Interim Results - Part 2.

Sun Life Fin.Services of Canada Inc 25 July 2001 PART 2 SECOND QUARTER 2001 INTERIM CONSOLIDATED FINANCIAL STATEMENTS Six Months Ended June 30, 2001 SUN LIFE FINANCIAL SERVICES OF CANADA INC. Interim Consolidated Financial Statements CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited, in millions of Canadian dollars, except for per share amounts) FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 JUNE 30 2001 2000 2001 2000 REVENUE Premium income: Annuities $ 945 $ 1,149 $ 2,204 $ 2,010 Life insurance 906 906 1,864 1,729 Health insurance 350 325 694 633 ------- ------- ------- ------- 2,201 2,380 4,762 4,372 Net investment income 925 980 1,866 1,955 Fee income 819 812 1,650 1,594 ------- ------- ------- ------- 3,945 4,172 8,278 7,921 ------- ------- ------- ------- POLICY BENEFITS AND EXPENSES Payments to policyholders, beneficiaries and depositors: Maturities and surrenders 454 547 986 1,151 Annuity payments 232 240 468 467 Death and disability benefits 276 270 586 562 Health benefits 278 259 538 523 Policyholder dividends and interest on claims and deposits 240 260 513 531 ------- ------- ------- ------- 1,480 1,576 3,091 3,234 Net transfers to segregated funds 756 640 1,493 1,289 Increase in actuarial liabilities 377 630 999 792 Commissions 344 336 702 660 Operating expenses 640 611 1,304 1,183 Premium taxes 30 38 55 60 Interest expense 43 40 85 83 ------- ------- ------- ------- 3,670 3,871 7,729 7,301 ------- ------- ------- ------- OPERATING INCOME BEFORE INCOME TAXES 275 301 549 620 Income taxes 64 108 137 230 ------- ------- ------- ------- TOTAL NET INCOME 211 193 412 390 Less: Net income from mutual operations (prior to demutualization) - - - 179 Participating policyholders' net income (loss) (after demutualization) (1) (4) (2) (4) ------- ------- ------- ------- SHAREHOLDERS' NET INCOME (AFTER DEMUTUALIZATION) $ 212 $ 197 $ 414 $ 215 Basic and diluted earnings per share (Note 2) $ 0.50 $ 0.47 $ 0.98 $ 0.51* * Basic and diluted earnings per share cover period from March 22 to June 30, 2000. Interim Consolidated Financial Statements (unaudited, in millions of Canadian dollars) AS AT JUNE 30 DECEMBER 31 JUNE 30 2001 2000 2000 ASSETS Bonds $ 27,354 $ 27,534 $ 26,390 Mortgages 10,633 10,179 9,970 Stocks 4,456 4,583 4,854 Real estate 2,270 2,327 2,304 Cash, cash equivalents and short-term securities 4,279 3,962 3,111 Policy loans and other invested assets 2,452 2,416 2,392 -------- -------- -------- Invested assets 51,444 51,001 49,021 Other assets 5,031 4,801 4,500 -------- -------- -------- Total general fund assets $ 56,475 $ 55,802 $ 53,521 -------- -------- -------- Segregated funds net assets 45,863 $ 48,741 $ 48,479 LIABILITIES AND EQUITY Actuarial liabilities and other policy liabilities $ 35,742 $ 35,022 $ 34,337 Amounts on deposit 3,960 3,864 3,736 Deferred net realized gains 3,712 3,725 3,565 Other liabilities 4,488 4,845 3,907 -------- -------- -------- Total general fund liabilities 47,902 47,456 45,545 Subordinated debt 755 749 743 Cumulative capital securities of a subsidiary 912 900 888 Total equity 6,906 6,697 6,345 -------- -------- -------- Total general fund liabilities and equity $ 56,475 $ 55,802 $ 53,521 -------- -------- -------- Segregated funds contract liabilities $ 45,863 $ 48,741 $ 48,479 Approved on behalf of the Board of Directors D.A. Stewart Chairman and Chief Executive Officer R.W. Osborne Director Interim Consolidated Financial Statements Consolidated Statements of Equity (unaudited, in millions of Canadian dollars) FOR THE SIX MONTHS ENDED PARTICIPATING JUNE 30 JUNE 30 POLICYHOLDERS SHAREHOLDERS 2001 2000 COMMON STOCK Balance, beginning of period $ - $ 795 $ 795 $ - New common shares issued - - - 844 Commissions and offering costs, net of taxes - - - (49) Purchase and cancellation of common shares (Note 3) - (2) (2) - --------- -------- ----- ------- Balance, end of period - 793 793 795 --------- -------- ----- ------- RETAINED EARNINGS/SURPLUS Balance, beginning of period 78 5,478 5,556 5,489 Demutualization costs, net of taxes - - - (114) Net income as a mutual company - - - 179 --------- -------- ----- ------- Balance, March 22, 2000, as at demutualization 78 5,478 5,556 5,554 Cash distribution to policyholders at demutualization - - - (576) Net income (loss) as a stock company (2) 414 412 211 Dividends paid to shareholders - (101) (101) - Purchase and cancellation of common shares (Note 3) - (33) (33) - --------- -------- ----- ------- Balance, end of period 76 5,758 5,834 5,189 --------- -------- ----- ------- CURRENCY TRANSLATION