal government and U.S. government and agencies. While we are generally permitted to sell or re-pledge the assets held as collateral, we have not sold or re-pledged any assets. Exchange-traded and cleared OTC derivatives require the posting of initial margin, as well as daily cash settlement of variation margin. The terms and conditions related to the use of the collateral are consistent with industry practice.

Further details on collateral held and pledged as well as the impact of netting arrangements are included in Note 6.A.ii.

The following table shows the OTC derivative financial instruments with a positive fair value split by counterparty credit rating:

As at December 31,	2019							2018
	Gross positive replacement cost(2)		Impact of master netting agreements(3)			Net replacement cost(4)		Gross positive replacement cost(2)		Impact of master netting agreements(3)			Net replacement cost(4)
Over-the-counter contracts:
AA	$	439	$	(210	)	$	229	$	289	$	(252	)	$	37
A		1,008		(517	)		491		750		(507	)		243
BBB		82		(10	)		72		46		(9	)		37
Total over-the-counter derivatives(1)	$	1,529	$	(737	)	$	792	$	1,085	$	(768	)	$	317

(1) Exchange-traded derivatives with a positive fair value of $19 in 2019 ($27 in 2018) are excluded from the table above, as they are subject to daily margining requirements. Our credit exposure on these derivatives is with the exchanges and clearinghouses.

(2) Used to determine the credit risk exposure if the counterparties were to default. The credit risk exposure is the cost of replacing, at current market rates, all contracts with a positive fair value.

(3) The credit risk associated with derivative assets subject to master netting arrangements is reduced by derivative liabilities due to the same counterparty in the event of default or early termination. Our overall exposure to credit risk reduced through master netting arrangements may change substantially following the reporting date as the exposure is affected by each transaction subject to the arrangement.

(4) Net replacement cost is positive replacement cost less the impact of master netting agreements.

Credit Default Swaps by Underlying Financial Instrument Credit Rating

Credit default swaps (“CDS”) are OTC contracts that transfer credit risk related to an underlying referenced financial instrument from one counterparty to another. The purchaser receives protection against the decline in the value of the referenced financial instrument as a result of

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    129

specified credit events such as default or bankruptcy. The seller receives a periodic premium in return for payment contingent on a credit event affecting the referenced financial instrument. CDS index contracts are those where the underlying referenced financial instruments are a group of assets. The Company enters into credit derivatives to replicate credit exposure of an underlying reference security and enhance investment returns. The credit risk ratings of the underlying reference securities for single name contracts were established in accordance with the internal rating process described in the Credit Risk Management Governance and Control section.

The following table provides a summary of the credit default swap protection sold by credit rating of the underlying reference security:

As at December 31,	2019				2018
	Notional amount		Fair value		Notional amount		Fair value
Single name credit default swap contracts:
AA	$	45	$	1	$	48	$	1
A		574		9		611		9
BBB		608		19		674		13
Total single name credit default swap contracts	$	1,227	$	29	$	1,333	$	23
Credit default swap index contracts	$	–	$	–	$	23	$	–
Total credit default swap contracts sold	$	1,227	$	29	$	1,356	$	23

Reinsurance Assets by Credit Rating

The table below presents the distribution of Reinsurance assets by credit rating:

As at December 31,	2019						2018
	Gross exposure		Collateral		Net exposure		Gross exposure		Collateral		Net exposure
Reinsurance assets by credit rating:
AA	$	2,131	$	5	$	2,126	$	1,442	$	6	$	1,436
A		1,170		68		1,102		1,760		83		1,677
BBB		200		128		72		203		132		71
BB		1,707		1,663		44		1,677		1,617		60
CCC		181		168		13		252		72		180
Not rated		78		67		11		79		75		4
Total	$	5,467	$	2,099	$	3,368	$	5,413	$	1,985	$	3,428
Less: Negative reinsurance assets		1,443						1,272
Total Reinsurance assets	$	4,024					$	4,141

6.A.vi Impairment of Assets

Management assesses debt and equity securities, mortgages and loans, and other invested assets for objective evidence of impairment at each reporting date. We employ a portfolio monitoring process to identify assets or groups of assets that have objective evidence of impairment, having experienced a loss event or events that have an impact on the estimated future cash flows of the asset or group of assets. There are inherent risks and uncertainties in our evaluation of assets or groups of assets for objective evidence of impairment, including both internal and external factors such as general economic conditions, issuers’ financial conditions and prospects for economic recovery, 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 our evaluation of an asset or group of assets for objective evidence of impairment.

Management exercises considerable judgment in assessing for objective evidence of impairment and, based on its assessment, classifies specific assets as either performing or into one of the following credit quality lists:

“Monitor List” – the timely collection of all contractually specified cash flows is reasonably assured, but changes in issuer-specific facts and circumstances require monitoring. No impairment charge is recorded for unrealized losses on assets related to these debtors.

“Watch List” – the timely collection of all contractually specified cash flows is reasonably assured, but changes in issuer-specific facts and circumstances require heightened monitoring. An asset 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 experience a loss event on an imminent basis. No impairment charge is recorded for unrealized losses on assets related to these debtors.

“Impaired List” – the timely collection of all contractually specified cash flows is no longer reasonably assured. For these investments that are classified as AFS or amortized cost, an impairment charge is recorded or the asset is sold and a realized loss is recorded as a charge to income. Impairment charges and realized losses are recorded on assets related to these debtors.

Our approach to determining whether there is objective evidence of impairment varies by asset type. However, we have a process to ensure that in all instances where a decision has been made to sell an asset at a loss, the asset is impaired.

Debt Securities

Objective evidence of impairment on debt securities involves an assessment of the issuer’s ability to meet current and future contractual interest and principal payments. In determining whether debt securities have objective evidence of impairment, we employ a screening

130    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

process. The process identifies securities in an unrealized loss position, with particular attention paid to those securities whose fair value to amortized cost percentages have been less than 80% for an extended period of time. Discrete credit events, such as a ratings downgrade, are also used to identify securities that may have objective evidence of impairment. The securities identified are then evaluated based on issuer-specific facts and circumstances, including an evaluation of the issuer’s financial condition and prospects for economic recovery, evidence of difficulty being experienced by the issuer’s parent or affiliate, and management’s assessment of the outlook for the issuer’s industry sector.

Management also assesses previously impaired debt securities whose fair value has recovered to determine whether the recovery is objectively related to an event occurring subsequent to the impairment loss that has an impact on the estimated future cash flows of the asset.

Asset-backed securities are assessed for objective evidence of impairment. Specifically, we periodically update our best estimate of cash flows over the life of the security. In the event that there is an adverse change in the expected cash flows, the asset is impaired. 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 mortgage-backed securities portfolios are based on loss models using assumptions about key systematic risks, such as unemployment rates and housing prices, and loan-specific information such as delinquency rates and loan-to-value ratios.

Equity Securities and Other Invested Assets

Objective evidence of impairment for equity securities and investments in limited partnerships, segregated funds, and mutual funds involves an assessment of the prospect of recovering the cost of our investment. Instruments in an unrealized loss position are reviewed to determine if objective evidence of impairment exists. Objective evidence of impairment for these instruments includes, but is not limited to, the financial condition and near-term prospects of the issuer, including information about significant changes with adverse effects that have taken place in the technological, market, economic, or legal environment in which the issuer operates, and a significant or prolonged decline in the fair value of the instruments below their cost.

We apply presumptive impairment tests to determine whether there has been a significant or prolonged decline in the fair value of an instrument below its cost, and unless extenuating circumstances exist, the instrument is considered to be impaired.

Mortgages and Loans

Objective evidence of impairment on mortgages and loans involves an assessment of the borrower’s ability to meet current and future contractual interest and principal payments. In determining whether objective evidence of impairment exists, we consider a number of factors including, but not limited to, the financial condition of the borrower and, for collateral dependent mortgages and loans, the fair value of the collateral.

Mortgages and loans causing concern are monitored closely and evaluated for objective evidence of impairment. For these mortgages and loans, we review information that is appropriate to the circumstances, including recent operating developments, strategy review, timelines for remediation, financial position of the borrower and, for collateral-dependent mortgages and loans, the value of security as well as occupancy and cash flow considerations.

In addition to specific allowances, circumstances may warrant a collective allowance based on objective evidence of impairment for a group of mortgages and loans. We consider regional economic conditions, developments for various property types, and significant exposure to struggling tenants in determining whether there is objective evidence of impairment for certain collateral dependent mortgages and loans, even though it is not possible to identify specific mortgages and loans that are likely to become impaired on an individual basis.

Management also assesses previously impaired mortgages and loans to determine whether a recovery is objectively related to an event occurring subsequent to the impairment loss that has an impact on the estimated future cash flows of the asset.

Impairment of Fair Value Through Profit or Loss Assets

Since financial assets classified as FVTPL are carried at fair value with changes in fair value recorded to income, any reduction in value of the assets due to impairment is already reflected in income. However, the impairment of assets classified as FVTPL generally impacts the change in insurance contract liabilities due to the impact of asset impairment on estimates of future cash flows.

Impairment of Available-for-Sale Assets

We recognized impairment losses on AFS assets of $36 for the year ended December 31, 2019 ($12 during 2018).

We did not reverse any impairment on AFS debt securities during 2019 and 2018.

Past Due and Impaired Mortgages and Loans

The distribution of mortgages and loans past due or impaired is shown in the following tables:

	Gross carrying value						Allowance for losses
As at December 31, 2019	Mortgages		Loans		Total		Mortgages		Loans		Total
Not past due	$	16,148	$	31,911	$	48,059	$	–	$	–	$	–
Impaired		147		133		280		70		47		117
Total	$	16,295	$	32,044	$	48,339	$	70	$	47	$	117
	Gross carrying value						Allowance for losses
As at December 31, 2018	Mortgages		Loans		Total		Mortgages		Loans		Total
Not past due	$	16,427	$	30,332	$	46,759	$	–	$	–	$	–
Past due:
Past due less than 90 days		–		14		14		–		–		–
Impaired		31		93		124		25		50		75
Total	$	16,458	$	30,439	$	46,897	$	25	$	50	$	75

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    131

Changes in Allowances for Losses

The changes in the allowances for losses are as follows:

	Mortgages			Loans			Total
Balance, January 1, 2018	$	22		$	28		$	50
Provision for (reversal of) losses		3			19			22
Write-offs, net of recoveries, and other adjustments		(2	)		–			(2	)
Foreign exchange rate movements		2			3			5
Balance, December 31, 2018	$	25		$	50		$	75
Provision for (reversal of) losses		46			(1	)		45
Foreign exchange rate movements		(1	)		(2	)		(3	)
Balance, December 31, 2019	$	70		$	47		$	117

6.B Market Risk

Risk Description

We are exposed to financial and capital market risk, which is defined as the risk that the fair value or future cash flows of an insurance contract or financial instrument will fluctuate because of changes or volatility in market prices. Market risk includes equity, interest rate and spread, real estate and foreign currency risks.

Market Risk Management Governance and Control

We employ a wide range of market risk management practices and controls as outlined below:

• Market risk governance practices are in place, including independent monitoring and review and reporting to senior management and the Risk & Conduct Review Committee.

• Risk appetite limits have been established for equity, interest rate, real estate and foreign currency risks.

• Income and regulatory capital sensitivities are monitored, managed and reported against pre-established risk limits.

• Comprehensive asset-liability management and hedging policies, programs and practices are in place.

• Regulatory solvency requirements include risk-based capital requirements and are monitored regularly.

• Product Design and Pricing Policy requires a detailed risk assessment and pricing provisions for material risks.

• Stress-testing techniques, such as DCAT, are used to measure the effects of large and sustained adverse market movements.

• Insurance contract liabilities are established in accordance with Canadian actuarial standards of practice.

• Internal capital targets are established at an enterprise level to cover all risks and are above minimum regulatory and supervisory levels. Actual capital levels are monitored to ensure they exceed internal targets.

Specific market risks and our risk management strategies are discussed below in further detail.

6.B.i Equity Risk

Equity risk is the potential for financial loss arising from declines or volatility in equity market prices. We are exposed to equity risk from a number of sources. A portion of our exposure to equity risk arises in connection with benefit guarantees on segregated fund contracts and variable annuities. These benefit guarantees may be triggered upon death, maturity, withdrawal or annuitization. The cost of providing for these guarantees is uncertain and will depend upon a number of factors, including general capital market conditions, underlying fund performance, policyholder behaviour and mortality experience, which may result in negative impacts on our net income and capital.

We generate revenue in our asset management businesses and from certain insurance and annuity contracts where fees are levied on account balances that are affected directly by equity market levels. Accordingly, we have further exposure to equity risk as adverse fluctuations in the market value of such assets will result in corresponding adverse impacts on our revenue and net income. In addition, declining and volatile equity markets may have a negative impact on sales and redemptions (surrenders) in these businesses, and this may result in further adverse impacts on our net income and financial position.

We also have direct exposure to equity markets from the investments supporting other general account liabilities, surplus, and employee benefit plans. These exposures fall within our risk-taking philosophy and appetite, and are therefore generally not hedged.

The carrying value of equities by issuer country is shown in the following table:

As at December 31,	2019						2018
	Fair value through profit or loss		Available- for-sale		Total equities		Fair value through profit or loss		Available- for-sale		Total equities
Canada	$	2,813	$	22	$	2,835	$	2,651	$	15	$	2,666
United States		550		137		687		508		388		896
United Kingdom		132		5		137		121		5		126
Other		979		149		1,128		734		212		946
Total equities	$	4,474	$	313	$	4,787	$	4,014	$	620	$	4,634

6.B.ii Embedded Derivatives Risk

An embedded derivative is contained within a host insurance contract if it includes an identifiable condition to modify the cash flows that are otherwise payable. This section is applicable to those embedded derivatives where we are not required to, and have not measured (either separately or together with the host contract) the embedded derivative at fair value.

132    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

A significant market risk exposure from embedded derivatives arises in connection with the benefit guarantees on segregated fund contracts. These benefit guarantees are linked to underlying fund performance and may be triggered upon death, maturity, withdrawal, or annuitization. We have implemented hedging programs to mitigate a portion of this market risk exposure.

We are also exposed to significant interest rate risk from embedded derivatives in certain general account products and segregated fund contracts, which contain explicit or implicit investment guarantees in the form of minimum crediting rates, guaranteed premium rates, settlement options, and benefit guarantees. If investment returns fall below guaranteed levels, we may be required to increase liabilities or capital in respect of these contracts. The guarantees attached to these products may be applicable to both past premiums collected and future premiums not yet received. Segregated fund contracts provide benefit guarantees that are linked to underlying fund performance and may be triggered upon death, maturity, withdrawal, or annuitization. These products are included in our asset-liability management program and the residual interest rate exposure is managed within our risk appetite limits.

We are also exposed to interest rate risk through guaranteed annuitization options included primarily in retirement contracts and pension plans. These embedded options give policyholders the right to convert their investment into a pension on a guaranteed basis, thereby exposing us to declining long-term interest rates as the annuity guarantee rates come into effect. Embedded options on unit-linked pension contracts give policyholders the right to convert their fund at retirement into pensions on a guaranteed basis, thereby exposing us to declining interest rates and increasing equity market returns (increasing the size of the fund which is eligible for the guaranteed conversion basis). Guaranteed annuity options are included in our asset-liability management program and most of the interest rate and equity exposure is mitigated through hedging.

Significant changes or volatility in interest rates or spreads could have a negative impact on sales of certain insurance and annuity products, and adversely impact the expected pattern of redemptions (surrenders) on existing policies. Increases in interest rates or widening spreads may increase the risk that policyholders will surrender their contracts, potentially forcing us to liquidate assets at a loss and accelerate recognition of certain acquisition expenses. While we have established hedging programs in place and our insurance and annuity products often contain surrender mitigation features, these may not be sufficient to fully offset the adverse impact of the underlying losses.

Certain annuity and long-term disability contracts contain embedded derivatives as benefits are linked to the Consumer Price Index; however most of this exposure is hedged through the Company’s ongoing asset-liability management program.

6.C Liquidity Risk

Risk Description

Liquidity risk is the possibility that we will not be able to fund all cash outflow commitments and collateral requirements as they fall due. This includes the risk of being forced to sell assets at depressed prices resulting in realized losses on sale. This risk also includes restrictions on our ability to efficiently allocate capital among our subsidiaries due to various market and regulatory constraints on the movement of funds. Our funding obligations arise in connection with the payment of policyholder benefits, expenses, reinsurance settlements, asset purchases, investment commitments, interest on debt, and dividends on common and preferred shares. Sources of available cash flow include general fund premiums and deposits, investment related inflows (such as maturities, principal repayments, investment income and proceeds of asset sales), proceeds generated from financing activities, and dividends and interest payments from subsidiaries. We have various financing transactions and derivative contracts under which we may be required to pledge collateral or to make payments to our counterparties for the decline in market value of specified assets. The amount of collateral or payments required may increase under certain circumstances (such as changes to interest rates, credit spreads, equity markets or foreign exchange rates), which could adversely affect our liquidity.

Liquidity Risk Management Governance and Control

We generally maintain a conservative liquidity position and employ a wide range of liquidity risk management practices and controls, which are described below:

• Liquidity risk governance practices are in place, including independent monitoring and review and reporting to senior management and the Risk & Conduct Review Committee.

• Liquidity is managed in accordance with our Asset Liability Management Policy and operating guidelines.

• Liquidity contingency plans are maintained for the management of liquidity in a liquidity event.

• Stress testing is performed by comparing liquidity coverage risk metrics under a one-month stress scenario to our policy thresholds. These liquidity coverage risk metrics are measured and managed at the enterprise and legal entity levels.

• Stress testing of our collateral is performed by comparing collateral coverage ratios to our policy threshold.

• Cash Management and asset-liability management programs support our ability to maintain our financial position by ensuring that sufficient cash flow and liquid assets are available to cover potential funding requirements. We invest in various types of assets with a view of matching them to our liabilities of various durations.

• Internal capital targets are established at an enterprise level to cover all risks and are above minimum regulatory and supervisory levels. Actual capital levels are monitored to ensure they exceed internal targets.

• We actively manage and monitor our capital and asset levels, and the diversification and credit quality of our investments.

• Various credit facilities for general corporate purposes are maintained.

We are subject to various regulations in the jurisdictions in which we operate. The ability of SLF Inc.’s subsidiaries to pay dividends and transfer funds is regulated in certain jurisdictions and may require local regulatory approvals and the satisfaction of specific conditions in certain circumstances. Through effective cash management and capital planning, SLF Inc. ensures that its subsidiaries, as a whole and on a stand-alone basis, are properly funded and maintain adequate liquidity to meet obligations, both individually and in aggregate.

Based on our historical cash flows and liquidity management processes, we believe that the cash flows from our operating activities will continue to provide sufficient liquidity for us to satisfy debt service obligations and to pay other expenses as they fall due.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    133

 7. Insurance Risk Management

7.A Insurance Risk

Risk Description

Insurance risk is the uncertainty of product performance due to actual experience emerging differently than expected in the areas of policyholder behaviour, mortality, morbidity and longevity. In addition, product design and pricing, expense and reinsurance risks impact multiple risk categories, including insurance risk.

Insurance Risk Management Governance and Control

We employ a wide range of insurance risk management practices and controls, as outlined below:

• Insurance risk governance practices are in place, including independent monitoring and review and reporting to senior management and the Risk & Conduct Review Committee.

• Risk appetite limits have been established for policyholder behaviour, mortality and morbidity, and longevity risks.

• Income and regulatory capital sensitivities are monitored, managed and reported against pre-established risk limits.

• Comprehensive Insurance Risk Policy, guidelines and practices are in place.

• The global underwriting manual aligns underwriting practices with our corporate risk management standards and ensures a consistent approach in insurance underwriting.

• Board-approved maximum retention limits are in place. Amounts issued in excess of these limits are reinsured.

• Detailed procedures, including criteria for approval of risks and for claims adjudication are established and monitored for each business segment.

• Underwriting and risk selection standards are established and overseen by the corporate underwriting and claims risk management function.

• Diversification and risk pooling is managed by aggregation of exposures across product lines, geography and distribution channels.

• The Insurance Risk Policy and Investment & Credit Risk Policy establish acceptance criteria and protocols to monitor the level of reinsurance ceded to any single reinsurer or group of reinsurers.

• Reinsurance counterparty risk is monitored, including annual reporting of reinsurance exposure to the Risk & Conduct Review Committee.

• Concentration risk exposure is monitored on group policies in a single location to avoid a catastrophic event occurrence resulting in a significant impact.

• Various limits, restrictions and fee structures are introduced into plan designs in order to establish a more homogeneous policy risk profile and limit potential for anti-selection.

• Regulatory solvency requirements include risk-based capital requirements and are monitored regularly.

• The Product Design and Pricing Policy requires detailed risk assessment and pricing provision for material risks.

• Company specific and industry level experience studies and sources of earnings analysis are monitored and factored into valuation, renewal and new business pricing processes.

• Stress-testing techniques, such as DCAT, are used to measure the effects of large and sustained adverse movements in insurance risk factors. In 2020, the Canadian Institute of Actuaries will replace DCAT with FCT. FCT, similar to DCAT, will continue to act as a key stress-testing technique for the organization. FCT’s testing is broader than DCAT and allows for harmonization with the Company’s ORSA.

• Insurance contract liabilities are established in accordance with Canadian actuarial standards of practice.

• Internal capital targets are established at an enterprise level to cover all risks and are above minimum regulatory and supervisory levels. Actual capital levels are monitored to ensure they exceed internal targets.