ACCOUNT Balance, beginning of period 1 345 346 389 Changes for the period (prior to demutualization) - - - (20) Changes for the period (after demutualization) - (67) (67) (8) Balance, end of period 1 278 279 361 --------- -------- ----- ------- Total equity $ 77 $ 6,829 $ 6,906 $ 6,345 --------- -------- ----- ------- Condensed Consolidated Statements of Cash Flows (unaudited, in millions of Canadian dollars) FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 JUNE 30 2001 2000 2001 2000 CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES Total net income $ 211 $ 193 $ 412 $ 390 New mutual fund business acquisition costs capitalized (62) (111) (143) (218) Items not affecting cash 457 747 389 1,007 ------- ------- ------- ------- Net cash provided by operating activities 606 829 658 1,179 ------- ------- ------- ------- CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES Borrowed funds (30) (184) 78 (492) Payments to certain participating policyholders and underwriters at demutualization - (11) - (658) Issuance of common shares - 268 - 844 Purchase and cancellation of common shares (Note 3) - - (35) - Dividends paid to shareholders (50) - (101) - ------- ------- ------- ------- Net cash provided by (used in) financing activities (80) 73 (58) (306) ------- ------- ------- ------- CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES Sales, maturities and repayments of bonds, mortgages, stocks and real estate 3,768 2,742 8,410 7,877 Purchases of bonds, mortgages, stocks and real estate (4,079) (3,598) (8,647) (8,826) Policy loans (21) 2 (44) (18) Short-term securities (54) 23 (303) (205) Other investments (48) (42) (31) 24 Disposal - - - 160 ------- ------- ------- ------- Net cash used in investing activities (434) (873) (615) (988) ------- ------- ------- ------- Net cash provided by (used in) discontinued operations (2) 48 49 26 Changes due to fluctuations in the exchange rates (70) (1) 21 12 ------- ------- ------- ------- Increase (decrease) in cash and cash equivalents 20 76 55 (77) Cash and cash equivalents, beginning of period 2,538 1,845 2,503 1,998 ------- ------- ------- ------- Cash and cash equivalents, end of period 2,558 1,921 2,558 1,921 Short-term securities, end of period 1,721 1,190 1,721 1,190 ------- ------- ------- ------- Cash, cash equivalents and short-term securities, end of period $ 4,279 $ 3,111 $ 4,279 $ 3,111 ------- ------- ------- ------- Supplementary Information Cash and cash equivalents: Cash $ 535 $ 335 Cash equivalents 2,023 1,586 ------- ------- $ 2,558 $ 1,921 ------- ------- Cash disbursements made for: Interest on borrowed funds, subordinated debt and cumulative capital securities $ 64 $ 60 $ 85 $ 82 ------- ------- ------- ------- Income taxes, net of refunds $ 54 $ 127 $ 174 $ 208 ------- ------- ------- ------- Consolidated Statements of Changes in Segregated Funds Net Assets (unaudited, in millions of Canadian dollars) FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED JUNE 30 JUNE 30 JUNE 30 JUNE 30 2001 2000 2001 2000 ADDITIONS TO SEGREGATED FUNDS Deposits: Annuities $ 1,264 $ 1,429 $ 3,171 $ 2,574 Life insurance 215 751 254 813 ------- ------- ------- ------- 1,479 2,180 3,425 3,387 Net transfers from general funds 756 640 1,493 1,289 Net realized and unrealized gains (losses) 721 (1,473) (5,184) 457 Other investment income 513 372 921 667 ------- ------- ------- ------- 3,469 1,719 655 5,800 ------- ------- ------- ------- DEDUCTIONS FROM SEGREGATED FUNDS Payments to policyholders and their beneficiaries 1,370 1,448 3,098 3,007 Management fees 136 115 273 247 Taxes and other expenses 32 8 29 36 Effect of changes in currency exchange rates 1,410 (276) 133 45 ------- ------- ------- ------- 2,948 1,295 3,533 3,335 ------- ------- ------- ------- Net additions (deductions) to segregated funds for the period 521 424 (2,878) 2,465 Segregated funds net assets, beginning of period 45,342 48,055 48,741 46,014 ------- ------- ------- ------- Segregated funds net assets, end of period $45,863 $ 48,479 $ 45,863 $ 48,479 ------- ------- ------- ------- Consolidated Statements of Segregated Funds Net Assets (unaudited, in millions of Canadian dollars) AS AT JUNE 30 DECEMBER 31 JUNE 30 2001 2000 2000 ASSETS Stocks $ 39,324 $ 42,225 $ 42,664 Bonds 4,989 5,146 4,194 Cash, cash equivalents and short-term securities 1,839 1,412 1,862 Real estate 748 817 812 Mortgages 317 338 332 Other assets 424 648 841 -------- -------- -------- $ 47,641 $ 50,586 $ 50,705 -------- -------- -------- LIABILITIES 1,778 1,845 2,226 -------- -------- -------- Net assets applicable to segregated funds policyholders $ 45,863 $ 48,741 $ 48,479 -------- -------- -------- Condensed Notes to the Interim Consolidated Financial Statements (unaudited, in millions of Canadian dollars, except for per share amounts and where otherwise stated) 1. Basis of Presentation Sun Life Financial Services of Canada Inc. and its subsidiaries are collectively referred to as 'Sun Life Financial' or 'the Company'. Sun Life Financial prepares its Consolidated Financial Statements according to Canadian generally accepted accounting principles (GAAP) including the requirements of the Office of the Superintendent of Financial Institutions Canada. These Interim Consolidated Financial Statements follow the same accounting policies and methods of computation as the annual 2000 Consolidated Financial Statements, with the exception of the change in accounting policy as described in Note 7. The Interim Consolidated Financial Statements should be read in conjunction with the most recent annual Consolidated Financial Statements, as they do not include all information and notes required by GAAP for annual Consolidated Financial Statements. Sun Life Financial Services of Canada Inc., a publicly traded company, is the holding company of Sun Life Assurance Company of Canada. Sun Life Assurance Company of Canada was organized as a mutual life insurance company until March 22, 2000, at which date it demutualized. For financial statement purposes, the surplus, results of operations and cash flows of Sun Life Assurance Company of Canada and its subsidiaries (Sun Life Assurance) have been presented in the Interim Consolidated Financial Statements of Sun Life Financial on a continuity of interest basis as a continuation of the historical operations of Sun Life Assurance. 2. Earnings Per Share BASIC, ADJUSTED AND DILUTED EARNINGS PER SHARE For the three For the six For the period months ended months ended March 22 to June 30 June 30 June 30 June 30 June 30 2000 2001 2000 2001 2000 Net income available to shareholders $ 212 $ 197 $ 414 $ 378 (2) $ 215 Less: Effect of stock options of subsidiaries (1) 2 1 3 1 ----- ----- ----- ----- ----- Net income available to shareholders on a diluted basis $ 210 $ 196 $ 411 $ 214 Weighted average number of shares outstanding (in millions) 421 421 421 411 419 Basic and adjusted (2) earnings per share $0.50 $0.47 $0.98 $0.92 (2) $0.51 Diluted earnings per share $0.50 $0.47 $0.98 $0.51 (1) The effect of stock options of the subsidiaries is calculated based on the treasury stock method requirements which assume that any proceeds from the exercise of the options would be used to purchase common shares of the subsidiaries at the average market prices during the period. (2) Adjusted earnings per share is calculated as if demutualization occurred and the offering, excluding the underwriters' over-allotment, closed on January 1, 2000. Net income of $390 from January 1 to June 30, 2000 was adjusted for the net income of $16 attributed to pre-demutualization participating policyholders and the net loss of $4 attributed to post-demutualization participating policyholders. 3. Normal Course Issuer Bid On May 11, 2000, the Company announced that the Board of Directors (Board) had authorized the purchase of up to 21 million common shares (Shares), representing 5% of the Shares issued and outstanding at that time. The purchases were made under a normal course issuer bid program in accordance with the rules of The Toronto Stock Exchange (Exchange). The normal course issuer bid program covered the period from May 15, 2000 to May 14, 2001. Regulatory approval for the normal course issuer bid program was received on May 16, 2000. Transactions were executed on the Exchange at the prevailing market price in amounts and times determined by the Company. The Company made no purchases of Shares other than open-market purchases. Any Shares purchased as part of the normal course issuer bid program were cancelled. As at June 30, 2001, the Company had purchased and cancelled approximately one million of its Shares at an average price of $32 per share and had 421 million (422 million in 2000) Shares issued and outstanding. 