We use reinsurance to limit losses, minimize exposure to significant risks and to provide additional capacity for growth. Our Insurance Risk Policy sets maximum global retention limits and related management standards and practices that are applied to reduce our exposure to large claims. Amounts in excess of the Board-approved maximum retention limits are reinsured. Effective January 1, 2019, we updated our single life or joint-first-to-die basis retention limit to $40 ($25 in 2018) in Canada and US$40 (US$25 in 2018) outside of Canada. For survivorship life insurance, our maximum global retention limit is $50 ($30 in 2018) in Canada and US$50 (US$30 in 2018) outside of Canada. In certain markets and jurisdictions, retention levels below the maximum are applied. Reinsurance is utilized for numerous products in most business segments, and placement is done on an automatic basis for defined insurance portfolios and on a facultative basis for individual risks with certain characteristics.

Our reinsurance coverage is well diversified and controls are in place to manage exposure to reinsurance counterparties. Reinsurance exposures are monitored to ensure that no single reinsurer represents an undue level of credit risk. This includes performing periodic due diligence on our reinsurance counterparties as well as internal credit assessments on counterparties with which we have material exposure. While reinsurance arrangements provide for the recovery of claims arising from the liabilities ceded, we retain primary responsibility to the policyholders.

Specific insurance risks and our risk management strategies are discussed below in further detail. The sensitivities provided below reflect the impact of any applicable ceded reinsurance arrangements.

7.A.i Policyholder Behaviour Risk

Risk Description

We can incur losses due to adverse policyholder behaviour relative to the assumptions used in the pricing and valuation of products with regard to lapse of policies or exercise of other embedded policy options.

Uncertainty in policyholder behaviour can arise from several sources including unexpected events in the policyholder’s life circumstances, the general level of economic activity (whether higher or lower than expected), changes in the financial and capital markets, changes in pricing and availability of current products, the introduction of new products, changes in underwriting technology and standards, as well as changes in our financial strength or reputation. Uncertainty in future cash flows affected by policyholder behaviour can be further exacerbated by irrational behaviour during times of economic turbulence or at key option exercise points in the life of an insurance contract.

134    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

For individual life insurance products where fewer terminations would be financially adverse to us, shareholders’ net income and equity would be decreased by about $265 ($250 in 2018) if the termination rate assumption were reduced by 10%. For products where more terminations would be financially adverse to us, shareholders’ net income and equity would be decreased by about $195 ($195 in 2018) if the termination rate assumption were increased by 10%. These sensitivities reflect the impact of any applicable ceded reinsurance arrangements.

Policyholder Behaviour Risk Management Governance and Control

Various types of provisions are built into many of our products to reduce the impact of uncertain policyholder behaviour. These provisions include:

• Surrender charges that adjust the payout to the policyholder by taking into account prevailing market conditions.

• Limits on the amount that policyholders can surrender or borrow.

• Restrictions on the timing of policyholders’ ability to exercise certain options.

• Restrictions on both the types of funds Clients can select and the frequency with which they can change funds.

• Policyholder behaviour risk is also mitigated through reinsurance on some insurance contracts.

Internal experience studies are used to monitor, review and update policyholder behaviour assumptions as needed, which could result in updates to policy liabilities.

7.A.ii Mortality and Morbidity Risk

Risk Description

Mortality and morbidity risk is the risk that future experience could be worse than the assumptions used in the pricing and valuation of products. 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 could also occur through systemic anti-selection, which could arise due to poor plan design, or underwriting process failure or the development of investor-owned and secondary markets for life insurance policies.

The risk of adverse morbidity experience also increases during economic slowdowns, especially with respect to disability coverage, as well as with increases in high medical treatment costs and growth in utilization of specialty drugs. This introduces the potential for adverse financial volatility in our financial results. External factors could adversely affect our life insurance, health insurance, critical illness, disability, long-term care insurance and annuity businesses. Adverse trends in morbidity experience, such as higher disability incidence, increases in high medical treatment costs and growth in utilization of specialty drugs, introduce the potential for adverse volatility in our financial results.

For life insurance products, a 2% increase in the best estimate assumption would decrease shareholders’ net income and equity by about $35 ($35 in 2018). This sensitivity reflects the impact of any applicable ceded reinsurance arrangements.

For products where morbidity is a significant assumption, a 5% adverse change in the assumptions would reduce shareholders’ net income and equity by about $205 ($185 in 2018). This sensitivity reflects the impact of any applicable ceded reinsurance arrangements.

Mortality and Morbidity Risk Management Governance and Control

Detailed uniform underwriting procedures have been established to determine the insurability of applicants and to manage exposure to large claims. These underwriting requirements are regularly scrutinized against industry guidelines and oversight is provided through a corporate underwriting and claim management function.

We do not have a high degree of concentration risk to single individuals or groups due to our well-diversified geographic and business mix. The largest portion of mortality risk within the Company is in North America. Individual and group insurance policies are underwritten prior to initial issue and renewals, based on risk selection, plan design, and rating techniques.

The Insurance Risk Policy approved by the Risk & Conduct Review Committee includes limits on the maximum amount of insurance that may be issued under one policy and the maximum amount that may be retained. These limits vary by geographic region and amounts in excess of limits are reinsured to ensure there is no exposure to unreasonable concentration of risk.

7.A.iii Longevity Risk

Risk Description

Longevity risk is the potential for economic loss, accounting loss or volatility in earnings arising from adverse changes in rates of mortality improvement relative to the assumptions used in the pricing and valuation of products. This risk can manifest itself slowly over time as socioeconomic conditions improve and medical advances continue. It could also manifest itself more quickly, for example, due to medical breakthroughs that significantly extend life expectancy. Longevity risk affects contracts where benefits or costs are based upon the likelihood of survival (for example, annuities, pensions, pure endowments, reinsurance, segregated funds, and specific types of health contracts). Additionally, our longevity risk exposure is increased for certain annuity products such as guaranteed annuity options by an increase in equity market levels.

For annuities products for which lower mortality would be financially adverse to us, a 2% decrease in the mortality assumption would decrease shareholders’ net income and equity by about $135 ($120 in 2018). These sensitivities reflect the impact of any applicable ceded reinsurance arrangements.

Longevity Risk Management Governance and Control

To improve management of longevity risk, we monitor research in the fields that could result in a change in expected mortality improvement. Stress-testing techniques are used to measure and monitor the impact of extreme mortality improvement on the aggregate portfolio of insurance and annuity products as well as our own pension plans.

7.A.iv Product Design and Pricing Risk

Risk Description

Product design and pricing risk is the risk a product does not perform as expected, causing adverse financial consequences. This risk may arise from deviations in realized experience versus assumptions used in the pricing of products. Risk factors include uncertainty concerning future investment yields, policyholder behaviour, mortality and morbidity experience, sales levels, mix of business, expenses and taxes. Although

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    135

some of our products permit us 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 our profitability and capital position.

Product Design and Pricing Governance and Control

Our Product Design and Pricing Policy, approved by the Risk & Conduct Review Committee, establishes the framework governing our product design and pricing practices and is designed to align our product offerings with our strategic objectives and risk-taking philosophy. Consistent with this policy, product development, design and pricing processes have been implemented throughout the Company. New products follow a stage-gate process with defined management approvals based on the significance of the initiative, and each initiative is subject to a risk assessment process to identify key risks and risk mitigation requirements, and is reviewed by multiple stakeholders. Additional governance and control procedures are listed below:

• Pricing models, methods, and assumptions are subject to periodic internal peer reviews.

• Experience studies, sources of earnings analysis, and product dashboards are used to monitor actual experience against those assumed in pricing and valuation.

• On experience rated, participating, and adjustable products, emerging experience is reflected through changes in policyholder dividend scales as well as other policy adjustment mechanisms such as premium and benefit levels.

• Limits and restrictions may be introduced into the design of products to mitigate adverse policyholder behaviour or apply upper thresholds on certain benefits.

7.A.v Expense Risk

Risk Description

Expense risk is the risk that future expenses are higher than the assumptions used in the pricing and valuation of products. This risk can arise from general economic conditions, unexpected increases in inflation, slower than anticipated growth, or reduction in productivity leading to increases in unit expenses. Expense risk occurs in products where we cannot or will not pass increased costs onto the Client and will manifest itself in the form of a liability increase or a reduction in expected future profits.

The sensitivity of liabilities for insurance contracts to a 5% increase in unit expenses would result in a decrease in shareholders’ net income and equity of about $170 ($175 in 2018). These sensitivities reflect the impact of any applicable ceded reinsurance arrangements.

Expenses Risk Management Governance and Control

We closely monitor expenses through an annual budgeting process and ongoing monitoring of any expense gaps between unit expenses assumed in pricing and actual expenses.

7.A.vi Reinsurance Risk

Risk Description

We purchase reinsurance for certain risks underwritten by our various insurance businesses. Reinsurance risk is the risk of financial loss due to adverse developments in reinsurance markets (for example, discontinuance or diminution of reinsurance capacity, or an increase in the cost of reinsurance), insolvency of a reinsurer or inadequate reinsurance coverage.

Changes in reinsurance market conditions, including actions taken by reinsurers to increase rates on existing and new coverage and our ability to obtain appropriate reinsurance, may adversely impact the availability or cost of maintaining existing or securing new reinsurance capacity, with adverse impacts on our business strategies, profitability and financial position. There is an increased possibility of rate increases or renegotiation of legacy reinsurance contracts by our reinsurers, as the global reinsurance industry continues to review and optimize their business models. In addition, changes to the regulatory treatment of reinsurance arrangements could have an adverse impact on our capital position.

Reinsurance Risk Management Governance and Control

We have an Insurance Risk Policy and an Investment & Credit Risk Policy approved by the Risk & Conduct Review Committee, which set acceptance criteria and processes to monitor the level of reinsurance ceded to any single reinsurer. These policies also set minimum criteria for determining which reinsurance companies qualify as suitable reinsurance counterparties having the capability, expertise, governance practices and financial capacity to assume the risks being considered. Additionally, these policies require that all agreements include provisions to allow action to be taken, such as recapture of ceded risk (at a potential cost to the Company), in the event that the reinsurer loses its legal ability to carry on business through insolvency or regulatory action. Periodic due diligence is performed on the reinsurance counterparties with which we do business and internal credit assessments are performed on reinsurance counterparties with which we have material exposure. Reinsurance counterparty credit exposures are monitored closely and reported annually to the Risk & Conduct Review Committee.

New sales of our products can be discontinued or changed to reflect developments in the reinsurance markets. Rates for our in-force reinsurance treaties can be either guaranteed or adjustable for the life of the ceded policy. In order to diversify reinsurance risk, there is generally more than one reinsurer supporting a reinsurance pool.

136    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

 8. Other Assets

Other assets consist of the following:

As at December 31,	2019		2018
Accounts receivable	$	1,294	$	1,451
Investment income due and accrued		1,122		1,131
Property and equipment		630		621
Right-of-use assets		770		–
Deferred acquisition costs(1)		139		130
Prepaid expenses		319		309
Premium receivable		662		567
Accrued post-retirement benefit assets (Note 25)		187		184
Other		93		105
Total other assets	$	5,216	$	4,498

(1) Amortization of deferred acquisition cost charged to income during the year amounted to $18 in 2019 ($33 in 2018).

 9. Goodwill and Intangible Assets

9.A Goodwill

Changes in the carrying amount of goodwill acquired through business combinations by reportable business segment are as follows:

	Canada		U.S.			Asia			Asset Management			Corporate			Total
Balance, January 1, 2018	$	2,573	$	1,043		$	655		$	729		$	183		$	5,183
Acquisitions		34		7			–			–			–			41
Foreign exchange rate movements		–		88			50			46			4			188
Balance, December 31, 2018	$	2,607	$	1,138		$	705		$	775		$	187		$	5,412
Acquisitions (Note 3)		–		–			–			537			–			537
Foreign exchange rate movements		–		(55	)		(29	)		(31	)		(2	)		(117	)
Balance, December 31, 2019	$	2,607	$	1,083		$	676		$	1,281		$	185		$	5,832

Goodwill was not impaired in 2019 or 2018. The carrying amounts of goodwill allocated to our CGUs or groups of CGUs are as follows:

As at December 31,	2019		2018
Canada
Individual	$	1,100	$	1,100
Group retirement services		453		453
Group benefits		1,054		1,054
U.S. Employee benefits group		1,083		1,138
Asia		676		705
Asset Management
MFS		494		515
SLC Management(1)		787		260
Corporate
UK		185		187
Total	$	5,832	$	5,412

(1) Prior to 2019, SLC Management was referred to as Sun Life Investment Management.

Goodwill acquired in business combinations is allocated to the CGUs or groups of CGUs that are expected to benefit from the synergies of the particular acquisition.

Goodwill is assessed for impairment annually or more frequently if events or circumstances occur that may result in the recoverable amount of a CGU falling below its carrying value. The recoverable amount is the higher of fair value less costs of disposal and value in use. We use fair value less costs of disposal as the recoverable amount.

We use the best evidence of fair value less costs of disposal as the price obtainable for the sale of a CGU, or group of CGUs. Fair value less costs of disposal is initially assessed by looking at recently completed market comparable transactions. In the absence of such comparables, we use either an appraisal methodology (with market assumptions commonly used in the valuation of insurance companies or asset management companies) or a valuation multiples methodology. The fair value measurements are categorized in Level 3 of the fair value hierarchy.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    137

The most recent calculations from 2018 for certain CGUs and groups of CGUs were carried forward and used in the impairment test in the current period as: (i) the recoverable amount for these CGUs and groups of CGUs exceeded the carrying amount by a substantial margin, (ii) the assets and liabilities making up the CGUs and groups of CGUs had not changed significantly, and (iii) the likelihood that the carrying value would exceed the recoverable amount was remote, based on an analysis of events that have occurred and circumstances that have changed. The key drivers impacting the recoverable amount from 2018 are consistent with the key assumptions below.

Under the appraisal methodology, fair value is assessed based on best estimates of future income, expenses, level and cost of capital over the lifetime of the policies and, where appropriate, adjusted for items such as transaction costs. The value ascribed to new business is based on sales anticipated in our business plans, sales projections for the valuation period based on reasonable growth assumptions, and anticipated levels of profitability of that new business. In calculating the value of new business, future sales are projected for 10 to 15 years. In some instances, market multiples are used to approximate the explicit projection of new business.

The discount rates applied reflect the nature of the environment for that CGU. The discount rates used range from 9.0% to 12.5% (after tax). More established CGUs with a stronger brand and competitive market position use discount rates at the low end of the range and CGUs with a weaker competitive position use discount rates at the high end of the range. The capital levels used are aligned with our business objectives.

Under the valuation multiples methodology, fair value is assessed with reference to multiples or ratios of comparable businesses. For life insurers and asset managers, these valuation multiples and ratios may include price-to-earnings or price-to-assets-under-management measures. This assessment takes into consideration a variety of relevant factors and assumptions, including expected growth, risk, and market conditions among others. The price-to-earnings multiples used range from 10.5 to 11.5. The price-to-assets-under-management ratios used range from 0.7% to 2.0%.

Judgment is used in estimating the recoverable amounts of CGUs and the use of different assumptions and estimates could result in material adjustments to the valuation of CGUs and the size of any impairment. Any material change in the key assumptions including those for capital, discount rates, the value of new business, and expenses, as well as cash flow projections used in the determination of recoverable amounts, may result in impairment charges, which could be material.

In considering the sensitivity of the key assumptions above, management determined that there is no reasonably possible change in any of the above that would result in the recoverable amount of any of the CGUs to be less than its carrying amount.

9.B Intangible Assets

Changes in intangible assets are as follows:

	Finite life
	Internally generated software			Other			Indefinite life			Total
Gross carrying amount
Balance, January 1, 2018	$	579		$	1,202		$	625		$	2,406
Additions		118			(1	)		–			117
Acquisitions		–			19			3			22
Foreign exchange rate movements		25			46			45			116
Balance, December 31, 2018	$	722		$	1,266		$	673		$	2,661
Additions		151			115			–			266
Acquisitions		–			238			–			238
Foreign exchange rate movements		(16	)		(28	)		(27	)		(71	)
Balance, December 31, 2019	$	857		$	1,591		$	646		$	3,094
Accumulated amortization and impairment losses
Balance, January 1, 2018	$	(338	)	$	(397	)	$	(4	)	$	(739	)
Amortization charge for the year		(66	)		(53	)		–			(119	)
Foreign exchange rate movements		(13	)		(11	)		–			(24	)
Balance, December 31, 2018	$	(417	)	$	(461	)	$	(4	)	$	(882	)
Amortization charge for the year		(73	)		(64	)		–			(137	)
Impairment of intangible assets		(13	)		–			(2	)		(15	)
Foreign exchange rate movements		15			8			–			23
Balance, December 31, 2019	$	(488	)	$	(517	)	$	(6	)	$	(1,011	)
Net carrying amount, end of period:
As at December 31, 2018	$	305		$	805		$	669		$	1,779
As at December 31, 2019	$	369		$	1,074		$	640		$	2,083

138    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

The components of the intangible assets are as follows:

As at December 31,	2019		2018
Finite life intangible assets:
Distribution, sales potential of field force	$	339	$	366
Client relationships and asset administration contracts		735		439
Internally generated software		369		305
Total finite life intangible assets		1,443		1,110
Indefinite life intangible assets:
Fund management contracts(1)		640		669
Total indefinite life intangible assets		640		669
Total intangible assets	$	2,083	$	1,779

(1) Fund management contracts are attributable to Asset Management, where its competitive position in, and the stability of, its markets support their classification as indefinite life intangible assets.

 10. Insurance Contract Liabilities and Investment Contract Liabilities

10.A Insurance Contract Liabilities

10.A.i Description of Business

The majority of the products sold by the Company are insurance contracts. These contracts include all forms of life, health and critical illness insurance sold to individuals and groups, life contingent annuities, accumulation annuities, and segregated fund products with guarantees.

10.A.ii Methods and Assumptions

General

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

In determining our liabilities for insurance contracts, assumptions must be made about mortality and morbidity rates, lapse and other policyholder behaviour, interest rates, equity market performance, asset default, inflation, expenses, and other factors over the life of our products. Most of these assumptions relate to events that are anticipated to occur many years in the future. Assumptions require significant judgment and regular review and, where appropriate, revision.

We use best estimate assumptions for expected future experience and apply margins for adverse deviations to provide for uncertainty in the choice of the best estimate assumptions. The amount of insurance contract liabilities related to the application of margins for adverse deviations to best estimate assumptions is called a provision for adverse deviations.

Best Estimate Assumptions

Best estimate assumptions are intended to be current, neutral estimates of the expected outcome as guided by Canadian actuarial standards of practice. The choice of best estimate assumptions takes into account current circumstances, past experience data (Company and/or industry), the relationship of past to expected future experience, anti-selection, the relationship among assumptions, and other relevant factors. For assumptions on economic matters, the assets supporting the liabilities and the expected policy for asset-liability management are relevant factors.

Margins for Adverse Deviations

The appropriate level of margin for adverse deviations on an assumption is guided by Canadian actuarial standards of practice. For most assumptions, the standard range of margins for adverse deviations is 5% to 20% of the best estimate assumption, and the actuary chooses from within that range based on a number of considerations related to the uncertainty in the determination of the best estimate assumption. The level of uncertainty, and hence the margin chosen, will vary by assumption and by line of business and other factors. Considerations that would tend to indicate a choice of margin at the high end of the range include:

• The statistical credibility of the Company’s experience is too low to be the primary source of data for choosing the best estimate assumption

• Future experience is difficult to estimate

• The cohort of risks lacks homogeneity

• Operational risks adversely impact the ability to estimate the best estimate assumption

• Past experience may not be representative of future experience and the experience may deteriorate

Provisions for adverse deviations in future interest rates are included by testing a number of scenarios of future interest rates, some of which are prescribed by Canadian actuarial standards of practice, and determining the liability based on the range of possible outcomes. A scenario of future interest rates includes, for each forecast period between the statement of financial position date and the last liability cash flow, interest rates for risk-free assets, premiums for asset default, rates of inflation, and an investment strategy consistent with the Company’s investment policy. The starting point for all future interest rate scenarios is consistent with the current market environment. If few scenarios are tested, the liability would be at least as great as the largest of the outcomes. If many scenarios are tested, the liability would be within a range defined by the average of the outcomes that are above the 60th percentile of the range of outcomes and the corresponding average for the 80th percentile.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    139

Provisions for adverse deviations in future equity returns are included by scenario testing or by applying margins for adverse deviations. In blocks of business where the valuation of liabilities uses scenario testing of future equity returns, the liability would be within a range defined by the average of the outcomes that are above the 60th percentile of the range of outcomes and the corresponding average for the 80th percentile. In blocks of business where the valuation of liabilities does not use scenario testing of future equity returns, the margin for adverse deviations on common share dividends is between 5% and 20%, and the margin for adverse deviations on capital gains would be 20% plus an assumption that those assets reduce in value by 20% to 50% at the time when the reduction is most adverse. A 30% reduction is appropriate for a diversified portfolio of North American common shares and, for other portfolios, the appropriate reduction depends on the volatility of the portfolio relative to a diversified portfolio of North American common shares.

In choosing margins, we ensure that, when taken one at a time, each margin is reasonable with respect to the underlying best estimate assumption and the extent of uncertainty present in making that assumption, and also that, in aggregate, the cumulative impact of the margins for adverse deviations is reasonable with respect to the total amount of our insurance contract liabilities. Our margins are generally stable over time and are generally only revised to reflect changes in the level of uncertainty in the best estimate assumptions. Our margins tend to be at the high end of the range for expenses and in the mid-range or higher for other assumptions. When considering the aggregate impact of margins, the actuary assesses the consistency of margins for each assumption across each block of business to ensure there is no double counting or omission and to avoid choosing margins that might be mutually exclusive. In particular, the actuary chooses similar margins for blocks of business with similar characteristics, and also chooses margins that are consistent with other assumptions, including assumptions about economic factors. The actuary is guided by Canadian actuarial standards of practice in making these professional judgments about the reasonableness of margins for adverse deviations.

The best estimate assumptions and margins for adverse deviations are reviewed at least annually and revisions are made when appropriate. The choice of assumptions underlying the valuation of insurance contract liabilities is subject to external actuarial peer review.

Mortality

Mortality refers to the rates at which death occurs for defined groups of people. Life insurance mortality assumptions are generally based on the past five to ten years of experience. Our experience is combined with industry experience where our own experience is insufficient to be statistically valid. Assumed mortality rates for life insurance and annuity contracts include assumptions about future mortality improvement based on recent trends in population mortality and our outlook for future trends.

Morbidity

Morbidity refers to both the rates of accident or sickness and the rates of recovery therefrom. Most of our disability insurance is marketed on a group basis. We offer critical illness policies on an individual basis in Canada and Asia, long-term care on an individual basis in Canada, and medical stop-loss insurance is offered on a group basis in the U.S. In Canada, group morbidity assumptions are based on our five-year average experience, modified to reflect any emerging trend in recovery rates. For long-term care and critical illness insurance, assumptions are developed in collaboration with our reinsurers and are largely based on their experience. In the U.S., our experience is used for both medical stop-loss and disability assumptions, with some consideration of industry experience.

Lapse and Other Policyholder Behaviour

Lapse

Policyholders may allow their policies to lapse prior to the end of the contractual coverage period by choosing not to continue to pay premiums or by surrendering their policy for the cash surrender value. Assumptions for lapse experience on life insurance are generally based on our five-year average experience. Lapse rates vary by plan, age at issue, method of premium payment, and policy duration.

Premium Payment Patterns

For universal life contracts, it is necessary to set assumptions about premium payment patterns. Studies prepared by industry or the actuarial profession are used for products where our experience is insufficient to be statistically valid. Premium payment patterns usually vary by plan, age at issue, method of premium payment, and policy duration.

Expense

Future policy-related expenses include the costs of premium collection, claims adjudication and processing, actuarial calculations, preparation and mailing of policy statements, and related indirect expenses and overhead. Expense assumptions are mainly based on our recent experience using an internal expense allocation methodology. Inflationary increases assumed in future expenses are consistent with the future interest rates used in scenario testing.

Investment Returns

Interest Rates

We generally maintain distinct asset portfolios for each major line of business. In the valuation of insurance contract liabilities, the future cash flows from insurance contracts and the assets that support them are projected under a number of interest rate scenarios, some of which are prescribed by Canadian actuarial standards of practice. Reinvestments and disinvestments take place according to the specifications of each scenario, and the liability is set based on the range of possible outcomes.

Non-Fixed Income Rates of Return

We are exposed to equity markets through our segregated fund products (including variable annuities) that provide guarantees linked to underlying fund performance and through insurance products where the insurance contract liabilities are supported by non-fixed income assets.

For segregated fund products (including variable annuities), we have implemented hedging programs involving the use of derivative instruments to mitigate a large portion of the equity market risk associated with the guarantees. The cost of these hedging programs is reflected in the liabilities. The equity market risk associated with anticipated future fee income is not hedged.

The majority of non-fixed income assets that are designated as FVTPL support our participating and universal life products where investment returns are passed through to policyholders through routine changes in the amount of dividends declared or in the rate of interest credited. In these cases, changes in non-fixed income asset values are largely offset by changes in insurance contract liabilities.

140    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

Asset Default

As required by Canadian actuarial standards of practice, insurance contract liabilities include a provision for possible future default of the assets supporting those liabilities. The amount of the provision for asset default included in the insurance contract liabilities is based on possible reductions in future investment yield that vary by factors such as type of asset, asset credit quality (rating), duration, and country of origin. The asset default assumptions are comprised of a best estimate plus a margin for adverse deviations, and are intended to provide for loss of both principal and income. Best estimate asset default assumptions by asset category and geography are derived from long-term studies of industry experience and the Company’s experience. Margins for adverse deviation are chosen from the standard range (of 25% to 100%) as recommended by Canadian actuarial standards of practice based on the amount of uncertainty in the choice of best estimate assumption. The credit quality of an asset is based on external ratings if available (public bonds) and internal ratings if not (mortgages and loans). Any assets without ratings are treated as if they are rated below investment grade.

In contrast to asset impairment provisions and changes in FVTPL assets arising from impairments, both of which arise from known credit events, the asset default provision in the insurance contract liabilities covers losses related to possible future (unknown) credit events. Canadian actuarial standards of practice require the asset default provision to be determined taking into account known impairments that are recognized elsewhere on the statement of financial position. The asset default provision included in the insurance contract liabilities is reassessed each reporting period in light of impairments, changes in asset quality ratings, and other events that occurred during the period.

10.A.iii Insurance Contract Liabilities

Insurance contract liabilities consist of the following:

As at December 31, 2019	Canada		U.S.		Asia			Corporate(1)		Total
Individual participating life	$	23,526	$	5,611	$	8,497		$	987	$	38,621
Individual non-participating life and health		13,527		13,832		12,188			386		39,933
Group life and health		10,493		5,541		39			14		16,087
Individual annuities		9,529		24		(17	)		5,335		14,871
Group annuities		14,276		7		99			–		14,382
Insurance contract liabilities before other policy liabilities		71,351		25,015		20,806			6,722		123,894
Add: Other policy liabilities(2)		2,959		1,724		2,401			206		7,290
Total insurance contract liabilities	$	74,310	$	26,739	$	23,207		$	6,928	$	131,184

(1) Primarily business from the UK and run-off reinsurance operations. Includes UK business of $893 for Individual participating life, $238 for Individual non-participating life and health, $5,107 for Individual annuities, and $156 for Other policy liabilities.

(2) Consists of amounts on deposit, policy benefits payable, provisions for unreported claims, provisions for policyholder dividends, and provisions for experience rating refunds.

As at December 31, 2018	Canada		U.S.		Asia			Corporate(1)		Total
Individual participating life	$	21,095	$	5,785	$	6,651		$	1,076	$	34,607
Individual non-participating life and health		11,435		13,239		12,463			391		37,528
Group life and health		9,591		5,674		32			–		15,297
Individual annuities		9,267		25		(44	)		5,608		14,856
Group annuities		12,461		6		147			–		12,614
Insurance contract liabilities before other policy liabilities		63,849		24,729		19,249			7,075		114,902
Add: Other policy liabilities(2)		3,049		1,457		2,276			239		7,021
Total insurance contract liabilities	$	66,898	$	26,186	$	21,525		$	7,314	$	121,923

(1) Primarily business from the UK and run-off reinsurance operations. Includes UK business of $980 for Individual participating life, $240 for Individual non-participating life and health, $5,214 for Individual annuities, and $170 for Other policy liabilities.

(2) Consists of amounts on deposit, policy benefits payable, provisions for unreported claims, provisions for policyholder dividends, and provisions for experience rating refunds.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    141

10.A.iv Changes in Insurance Contract Liabilities and Reinsurance Assets

Changes in Insurance contract liabilities and Reinsurance assets are as follows:

For the years ended December 31,	2019									2018
	Insurance contract liabilities			Reinsurance assets			Net			Insurance contract liabilities			Reinsurance assets			Net
Balances, before Other policy liabilities and assets as at January 1,	$	114,902		$	3,653		$	111,249		$	111,091		$	3,503		$	107,588
Change in balances on in-force policies		7,632			268			7,364			(3,094	)		(129	)		(2,965	)
Balances arising from new policies		4,098			136			3,962			3,780			128			3,652
Method and assumption changes		(363	)		(376	)		13			(374	)		(96	)		(278	)
Increase (decrease) in Insurance contract liabilities and Reinsurance assets		11,367			28			11,339			312			(97	)		409
Other(1)		(123	)		(123	)		–			–			–			–
Foreign exchange rate movements		(2,252	)		(163	)		(2,089	)		3,499			247			3,252
Balances before Other policy liabilities and assets		123,894			3,395			120,499			114,902			3,653			111,249
Other policy liabilities and assets		7,290			629			6,661			7,021			488			6,533
Total Insurance contract liabilities and Reinsurance assets, December 31	$	131,184		$	4,024		$	127,160		$	121,923		$	4,141		$	117,782

(1) Termination of reinsurance contracts.

10.A.v Impact of Method and Assumption Changes

Impacts of method and assumption changes on Insurance contract liabilities, net of Reinsurance assets, are as follows:

For the year ended December 31, 2019	Net increase (decrease) before income taxes			Description
Mortality / Morbidity	$	(347	)	Updates to reflect mortality/morbidity experience in all jurisdictions. The largest items were favourable mortality impacts in the UK in Corporate and in Group Retirement Services in Canada.
Lapse and other policyholder behaviour		102		Updates to lapse and policyholder behaviour in all jurisdictions. The largest item was an unfavourable lapse update in International in Asia.
Expenses		6		Updates to reflect expense experience in all jurisdictions.
Investment returns		6		Updates to various investment-related assumptions across the Company, partially offset by updates to promulgated ultimate reinvestment rates.
Model enhancements and other		246		Various enhancements and methodology changes across all jurisdictions. The largest item was an unfavourable strengthening of reinsurance provisions in In-force Management in the U.S., partially offset by a favourable change to participating accounts in the UK in Corporate and the Philippines in Asia.
Total impact of method and assumption changes	$	13

142    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

For the year ended December 31, 2018	Net increase (decrease) before income taxes			Description
Mortality / Morbidity	$	(337	)	Updates to reflect mortality/morbidity experience in all jurisdictions. The largest items were favourable mortality in International in Asia, Group Retirement Services in Canada and the UK in Corporate.
Lapse and other policyholder behaviour		563		Updates to lapse and other policyholder behaviour in all jurisdictions. The largest items, which all had unfavourable impacts, were updated lapse assumptions in the U.S. and International in Asia.
Expenses		6		Updates to reflect expense experience in all jurisdictions including updates to Canada participating life insurance accounts.
Investment returns		(331	)	Updates to various investment-related assumptions across the Company including updates to Canada participating life insurance accounts.
Model enhancements and other		(179	)	Various enhancements and methodology changes across all jurisdictions. The largest items were a favourable change to the participating provisions for adverse deviation in Canada and the U.S., partially offset by a change in reinsurance provisions in the U.S.
Total impact of method and assumption changes	$	(278	)

10.B Investment Contract Liabilities

10.B.i Description of Business

The following are the types of investment contracts in-force:

• Term certain payout annuities in Canada

• Guaranteed Investment Contracts in Canada

• Unit-linked products issued in the UK and Hong Kong

• Non-unit-linked pensions contracts issued in the UK and Hong Kong

10.B.ii Method and Assumption Changes

Investment Contracts with Discretionary Participation Features

Investment contracts with DPF are measured using the same approach as insurance contracts.

Investment Contracts without Discretionary Participation Features

Investment contracts without DPF are measured at FVTPL if by doing so, a potential accounting mismatch is eliminated or significantly reduced or if the contract is managed on a fair value basis. Other investment contracts without DPF are measured at amortized cost.

The fair value liability is measured through the use of prospective discounted cash-flow techniques. For unit-linked contracts, the fair value liability is equal to the current unit fund value, plus additional non-unit liability amounts on a fair value basis if required. For non-unit-linked contracts, the fair value liability is equal to the present value of cash flows.

Amortized cost is measured at the date of initial recognition as the fair value of consideration received, less the net effect of principal payments such as transaction costs and front-end fees. At each reporting date, the amortized cost liability is measured as the present value of future cash flows discounted at the effective interest rate where the effective interest rate is the rate that equates the discounted cash flows to the liability at the date of initial recognition.

10.B.iii Investment Contract Liabilities

Investment contract liabilities consist of the following:

As at December 31, 2019	Canada		Asia		Corporate		Total
Individual participating life	$	–	$	–	$	5	$	5
Individual non-participating life and health		–		258		2		260
Individual annuities		2,612		–		39		2,651
Group annuities		–		200		–		200
Total investment contract liabilities	$	2,612	$	458	$	46	$	3,116

For the year ended December 31, 2019, Investment contract liabilities of $3,116 are comprised of investment contracts with DPF of $502, investment contracts without DPF measured at amortized cost of $2,612, and for investment contracts without DPF measured at fair value of $2.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    143

As at December 31, 2018	Canada		Asia		Corporate		Total
Individual participating life	$	–	$	–	$	6	$	6
Individual non-participating life and health		–		254		3		257
Individual annuities		2,646		–		43		2,689
Group annuities		–		212		–		212
Total investment contract liabilities	$	2,646	$	466	$	52	$	3,164

For the year ended December 31, 2018, Investment contract liabilities of $3,164 are comprised of investment contracts with DPF of $515, investment contracts without DPF measured at amortized cost of $2,646, and investment contracts without DPF measured at fair value of $3.

10.B.iv Changes in Investment Contract Liabilities

Changes in investment contract liabilities without DPF are as follows:

For the years ended December 31,	2019						2018
	Measured at fair value			Measured at amortized cost			Measured at fair value		Measured at amortized cost
Balance as at January 1	$	3		$	2,646		$	3	$	2,517
Deposits		–			360			–		483
Interest		–			57			–		53
Withdrawals		–			(464	)		–		(420	)
Fees		–			(6	)		–		(8	)
Other		–			20			–		21
Foreign exchange rate movements		(1	)		(1	)		–		–
Balance as at December 31	$	2		$	2,612		$	3	$	2,646

Changes in investment contract liabilities with DPF are as follows:

For the years ended December 31,	2019			2018
Balance as at January 1	$	515		$	562
Change in liabilities on in-force		2			(84	)
Changes in assumptions or methodology		6			–
Foreign exchange rate movements		(21	)		37
Balance as at December 31	$	502		$	515

10.C Gross Claims and Benefits Paid

Gross claims and benefits paid consist of the following:

For the years ended December 31,	2019		2018
Maturities and surrenders	$	2,956	$	2,609
Annuity payments		1,909		1,876
Death and disability benefits		4,246		3,948
Health benefits		7,222		6,421
Policyholder dividends and interest on claims and deposits		1,088		1,132
Total gross claims and benefits paid	$	17,421	$	15,986

10.D Total Assets Supporting Liabilities and Equity

The following tables show the total assets supporting liabilities for the product lines shown (including insurance contract and investment contract liabilities) and assets supporting equity and other:

As at December 31, 2019	Debt securities		Equity securities		Mortgages and loans		Investment properties		Other		Total
Individual participating life	$	22,533	$	2,899	$	8,372	$	4,941	$	4,754	$	43,499
Individual non-participating life and health		21,301		1,418		14,145		1,790		9,353		48,007
Group life and health		6,858		72		9,301		–		2,897		19,128
Individual annuities		11,711		48		6,065		–		793		18,617
Group annuities		7,323		37		7,261		–		697		15,318
Equity and other		11,880		313		3,078		575		19,814		35,660
Total assets	$	81,606	$	4,787	$	48,222	$	7,306	$	38,308	$	180,229

144    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

As at December 31, 2018	Debt securities		Equity securities		Mortgages and loans		Investment properties		Other		Total
Individual participating life	$	19,624	$	2,557	$	7,978	$	4,736	$	4,397	$	39,292
Individual non-participating life and health		18,720		1,303		14,398		1,638		9,058		45,117
Group life and health		6,271		70		9,217		–		2,882		18,440
Individual annuities		11,918		49		5,769		–		959		18,695
Group annuities		6,448		35		6,298		–		822		13,603
Equity and other		11,462		620		3,162		783		17,591		33,618
Total assets	$	74,443	$	4,634	$	46,822	$	7,157	$	35,709	$	168,765

10.E Role of the Appointed Actuary

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

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

The Appointed Actuary is required each year to investigate the financial condition of the Company and prepare a report for the Board. The 2019 analysis tested our capital adequacy until December 31, 2023, under various adverse economic and business conditions. The Appointed Actuary reviews the calculation of our Life Insurance Capital Adequacy Test (“LICAT”) Ratios.

 11. Reinsurance

Reinsurance is used primarily to limit exposure to large losses. We have a retention policy that requires that such arrangements be placed with well-established, highly-rated reinsurers. Coverage is well-diversified and controls are in place to manage exposure to reinsurance counterparties. While reinsurance arrangements provide for the recovery of claims arising from the liabilities ceded, we retain primary responsibility to the policyholders.

11.A Reinsurance Assets

Reinsurance assets are measured using the amounts and assumptions associated with the underlying insurance contracts and in accordance with the terms of each reinsurance contract. Reinsurance assets are comprised of the following:

As at December 31, 2019	Canada			U.S.		Asia		Corporate(1)		Total
Individual participating life	$	35		$	10	$	322	$	–	$	367
Individual non-participating life and health		(377	)		913		48		20		604
Group life and health		384			1,881		2		–		2,267
Individual annuities		–			–		–		26		26
Group annuities		131			–		–		–		131
Reinsurance assets before other policy assets		173			2,804		372		46		3,395
Add: Other policy assets(2)		73			456		57		43		629
Total Reinsurance assets	$	246		$	3,260	$	429	$	89	$	4,024

(1) Primarily business from the UK and run-off reinsurance operations. Includes UK business of $20 for Individual non-participating life and health, and $26 for Individual annuities.

(2) Consists of amounts on deposit, policy benefits payable, provisions for unreported claims, provisions for policyholder dividends, and provisions for experience rating refunds.

As at December 31, 2018	Canada			U.S.		Asia		Corporate(1)		Total
Individual participating life	$	20		$	10	$	180	$	–	$	210
Individual non-participating life and health		(205	)		1,076		36		21		928
Group life and health		358			1,848		2		–		2,208
Individual annuities		–			–		–		186		186
Group annuities		121			–		–		–		121
Reinsurance assets before other policy assets		294			2,934		218		207		3,653
Add: Other policy assets(2)		80			307		42		59		488
Total Reinsurance assets	$	374		$	3,241	$	260	$	266	$	4,141

(1) Primarily business from the UK and run-off reinsurance operations. Includes UK business of $21 for Individual non-participating life and health, and $47 for Individual annuities.

(2) Consists of amounts on deposit, policy benefits payable, provisions for unreported claims, provisions for policyholder dividends, and provisions for experience rating refunds.

There was no impairment of Reinsurance assets in 2019 or 2018. Changes in Reinsurance assets are included in Note 10.A.iv.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    145

11.B Reinsurance (Expenses) Recoveries

Reinsurance (expenses) recoveries are comprised of the following:

For the years ended December 31,	2019		2018
Recovered claims and benefits	$	1,955	$	1,839
Commissions		70		74
Reserve adjustments		26		25
Operating expenses and other		80		83
Reinsurance (expenses) recoveries	$	2,131	$	2,021

11.C Reinsurance Gains or Losses

We did not enter into reinsurance arrangements that resulted in profits on inception in 2019 or 2018.

 12. Other Liabilities

12.A Composition of Other Liabilities

Other liabilities consist of the following:

As at December 31,	2019		2018
Accounts payable	$	1,903	$	2,045
Bank overdrafts and cash pooling		30		104
Repurchase agreements (Note 5)		1,850		1,824
Accrued expenses and taxes		3,251		3,137
Borrowed funds(1)		320		188
Senior financing(2)		1,967		2,066
Accrued post-retirement benefit liability (Note 25)		675		651
Secured borrowings from mortgage securitization (Note 5)		1,715		1,453
Lease liabilities		902		–
Put option liability (Note 5)		956		–
Deferred payments liability		438		–
Other		930		685
Total other liabilities	$	14,937	$	12,153

(1) The change in Borrowed funds relates to net cash flow changes of $132 in 2019 ($(40) in 2018) and foreign exchange rate movements of $nil in 2019 ($1 in 2018).

(2) The change in Senior financing relates to foreign exchange rate movements of $(99) in 2019 ($161 in 2018).

12.B Borrowed Funds

Borrowed funds include the following:

As at December 31,	Currency of borrowing		Maturity		2019		2018
Encumbrances on real estate		Cdn. dollars		Current – 2033	$	320	$	177
Encumbrances on real estate		U.S. dollars		Current – 2020		–		11
Total borrowed funds					$	320	$	188

Interest expense for the borrowed funds was $13 and $10 for 2019 and 2018, respectively. The aggregate maturities of borrowed funds are included in Note 6.

12.C Senior Financing

On November 8, 2007, a structured entity consolidated by us issued a US$1,000 variable principal floating rate certificate (the “Certificate”) to a financial institution (the “Lender”). At the same time, Sun Life Assurance Company of Canada-U.S. Operations Holdings, Inc. (“U.S. Holdings”), a subsidiary of SLF Inc., entered into an agreement with the Lender, pursuant to which U.S. Holdings will bear the ultimate obligation to repay the outstanding principal amount of the Certificate and be obligated to make quarterly interest payments at three-month LIBOR plus a fixed spread. SLF Inc. has fully guaranteed the obligation of U.S. Holdings. The structured entity issued additional certificates after the initial issuance, totaling to US$515, none of which were issued during 2019 and 2018. Total collateral posted per the financing agreement was US$nil as at December 31, 2019 and 2018.

The maximum capacity of this agreement is US$2,500. The agreement expires on November 8, 2037 and the maturity date may be extended annually for additional one-year periods upon the mutual agreement of the parties, provided such date is not beyond November 8, 2067. The agreement can be cancelled or unwound at the option of U.S. Holdings in whole or in part from time to time, or in whole under certain events.

For the year ended December 31, 2019, we recorded $64 of interest expense relating to this obligation ($57 in 2018). The fair value of the obligation is $1,874 ($1,879 in 2018). The fair value is determined by discounting the expected future cash flows using a current market interest rate adjusted by SLF Inc.’s credit spread and is categorized in Level 3 of the fair value hierarchy.