4. Stock-based Compensation On April 25, 2001, shareholders of the Company approved the Executive Stock Option Plan, the Director Stock Option Plan and the Senior Executives' Deferred Share Unit Plan at the Annual and Special Meeting. The Company granted stock options to certain employees and directors under the Executive Stock Option Plan and the Director Stock Option Plan and to all eligible employees under the Special 2001 Stock Option Award Plan. These options may be exercised at the closing price of the Shares on the Toronto Stock Exchange on the trading day preceding the grant date. The options granted under the stock option plans will vest at various times: over a five-year period under the Executive Stock Option Plan, two years after the grant date under the Special 2001 Stock Option Award Plan and over a two-year period or immediately upon death or attainment of the mandatory age for retirement under the Director Stock Option Plan. All options have a maximum exercise period of 10 years. The maximum number of Shares that may be issued under the Executive Stock Option Plan, the Special 2001 Stock Option Award Plan and the Director Stock Option Plan are 29,525,000 Shares, 1,150,000 Shares and 150,000 Shares, respectively. The Company follows the intrinsic value method of accounting for the stock options. Since the exercise price is set at the closing price of the Shares on the trading day preceding the grant date, no compensation expense is recognized on the grant date. When options are exercised, the proceeds received by the Company are credited to common stock in the Consolidated Statements of Equity. The activity in the stock option plans for the period ended June 30, 2001 is as follows: 2001 Weighted average Weighted remaining contractual Number of average life (years) stock options exercise price Granted 5,276,400 $29.51 Forfeited 21,500 29.49 Balance, June 30 (exercise prices: $29.49 to $33.53) 9.75 5,254,900 $29.51 --------------------------- Exercisable, June 30 2,000 $31.00 --------------------------- 5. Acquisitions On May 2, 2001, the Company signed an agreement of purchase and sale with Liberty Financial Companies, Inc. to acquire both Keyport Life Insurance Company and Independent Financial Marketing Group, Inc. for $2.6 billion. Subject to the approvals of the relevant Canadian and U.S. regulators and the shareholders of Liberty Financial Companies, Inc., the acquisition is expected to close in the third quarter of 2001. 6. Segmented Information The Company's reportable segments reflect the Company's management structure and internal financial reporting. Each of these segments has its own management. All of these segments operate in the financial services industry. They derive their revenues principally from wealth management operations (mutual funds, investment management, annuities, trust operations and banking) and protection services (life and health insurance). Corporate and other represents amounts not attributed to wealth management and protection. It primarily includes investments of a corporate nature and earnings on capital not attributed to the strategic business units. Other operations include those operations for which management responsibility resides in head office. Total net income or loss in this category is shown net of certain expenses borne centrally. Transactions occurring between segments consist primarily of internal financing agreements. Inter-segment transactions are measured at market values prevailing when the arrangements were negotiated. Inter-segment revenue for the three and six months ended June 30, 2001 consists of interest of $32 and $68, respectively ($36 and $70, respectively, in 2000) and fee income of $8 and $15, respectively ($10 and $17, respectively, in 2000). RESULTS BY SEGMENT FOR THE THREE MONTHS ENDED JUNE 30, 2001 United States United Consolidation Canada Sun Life MFS Kingdom Asia Other Adjustments Total REVENUE Wealth management $ 318 $ 1,009 $ 587 $ 197 $ - $ 3 $ (8) $ 2,106 Protection 604 743 - 340 106 5 - 1,798 Corporate and other 10 3 - 1 - 59 (32) 41 ---------------------------------------------------------------- $ 932 $ 1,755 $ 587 $ 538 $ 106 $ 67 $ (40) $ 3,945 ---------------------------------------------------------------- TOTAL NET INCOME (LOSS) Wealth management $ 18 $ 1 $ 65 $ 35 $ (1) $ 2 $ (7) $ 113 Protection 30 35 - 44 11 1 - 121 Corporate and other 6 (9) - (29) - 2 7 (23) --------------------------------------------------------------- $ 54 $ 27 $ 65 $ 50 $ 10 $ 5 $ - $ 211 --------------------------------------------------------------- RESULTS BY SEGMENT FOR THE THREE MONTHS ENDED JUNE 30, 2000 United States United Consolidation Canada Sun Life MFS Kingdom Asia Other Adjustments Total REVENUE Wealth management $387 $ 1,122 $ 581 $ 245 $ - $ 3 $ (10) $ 2,328 Protection 610 685 - 376 100 4 - 1,775 Corporate and other 11 39 - (1) - 56 (36) 69 ------------------------------------------------------------------ $ 1,008 $ 1,846 $ 581 $ 620 $ 100 $ 