146    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

 13. Senior Debentures and Innovative Capital Instruments

13.A Senior Debentures⁽¹⁾    

The following obligations are included in Senior debentures as at December 31:

	Interest rate		Earliest par call or redemption date			Maturity		2019		2018
SLF Inc. senior debentures:
Series D issued June 30, 2009(2)		5.70%		n/a			2019	$	–	$	300
Series E issued August 23, 2011(2)		4.57%		n/a			2021		300		299
Sun Life Assurance senior debentures:(3)
Issued to Sun Life Capital Trust (“SLCT I”)
Series B issued June 25, 2002		7.09%		June 30, 2032	(4)		2052		200		200
Issued to Sun Life Capital Trust II (“SLCT II”)
Series C issued November 20, 2009(5)		6.06%		December 31, 2019			2108		–		500
Total senior debentures								$	500	$	1,299
Fair value								$	585	$	1,390

(1) All senior debentures are unsecured.

(2) Redeemable in whole or in part at any time prior to maturity at a price equal to the greater of par and a price based on the yield of a corresponding Government of Canada bond plus 0.575% for the Series D debentures and 0.53% for the Series E debentures. On July 2, 2019, SLF Inc.’s Series D debentures matured and SLF Inc. repaid all of the outstanding $300 principal amount of such debentures together with all accrued and unpaid interest.

(3) Redemption is subject to regulatory approval.

(4) Redeemable in whole or in part on any interest payment date or in whole upon the occurrence of a Regulatory Event or Tax Event, as described in the debenture. Prior to June 30, 2032, the redemption price is the greater of par and a price based on the yield of a corresponding Government of Canada bond plus 0.32%; from June 30, 2032, the redemption price is par.

(5) Redeemed on December 31, 2019.

Fair value is determined based on quoted market prices for identical or similar instruments. When quoted market prices are not available, fair value is determined from observable market data by dealers that are typically the market makers. The fair value is categorized in Level 2 of the fair value hierarchy.

Interest expense for senior debentures was $67 and $76 for 2019 and 2018, respectively.

The senior debentures issued by SLF Inc. are direct senior unsecured obligations and rank equally with other unsecured and unsubordinated indebtedness of SLF Inc.

13.B Innovative Capital Instruments

Innovative capital instruments consist of Sun Life ExchangEable Capital Securities (“SLEECS”), which were issued by SLCT I and SLCT II (together “SL Capital Trusts”), established as trusts under the laws of Ontario. SLCT I issued Sun Life ExchangEable Capital Securities – Series B (“SLEECS B”), which are units representing an undivided beneficial ownership interest in the assets of that trust. SLEECS B are non-voting except in certain limited circumstances. Holders of the SLEECS B are eligible to receive semi-annual non-cumulative fixed cash distributions.

SLCT II issued Sun Life ExchangEable Capital Securities – Series 2009-1 (“SLEECS 2009-1”), which were subordinated unsecured debt obligations. Holders of SLEECS 2009-1 were eligible to receive semi-annual interest payments. The SLEECS 2009-1 were redeemed on December 31, 2019.

The proceeds of the issuances of SLEECS B and SLEECS 2009-1 were used by the SL Capital Trusts to purchase senior debentures of Sun Life Assurance. The SL Capital Trusts are not consolidated by us. As a result, the innovative capital instruments are not reported on our Consolidated Financial Statements. However, the senior debentures issued by Sun Life Assurance to the SL Capital Trusts are reported on our Consolidated Financial Statements.

The SLEECS are structured to achieve Tier 1 regulatory capital treatment for SLF Inc. and Sun Life Assurance and, as such, have features of equity capital. No interest payments or distributions will be paid in cash by the SL Capital Trusts on the SLEECS if Sun Life Assurance fails to declare regular dividends (i) on its Class B Non-Cumulative Preferred Shares Series A, or (ii) on its public preferred shares, if any are outstanding (each, a “Missed Dividend Event”). In the case of the SLEECS B, if a Missed Dividend Event occurs, the net distributable funds of SLCT I will be distributed to Sun Life Assurance as the holder of Special Trust Securities of that trust.

If SLCT I fails to pay in cash the semi-annual interest payments or distributions on the SLEECS B in full for any reason other than a Missed Dividend Event, then, for a specified period of time, Sun Life Assurance will not declare dividends of any kind on any of its public preferred shares, and if no such public preferred shares are outstanding, SLF Inc. will not declare dividends of any kind on any of its preferred shares or common shares.

Each SLEECS B unit will be automatically exchanged for 40 non-cumulative perpetual preferred shares of Sun Life Assurance if any one of the following events occurs: (i) proceedings are commenced or an order is made for the winding-up of Sun Life Assurance; (ii) OSFI takes control of Sun Life Assurance or its assets; (iii) Sun Life Assurance’s capital ratios fall below applicable thresholds; or (iv) OSFI directs Sun Life Assurance to increase its capital or provide additional liquidity and Sun Life Assurance either fails to comply with such direction or elects to have the SLEECS B automatically exchanged (“Automatic Exchange Event”). Upon an Automatic Exchange Event, former holders of the SLEECS B will cease to have any claim or entitlement to distributions, interest or principal against the issuing SL Capital Trusts and will rank as preferred shareholders of Sun Life Assurance in a liquidation of Sun Life Assurance.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    147

The table below presents additional significant terms and conditions of the SLEECS:

Issuer

Issuance date

Distribution or interest payment dates

Annual yield

Redemption date at the issuer’s option

Conversion date at the holder’s option

Principal amount

Sun Life Capital Trust(1)(2)(3)(4)

SLEECS B

June 25, 2002

June 30, December 31

7.093%

June 30, 2007

Any time

$

200

(1) Subject to regulatory approval, the SL Capital Trusts may (i) redeem any outstanding SLEECS, in whole or in part, on the redemption date specified above or on any distribution date thereafter, or in the case of SLCT II, on any date thereafter, and (ii) may redeem all, but not part of any class of SLEECS upon occurrence of a Regulatory Event or a Tax Event, prior to the redemption date specified above.

(2) The SLEECS B may be redeemed for cash equivalent to (i) the greater of the Early Redemption Price or the Redemption Price if the redemption occurs prior to June 30, 2032 or (ii) the Redemption Price if the redemption occurs on or after June 30, 2032. Redemption Price is equal to one thousand dollars plus the unpaid distributions, other than unpaid distributions resulting from a Missed Dividend Event, to the redemption date. Early Redemption Price for the SLEECS B is the price calculated to provide an annual yield, equal to the yield of a Government of Canada bond issued on the redemption date that has a maturity date of June 30, 2032, plus 32 basis points, plus the unpaid distributions, other than unpaid distributions resulting from a Missed Dividend Event, to the redemption date.

(3) The non-cumulative perpetual preferred shares of Sun Life Assurance issued upon an Automatic Exchange Event in respect of the SLEECS B will become convertible, at the option of the holder, into a variable number of common shares of SLF Inc. on distribution dates on or after December 31, 2032.

(4) Holders of SLEECS B may exchange, at any time, all or part of their SLEECS B units for non-cumulative perpetual preferred shares of Sun Life Assurance at an exchange rate for each SLEECS of 40 non-cumulative perpetual preferred shares of Sun Life Assurance. SLCT I will have the right, at any time before the exchange is completed, to arrange for a substituted purchaser to purchase SLEECS tendered for surrender to SLCT I so long as the holder of the SLEECS so tendered has not withheld consent to the purchase of its SLEECS. Any non-cumulative perpetual preferred shares issued in respect of an exchange by the holders of SLEECS B will become convertible, at the option of the holder, into a variable number of common shares of SLF Inc. on distribution dates on or after December 31, 2032.

 14. Subordinated Debt

The following obligations are included in Subordinated debt as at December 31, and qualify as capital for Canadian regulatory purposes:

	Interest rate		Earliest par call or redemption date(1)			Maturity		2019		2018
Sun Life Assurance:
Issued May 15, 1998(2)		6.30%		n/a			2028	$	150	$	150
Sun Life Financial Inc.:
Issued May 29, 2007(3)		5.40%		May 29, 2037	(4)		2042		398		398
Issued May 13, 2014(5)		2.77%		May 13, 2019			2024		–		250
Issued September 25, 2015(6)		2.60%		September 25, 2020			2025		500		499
Issued February 19, 2016(7)		3.10%		February 19, 2021			2026		349		349
Issued September 19, 2016(8)		3.05%		September 19, 2023	(4)		2028		996		995
Issued November 23, 2017(9)		2.75%		November 23, 2022			2027		399		398
Issued August 7, 2019(10)		2.38%		August 13, 2024			2029		746		–
Total subordinated debt								$	3,538	$	3,039
Fair value								$	3,727	$	3,129

(1) The debentures issued by SLF Inc. in 2007 are redeemable at any time and the debentures issued by SLF Inc. in 2014, 2015, 2016, and 2017 are redeemable on or after the date specified. From the date noted, the redemption price is par and redemption may only occur on a scheduled interest payment date. Redemption of all subordinated debentures is subject to regulatory approval.

(2) 6.30% Debentures, Series 2, due 2028, issued by The Mutual Life Assurance Company of Canada, which subsequently changed its name to Clarica Life Insurance Company (“Clarica”) and was amalgamated with Sun Life Assurance. These debentures are redeemable at any time. Prior to May 15, 2028, the redemption price is the greater of par and a price based on the yield of a corresponding Government of Canada bond plus 0.16%.

(3) Series 2007-1 Subordinated Unsecured 5.40% Fixed/Floating Debentures due 2042. From May 29, 2037, interest is payable at 1.00% over Canadian dollar offered rate for three-month bankers’ acceptances (“CDOR”).

(4) For redemption of the 2007 debentures prior to the date noted, and for redemptions of the September 19, 2016 debentures between September 19, 2021 and September 19, 2023, the redemption price is the greater of par and a price based on the yield of a corresponding Government of Canada bond plus 0.25% for the 2007 debentures and 0.52% for the September 19, 2016 debentures.

(5) Series 2014-1 Subordinated Unsecured 2.77% Fixed/Floating Debentures due 2024. On May 13, 2019, SLF Inc. redeemed all of the outstanding $250 principal amount of these debentures in accordance with the redemption terms attached to such debentures.

(6) Series 2015-1 Subordinated Unsecured 2.60% Fixed/Floating Debentures due 2025. From September 25, 2020, interest is payable at 1.43% over CDOR.

(7) Series 2016-1 Subordinated Unsecured 3.10% Fixed/Floating Debentures due 2026. From February 19, 2021, interest is payable at 2.20% over CDOR.

(8) Series 2016-2 Subordinated Unsecured 3.05% Fixed/Floating Debentures due 2028. From September 19, 2023, interest is payable at 1.85% over CDOR.

(9) Series 2017-1 Subordinated Unsecured 2.75% Fixed/Floating Debentures due 2027. From November 23, 2022, interest is payable at 0.74% over CDOR.

(10) Series 2019-1 Subordinated Unsecured 2.38% Fixed/Floating Debentures due 2029. From August 13, 2024, interest is payable at 0.85% over CDOR.

Fair value is determined based on quoted market prices for identical or similar instruments. When quoted market prices are not available, fair value is determined from observable market data by dealers that are typically the market makers. The fair value is categorized in Level 2 of the fair value hierarchy.

Interest expense on subordinated debt was $105 for 2019 and 2018.

148    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

 15. Share Capital

The authorized share capital of SLF Inc. consists of the following:

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

• An unlimited number of Class A and Class B non-voting shares, issuable in series. The Board is authorized before issuing the shares, to fix the number, the consideration per share, the designation of, and the rights and restrictions of the Class A and Class B shares of each series, subject to the special rights and restrictions attached to all the Class A and Class B shares. The Board has authorized 13 series of Class A non-voting preferred shares, 10 of which are outstanding.

The common and preferred shares of SLF Inc. qualify as capital for Canadian regulatory purposes. See Note 21.

Dividends and Restrictions on the Payment of Dividends

Under the Insurance Companies Act (Canada), SLF Inc. and Sun Life Assurance are each prohibited from declaring or paying a dividend on any of its shares if there are reasonable grounds for believing that it is, or by paying the dividend would be, in contravention of: (i) the requirement that it maintains adequate capital and adequate and appropriate forms of liquidity, (ii) any regulations under the Insurance Companies Act (Canada) in relation to capital and liquidity, and (iii) any order by which OSFI directs it to increase its capital or provide additional liquidity.

SLF Inc. and Sun Life Assurance have each covenanted that, if a distribution is not paid when due on any outstanding SLEECS issued by the SL Capital Trusts, then (i) Sun Life Assurance will not pay dividends on its public preferred shares, if any are outstanding, and (ii) if Sun Life Assurance does not have any public preferred shares outstanding, then SLF Inc. will not pay dividends on its preferred shares or common shares, in each case, until the 12th month (in the case of the SLEECS issued by SLCT I) or 6th month (in the case of SLEECS issued by SLCT II) following the failure to pay the required distribution in full, unless the required distribution is paid to the holders of SLEECS. Public preferred shares means preferred shares issued by Sun Life Assurance which: (a) have been issued to the public (excluding any preferred shares held beneficially by affiliates of Sun Life Assurance); (b) are listed on a recognized stock exchange; and (c) have an aggregate liquidation entitlement of at least $200. As at December 31, 2019, Sun Life Assurance did not have outstanding any shares that qualify as public preferred shares.

The terms of SLF Inc.’s outstanding preferred shares provide that for so long as Sun Life Assurance is a subsidiary of SLF Inc., no dividends on such preferred shares are to be declared or paid if Sun Life Assurance’s minimum regulatory capital ratio falls below the applicable threshold.

In addition, under the terms of SLF Inc.’s outstanding preferred shares, SLF Inc. cannot pay dividends on its common shares without the approval of the holders of those preferred shares unless all dividends on the preferred shares for the last completed period for which dividends are payable have been declared and paid or set apart for payment.

Currently, the above limitations do not restrict the payment of dividends on SLF Inc.’s preferred or common shares.

The declaration and payment of dividends on SLF Inc.’s shares are at the sole discretion of the Board of Directors and will be dependent upon our earnings, financial condition and capital requirements. Dividends may be adjusted or eliminated at the discretion of the Board on the basis of these or other considerations.

15.A Common Shares

The changes in common shares issued and outstanding for the years ended December 31 were as follows:

	2019						2018
Common shares (in millions of shares)	Number of shares			Amount			Number of shares			Amount
Balance, January 1		598.5		$	8,419			610.5		$	8,582
Stock options exercised (Note 19)		0.8			28			0.4			16
Common shares purchased for cancellation		(11.5	)		(158	)		(12.5	)(1)		(183	)
Common shares issued as consideration for business acquisition		–			–			0.1			4
Balance, December 31		587.8		$	8,289			598.5		$	8,419

(1) 1.1 million shares were purchased pursuant to a third-party share repurchase program under an issuer bid exemption order at a discount to the prevailing market price of the common shares on the Toronto Stock Exchange.

On August 14, 2019, SLF Inc. launched a normal course issuer bid to purchase and cancel up to 15 million common shares of SLF Inc. (“common shares”) between August 14, 2019 and August 13, 2020 (the “2019 NCIB”) and implemented an automatic repurchase plan with its designated broker in order to facilitate purchases of common shares under such bid. Under such automatic repurchase plan, SLF Inc.’s designated broker may purchase common shares pursuant to the 2019 NCIB at times when SLF Inc. ordinarily would not be active in the market due to regulatory restrictions or self-imposed blackout periods. SLF Inc. launched a normal course issuer bid on August 14, 2018 and amended it effective May 14, 2019 (the “2018 NCIB”). Under the 2018 NCIB, SLF Inc. was authorized to purchase and cancel up to 18 million common shares between August 14, 2018 and August 13, 2019. On August 14, 2017, SLF Inc. launched a normal course issuer bid to purchase and cancel up to 11.5 million common shares between August 14, 2017 and August 13, 2018 (the “2017 NCIB” and, together with the 2018 NCIB and the 2019 NCIB, the “NCIBs”).

Pursuant to each of the NCIBs, common shares purchased for cancellation were (or, in the case of the 2019 NCIB, are) able to be purchased through the facilities of the Toronto Stock Exchange, other Canadian stock exchanges, and/or alternative Canadian trading platforms, at prevailing market rates, or by way of private agreements or share repurchase programs under issuer bid exemption orders issued by securities regulatory authorities at a discount to the prevailing market price.

In 2019, SLF Inc. purchased and cancelled approximately 11.4 million common shares at an average price per share of $52.01 for a total amount of $592 under the 2018 NCIB and 2019 NCIB. An additional 0.1 million common shares purchased in 2018, at an average price per share of $44.91 for a total amount of $6, were subsequently cancelled in 2019. The total amount paid to purchase the shares is allocated to Common shares and Retained earnings in our Consolidated Statements of Changes in Equity. The amount allocated to Common shares is based on the average cost per common share and amounts paid above the average cost are allocated to Retained earnings.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    149

15.B Preferred Shares

The were no changes in preferred shares issued and outstanding for the years ended December 31, 2019 and December 31, 2018.

Further information on the preferred shares outstanding as at December 31, 2019, is as follows:

Class A Preferred shares (in millions of shares)	Issue date	Annual dividend rate			Annual dividend per share			Earliest par call or redemption date(1)			Number of shares		Face amount		Net amount(2)
Series 1	February 25, 2005		4.75%		$	1.19			Any time			16.0	$	400	$	394
Series 2	July 15, 2005		4.80%		$	1.20			Any time			13.0		325		318
Series 3	January 13, 2006		4.45%		$	1.11			Any time			10.0		250		245
Series 4	October 10, 2006		4.45%		$	1.11			Any time			12.0		300		293
Series 5	February 2, 2007		4.50%		$	1.13			Any time			10.0		250		245
Series 8R(3)	May 25, 2010		2.275%	(3)	$	0.57			June 30, 2020	(4)		5.2		130		127
Series 9QR(5)	June 30, 2015		Floating	(6)		Floating			June 30, 2020	(7)		6.0		150		147
Series 10R(3)	August 12, 2011		2.842%	(3)	$	0.71	(8)		September 30, 2021	(4)		6.9		173		169
Series 11QR(5)	September 30, 2016		Floating	(6)		Floating			September 30, 2021	(7)		1.1		27		26
Series 12R(3)	November 10, 2011		3.806%	(3)	$	0.95	(8)		December 31, 2021	(4)		12.0		300		293
Total preferred shares												92.2	$	2,305	$	2,257

(1) Redemption of all preferred shares is subject to regulatory approval.

(2) Net of after-tax issuance costs.

(3) On the earliest redemption date and every five years thereafter, the dividend rate will reset to an annual rate equal to the 5-year Government of Canada bond yield plus a spread specified for each series. The specified spread for Class A shares is: Series 8R – 1.41%, Series 10R – 2.17%, and Class A Non-Cumulative 5-Year Rate Reset Preferred Shares Series 12R (“Series 12R Shares”) – 2.73%. On the earliest redemption date and every five years thereafter, holders will have the right, at their option, to convert their shares into the series that is one number higher than their existing series.

(4) Redeemable on the redemption date and every five years thereafter, in whole or in part, at $25.00 per share.

(5) On the earliest redemption date and every five years thereafter, holders will have the right, at their option, to convert those shares into the series that is one number lower than their existing series.

(6) Holders are entitled to receive quarterly floating rate non-cumulative dividends at an annual rate equal to the then 3-month Government of Canada treasury bill yield plus a spread specified for each series. The specified spread for Class A shares is: Series 9QR – 1.41% and Series 11QR – 2.17%.

(7) Redeemable on the redemption date and every five years thereafter, in whole or in part, at $25.00 per share, and on any other date at $25.50 per share.

(8) The annual dividend per share in the table above is the amount paid per share in 2019.

 16. Interests in Other Entities

16.A Subsidiaries

Our principal subsidiaries are Sun Life Assurance and Sun Life Global Investments Inc. Sun Life Assurance is our principal operating insurance company and holds our insurance operations in Canada, the U.S., the UK, the Philippines, Hong Kong, Indonesia and Vietnam. These insurance operations are operated directly by Sun Life Assurance or through other subsidiaries. Sun Life Global Investments Inc. is a non-operating holding company that holds our asset management businesses, including Massachusetts Financial Services and the group of companies under SLC Management.

We are required to comply with various regulatory capital and solvency requirements in the jurisdictions in which we operate that may restrict our ability to access or use the assets of the group and to pay dividends. Further details on these restrictions are included in Notes 15 and 21.

16.B Joint Ventures and Associates

We have interests in various joint ventures and associates that principally operate in India, Malaysia, China, and the Philippines. We also have interests in joint ventures related to certain real estate investments in Canada. Our interests in these joint ventures and associates range from 24.99% to 50%. The following table summarizes, in aggregate, the financial information of these joint ventures and associates:

As at or for the years ended December 31,	2019			2018
Carrying amount of interests in joint ventures and associates	$	1,510		$	1,500
Our share of:
Net income (loss)		86			91
Other comprehensive income (loss)		(9	)		7
Total comprehensive income (loss)	$	77		$	98

In 2019, our investment in our joint ventures and associates changed by $19 ($64 in 2018), primarily in Canada.

During 2019, we received dividends from our joint ventures and associates of $45 ($34 in 2018). We also incurred rental expenses of $17 ($16 in 2018) related to leases with our joint ventures and associates, with the remaining future rental payments payable to our joint ventures and associates totaling $212 over 13 years.

16.C Joint Operations

We invest jointly in investment properties and owner-occupied properties which are co-managed under contractual relationships with the other investors. We share in the revenues and expenses generated by these properties in proportion to our investment. The carrying amount

150    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

of these jointly controlled assets, which is included in Investment properties and in Other Assets for owner-occupied properties, is $1,503 as at December 31, 2019 ($1,223 as at December 31, 2018). The fair value of these jointly controlled assets is $1,595 as at December 31, 2019 ($1,307 as at December 31, 2018).

16.D Unconsolidated Structured Entities

SLF Inc. and its subsidiaries have interests in various structured entities that are not consolidated by us. A structured entity is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements. We have an interest in a structured entity when we have a contractual or non-contractual involvement that exposes us to variable returns from the performance of the entity. Our interest includes investments held in securities or units issued by these entities and fees earned from management of the assets within these entities.

Information on our interests in unconsolidated structured entities is as follows:

As at December 31,					2019				2018
Type of structured entity	Type of investment held		Consolidated Statements of Financial Position line item		Carrying amount		Maximum exposure to loss(1)		Carrying amount		Maximum exposure to loss(1)
Securitization entities – third-party managed		Debt securities		Debt securities	$	8,402	$	8,402	$	7,366	$	7,366
Securitization entities – third-party managed		Short-term securities		Cash, cash equivalents and short-term securities	$	498	$	498	$	430	$	430
Investment funds – third-party managed		Investment fund units		Equity securities	$	3,453	$	3,453	$	3,439	$	3,439
Investment funds – company managed(2)		Investment fund units and Limited partnership units		Equity securities and Other invested assets	$	2,293	$	2,293	$	1,705	$	1,705
Limited partnerships – third-party managed		Limited partnership units		Other invested assets	$	1,682	$	1,682	$	1,557	$	1,557

(1) The maximum exposure to loss is the maximum loss that we could record through comprehensive income as a result of our involvement with these entities.

(2) Includes investments in funds managed by our joint ventures with a carrying amount of $204 ($213 in 2018).

16.D.i Securitization Entities

Securitization entities are structured entities that are generally financed primarily through the issuance of debt securities that are backed by a pool of assets, such as mortgages or loans.

Third-Party Managed

Our investments in third-party managed securitization entities consist of asset-backed securities, such as commercial mortgage-backed securities, residential mortgage-backed securities, collateralized debt obligations (“CDOs”), and commercial paper. These securities are generally large-issue debt securities designed to transform the cash flows from a specific pool of underlying assets into tranches providing various risk exposures for investment purposes. We do not provide financial or other support to these entities other than our original investment and therefore our maximum exposure to loss on these investments is limited to the carrying amount of our investment. We do not have control over these investments since we do not have power to direct the relevant activities of these entities, regardless of the level of our investment.

Company Managed

We provide collateral management services to various securitization entities, primarily CDOs, from which we earn a fee for our services. The financial support provided to these entities is limited to the carrying amount of our investment in these entities. We provide no guarantees or other contingent support to these entities. We have not consolidated these entities since we do not have significant variability from our interests in these entities and we do not have any investment in these entities.

16.D.ii Investment Funds and Limited Partnerships

Investment funds and limited partnerships are investment vehicles that consist of a pool of funds collected from a group of investors for the purpose of investing in assets such as money market instruments, debt securities, equity securities, real estate, and other similar assets. The preceding table includes our investments in all investment funds, including mutual funds, exchange-traded funds, and segregated funds, and our investments in certain limited partnerships. Some of these investment funds and limited partnerships are structured entities. For all investment funds and limited partnerships, our maximum exposure to loss is equivalent to the carrying amount of our investment in the fund or partnership. Investment funds and limited partnerships are generally financed through the issuance of investment fund units or limited partnership units.

Third-Party Managed

We hold units in investment funds and limited partnerships managed by third-party asset managers. Our investments in fund units and limited partnership units generally give us an undivided interest in the investment performance of a portfolio of underlying assets managed or tracked to a specific investment mandate for investment purposes. We do not have control over investment funds or limited partnerships that are structured entities since we do not have power to direct their relevant activities.

Company Managed

We hold units in Company managed investment funds and limited partnerships. We generally have power over Company managed investment funds and limited partnerships that are structured entities since we have power to direct the relevant activities of the funds and limited

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    151

partnerships. However, we have not consolidated these funds and limited partnerships since we do not have significant variability from our interests in these funds and limited partnerships. We earn management fees from the management of these investment funds and limited partnerships that are commensurate with the services provided and are reported in Fee income. Management fees are generally based on the value of the assets under management. Therefore, the fees earned are impacted by the composition of the assets under management and fluctuations in financial markets. The fee income earned is included in Fund management and other asset based fees in Note 17. We also hold units in investment funds and limited partnerships managed by our joint ventures. Our share of the management fees earned is included as part of the Net income (loss) reported in Note 16.B.

16.E Consolidated Structured Entities

A significant structured entity consolidated by us is the entity that issued the senior financing that is described in more detail in Note 12.C. We also consolidate certain investment funds managed by SLC Management that invest primarily in mortgages and investment properties.

 17. Fee Income

Fee income for the years ended December 31 consists of the following:

	2019		2018
Fee income from insurance contracts	$	1,017	$	968
Fee income from service contracts:
Distribution fees		820		829
Fund management and other asset-based fees		3,662		3,444
Administrative service and other fees		752		725
Total fee income	$	6,251	$	5,966

Distribution fees and Fund management and other asset-based fees are primarily earned in the Asset Management segment. Administrative service and other fees are primarily earned in the Canada segment. The fee income by business segment is presented in Note 4.

 18. Operating Expenses

Operating expenses for the years ended December 31 consist of the following:

	2019		2018
Employee expenses(1)	$	4,090	$	3,707
Premises and equipment		163		268
Capital asset depreciation		241		107
Service fees		919		870
Amortization of intangible assets (Note 9)		137		119
Impairment of intangible assets (Note 9)		15		–
Other expenses		1,468		1,361
Total operating expenses	$	7,033	$	6,432

(1) See table below for further details.

Employee expenses for the years ended December 31 consist of the following:

	2019		2018
Salaries, bonus, employee benefits	$	3,497	$	3,322
Share-based payments (Note 19)		549		346
Other personnel costs		44		39
Total employee expenses	$	4,090	$	3,707

 19. Share-Based Payments

19.A Stock Option Plans

SLF Inc. has granted stock options to eligible employees under the Executive Stock Option Plan. These options are granted at the closing price of the common shares on the Toronto Stock Exchange (“TSX”) on the grant date. The options granted under the stock option plans vest over a four-year period. All options have a maximum exercise period of 10 years. The maximum number of common shares that may be issued under the Executive Stock Option Plan is 29,525,000 shares.

152    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

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

	2019					2018
	Number of stock options (thousands)			Weighted average exercise price		Number of stock options (thousands)			Weighted average exercise price
Balance, January 1,		3,101		$	37.06		3,008		$	33.88
Granted		745		$	50.58		517		$	53.96
Exercised		(772	)	$	29.01		(399	)	$	34.57
Forfeited		–		$	–		(25	)	$	43.79
Balance, December 31,		3,074		$	42.36		3,101		$	37.06
Exercisable, December 31,		1,670		$	35.51		2,041		$	30.97

The average share price at the date of exercise of stock options for the year ended December 31, 2019 was $53.22 ($53.28 for 2018).

Compensation expense for stock options was $4 for the year ended December 31, 2019 ($3 for 2018).

The stock options outstanding as at December 31, 2019, by exercise price, are as follows:

Range of exercise prices	Number of stock options (thousands)		Weighted average remaining contractual life (years)		Weighted average exercise price
$18.00 to $24.00		407		2.16	$	21.53
$24.01 to $30.00		176		3.16	$	28.20
$30.01 to $35.00		82		0.72	$	31.03
$35.01 to $45.00		794		5.29	$	39.50
$45.01 to $53.96		1,615		8.40	$	51.14
Total stock options		3,074		6.27	$	42.36

The weighted average fair values of the stock options, calculated using the Black-Scholes option pricing model, granted during the year ended December 31, 2019 was $5.56 ($7.00 for 2018). The Black-Scholes option pricing model used the following assumptions to determine the fair value of options granted during the years ending December 31:

Weighted average assumptions	2019		2018
Risk-free interest rate		1.8%		2.2%
Expected volatility		19.5%		21.3%
Expected dividend yield		4%		4%
Expected life of the option (in years)		6.3		6.3
Exercise price	$	50.58	$	53.96

Expected volatility is based on historical volatility of the common shares, implied volatilities from traded options on the common shares, and other factors. The expected term of options granted is derived based on historical employee exercise behaviour and employee termination experience. The risk-free rate for periods within the expected term of the option is based on the Canadian government bond yield curve in effect at the time of grant.

19.B Employee Share Ownership Plan

In Canada, we match eligible employees’ contributions to the Sun Life Financial Employee Stock Plan. Employees may elect to contribute from 1% to 20% of their target annual compensation to the Sun Life Financial Employee Stock Plan. Under this plan the match is provided for employees who have met one year of employment eligibility and is equal to 50% of the employee’s contributions up to 5% of an employee’s annual compensation. The match is further capped by a one thousand five hundred dollar annual maximum. Our contributions vest immediately and are expensed.

In 2019, we introduced the Sun Life Financial U.S. Employee Stock Purchase Plan which allows eligible employees to buy shares of SLF Inc. at a 10% discount at the end of six-month offering windows. Under this plan, employees who enroll can contribute from 1% to 10% of their base salary. At the end of each window, accumulated employee amounts are used to purchase stock, with the Company financing the 10% discount. The total annual contribution, including the company discount, is limited to U.S. twenty-five thousand dollars.

We recorded an expense of $8 for the year ended December 31, 2019 ($8 for 2018).

19.C Other Share-Based Payment Plans

All other share-based payment plans use notional units that are valued based on the common share price on the TSX. Any fluctuation in the common share price changes the value of the units, which affects our share-based payment compensation expense. Upon redemption of these units, payments are made to the employees with a corresponding reduction in the accrued liability. We use equity swaps and forwards to hedge our exposure to variations in cash flows due to changes in the common share price for all of these plans.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    153

Details of these plans are as follows:

Senior Executives’ Deferred Share Unit (“DSU”) Plan: Under the DSU plan, designated executives may elect to receive all or a portion of their annual incentive award in the form of DSUs. Each DSU is equivalent in value to one common share and earns dividend equivalents in the form of additional DSUs at the same rate as the dividends on common shares. The designated executives must elect to participate in the plan prior to the beginning of the plan year and this election is irrevocable. Awards generally vest immediately; however, participants are not permitted to redeem the DSUs until after termination, death, or retirement. The value at the time of redemption will be based on the fair value of the common shares immediately before their redemption.

Sun Share Unit (“Sun Share”) Plan: Under the Sun Share plan, participants are granted units that are equivalent in value to one common share and have a grant price equal to the average of the closing price of a common share on the TSX on the five trading days immediately prior to the date of grant. Participants generally hold units for up to 36 months from the date of grant. The units earn dividend equivalents in the form of additional units at the same rate as the dividends on common shares. Units may vest or become payable if we meet specified threshold performance targets. The plan provides for performance factors to motivate participants to achieve a higher return for shareholders (performance factors are determined through a multiplier that can be as low as zero or as high as two times the number of units that vest). Payments to participants are based on the number of units vested multiplied by the average closing price of a common share on the TSX on the five trading days immediately prior to the vesting date.

Additional information for other share-based payment plans: The units outstanding under these plans and the liabilities recognized for these units in our Consolidated Statements of Financial Position are summarized in the following table:

Number of units (in thousands)	Sun Shares		DSUs		Total
Units outstanding December 31, 2019		5,521		930		6,451
Units outstanding December 31, 2018		5,967		854		6,821
Liability accrued as at December 31, 2019	$	257	$	51	$	308
Liability accrued as at December 31, 2018	$	200	$	35	$	235

Compensation expense and the income tax expense (benefit) for other share-based payment plans for the years ended December 31 are shown in the following table. Since expenses for the DSUs are accrued as part of incentive compensation in the year awarded, the expenses below do not include these accruals. The expenses presented in the following table include increases in the liabilities for Sun Shares and DSUs due to changes in the fair value of the common shares and the accruals of the Sun Shares liabilities over the vesting period, and exclude any adjustment in expenses due to the impact of hedging.

For the years ended December 31,	2019			2018
Compensation expense	$	205		$	87
Income tax expense (benefit)	$	(53	)	$	(21	)

19.D Share-Based Payment Plans of MFS

Share-based payment awards within MFS are based on their own shares. Restricted share awards and stock option awards are settled in MFS shares and restricted stock unit awards are settled in cash. Restricted share awards, restricted stock unit awards, and stock option awards generally vest over a four-year period and continued employment is generally the only service requirement for these awards. Holders of restricted share awards and restricted stock unit awards are entitled to receive non-forfeitable dividend equivalent payments during the vesting period at the same rate as the dividends on MFS’s shares.

Although restricted share awards and stock option awards are settled in shares, all of the MFS share-based awards, including outstanding MFS shares, are accounted for as cash-settled share-based payment awards due to the fact that MFS has a practice of repurchasing its outstanding shares after a specified holding period. The fair value of stock option awards is determined using the Black-Scholes option pricing model, while the fair value of restricted share awards, restricted stock unit awards, and outstanding MFS shares are estimated using a market consistent share valuation model. The amount of periodic compensation expense recognized is impacted by grants of new awards, vesting, exercise, and forfeiture of unvested awards, share repurchases, changes in fair value of awards, and outstanding MFS shares. The total liability accrued attributable to all MFS share-based payment plans as at December 31, 2019 was $810 ($831 as at December 31, 2018) which includes a liability of $644 ($677 as at December 31, 2018) for the stock options, restricted shares, and outstanding MFS shares.

Compensation expense and the income tax expense (benefit) for these awards for the years ended December 31 are shown in the following table:

For the years ended December 31,	2019			2018
Compensation expense	$	332		$	248
Income tax expense (benefit)	$	(58	)	$	(49	)

154    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

 20. Income Taxes

20.A Deferred Income Taxes

The following represents the deferred tax assets and liabilities in the Consolidated Statements of Financial Position:

For the years ended December 31,	2019		2018
Deferred tax assets(1)	$	1,455	$	1,209
Deferred tax liabilities(1)		406		322
Net deferred tax asset	$	1,049	$	887

(1) Our deferred tax assets and deferred tax liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred taxes relate to the same taxable entity and the same taxation authority.

The movement in net deferred tax assets for the years ended December 31, are as follows:

	Investments			Policy liabilities(1)			Deferred acquisition costs			Losses available for carry forward			Pension and other employee benefits			Other(2)			Total
As at December 31, 2018	$	(746	)	$	737		$	96		$	648		$	319		$	(167	)	$	887
Acquisitions (disposals)		–			–			–			–			–			(48	)		(48	)
Charged to statement of operations		(263	)		406			(9	)		63			7			50			254
Charged to other comprehensive income		(52	)		(9	)		–			(10	)		21			(1	)		(51	)
Charged to equity, other than other comprehensive income		–			–			–			–			–			9			9
Foreign exchange rate movements and Other		21			(13	)		(4	)		(4	)		(9	)		7			(2	)
As at December 31, 2019	$	(1,040	)	$	1,121		$	83		$	697		$	338		$	(150	)	$	1,049

(1) Consists of Insurance contract liabilities and Investment contract liabilities, net of Reinsurance assets.

(2) Includes unused tax credits.

	Investments			Policy liabilities(1)			Deferred acquisition costs		Losses available for carry forward			Pension and other employee benefits			Other(2)			Total
As at December 31, 2017	$	(957	)	$	896		$	77	$	549		$	351		$	(24	)	$	892
Charged to statement of operations		195			(170	)		6		107			(26	)		(149	)		(37	)
Charged to other comprehensive income		45			–			–		(13	)		(17	)		9			24
Charged to equity, other than other comprehensive income		–			–			6		–			–			3			9
Foreign exchange rate movements and Other		(29	)		11			7		5			11			(6	)		(1	)
As at December 31, 2018	$	(746	)	$	737		$	96	$	648		$	319		$	(167	)	$	887

(1) Consists of Insurance contract liabilities and Investment contract liabilities, net of Reinsurance assets.

(2) Includes unused tax credits.

We have accumulated non-capital tax losses, primarily in Canada, the Philippines, the UK and Indonesia, totaling $3,317 ($3,245 in 2018). The benefit of these tax losses has been recognized to the extent that it is probable that the benefit will be realized. In addition, in the U.S., we have net capital losses of $1 ($30 in 2018) for which a deferred tax asset of less than $1 ($6 in 2018) has been recognized. Unused tax losses for which a deferred tax asset has not been recognized amount to $553 as of December 31, 2019 ($702 in 2018) primarily in the Philippines and Indonesia. We also have capital losses of $455 in the UK ($460 in 2018) and $178 in Canada ($176 in 2018) for which a deferred tax asset of $101 ($102 in 2018) has not been recognized.

We will realize the benefit of tax losses carried forward in future years through a reduction in current income taxes as and when the losses are utilized. These tax losses are subject to examination by various tax authorities and could be reduced as a result of the adjustments to tax returns. Furthermore, legislative, business or other changes may limit our ability to utilize these losses.

Included in the deferred tax asset related to losses available for carry forward are tax benefits that have been recognized on losses incurred in either the current or the preceding year. In determining if it is appropriate to recognize these tax benefits, we rely on projections of future taxable profits, and we also consider tax planning opportunities that will create taxable income in the period in which the unused tax losses can be utilized.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    155

The non-capital losses carried forward in Canada expire beginning in 2028 and the capital losses can be carried forward indefinitely. The operating and capital losses in the UK can be carried forward indefinitely. The non-capital losses in the Philippines can be carried forward three years, and the non-capital losses in Indonesia can be carried forward five years.

We recognize a deferred tax liability on all temporary differences associated with investments in subsidiaries, branches, joint ventures and associates unless we are able to control the timing of the reversal of these differences and it is probable that these differences will not reverse in the foreseeable future. As at December 31, 2019, temporary differences associated with investments in subsidiaries, branches, joint ventures and associates for which a deferred tax liability has not been recognized amount to $6,068 ($5,723 in 2018).

20.B Income Tax Expense (Benefit)

20.B.i  In our Consolidated Statements of Operations, Income tax expense (benefit) for the years ended December 31 has the following components:

	2019			2018
Current income tax expense (benefit):
Current year	$	620		$	561
Adjustments in respect of prior years, including resolution of tax disputes		(80	)		(1	)
Total current income tax expense (benefit)		540			560
Deferred income tax expense (benefit):
Origination and reversal of temporary differences		(240	)		42
Adjustments in respect of prior years, including resolution of tax disputes		(24	)		(9	)
Tax expense (benefit) arising from unrecognized tax losses		8			4
Tax rate and other legislative changes		2			–
Total deferred income tax expense (benefit)		(254	)		37
Total income tax expense (benefit)	$	286		$	597

20.B.ii  Income tax benefit (expense) recognized directly in equity for the years ended December 31:

	2019			2018
Recognized in other comprehensive income:
Current income tax benefit (expense)	$	(12	)	$	(4	)
Deferred income tax benefit (expense)		(51	)		24
Total recognized in other comprehensive income		(63	)		20
Recognized in equity, other than other comprehensive income:
Deferred income tax benefit (expense)		9			9
Total income tax benefit (expense) recorded in equity, including tax benefit (expense) recorded in Other comprehensive income	$	(54	)	$	29

20.B.iii Our effective income tax rate differs from the combined Canadian federal and provincial statutory income tax rate as follows:

For the years ended December 31,	2019						2018
				%						%
Total net income (loss)	$	2,947					$	2,914
Add: Income tax expense (benefit)		286						597
Total net income (loss) before income taxes	$	3,233					$	3,511
Taxes at the combined Canadian federal and provincial statutory income tax rate	$	857			26.5		$	939			26.8
Increase (decrease) in rate resulting from:
Tax-exempt investment income		(260	)		(8.0	)		(131	)		(3.8	)
Higher (lower) effective rates on income subject to taxation in foreign jurisdictions		(194	)		(6.0	)		(222	)		(6.3	)
Adjustments in respect of prior years, including resolution of tax disputes		(104	)		(3.2	)		(10	)		(0.3	)
Tax (benefit) cost of unrecognized tax losses and tax credits		8			0.2			4			0.1
Tax rate and other legislative changes		2			0.1			–			–
Other		(23	)		(0.8	)		17			0.5
Total tax expense (benefit) and effective income tax rate	$	286			8.8		$	597			17.0

In the second quarter of 2019, a provincial corporate tax rate decrease from 12% to 8% was enacted in Alberta, Canada. As a result, our statutory tax rate decreased from 26.75% (rounded to 26.8% in the table above) in 2018 to 26.5% in 2019 and future years.

Tax-exempt investment income includes tax rate differences related to various types of investment income that is taxed at rates lower than our statutory income tax rate, such as dividend income, capital gains arising in Canada, and various others. Fluctuations in foreign exchange rates, changes in market values of real estate properties and other investments have an impact on the amount of these tax rate differences.

156    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

Statutory income tax rates in other jurisdictions in which we conduct business range from 0% to 30%, which creates a tax rate differential and corresponding tax provision difference compared to the Canadian federal and provincial statutory rate when applied to foreign income not subject to tax in Canada. Generally, higher earnings in jurisdictions with higher statutory tax rates result in an increase of our tax expense, while earnings arising in tax jurisdictions with statutory rates lower than 26.5% reduce our tax expense. These differences are reported in Higher (lower) effective rates on income subject to taxation in foreign jurisdictions. The benefit reported in 2019 included lower income in jurisdictions with low statutory income tax rates compared to 2018.

Adjustments in respect of prior periods, including the resolution of tax disputes, relates mainly to the resolution of Canadian tax matters, and the finalization of the prior year’s Canadian and U.S. tax filings in 2019. In 2018, it related to tax audit adjustments and the finalization of tax filings in Canada, Asia and the U.S.