63 $ (46) $ 4,172 ------------------------------------------------------------------ TOTAL NET INCOME (LOSS) Wealth management $ 17 $ 14 $ 62 $ 36 $ (2) $ 2 $ (8) $ 121 Protection 14 24 - 20 7 - - 65 Corporate and other 9 18 - (23) - (5) 8 7 ------------------------------------------------------------------- $ 40 $ 56 $ 62 $ 33 $ 5 $ (3) $ - $ 193 ------------------------------------------------------------------- RESULTS BY SEGMENT FOR THE SIX MONTHS ENDED JUNE 30, 2001 United States United Consolidation Canada Sun Life MFS Kingdom Asia Other Adjustments Total REVENUE Wealth management $ 677 $ 2,276 $ 1,190 $ 415 $ - $ 6 $ (15) $ 4,549 Protection 1,271 1,473 - 677 209 7 - 3,637 Corporate and other 14 27 - 3 - 116 (68) 92 ------------------------------------------------------------------ $ 1,962 $ 3,776 $ 1,190 $ 1,095 $ 209 $ 129 $ (83) $ 8,278 ------------------------------------------------------------------ TOTAL NET INCOME (LOSS) Wealth management $ 39 $ 14 $ 123 $ 64 $ (2) $ 6 $ (15) $ 229 Protection 51 64 - 51 20 1 - 187 Corporate and other 12 (1) - (26) - (4) 15 (4) ------------------------------------------------------------------ $ 102 $ 77 $ 123 $ 89 $ 18 $ 3 $ - $ 412 ------------------------------------------------------------------ ASSETS General fund assets $17,389 $18,611 $1,735 $13,657 $1,579 $3,637 $ (133) $56,475 Segregated funds net assets $ 8,426 $26,970 $ - $10,467 $ - $ - $ - $45,863 Other assets under Management $23,851 $ 1,629 $220,087 $3,015 $ 12 $ - $(24,484)$224,110 RESULTS BY SEGMENT FOR THE SIX MONTHS ENDED JUNE 30, 2000 United States United Consolidation Canada Sun Life MFS Kingdom Asia Other Adjustments Total REVENUE Wealth management $ 808 $ 1,934 $ 1,139 $ 441 $ - $ 5 $ (17) $ 4,310 Protection 1,221 1,313 - 770 195 8 - 3,507 Corporate and other 10 58 - (2) - 108 (70) 104 ------------------------------------------------------------------ $ 2,039 $ 3,305 $ 1,139 $1,209 $ 195 $ 121 $ (87) $ 7,921 ------------------------------------------------------------------ TOTAL NET INCOME (LOSS) Wealth management $ 45 $ 29 $ 124 $ 67 $ (2) $ 4 $ (15) $ 252 Protection 38 47 - 15 14 - - 114 Corporate and other 6 47 - (32) - (12) 15 24 ------------------------------------------------------------------ $ 89 $ 123 $ 124 $ 50 $ 12 $ (8) $ - $ 390 ------------------------------------------------------------------ ASSETS General fund assets $17,256 $16,336 $ 1,568 $13,738 $1,427 $3,453 $(257) $53,521 Segregated funds net assets $ 9,482 $27,006 $ - $11,991 $ - $ - $ - $48,479 Other assets under Management $24,684 $ 707 $225,104 $ 3,784 $ - $ - $(26,577)$227,702 7. Change in Accounting Policy The Company adopted Earnings Per Share, the Canadian Institute of Chartered Accountants Handbook Section 3500, on January 1, 2001, which requires the use of treasury stock method to determine the dilutive effect of options, warrants and equivalents in the calculation of earnings per share. This new standard does not materially impact the Company's earnings per share disclosures. 8. Provisions for Certain Contingencies REINSURANCE MATTERS The Company adopted a formal plan of disposal for its reinsurance operations on December 15, 1999. On April 10, 2000, the transaction to sell the life retrocession and financial reinsurance lines of its reinsurance business closed after receiving all of the necessary regulatory approvals. The portion of the reinsurance business which is not included in the sale, primarily the accident and health reinsurance business, has been discontinued as the Company has stopped writing such business and closed its existing block of business. The actuarial liabilities and provisions remaining with the Company amount to $742 ($799 as at June 30, 2000). Certain of the arrangements in the business remaining with the Company are subject to litigation or arbitration. The liabilities of the Company under these arrangements are subject to measurement uncertainty, but this is not expected to have a material adverse effect on the consolidated financial position of the Company. UNICOVER The Company is engaged in arbitration proceedings in the United States with Cragwood Managers, LLC (formerly Unicover Managers, Inc.) and the members of the Unicover reinsurance pool. The Company is seeking rescission of, or damages in respect of, certain contracts of reinsurance of accident and health insurance components of workers' compensation insurance policies written by U.S. insurers. The amounts involved are substantial. The Company is also engaged in arbitration proceedings in the United States and in England with