Tax (benefit) cost of unrecognized tax losses/tax credits reflects unrecognized losses in Asia.

Tax rate and other legislative changes relates to the corporate tax rate decrease in Alberta in 2019.

Other primarily reflects withholding taxes on distributions from our foreign subsidiaries and the benefit relating to investments in joint ventures in Asia. In 2019, Other also reflects the reversal of withholding taxes no longer expected to be paid.

 21. Capital Management

21.A Capital

Our capital base is structured to exceed minimum regulatory and internal capital targets and maintain strong credit and financial strength ratings while maintaining a capital efficient structure. We strive to achieve an optimal capital structure by balancing the use of debt and equity financing. Capital is managed both on a consolidated basis under principles that consider all the risks associated with the business as well as at the business group level under the principles appropriate to the jurisdiction in which each operates. We manage the capital for all of our international subsidiaries on a local statutory basis in a manner commensurate with their individual risk profiles.

The Board of Directors of SLF Inc. is responsible for the annual review and approval of the Company’s capital plan and capital risk policy. Management oversight of our capital programs and position is provided by the Company’s Executive Risk Committee, the membership of which includes senior management from the finance, actuarial, and risk management functions.

We engage in a capital planning process annually in which capital deployment options, fundraising, and dividend recommendations are presented to the Risk & Conduct Review Committee of the Board of Directors. Capital reviews are regularly conducted which consider the potential impacts under various business, interest rate, and equity market scenarios. Relevant components of these capital reviews, including dividend recommendations, are presented to the Risk & Conduct Review Committee on a quarterly basis. The Board of Directors is responsible for the approval of the dividend recommendations.

The capital risk policy is designed to ensure that adequate capital is maintained to provide the flexibility necessary to take advantage of growth opportunities, to support the risks associated with our businesses and to optimize return to our shareholders. This policy is also intended to provide 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 us and our subsidiaries to support ongoing operations and to take advantage of opportunities for expansion. SLF Inc. manages its capital in a manner commensurate with its risk profile and control environment.

SLF Inc. is a non-operating insurance company and is subject to the LICAT guideline. As at December 31, 2019, SLF Inc.’s LICAT ratio exceeds the regulatory minimum ratio as set out by OSFI.

Sun Life Assurance, SLF’s principal operating life insurance subsidiary in Canada, is also subject to the LICAT guideline. With a LICAT Ratio of 130% as at December 31, 2019, Sun Life Assurance’s LICAT Ratio is above OSFI’s Supervisory Target Total Ratio of 100% and minimum Total Ratio of 90%.

OSFI may intervene and assume control of a Canadian life insurance company if it deems the amount of available capital insufficient. Capital requirements may be adjusted by OSFI in the future, as experience develops or the risk profile of Canadian life insurers changes or to reflect other risks. Sun Life Assurance exceeded levels that would require regulatory or corrective action as at December 31, 2019 and December 31, 2018.

The Company’s regulated subsidiaries must comply with the capital adequacy requirements imposed in the jurisdictions in which they operate. In certain jurisdictions, the payment of dividends from our subsidiaries is subject to maintaining capital levels exceeding regulatory targets and/or receiving regulatory approval. We maintained capital levels above minimum local requirements as at December 31, 2019 and December 31, 2018.

In the U.S., Sun Life Assurance operates through a branch which is subject to U.S. regulatory supervision and it exceeded the levels under which regulatory action would be required as at December 31, 2019 and December 31, 2018. In the U.S., we use captive reinsurance arrangements to provide efficient financing of U.S. statutory reserve requirements in excess of those required under IFRS. Under one such arrangement, the funding of these reserve requirements is supported by a guarantee from SLF Inc.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    157

Our capital base consists mainly of common shareholders’ equity, preferred shareholders’ equity, participating policyholders’ equity, non-controlling interests’ equity and certain other capital securities that qualify as regulatory capital. For regulatory reporting purposes under the LICAT framework, there were further adjustments, including goodwill, non-life investments, and others as was prescribed by OSFI, to the total capital figure presented in the table below:

As at December 31,	2019		2018
Subordinated debt	$	3,538	$	3,039
Innovative capital instruments(1)		200		699
Equity:
Preferred shareholders’ equity		2,257		2,257
Common shareholders’ equity		21,141		21,449
Participating policyholders’ equity		1,091		864
Non-controlling interests’ equity		19		–
Total capital	$	28,246	$	28,308

(1) Innovative capital instruments are SLEECS issued by the SL Capital Trusts (Note 13). The SL Capital Trusts are not consolidated by us.

21.B Participating Account Seed Capital

In the first quarter of 2018, with OSFI’s approval, seed capital, together with interest earned since demutualization, was transferred from the participating account to the shareholder account. The transfer of seed capital is recorded on our Consolidated Statements of Changes in Equity as a Transfer from participating policyholders’ equity totaling $89, comprised of $50 in Canada and $39 in U.S. The transfer of interest on seed capital is included as a reduction in Participating policyholders’ net income (loss) and an increase in Shareholders’ net income (loss) totaling $110, on a pre- and post-tax basis, comprised of $75 in Canada and $35 in U.S. At the time of demutualization, OSFI required shareholders to transfer seed capital into the participating account to support participating insurance policies sold after demutualization. It was anticipated that over time the seed capital would no longer be needed and that the seed capital and accumulated interest would be returned to the shareholders, subject to OSFI’s approval. The transfer has no impact on regulatory capital requirements, and will have no adverse impact on the policy dividends or security of benefits of participating policyholders.

 22. Segregated Funds

We have segregated fund products, including variable annuities, unit-linked products and universal life insurance policies, in Canada, the U.S., the UK, and Asia. Under these contracts, the benefit amount is contractually linked to the fair value of the investments in the particular segregated fund. Policyholders can select from a variety of categories of segregated fund investments. Although the underlying assets are registered in our name and the segregated fund contract holder has no direct access to the specific assets, the contractual arrangements are such that the segregated fund policyholder bears the risk and rewards of the funds’ investment performance. Therefore, net realized gains and losses, other net investment income earned, and expenses incurred on the segregated funds are attributable to policyholders and not to us. However, certain contracts include guarantees from us. We are exposed to equity market risk and interest rate risk as a result of these guarantees. Further details on these guarantees and our risk management activities related to these guarantees are included in the Risk Management section of the MD&A.

We derive fee income from segregated funds. Market value movements in the investments held for segregated fund holders impact the management fees earned on these funds.

The segregated fund types offered, by percentage of total investments for account of segregated fund holders, were within the following ranges as at December 31, 2019 and 2018:

Type of fund	%
Money market		1 to 5
Fixed income		10 to 15
Balanced		40 to 45
Equity		40 to 45

Money market funds include investments that have a term to maturity of less than one year. Fixed income funds are funds that invest primarily in investment grade fixed income securities and where less than 25% can be invested in diversified equities or high-yield bonds. Balanced funds are a combination of fixed income securities with a larger equity component. The fixed income component is greater than 25% of the portfolio. Equity consists primarily of broad-based diversified funds that invest in a well-diversified mix of Canadian, U.S. or global equities. Other funds in this category include low volatility funds, intermediate volatility funds, and high volatility funds.

158    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

22.A Investments for Account of Segregated Fund Holders

The carrying value of investments held for segregated fund holders are as follows:

As at December 31,	2019		2018
Segregated and mutual fund units	$	102,071	$	89,049
Equity securities		10,565		9,771
Debt securities		3,825		3,448
Cash, cash equivalents and short-term securities		589		711
Investment properties		403		400
Mortgages		21		23
Other assets		146		156
Total assets	$	117,620	$	103,558
Less: Liabilities arising from investing activities		647		496
Total investments for account of segregated fund holders	$	116,973	$	103,062

22.B Changes in Insurance Contracts and Investment Contracts for Account of Segregated Fund Holders

Changes in insurance contracts and investment contracts for account of segregated fund holders are as follows:

	Insurance contracts						Investment contracts
For the years ended December 31,	2019			2018			2019		2018
Balance as at January 1	$	96,663		$	99,121		$	6,399	$	7,271
Additions to segregated funds:
Deposits		11,874			11,468			84		85
Net transfer (to) from general funds		(437	)		(308	)		–		–
Net realized and unrealized gains (losses)		10,700			(7,123	)		844		(658	)
Other investment income		4,522			4,576			143		178
Total additions	$	26,659		$	8,613		$	1,071	$	(395	)
Deductions from segregated funds:
Payments to policyholders and their beneficiaries		11,420			10,224			604		614
Management fees		1,053			1,004			56		57
Taxes and other expenses		371			256			14		–
Foreign exchange rate movements		209			(413	)		92		(194	)
Total deductions	$	13,053		$	11,071		$	766	$	477
Net additions (deductions)	$	13,606		$	(2,458	)	$	305	$	(872	)
Balance as at December 31	$	110,269		$	96,663		$	6,704	$	6,399

 23. Commitments, Guarantees and Contingencies

23.A Lease Commitments

We lease offices and certain equipment. These are operating leases with rents charged to operations in the year to which they relate. Total future rental payments for the remainder of these leases total $1,114. The future rental payments by year of payment are included in the MD&A as described in Note 6.

23.B Contractual Commitments

In the normal course of business, various contractual commitments are outstanding, which are not reflected in our Consolidated Financial Statements. In addition to loan commitments for debt securities and mortgages included in Note 6.A.i, we have equity, investment property, and property and equipment commitments. As at December 31, 2019, we had a total of $3,583 of contractual commitments outstanding. The expected maturities of these commitments are included in the MD&A as described in Note 6.

23.C Letters of Credit

We issue commercial letters of credit in the normal course of business. As at December 31, 2019, we had credit facilities of $859 available for the issuance of letters of credit ($891 as at December 31, 2018), from which a total of $214 in letters of credit were outstanding ($227 as at December 31, 2018).

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    159

23.D Commission on Release

Commissions on Release (“CORe”) is a program designed to facilitate the transfer of blocks of business between advisors in order to provide ongoing service and advice to our Clients. We facilitate and administer these transactions including payment and collection streams. Under the CORe program, when an eligible advisor releases Clients they are servicing, we are contractually obligated to pay them the associated CORe value, based on a specified formula as stipulated in the advisor contract. The value of the CORe commitment will vary for blocks of business which have not been released by an active advisor. The occurrence of future events that will trigger an advisor to release their block of business and the value of the related CORe commitment at that future release date is difficult to predict. As a result of uncertainty in the timing of the triggering event, we cannot reliably estimate our commitment under the CORe program. Due to the nature of the program, in the normal course of business, the commitment related to the future payment to advisors on release of a block of business would be expected to be matched or partially matched by a corresponding amount related to the receivable on the assignment of blocks of business to new advisors, resulting in an immaterial impact to earnings and liquidity in any reporting period.

23.E Indemnities and Guarantees

In the normal course of our business, we have entered into agreements that include indemnities in favour of third parties, such as confidentiality agreements, engagement letters with advisors and consultants, outsourcing agreements, leasing contracts, trade-mark licensing agreements, underwriting and agency agreements, information technology agreements, distribution agreements, financing agreements, the sale of equity interests, and service agreements. These agreements may require us to compensate the counterparties for damages, losses or costs incurred by the counterparties as a result of breaches in representation, changes in regulations (including tax matters), or as a result of litigation claims or statutory sanctions that may be suffered by the counterparty as a consequence of the transaction. We have also agreed to indemnify our directors and certain of our officers and employees in accordance with our by-laws. These indemnification provisions will vary based upon the nature and terms of the agreements. In many cases, these indemnification provisions do not contain limits on our liability, and the occurrence of contingent events that will trigger payment under these indemnities is difficult to predict. As a result, we cannot estimate our potential liability under these indemnities. We believe that the likelihood of conditions arising that would trigger these indemnities is remote and, historically, we have not made any significant payment under such indemnification provisions. In certain cases, we have recourse against third parties with respect to the aforesaid indemnities, and we also maintain insurance policies that may provide coverage against certain of these claims.

In the normal course of our business, we have entered into purchase and sale agreements that include indemnities in favour of third parties. These agreements may require us to compensate the counterparties for damages, losses, or costs incurred by the counterparties as a result of breaches in representation. As at December 31, 2019, we are not aware of any breaches in representations that would result in any payment required under these indemnities that would have a material impact on our Consolidated Financial Statements.

Guarantees made by us that can be quantified are included in Note 6.A.i.

23.F Guarantees of Sun Life Assurance Preferred Shares and Subordinated Debentures

SLF Inc. has provided a guarantee on the $150 of 6.30% subordinated debentures due 2028 issued by Sun Life Assurance. Claims under this guarantee will rank equally with all other subordinated indebtedness of SLF Inc. SLF Inc. has also provided a subordinated guarantee of the preferred shares issued by Sun Life Assurance from time to time, other than such preferred shares which are held by SLF Inc. and its affiliates. Sun Life Assurance has no outstanding preferred shares subject to the guarantee. As a result of these guarantees, Sun Life Assurance is entitled to rely on exemptive relief from most continuous disclosure and the certification requirements of Canadian securities laws.

The following tables set forth certain consolidating summary financial information for SLF Inc. and Sun Life Assurance (consolidated):

Results for the years ended	SLF Inc. (unconsolidated)		Sun Life Assurance (consolidated)		Other subsidiaries of SLF Inc. (combined)		Consolidation adjustments			SLF Inc. (consolidated)
December 31, 2019
Revenue	$	213	$	33,693	$	7,516	$	(1,743	)	$	39,679
Shareholders’ net income (loss)	$	2,713	$	1,750	$	881	$	(2,631	)	$	2,713
December 31, 2018
Revenue	$	361	$	22,619	$	4,453	$	(436	)	$	26,997
Shareholders’ net income (loss)	$	2,616	$	2,036	$	382	$	(2,418	)	$	2,616

160    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

Assets and liabilities as at	SLF Inc. (unconsolidated)		Sun Life Assurance (consolidated)		Other subsidiaries of SLF Inc. (combined)		Consolidation adjustments			SLF Inc. (consolidated)
December 31, 2019
Invested assets	$	23,639	$	152,512	$	8,552	$	(23,084	)	$	161,619
Total other general fund assets	$	4,135	$	24,000	$	11,955	$	(21,480	)	$	18,610
Investments for account of segregated fund holders	$	–	$	116,918	$	55	$	–		$	116,973
Insurance contract liabilities	$	–	$	131,428	$	9,644	$	(9,888	)	$	131,184
Investment contract liabilities	$	–	$	3,116	$	–	$	–		$	3,116
Total other general fund liabilities	$	4,376	$	23,780	$	8,053	$	(14,788	)	$	21,421
December 31, 2018
Invested assets	$	24,255	$	143,040	$	6,991	$	(22,560	)	$	151,726
Total other general fund assets	$	4,088	$	21,958	$	10,389	$	(19,396	)	$	17,039
Investments for account of segregated fund holders	$	–	$	103,014	$	48	$	–		$	103,062
Insurance contract liabilities	$	–	$	122,066	$	8,534	$	(8,677	)	$	121,923
Investment contract liabilities	$	–	$	3,164	$	–	$	–		$	3,164
Total other general fund liabilities	$	4,636	$	21,801	$	5,972	$	(13,301	)	$	19,108

23.G Legal and Regulatory Proceedings

We are regularly involved in legal actions, both as a defendant and as a plaintiff. Legal actions naming us as a defendant ordinarily involve our activities as a provider of insurance protection and wealth management products, as an investor and investment advisor, and as an employer. In addition, government and regulatory bodies in Canada, the U.S., the UK and Asia, including federal, provincial, and state securities and insurance regulators and government authorities, from time to time, make inquiries and require the production of information or conduct examinations or investigations concerning our compliance with insurance, securities, and other laws.

Provisions for legal proceedings related to insurance contracts, such as for disability and life insurance claims and the cost of litigation, are included in Insurance contract liabilities in our Consolidated Statements of Financial Position. Other provisions are established outside of the Insurance contract liabilities if, in the opinion of management, it is both probable that a payment will be required and a reliable estimate can be made of the amount of the obligation. Management reviews the status of all proceedings on an ongoing basis and exercises judgment in resolving them in such manner as management believes to be in our best interest.

Two class action lawsuits have been filed against Sun Life Assurance in connection with sales practices relating to, and the administration of, individual policies issued by the Metropolitan Life Insurance Company (“MLIC”). These policies were assumed by Clarica when Clarica acquired the bulk of MLIC’s Canadian operations in 1998 and subsequently assumed by Sun Life Assurance as a result of its amalgamation with Clarica. One of the lawsuits (Fehr et al v Sun Life Assurance Company of Canada) is issued in Ontario and the other (Alamwala v Sun Life Assurance Company of Canada) is in British Columbia. In the Fehr action, the motions judge dismissed the plaintiff’s motion for certification in its entirety by way of a two-part decision released on November 12, 2015 and December 7, 2016. The plaintiffs appealed and, in a decision released on September 5, 2018, the Ontario Court of Appeal overturned part of the lower court’s decision and certified certain common issues, including three alleged breach of contract claims related to the policies. The next step in the process is the discovery phase. The other action (Alamwala v Sun Life Assurance Company of Canada) has remained largely dormant since it was commenced in 2011 and has not been certified. We will continue to vigorously defend against the claims in these actions. In connection with the acquisition of the Canadian operations of MLIC, MLIC agreed to indemnify Clarica for certain losses, including those incurred relating to the sales of its policies. Should either of the Fehr or the Alamwala lawsuits result in a loss, Sun Life Assurance will seek recourse against MLIC under that indemnity through arbitration.

Management does not believe that the probable conclusion of any current legal or regulatory matter, either individually or in the aggregate, will have a material adverse effect on the Consolidated Statements of Financial Position or results of operations of the Company.

 24. Related Party Transactions

SLF Inc. and its subsidiaries, joint ventures and associates transact business worldwide. All transactions between SLF Inc. and its subsidiaries have been eliminated on consolidation. Transactions with joint ventures and associates, which are also related parties, are disclosed in Note 16. Transactions between the Company and related parties are executed and priced on an arm’s-length basis in a manner similar to transactions with third parties.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    161

24.A Transactions with Key Management Personnel, Remuneration and Other Compensation

Key management personnel refers to the executive team and Board of Directors of SLF Inc. These individuals have the authority and responsibility for planning, directing, and controlling the activities of the Company. The aggregate compensation to the executive team and directors are as follows:

For the years ended December 31,	2019				2018
	Executive team		Directors		Executive team		Directors
Number of individuals		12		10		12		10
Base salary and annual incentive compensation	$	17	$	–	$	18	$	–
Additional short-term benefits and other	$	1	$	1	$	3	$	1
Share-based long-term incentive compensation	$	22	$	2	$	24	$	2
Value of pension and post-retirement benefits	$	2	$	–	$	2	$	–

24.B Other Related Party Transactions

We provide investment management services for our pension plans. The services are provided on substantially the same terms as for comparable transactions with third parties. We also hold units of investment funds managed by certain of our joint ventures. The carrying amount of our investment in these funds is included in Note 16.D.

 25. Pension Plans and Other Post-Retirement Benefits

We sponsor defined benefit pension plans and defined contribution plans for eligible employees. All of our material defined benefit plans worldwide are closed to new entrants with new hires participating in defined contribution plans. Material defined benefit plans are located in Canada, the U.S., and the UK. The defined benefit pension plans offer benefits based on length of service and final average earnings and certain plans offer some indexation of benefits. The specific features of these plans vary in accordance with the employee group and countries in which employees are located. In addition, we maintain supplementary non-contributory defined benefit pension arrangements for eligible employees, which are primarily for benefits which are in excess of local tax limits. As at December 31, 2014, there are no active members in the UK and the U.S. defined benefit plans continuing to accrue future service benefits. On January 1, 2009, the Canadian defined benefit plans were closed to new employees. Canadian employees hired before January 1, 2009 continue to earn future service benefits in the previous plans, which includes both defined benefit and defined contribution components, while new hires since then are eligible to join a defined contribution plan. In addition, one small defined benefit plan in the Philippines remains open to new hires.

Our funding policy for defined benefit pension plans is to make at least the minimum annual contributions required by regulations in the countries in which the plans are offered. Our UK defined benefit pension scheme is governed by pension trustees. In other countries in which we operate, the defined benefit pension arrangements are governed by local pension committees. Significant plan changes require the approval of the Board of Directors of the sponsoring subsidiary of SLF Inc.

We also established defined contribution plans for eligible employees. Our contributions to these defined contribution pension plans may be subject to certain vesting requirements. Generally, our contributions are a set percentage of employees’ annual income and may be a set percentage of employee contributions, up to specified levels.

In addition to our pension plans, in Canada and the U.S., we provide certain post-retirement health care and life insurance benefits to eligible employees and to their dependents upon meeting certain requirements. Eligible retirees may be required to pay a portion of the premiums for these benefits and, in general, deductible amounts and co-insurance percentages apply to benefit payments. These post-retirement benefits are not pre-funded. In Canada, certain post-retirement health care and life insurance benefits are provided for eligible employees who retired before December 31, 2015. Eligible employees in Canada who retire after December 31, 2015 will have access to voluntary retiree-paid health care coverage. In the U.S., certain post-retirement health care and life insurance benefits are provided to eligible retirees. In the U.S., employees who were not age 50 with 10 years of service as of December 31, 2015 only have access to subsidized retiree health care coverage until eligible for Medicare. Eligible existing and future retirees and covered dependents eligible for Medicare receive an annual contribution to a health reimbursement account to be applied against individual coverage and other eligible expenses.

25.A Risks Associated with Employee Defined Benefit Plans

With the closure of the material defined benefit pension and retiree benefit plans to new entrants, the volatility associated with future service accruals for active members has been limited and will decline over time.

The major risks remaining in relation to past service obligations are increases in liabilities due to a decline in discount rates, greater life expectancy than assumed and adverse asset returns. We have significantly de-risked the investments of our material defined benefit pension plans Company-wide by shifting the pension asset mix away from equities and into more fixed income and liability-matching investments. In 2018, the risk in our UK pension plan was reduced through a buy-in insurance contract protecting the majority of pensioner benefits. The target for our material funded defined benefit plans is to minimize volatility in funded status arising from changes in discount rates and exposure to equity markets.

162    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

25.B Defined Benefit Pension and Other Post-Retirement Benefit Plans

The following tables set forth the status of the defined benefit pension and other post-retirement benefit plans:

	2019									2018
	Pension			Other post- retirement			Total			Pension			Other post- retirement			Total
Change in defined benefit obligations:
Defined benefit obligation, January 1	$	3,458		$	262		$	3,720		$	3,661		$	268		$	3,929
Current service cost		52			5			57			54			5			59
Interest cost		123			10			133			118			9			127
Actuarial losses (gains)		360			20			380			(253	)		(11	)		(264	)
Benefits paid		(158	)		(14	)		(172	)		(180	)		(15	)		(195	)
Curtailment losses (gains)		1			–			1			–			–			–
Plan amendments		–			–			–			(1	)		–			(1	)
Foreign exchange rate movement		(31	)		(4	)		(35	)		59			6			65
Defined benefit obligation, December 31	$	3,805		$	279		$	4,084		$	3,458		$	262		$	3,720
Change in plan assets:
Fair value of plan assets, January 1	$	3,253		$	–		$	3,253		$	3,301		$	–		$	3,301
Administrative expense		(1	)		–			(1	)		(1	)		–			(1	)
Interest income on plan assets		115			–			115			105			–			105
Return on plan assets (excluding amounts included in net interest expense)		306			–			306			(156	)		–			(156	)
Employer contributions		111			14			125			127			15			142
Benefits paid		(158	)		(14	)		(172	)		(180	)		(15	)		(195	)
Foreign exchange rate movement		(30	)		–			(30	)		57			–			57
Fair value of plan assets, December 31	$	3,596		$	–		$	3,596		$	3,253		$	–		$	3,253
Amounts recognized on Statement of Financial Position:
Fair value of plan assets	$	3,596		$	–		$	3,596		$	3,253		$	–		$	3,253
Defined benefit (obligation)		(3,805	)		(279	)		(4,084	)		(3,458	)		(262	)		(3,720	)
Net recognized (liability) asset, December 31	$	(209	)	$	(279	)	$	(488	)	$	(205	)	$	(262	)	$	(467	)
Components of net benefit expense recognized:
Current service cost	$	52		$	5		$	57		$	54		$	5		$	59
Administrative expense		1			–			1			1			–			1
Net interest expense (income)		8			10			18			13			9			22
Curtailment losses (gains)		1			–			1			–			–			–
Plan amendments		–			–			–			(1	)		–			(1	)
Other long-term employee benefit losses (gains)		–			5			5			–			(3	)		(3	)
Net benefit expense	$	62		$	20		$	82		$	67		$	11		$	78
Remeasurement of net recognized (liability) asset:
Return on plan assets (excluding amounts included in net interest expense)	$	306		$	–		$	306		$	(156	)	$	–		$	(156	)
Actuarial gains (losses) arising from changes in demographic assumptions		28			1			29			7			(2	)		5
Actuarial gains (losses) arising from changes in financial assumptions		(393	)		(18	)		(411	)		241			8			249
Actuarial gains (losses) arising from experience adjustments		5			2			7			5			2			7
Foreign exchange rate movement		2			4			6			(2	)		(2	)		(4	)
Components of defined benefit costs recognized in Other comprehensive income (loss)	$	(52	)	$	(11	)	$	(63	)	$	95		$	6		$	101

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    163

25.C Principal Assumptions for Significant Plans

	2019						2018
	Canada %		UK %		U.S. %		Canada %		UK %		U.S. %
To determine defined benefit obligation at end of year:
Discount rate for pension plans		3.00		2.00		3.45		3.60		2.85	4.40
Rate of compensation increase		3.00		n/a		n/a		3.00		n/a	n/a
Pension increases		0.00-0.15		2.95		n/a		0.00-0.15		3.15	n/a
To determine net benefit expense for year:
Discount rate for pension plans		3.60		2.85		4.40		3.40		2.30	3.70
Rate of compensation increase		3.00		n/a		n/a		3.10		n/a	n/a
Pension increases		0.00-0.15		3.15		n/a		0.00-0.15		3.50	n/a
Health care trend rates:
Initial health care trend rate		5.36		n/a		6.50		5.42		n/a	6.50
Ultimate health care trend rate		4.50		n/a		5.00		4.50		n/a	5.00
Year ultimate health care trend rate reached		2030		n/a		2025		2030		n/a	2023

	2019						2018
	Canada		UK		U.S.		Canada		UK		U.S.
Mortality rates:
Life expectancy (in years) for individuals currently at age 65:
Male		23		23		22		23		24	23
Female		25		24		24		25		25	24
Life expectancy (in years) at 65 for individuals currently at age 45:
Male		24		25		24		24		25	24
Female		26		27		25		26		28	26
Average duration (in years) of pension obligation		16.7		16.6		13.4		17.3		16.9	12.2

Discount Rate, Rate of Compensation Increase and Health Care Cost

The major economic assumptions which are used in determining the actuarial present value of the accrued benefit obligations vary by country.

The discount rate assumption used for material plans is determined by reference to the market yields, as of December 31, of high-quality corporate bonds that have terms to maturity approximating the terms of the related obligation. In countries where a deep corporate market does not exist, government bonds are used. Compensation and health care trend assumptions are based on expected long-term trend assumptions which may differ from actual results.

25.D Sensitivity of Key Assumptions

The following table provides the potential impact of changes in key assumptions on the defined benefit obligation for pension and other post-retirement benefit plans as at December 31, 2019. These sensitivities are hypothetical and should be used with caution. The impact of changes in each key assumption may result in greater than proportional changes in sensitivities.

	Pension			Post-retirement benefits
Interest/discount rate sensitivity:(1)
1% decrease	$	690		$	36
1% increase	$	(537	)	$	(30	)
Rate of compensation increase assumption:
1% decrease	$	(78	)		n/a
1% increase	$	81			n/a
Health care trend rate assumption:
1% decrease		n/a		$	(14	)
1% increase		n/a		$	17
Mortality rates:(2)
10% decrease	$	99		$	7

(1) Represents a parallel shift in interest rates across the entire yield curve, resulting in a change in the discount rate assumption.

(2) Represents 10% decrease in mortality rates at each age.

164    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

25.E Fair Value of Plan Assets

Composition of fair value of plan assets, December 31:

	2019		2018
Equity investments		3%		3%
Fixed income investments		77%		76%
Real estate investments		7%		8%
Qualifying insurance contract		8%		9%
Other		5%		4%
Total composition of fair value of plan assets		100%		100%

The fair value of our equity investments in 2019 and 2018 are consistent with Level 1 or Level 2 fair value hierarchy. In 2019, 3% of our fixed income investments (2% in 2018) are determined based on valuation techniques consistent with Level 1 of the fair value hierarchy.

The assets of the defined benefit pension plans are primarily held in trust for plan members, and are managed within the provisions of each plan’s investment policies and procedures. Diversification of the investments is used to limit credit, market, and foreign currency risks. We have significantly de-risked the investments of our material defined benefit pension plans by shifting the pension asset mix away from equities and into more fixed income and liability-matching investments. In 2018, the risk in our UK pension plan was reduced through a buy-in insurance contract, protecting the majority of pensioner benefits. The long-term investment objectives of the defined benefit pension plans are to equal or exceed the rate of growth of the liabilities. Over shorter periods, the objective of the defined benefit pension plan investment strategy is to minimize volatility in the funded status. Liquidity is managed with consideration to the cash flow requirements of the liabilities.

25.F Future Cash Flows

The following tables set forth the expected contributions and expected future benefit payments of the defined benefit pension and other post-retirement benefit plans:

	Pension		Post-retirement		Total
Expected contributions for the next 12 months	$	84	$	16	$	100

Expected Future Benefit Payments

	2020		2021		2022		2023		2024		2025 to 2029
Pension	$	149	$	155	$	159	$	167	$	170	$       924
Post-retirement		16		16		17		17		17	93
Total	$	165	$	171	$	176	$	184	$	187	$    1,017

25.G Defined Contribution Plans

We expensed $131 in 2019 ($120 for 2018) with respect to defined contribution plans.

 26. Earnings (Loss) Per Share

Details of the calculation of the net income (loss) and the weighted average number of shares used in the earnings per share computations are as follows:

For the years ended December 31,	2019		2018
Common shareholders’ net income (loss) for basic earnings per share	$	2,618	$	2,522
Add: Increase in income due to convertible instruments(1)		10		10
Common shareholders’ net income (loss) on a diluted basis	$	2,628	$	2,532
Weighted average number of common shares outstanding for basic earnings per share (in millions)		592		606
Add: Dilutive impact of stock options(2) (in millions)		1		1
Add: Dilutive impact of convertible instruments(1) (in millions)		4		4
Weighted average number of common shares outstanding on a diluted basis (in millions)		597		611
Basic earnings (loss) per share	$	4.42	$	4.16
Diluted earnings (loss) per share	$	4.40	$	4.14

(1) The convertible instruments are the SLEECS B issued by SL Capital Trusts.

(2) Excludes the impact of 1 million stock options for the year ended December 31, 2019 (1 million for the year ended December 31, 2018) because these stock options were anti-dilutive for the period.

Notes to Consolidated Financial Statements Sun Life Financial Inc.    Annual Report 2019    165

 27. Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss), net of taxes, are as follows:

	2019									2018
For the years ended December 31,	Balance, beginning of period			Other comprehensive income (loss)			Balance, end of period			Balance, beginning of period			Other comprehensive income (loss)			Balance, end of period
Items that may be reclassified subsequently to income:
Unrealized foreign currency translation gains (losses), net of hedging activities	$	1,923		$	(564	)	$	1,359		$	1,012		$	911		$	1,923
Unrealized gains (losses) on available-for-sale assets		(56	)		369			313			346			(402	)		(56	)
Unrealized gains (losses) on cash flow hedges		(21	)		14			(7	)		(11	)		(10	)		(21	)
Share of other comprehensive income (loss) in joint ventures and associates		(24	)		(9	)		(33	)		(31	)		7			(24	)
Items that will not be reclassified subsequently to income:
Remeasurement of defined benefit plans		(263	)		(42	)		(305	)		(347	)		84			(263	)
Revaluation surplus on transfers to investment properties		145			–			145			145			–			145
Total	$	1,704		$	(232	)	$	1,472		$	1,114		$	590		$	1,704
Total attributable to:
Participating policyholders	$	14		$	(3	)	$	11		$	9		$	5		$	14
Shareholders		1,690			(229	)		1,461			1,105			585			1,690
Total	$	1,704		$	(232	)	$	1,472		$	1,114		$	590		$	1,704

166    Sun Life Financial Inc.    Annual Report 2019 Notes to Consolidated Financial Statements

Sources of earnings

The following is provided in accordance with the OSFI guideline requiring Sources of Earnings (SOE) disclosure. SOE is a non-International Financial Reporting Standard (IFRS) financial measure. There is no standard SOE methodology. The calculation of SOE is dependent on, and sensitive to, the methodology, estimates, and assumptions used.

SOE identifies various sources of IFRS net income. It provides an analysis of the difference between actual net income and expected net income based on business in-force and assumptions made at the beginning of the reporting period. The terminology used in the discussion of sources of earnings is described below:

Expected profit on in-force business

The portion of the consolidated pre-tax net income on business in-force at the start of the reporting period that was expected to be realized based on the achievement of the best estimate assumptions made at the beginning of the reporting period. Expected profit for asset management companies is set equal to their pre-tax net income.

Impact of new business

The point-of-sale impact on pre-tax net income of writing new business during the reporting period. Issuing new business may produce a gain or loss at the point-of sale, primarily because valuation assumptions are different than pricing assumptions and/or actual acquisition expenses may differ from those assumed in pricing. For example, new business losses in individual life insurance would emerge where valuation margins and acquisition expenses are relatively high.

Experience gains and losses

Pre-tax gains and losses that are due to differences between the actual experience during the reporting period and the best estimate assumptions at the start of the reporting period.

Management actions and changes in assumptions

Impact on pre-tax net income resulting from changes in actuarial methods and assumptions or other management actions.

Other

Impact on pre-tax net income not addressed under the previous categories. Examples include acquisition/integration/restructuring and other related costs.

Sources of Earnings Sun Life Financial Inc.    Annual Report 2019    167

For the Year Ended December 31, 2019 (in millions of Canadian dollars)	Sun Life Canada			Sun Life U.S.			Sun Life Asset Mgmt			Sun Life Asia			Corporate			Total
Expected Profit on In-force Business		968			486			1,330			538			(134	)		3,188
Impact of New Business		91			6			–			(113	)		–			(16	)
Experience Gains and Losses		(87	)		55			3			(1	)		(43	)		(73	)
Management Actions and Changes in Assumptions		(24	)		(369	)		–			37			229			(127	)
Other		–			(26	)		(174	)		(2	)		(35	)		(237	)
Earnings on Operations (pre-tax)		948			152			1,159			459			17			2,735
Earnings on Surplus		124			34			–			173			169			500
Earnings before Income Taxes		1,072			186			1,159			632			186			3,235
Income Taxes		(15	)		(28	)		(262	)		(51	)		64			(292	)
Earnings before Non-controlling Interests, Participating Policyholders’ Net Income and Preferred Share Dividends		1,057			158			897			581			250			2,943
Less:
Non-controlling Interests		–			–			–			–			–			–
Participating Policyholders’ Net Income		174			(5	)		–			61			–			230
Preferred Share Dividends		–			–			–			–			95			95
Common Shareholders’ Net Income (Loss)		883			163			897			520			155			2,618

For the Year Ended December 31, 2018 (in millions of Canadian dollars)	Sun Life Canada			Sun Life U.S.			Sun Life Asset Mgmt			Sun Life Asia			Corporate			Total
Expected Profit on In-force Business		882			451			1,264			507			(106	)		2,998
Impact of New Business		108			5			–			(98	)		–			15
Experience Gains and Losses		424			(7	)		–			(17	)		(46	)		354
Management Actions and Changes in Assumptions		31			(498	)		–			76			145			(246	)
Other		(1	)		(51	)		(71	)		(14	)		(13	)		(150	)
Earnings on Operations (pre-tax)		1,444			(100	)		1,193			454			(20	)		2,971
Earnings on Surplus		127			98			–			164			151			540
Earnings before Income Taxes		1,571			(2	)		1,193			618			131			3,511
Income Taxes		(308	)		19			(284	)		(51	)		27			(597	)
Earnings before Non-controlling Interests, Participating Policyholders’ Net Income and Preferred Share Dividends		1,263			17			909			567			158			2,914
Less:
Non-controlling Interests		–			–			–			–			–			–
Participating Policyholders’ Net Income		321			(35	)		–			12			–			298
Preferred Share Dividends		–			–			–			–			94			94
Common Shareholders’ Net Income (Loss)		942			52			909			555			64			2,522

168    Sun Life Financial Inc.    Annual Report 2019 Sources of Earnings

Analysis of results

For the year ended December 31, 2019, the pre-tax expected profit on in-force business of $3,188 million was $190 million higher than 2018. The increase in expected profit was largely driven by business growth in Canada, US, and Asia, higher ANA, expense management, and investment income in MFS, as well as favourable currency impacts from the change in the Canadian dollar relative to foreign currencies.

The new business strain in 2019 was $16 million, $31 million lower than 2018. The change was mainly due to unfavourable yield movements and sales mix.

The 2019 experience loss of $73 million pre-tax was primarily due to unfavourable impacts from interest rates, unfavourable morbidity experience in Canada, and unfavourable other experience, including higher regulatory expenses from the preparation for IFRS 17 Insurance Contracts (“IFRS 17”). This is partially offset by favourable gains from investing activities on insurance contract liabilities, equity market growth, and improved mortality experience.

For the year 2019, management actions and changes in assumptions resulted in a pre-tax loss of $127 million. In Canada, the pre-tax loss of $24 million reflected unfavourable updates to the promulgated URR and unfavourable model enhancements and methodology changes, offset partially by favourable changes to mortality assumptions in Group Retirement Services and favourable investment related assumption updates. In the U.S., the pre-tax loss of $369 million includes unfavourable updates to the reinsurance provisions in In-force Management. In Asia, the pre-tax gain of $37 million reflected favourable methods and model updates, offset partially by unfavourable lapse updates in International. In Corporate, the pre-tax gain of $229 million reflected a favourable mortality impact in the U.K.

Other in 2019 resulted in a pre-tax loss of $237 million. In the U.S., the loss of $26 million was due to the impact of integration costs related to the U.S. employee benefits businesses acquired. In Asset Management, the loss of $174 million was related to fair value adjustments on MFS’s share-based payment awards and acquisition costs in SLC Management related to the BGO acquisition. In Corporate, the loss of $35 million was due to restructuring costs, primarily related to severance costs as a result of various initiatives to simplify our organizational structure and drive efficiencies.

Net pre-tax earnings on surplus of $500 million in 2019 was $40 million lower than a year ago. The change was mainly due to declines in valuations for the real estate portfolio and lower investment income, partially offset by higher Available-for-Sale asset gains.

Sources of Earnings Sun Life Financial Inc.    Annual Report 2019    169

Board of Directors and Executive Team

Board of Directors

All directors of Sun Life Financial Inc. are also directors of Sun Life Assurance Company of Canada. The Board has determined that all directors other than Dean A. Connor are independent directors.

William D. Anderson, FCPA, FCA Chairman, Sun Life Financial Inc.   Dean A. Connor President & Chief Executive Officer,
Sun Life Financial Inc.   Stephanie L. Coyles⁽¹⁾⁽²⁾ Corporate Director   Martin J. G. Glynn⁽³⁾⁽⁴⁾ Corporate Director Ashok K. Gupta⁽³⁾⁽⁴⁾ Corporate Director   M. Marianne Harris⁽³⁾⁽⁴⁾ Corporate Director   Sara Grootwassink Lewis, CPA, CFA⁽¹⁾⁽²⁾ Corporate Director   James M. Peck⁽³⁾⁽⁴⁾ Corporate Director Scott F. Powers⁽²⁾⁽³⁾ Corporate Director   Hugh D. Segal, OC, OONT, CD⁽¹⁾⁽²⁾ Corporate Director   Barbara G. Stymiest, FCPA, FCA⁽¹⁾⁽⁴⁾ Corporate Director

(1) Member of Audit Committee

(2) Member of Governance, Nomination & Investment Committee

(3) Member of Management Resources Committee

(4) Member of Risk & Conduct Review Committee

Additional information on the directors and a report on the Board’s corporate governance processes and practices are available in the 2020 Management Information Circular, on sunlife.com and on www.sedar.com.

Executive Team

Dean A. Connor President & Chief Executive Officer   Linda M. Dougherty Executive Vice-President, Corporate Strategy & Global Marketing   Daniel R. Fishbein President, Sun Life U.S.   Colm J. Freyne Executive Vice-President & Chief Risk Officer Jacques Goulet President, Sun Life Canada   Léo M. Grépin President, Sun Life Asia   Melissa J. Kennedy Executive Vice-President, Chief Legal Officer & Public Affairs   Helena J. Pagano Executive Vice-President, Chief Human Resources & Communications Officer Stephen C. Peacher President, SLC Management   Mark S. Saunders Executive Vice-President & Chief Information Officer   Kevin D. Strain Executive Vice-President & Chief Financial Officer  

As of March 1, 2020

170    Sun Life Financial Inc.    Annual Report 2019 Board of Directors and Executive Team

Sun Life Financial Inc. – Subsidiaries and Associates

The following table lists the direct and indirect subsidiaries of Sun Life Financial Inc. (“SLF Inc.”) as at December 31, 2019 and provides the book values (in millions of Canadian dollars, based on the equity method) of the shares of those subsidiaries that are principal operating subsidiaries. The table also lists significant joint venture entities in which SLF Inc. directly or indirectly holds 50% or less of the issued and outstanding voting securities. Subsidiaries which are inactive or which have been set up for the sole purpose of holding investments are not listed in the table.