three of the companies that have contracts to provide reinsurance to the Company. Those contracts would provide coverage for Unicover-related claims (as well as non-Unicover claims). Those companies are disputing their obligation to provide coverage to the Company under their respective contracts of reinsurance. Other reinsurers of the Company may institute similar proceedings. Based on its investigation of the facts currently available and on the advice of counsel, the Company believes that it has strong grounds on which to rescind the contracts with the Unicover pool members. However, the arbitration proceedings may be lengthy and the outcome of the arbitration proceedings is uncertain. The final liabilities of the Company in respect of Unicover-related claims are not expected to have a material adverse effect on the consolidated financial position of the Company regardless of the outcome of these arbitration proceedings. The Company established provisions of $150 after taxes during 1999 in connection with the Unicover business based on information known to it at the time. The financial terms of certain settlements that the Company has entered into to date in connection with Unicover-related claims are consistent with these provisions. No additional provisions were established during the first six months of 2001. LEGAL PROCEEDINGS Sun Life Financial and its subsidiaries are engaged in litigation arising in the ordinary course of business. None of this litigation is expected to have a material adverse effect on the consolidated financial position of the Company other than those mentioned elsewhere in this note. PROVISIONS IN THE UNITED KINGDOM In the United Kingdom, the life insurance industry is being required to compensate certain policyholders under the Financial Services Authority guidelines on sales of pension products. The compensation is for sales which occurred from 1988 to 1994. These guidelines have been significantly expanded for the second phase of required compensation, which has required the entire industry to significantly increase its provisions. The Financial Services Authority is continuing to provide more specific guidance for this compensation. The liability has been determined by the use of estimates derived from the regulatory guidance or the Company's prior experience. The Company's future experience may be different from these estimates and consequently there is still uncertainty in measuring its ultimate costs. There was no increase in the provisions for the first six months of 2001 and 2000 and the total cost since inception is $1,176. During the first six months of 2001, the Company paid compensation of $94 ($48 in the first six months of 2000), for total compensation payments since inception of $606. At June 30, 2001, the Company had provisions of $433 ($662 as at June 30, 2000) for future compensation payments and related expenses. In 1998, the Company significantly increased its actuarial liabilities in connection with certain annuities with minimum annuity rates issued prior to 1994 by Confederation Life (U.K.) in the United Kingdom. At June 30, 2001, the actuarial liabilities for these annuities were $422 ($451 as at June 30, 2000). The Company has instituted a hedging program with the objective of limiting losses that would otherwise arise upon further declines in interest rates in the United Kingdom. This program provides a substantial, although not complete, hedge against declines in interest rates. There can be no certainty that additional liabilities will not be required in the future as a result of interest rate changes or other factors. 9. Restructuring of the United Kingdom Operations In February 2001, the Board approved a restructuring plan of the Company's United Kingdom operations. As part of the restructuring plan, the Company decided to exit the direct sales force distribution channel and significantly reduce the scale of its operations by the end of 2003. The cost to the Company will be partially offset by the effect in the actuarial liabilities of having lower operating expenses. SUN LIFE FINANCIAL SERVICES OF CANADA INC. Management's Discussion and Analysis for the three months ended June 30, 2001 Sun Life Financial Services of Canada Inc. (NYSE/TSE: 'SLC') reported record shareholder net income of $212 million for the quarter ending June 30, 2001, an increase of 8 per cent over the $197 million earned in the same period in 2000. Earnings per share of $0.50 were up 6 per cent from the $0.47 per share earned in the second quarter, a year ago. Revenues for the quarter