Company	Jurisdiction of Formation	Book Value of Shares Owned		Per cent of Voting Shares Owned by SLF Inc.
Sun Life Assurance Company of Canada	Canada		20,522		100%
Annemasse Boisbriand Holdings L.P.	Manitoba, Canada				100%
BestServe Financial Limited	Hong Kong		129		100%
Country Lane Enterprises Ltd.	British Columbia, Canada				100%
Dental Health Alliance, L.L.C.	Delaware, USA				100%
Denticare of Alabama, Inc.	Alabama, USA				100%
PT. Sun Life Financial Indonesia	Indonesia		180		100%
PT. Sun Life Indonesia Services	Indonesia				100%
SL Investment US-RE Holdings 2009-1, Inc.	Delaware, USA				100%
SLF of Canada UK Limited	England and Wales				100%
Sun Life Assurance Company of Canada (U.K.) Limited	England and Wales		911		100%
Barnwood Properties Limited	England and Wales				100%
Sun Life of Canada UK Holdings Limited	England and Wales				100%
Laurtrust Limited	England and Wales				100%
SLFC Services Company (UK) Limited	England and Wales				100%
Solidify Software, LLC	Kansas, USA				100%
Sun Life (India) AMC Investments Inc.	Canada				100%
Aditya Birla Sun Life AMC Limited	India				49%
Sun Life (Luxembourg) Finance No. 2 SARL	Luxembourg				100%
Sun Life and Health Insurance Company (U.S.)	Michigan, USA		476		100%
Sun Life Capital Trust	Ontario, Canada				100%
Sun Life Capital Trust II	Ontario, Canada				100%
Sun Life Everbright Life Insurance Company Limited	Tianjin, People’s Republic of China				24.99%
Sun Life Financial (India) Insurance Investments Inc.	Canada				100%
Aditya Birla Sun Life Insurance Company Limited	India				49%
Sun Life Financial Advisory Inc.	Canada				100%
Sun Life Financial Asia Services Limited	Hong Kong				100%
Sun Life Financial Distributors (Bermuda) Ltd.	Bermuda				100%
Sun Life Financial Distributors (Canada) Inc.	Canada		72		100%
Sun Life Financial International Holdings (MC), LLC	Delaware, USA				100%
Sun Life Financial Investment Services (Canada) Inc.	Canada		72		100%
Sun Life Financial Investments (Bermuda) Ltd.	Bermuda				100%
Sun Life Financial of Canada (U.K.) Overseas Investments Limited	England and Wales				100%
Sun Life of Canada (Netherlands) B.V.	Netherlands				100%
Sun Life Financial Philippine Holding Company, Inc.	Philippines				100%
Sun Life Grepa Financial, Inc.	Philippines				49%
Sun Life of Canada (Philippines), Inc.	Philippines		1,244		100%
Sun Life Asset Management Company, Inc.	Philippines				100%
Sun Life Financial Plans, Inc.	Philippines				100%
Sun Life Financial Trust Inc.	Canada		115		100%
Sun Life Hong Kong Limited	Bermuda		2,126		100%
Sun Life Asset Management (HK) Limited	Hong Kong				100%
Sun Life Financial Holdings (HK) Limited	Hong Kong				100%
Sun Life Hong Kong Services Limited	Hong Kong				100%
Sun Life Investment Holdings (HK) Limited	Hong Kong				100%
Sun Life Management Holdings (HK) Limited	Hong Kong				100%
Sun Life Pension Trust Limited	Hong Kong				100%
Sun Life Trustee Company Limited	Hong Kong				100%
Sun Life India Service Centre Private Limited	India				100%
Sun Life Information Services Canada, Inc.	Canada				100%
Sun Life Information Services Ireland Limited	Republic of Ireland				100%

Subsidiary and Affiliate Companies of Sun Life Financial Inc. Sun Life Financial Inc.    Annual Report 2019    171

Company	Jurisdiction of Formation	Book Value of Shares Owned		Per cent of Voting Shares Owned by SLF Inc.
Sun Life Insurance (Canada) Limited	Canada		1,917		100%
SLI General Partner Limited	Canada				100%
SLI Investments LP	Manitoba, Canada				100%
6425411 Canada Inc.	Canada				100%
Sun Life Investments LLC	Delaware, USA				100%
Sun Life Malaysia Assurance Berhad	Malaysia				49%
Sun Life Malaysia Takaful Berhad	Malaysia				49%
Sun Life Vietnam Insurance Company Limited	Vietnam		282		100%
UDC Dental California, Inc.	California, USA				100%
UDC Ohio, Inc.	Ohio, USA				100%
Union Security DentalCare of Georgia, Inc.	Georgia, USA				100%
Union Security DentalCare of New Jersey, Inc.	New Jersey, USA				100%
United Dental Care of Arizona, Inc.	Arizona, USA				100%
United Dental Care of Colorado, Inc.	Colorado, USA				100%
United Dental Care of Michigan, Inc.	Michigan, USA				100%
United Dental Care of Missouri, Inc.	Missouri, USA				100%
United Dental Care of New Mexico, Inc.	New Mexico, USA				100%
United Dental Care of Texas, Inc.	Texas, USA				100%
United Dental Care of Utah, Inc.	Utah, USA				100%
10851744 Canada Inc.	Canada				100%
10851779 Canada Inc.	Canada				100%
11096800 Canada Inc.	Canada				100%
6965083 Canada Inc.	Canada				100%
7037457 Canada Inc.	Canada				100%
7647913 Canada Inc.	Canada				100%
7647930 Canada Inc.	Canada				100%
Sun Life Global Investments Inc.	Canada				100%
BK Canada Holdings Inc.	Canada				100%
BentallGreenOak (Canada) GP Ltd.	Canada				100%
BentallGreenOak (Canada) Limited Partnership	British Columbia, Canada		435		56%
Bentall Property Services (Ontario) Ltd.	Ontario, Canada				56%
BGO Capital (Canada) Inc.	Canada				56%
BGO Holdings (Cayman), LP	Grand Cayman, Cayman Islands		58		56%
BentallGreenOak Advisors (Korea) Limited	Republic of Korea				56%
GreenOak India Investment Advisors Private Limited	Mumbai, India				56%
GreenOak Investment Management K.K.	Japan				56%
GreenOak Real Estate Advisors (Jersey) Limited	Jersey, Channel Islands				56%
GreenOak Real Estate Services Ltd.	England and Wales				56%
BentallGreenOak Advisors (UK) LLP	England and Wales				56%
BentallGreenOak Asset Management (Germany) GmbH	Germany				56%
GreenOak Management Services Sàrl	Luxembourg				56%
GreenOak Real Estate Advisors (Spain) S.L.	Madrid, Spain				56%
BGO Luxembourg Holdings Ltd.	Canada				56%
BGO Real Property Services (Canada) Inc.	Canada				56%
BK Prime GP Holdco Inc.	Canada				56%
BKCG Services Ltd.	Canada				56%
BKCP Residential G.P. LTD.	Canada				56%
BKCP Residential Limited Partnership	Manitoba, Canada				56%
SynchroSERV Inc.	Canada				56%
SynchroSERV Limited Partnership	British Columbia, Canada				56%
0936543 BC Ltd.	British Columbia, Canada				56%
Sun Life 2007-1 Financing Corp.	Canada				100%
Sun Life (Luxembourg) Finance No. 1 SARL	Luxembourg				100%
Sun Life Assurance Company of Canada - U.S. Operations  Holdings, Inc.	Delaware, USA				100%
SL Investment 2007-1 ULC	Nova Scotia, Canada				100%
Sun Life Financial (Bermuda) Reinsurance Ltd.	Bermuda				100%
Sun Life Financial (Japan), Inc.	Delaware, USA				100%

172    Sun Life Financial Inc.    Annual Report 2019 Subsidiary and Affiliate Companies of Sun Life Financial Inc.

Company	Jurisdiction of Formation	Book Value of Shares Owned		Per cent of Voting Shares Owned by SLF Inc.
Sun Life Financial (U.S.) Holdings, Inc.	Delaware, USA				100%
Sun Life Financial (U.S.) Investments LLC	Delaware, USA				100%
Sun Life Institutional Distributors (U.S.) LLC	Delaware, USA		1		100%
Sun Life Investment Management U.S., Inc.	Delaware, USA				100%
BentallGreenOak (U.S.) GP LLC	Delaware, USA				100%
BentallGreenOak (U.S.) Limited Partnership	Delaware, USA		492		56%
BGO Corporate Holdings (US) LLC	Delaware, USA				56%
Rushmore Partners LLC	Delaware, USA				56%
NewTower Trust Company	Maryland, USA				56%
NewTower Management GP LLC	Delaware, USA				56%
NewTower Management LLC	Delaware, USA				56%
BGO US Real Estate LP	Delaware, USA				56%
BentallGreenOak Real Estate US LLC	Delaware, USA				56%
GreenOak Real Estate Advisors LP	Delaware, USA				56%
GreenOak Real Estate GP LLC	Delaware, USA				56%
BKUS Institutional Logistics Coinvestment LLC	California, USA				56%
GO Equity GP LLC	Delaware, USA				100%
GO Europe Advisor LP	Grand Cayman, Cayman Islands				100%
GreenOak Japan GP Ltd.	Grand Cayman, Cayman Islands				100%
GreenOak Asia Advisor LP	Grand Cayman, Cayman Islands				100%
Prime Advisors, Inc.	Washington, USA		72		100%
Ryan Labs Asset Management Inc.	Delaware, USA		57		100%
Ryan Labs Fund Management, LLC	Delaware, USA				100%
Ryan Labs TIPS Partners, L.P.	Delaware, USA				100%
Sun Life Capital Management (U.S.) LLC	Delaware, USA				100%
SLC Management U.S. Private Credit GP, LLC	Delaware, USA				100%
SLCAL, Inc.	Delaware, USA				100%
Sun Life of Canada (U.S.) Financial Services Holdings, Inc.	Delaware, USA				99.92%
Massachusetts Financial Services Company	Delaware, USA		749		95.61%
MFS Development Funds, LLC	Delaware, USA				95.61%
MFS Exchange LLC	Delaware, USA				95.61%
MFS Fund Distributors, Inc.	Delaware, USA				95.61%
MFS Heritage Trust Company	New Hampshire, USA				95.61%
MFS Institutional Advisors, Inc.	Delaware, USA				95.61%
MFS Investment Management Canada Limited	Canada				95.61%
3060097 Nova Scotia Company	Nova Scotia, Canada				95.61%
MFS International Ltd.	Bermuda				95.61%
MFS do Brasil Desenvolvimento de Mercado Ltda.	Brazil				95.61%
MFS International (Chile) SpA	Chile				95.61%
MFS International (Hong Kong) Limited	Hong Kong				95.61%
MFS International Holdings Pty Ltd	Sydney, Australia				95.61%
MFS Financial Management Consulting (Shanghai) Co., Ltd.	Shanghai, People’s Republic of China				95.61%
MFS International (U.K.) Limited	England and Wales				95.61%
MFS International Switzerland GmbH	Switzerland				95.61%
MFS International Australia Pty Ltd	Victoria, Australia				95.61%
MFS International Singapore Pte. Ltd.	Singapore				95.61%
MFS Investment Management Company (LUX) S.à.r.l.	Luxembourg				95.61%
MFS Investment Management K.K.	Japan				95.61%
MFS Service Center, Inc.	Delaware, USA				95.61%
Sun Life of Canada (U.S.) Holdings, Inc.	Delaware, USA				100%
DailyFeats, Inc.	Delaware, USA				100%
Disability Reinsurance Management Services, Inc.	Delaware, USA				100%
Independence Life and Annuity Company	Delaware, USA		276		100%
Sun Life Financial (U.S.) Reinsurance Company II	Delaware, USA				100%
Professional Insurance Company	Texas, USA		102		100%
Sun Canada Financial Co.	Delaware, USA				100%
Sun Life Administrators (U.S.), Inc.	Delaware, USA				100%
Sun Life Financial (U.S.) Delaware Finance, LLC	Delaware, USA				100%

Subsidiary and Affiliate Companies of Sun Life Financial Inc. Sun Life Financial Inc.    Annual Report 2019    173

Company	Jurisdiction of Formation	Book Value of Shares Owned		Per cent of Voting Shares Owned by SLF Inc.
Sun Life Financial (U.S.) Reinsurance Company	Vermont, USA				100%
Sun Life Financial (U.S.) Services Company, Inc.	Delaware, USA		5		100%
The Premier Dental Group, Inc.	Minnesota, USA				100%
Landmark Dental Alliance, Inc.	Minnesota, USA				100%
Vuzion, Inc.	Minnesota, USA				100%
Sun Life Financial Distributors, Inc.	Delaware, USA				100%
Sun Life Capital Management (Canada) Inc.	Canada		14		100%
Sun Life Global Investments (Canada) Inc.	Canada		126		100%
SL Finance 2007-1, Inc.	Delaware, USA				100%
Sun Life Assurance Company of Canada (Barbados) Limited	Barbados				100%
Sun Life of Canada International Assurance Limited	Barbados				100%
6324983 Canada Inc.	Canada				100%

174    Sun Life Financial Inc.    Annual Report 2019 Subsidiary and Affiliate Companies of Sun Life Financial Inc.

Major Offices

The following is contact information for Sun Life’s major offices and affiliates around the world. For inquiries and customer service, please contact the appropriate office in your area.

Sun Life Financial Inc.

Corporate Office

1 York Street

Toronto, Ontario

Canada M5J 0B6

Website: sunlife.com

Sun Life Canada

Canadian Headquarters

227 King Street South

Waterloo, Ontario

Canada N2J 4C5

Tel: 519-888-2290

Clients: 1-877-SUN-LIFE /

1-877-786-5433

Website: sunlife.ca

Montreal Office

1155 Metcalfe Street

Montreal, Quebec

Canada H3B 2V9

Tel: 514-866-6411

Website: sunlife.ca

Sun Life U.S.

One Sun Life Executive Park

Wellesley Hills, Massachusetts

USA 02481

Clients: 1-800-SUN-LIFE /

1-800-786-5433

Website: sunlife.com/us

Sun Life Financial International

Washington House, 3^rd Floor

16 Church Street

Hamilton HM 11

Bermuda

Tel: 441-294-6050 / 1-800-368-9428

Website: sunlife.com/international

Sun Life UK

Matrix House

Basing View, Basingstoke

Hampshire

United Kingdom RG21 4DZ

Clients: 0345-072-0223

Website: sloc.co.uk

Sun Life Asia

Sun Life Asia Regional Office

Level 14

14 Taikoo Wan Road

Taikoo Shing, Hong Kong

Tel: (852) 2918-3888

China

Sun Life Everbright Life Insurance

Company Limited

Tianjin International Building, 37^th Floor

75 Nanjing Road

Tianjin, China 300050

Tel: (8622) 2339-1188

Website: sunlife-everbright.com

Sun Life Assurance Company of Canada

Beijing Representative Office

Tel: (8610) 8590-6500

Hong Kong, SAR

Sun Life Hong Kong Limited

16/F, Cheung Kei Center Tower A,

No. 18 Hung Luen Road,

Hunghom,

Kowloon, Hong Kong

Tel: (852) 2103-8888

Clients: (852) 2103-8928

Website: sunlife.com.hk

India

Birla Sun Life Insurance

Company Limited

One India Bulls Centre, Tower 1

16^th Floor

Jupiter Mill Compound

841, Senapati Bapat Marg

Elphinstone Road

Mumbai, India 400 013

Tel: 1-800-270-7000 in India

91-22-6723-9100 outside India

Website: birlasunlife.com

Birla Sun Life Asset Management Company Limited

One India Bulls Centre, Tower 1

17^th Floor

Jupiter Mill Compound

841, Senapati Bapat Marg

Elphinstone Road

Mumbai, India 400 013

Tel: 91-22-4356-8000

Website: birlasunlife.com

Sun Life Assurance Company of Canada

India Representative Office

Mumbai

Tel: 91-22-4356-9124

Indonesia

PT Sun Life Indonesia

Menara Sun Life Lantai 12

JI Dr Ide Anak Agung Gde Agung Blok 6.3

Kawasan Mega Kuningan

Jakarta, Selatan 12950

Indonesia

Tel: (6221) 5289-0000

Clients: (6221) 1500-786

Website: sunlife.co.id

Malaysia

Sun Life Malaysia Assurance Berhad

Sun Life Malaysia Takaful Berhad

Level 11, 338 Jalan Tuanku Abdul Rahman

50100 Kuala Lumpur

Malaysia

Tel: (603) 2612-3600

Website: sunlifemalaysia.com

Philippines

Sun Life Philippines

Sun Life Centre

5^th Avenue cor. Rizal Drive

Bonifacio Global City

Taguig City, Metro Manila

Philippines

Clients: (632) 555-8888

Website: sunlife.com.ph

Sun Life Grepa

6/F Grepalife Building

221 Sen. Gil J. Puyat Avenue

Makati City 1203

Philippines

Tel: (632) 8866-6800, 8849-9633

Website: sunlifegrepa.com

Vietnam

Sun Life Vietnam Insurance Company Limited

Vietcombank Tower, 29^th Floor

5 Me Linh Square, District 1

Ho Chi Minh City, Vietnam

Tel: (848) 6298-5888

Website: sunlife.com.vn

MFS Investment Management

111 Huntington Avenue

Boston, Massachusetts

USA 02199

Tel: 617-954-5000

Toll-free in Canada and U.S.:

1-800-343-2829

Website: mfs.com

Sun Life Global Investments (Canada) Inc.

1 York Street

Toronto, Ontario

Canada M5J 0B6

Tel: 1-877-344-1434

Website: sunlifeglobalinvestments.com

SLC Management

Canadian Headquarters

1 York Street, Suite 1100

Toronto, Ontario

Canada M5J 0B6

Email: info@slcmanagement.com

Website: slcmanagement.com

U.S. Offices

One Sun Life Executive Park

Wellesley Hills, Massachusetts

USA 02481

Email: info@slcmanagement.com

Redmond Ridge Corporate Center

22635 NE Marketplace Drive, Suite 160

Redmond, Washington

USA 98053

Tel: 425-202-2000

500 Fifth Avenue, Suite 2520

New York, New York

USA 10110

Tel: 212-635-2300

BentallGreenOak

Canadian Headquarters

1 York Street, Suite 1100

Toronto, Ontario

Canada M5J 0B6

Tel: 416-681-3400

Website: bentallgreenoak.com

Major Offices Sun Life Financial Inc.    Annual Report 2019    175

Notes

176    Sun Life Financial Inc.    Annual Report 2019 Notes

CORP ORAT E A N D S H A R E H O L D E R INF ORMATION Corporate office Sun Life Financial Inc. 1 York Street Toronto, Ontario Canada M5J 0B6 Tel: 416-979-9966 Website: www.sunlife.com Investor Relations For financial analysts, portfolio managers and institutional investors requiring information, please contact: Investor Relations Fax: 416-979-4080 Email: investor.relations@sunlife.com Please note that financial information can also be obtained from www.sunlife.com. Transfer agent For information about your shareholdings, dividends, change in share registration or address, estate transfers, lost certificates, or to advise of duplicate mailings, please contact the Transfer Agent in the country where you reside. If you do not live in any of the countries listed, please contact the Canadian Transfer Agent. Canada AST Trust Company (Canada) P.O. Box 700 Station B Montreal, Quebec Canada H3B 3K3 Within North America: Tel: 1-877-224-1760 Outside of North America: Tel: 416-682-3865 Fax: 1-888-249-6189 Email: sunlifeinquiries@astfinancial.com Website: www.astfinancial.com/ca-en Shareholders can view their account details using AST Trust Company (Canada)’s Internet service, Investor Central. Register at https://www.astfinancial.com/ca-en/login United States American Stock Transfer & Trust Company, LLC 6201 15th Ave. Brooklyn, NY 11219 Tel: 1-877-224-1760 Email: sunlifeinquiries@astfinancial.com United Kingdom Link Asset Services 34 Beckenham Road Beckenham, Kent United Kingdom BR3 4TU Tel: +44 (0) 345-602-1587 Email: enquiries@linkgroup.co.uk Philippines Rizal Commercial Banking Corporation (RCBC) RCBC Stock Transfer Processing Section Ground Floor, West Wing, GPL (Grepalife) Building, 221 Senator Gil Puyat Avenue Makati City, 1200, Philippines From Metro Manila: 632-5318-8567 From the Provinces: 1-800-1-888-2422 Email: rcbcstocktransfer@rcbc.com Hong Kong, SAR Computershare Hong Kong Investor Services Limited 17M Floor, Hopewell Centre 183 Queen’s Road East Wanchai, Hong Kong Tel: 852-2862-8555 Email: hkinfo@computershare.com.hk Shareholder services For shareholder account inquiries, please contact the Transfer Agent in the country where you reside, or Shareholder Services: Fax: 416-598-3121 English Email: shareholderservices@sunlife.com French Email: servicesauxactionnaires@sunlife.com 2020 dividend dates Common Shares Record dates March 2, 2020 May 27, 2020* August 26, 2020* November 25, 2020* Payment dates March 31, 2020 June 30, 2020* September 30, 2020* December 31, 2020* *Subject to approval by the Board of Directors Direct deposit of dividends Common shareholders residing in Canada or the U.S. may have their dividend payments deposited directly into their bank account. The Request for Electronic Payment of Dividends Form is available for downloading from the AST Trust Company (Canada) website, www.astfinancial.com/ca-en, or you can contact AST Trust Company (Canada) to have a form sent to you. Canadian dividend reinvestment and share purchase plan Canadian-resident common shareholders can enroll in the Dividend Reinvestment and Share Purchase Plan. For details visit our website at sunlife.com or contact the Plan Agent, AST Trust Company (Canada) at sunlifeinquiries@astfinancial.com Stock exchange listings Sun Life Financial Inc. common shares are listed on the Toronto (TSX), New York (NYSE) and Philippine (PSE) stock exchanges. Ticker Symbol: SLF Sun Life Financial Inc. Class A Preferred Shares are listed on the Toronto Stock Exchange (TSX). Ticker Symbols: Series 1 – SLF.PR.A Series 8R – SLF.PR.G Series 2 – SLF.PR.B Series 9QR – SLF.PR.J Series 3 – SLF.PR.C Series 10R – SLF.PR.H Series 4 – SLF.PR.D Series 11QR – SLF.PR.K Series 5 – SLF.PR.E Series 12R – SLF.PR.I 2020 Annual Meeting The Annual Meeting will be held on: Date: Tuesday, May 5, 2020 Time: 5:00 p.m. (Toronto Time) Place: Virtual only meeting via live audio webcast online at https://web.lumiagm.com/186947015 Password: ”sunlife2020” (case sensitive) Normal course issuer bid A copy of the Notice of Intention to commence the normal course issuer bid is available without charge by contacting the Corporate Secretary’s Department at shareholderservices@sunlife.com. For information about the Sun Life Group of Companies, corporate news and financial results, please visit sunlife.com. Sun Life Financial Inc. 2019 Annual Report | 177

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