were $3,945 million, compared with $4,172 million in the second quarter of 2000, a decrease of 5 per cent. Assets under management were $326 billion at quarter end, an increase of 3 per cent compared with the $316 billion at the end of the first quarter of 2001, and a decline of 1 per cent relative to assets under management of $329 billion at June 30, 2000. Return on equity was 12.3 per cent in the second quarter, up from 12.0 per cent in the first quarter of 2001. Summary Quarterly Results Six Month Results 2Q'01 1Q'01 2Q'00 2001 2000 Shareholder Net Income ($) 212 202 197 414 378* Earnings Per Share ($) .50 .48 .47 .98 .92* Revenues ($) 3,945 4,333 4,172 8,278 7,921 Return on Equity (per cent) 12.3 12.0 12.9 12.3 12.7* Average Share Outstanding 420.7 421.4 421.0 421.0 410.5 *Proforma (in millions, except per share amounts and Return on Equity) Sun Life Financial's second quarter results demonstrated the Corporation's ability to maintain stable earnings performance in a challenging financial environment. A combination of strong sales in a number of its businesses and prudent attention to costs across all operations helped to produce record net income for the quarter. While Sun Life Financial's wealth management focus results in an inherent sensitivity to North American capital markets, the diversity of the Company's business model was successful in mitigating the impact of the market on its performance. The strategic positions of the Corporation's major operating units continued to advance. This was especially true in its Canadian operations and at MFS Investment Management as both units achieved strong growth relative to the first quarter. Assets under management recovered nicely from the first quarter, providing the foundation for continued profitability enhancements going forward. In addition, Sun Life Financial is progressing with its plans to close on the Keyport/IFMG acquisition in the third quarter. The capital which will be used to fund the Keyport/IFMG acquisition was kept in liquid form during the second quarter, and this liquidity had a restraining impact on the quarter's profitability and return on equity which was 12.3 per cent. Nevertheless, progress was made, particularly by lowering expenses by $24 million relative to expense levels in the first quarter. FINANCIAL REVIEW At June 30, 2001, assets under management were $326 billion, a decrease of $3 billion or 1 per cent relative to the $329 billion at June 30, 2000. The year-over-year decrease was attributable to the downturn in North American equity markets over the past year. Relative to assets under management of $316 billion as at March 31, 2001, assets under management produced an increase of 10 billion, or 3 per cent. This rebound was largely attributable to strong net sales of mutual funds and managed funds totalling $8.1 billion in the second quarter. Total revenue in the second quarter was $3.9 billion, a decrease of $388 million, or 9 per cent, compared to the $4.3 billion recorded in the quarter ending March 31, 2001. Contributing to this decline, were decreased sales of European Medium Term Notes and annuities in the U.S, in addition. Group Life premiums in Canada were lower. Shareholder earnings for the first six months of 2001 were $414 million, up 9 per cent over the earnings of $378 million for the first six months of 2000. Shareholders' net income for the second quarter was $212 million, up $15 million, or 8 per cent from the $197 million earned in the second quarter of 2000. Net income, which includes earnings attributable to policyholders, was $211 million, an increase of 18 million, or 9 per cent, as compared to the $193 million earned in the second quarter of 2000. Net cash flows in the second quarter of 2001 were $20 million compared to net cash flows of $76 million in the second quarter of 2000. Net cash flows in the first six months of 2001 were $55 million compared to negative cash flows of $77 million in the first six months of 2000. At June 30, 2001 cash, cash equivalents and short-term investments were $4.3 billion compared to $3.1 billion a year earlier and $4.0 billion at December 31, 2000. PERFORMANCE BY COUNTRY Canada Quarterly Results Six Month Results 2Q'01 1Q'01 2Q'00 2001 2000 Individual Life 8 10 4 18 3 Group Life and Health 23 12 12 35 23 Group Retirement Services 12 11 8 23 21 Spectrum and Other 6 10 9 16 24 Investment Portfolio 6 6 9 12 6 Total 55 49 42 104 77 Canadian net income for the first six months of 2001 was $104 million, an increase of $27 million or 35 per cent, over the $77 million earned in the first half of 2000. Favourable morbidity experience in the Group Health operation added $12 million to first half earnings. Reserve strengthening depressed Individual Life earnings in the first six months of 2000. Canadian Operations earned $55 million in the second quarter of 2001, an increase of $13 million, or 31 per cent, relative to the $42 million earned in the second quarter of 2000. This increase was primarily the result of an $11 million increase in earnings from Group Life and Health. - Individual Life reported earnings of $8 million for the current quarter, an increase of $4 million relative to the $4 million earned in the second quarter of 2000. The earnings increase resulted from enhanced cost efficiencies. - Group Life and Health earned $23 million in the quarter, an increase of $ll million or 92 per cent, relative to the $12 million earned in the second quarter of 2000. Improved mortality and morbidity experience and reduced expenses added to earnings in the second quarter. - Group Retirement Services earned $12 million in the second quarter of 2001, an increase of $4 million, or 50 per cent, relative to the second quarter of 2000. Reduced new business strain and lower expenses contributed to the increase in earnings. - Spectrum and Other earnings declined to $6 million in the current quarter from $9 million in the second quarter of 2000. The earnings decrease resulted primarily from a $1.2 billion reduction in assets under management as equity markets valuations declined. United States Annuity and Insurance Operations Quarterly Results Six Month Results 2Q'01 1Q'01 2Q'00 2001 2000 Retirement Products and 1 13 14 14 29 Services Individual Life 25 23 20 48 41 Group Life and Health 10 6 6 16 6 Investment Portfolio (9) 8 18 (1) 47 Total 27 50 58 77 123 U.S. Annuity and Insurance Operations earned $77 million for the first six months of 2001, a decrease of $46 million or 37 per cent from earnings of $123 million reported for the first six months of 2000. Declining assets under management in the Retirement Product & Services line contributed to a $15 million reduction in earnings. In the first six months of 2000, the U.S. operations included a $20 million gain from venture capital. There were no such gains in the first six months of 2001 In the second quarter of 2001, U.S. Annuity and Insurance Operations earned $27 million compared to $58 million in the second quarter of 2000, a decrease of $31 million, or 53 per cent. This decline was largely as the result of earnings declines in Retirement Products and Services and in the Investment Portfolio. The earnings of the Investment Portfolio were reduced by a more tightly hedged book. - Retirement Products and Services reported earnings of $l million, a decline of $13 million or 93 per cent relative to the $14 million earned in the second quarter of 2000. Margins were lower due to declining market valuations. - Individual Life had a solid quarter earning $25 million, an increase of $5 million, or 25 per cent, relative to the $20 million earned in the second quarter of 2000. Contributing to the increase in earnings were favourable experience gains. - Group Life and Health earned $10 million in the second quarter, a $4 million increase relative to the $6 million reported in the second quarter of 2000. The profitability growth reflects premium growth in the stop loss line and favourable claims experience in the Long Term Disability business. MFS Investment Management Quarterly Results Six Month Results 20'01 1Q'01 2Q'00 2001 2000 MFS Net Income (C$mm) 65 58 62 123 124 Assets Under Management (C$Billions) 220 209 225 220 225 Net New Sales (C$Billions) 7.8 12.4 8.4 20.2 14.7 Market Movement/Currency 3.7 (24.8) (2.5) (21.1) 11.5 (C$Billions) Net income earned by MFS for the first six months of 2001 was $123 million compared to $124 million for the first six months of 2000, a decrease of only $1 million, despite a decline in assets under management of $5 billion. MFS earned $65 million in the second quarter, an increase of $3 million, or 5 per cent, relative to the $62 million earned in the second quarter of 2000. Relative to performance in the first quarter of 2001 earnings in the second quarter increased by $7 million, or 12 per cent. Two factors were responsible for MFS' ability to report relatively stable earnings performance during this period of steep declines in U.S. equity markets: (1) net funds inflows provided a partial offset to asset valuation declines, and (2) aggressive cost control offset pressure on profit margins. - Net new sales for the quarter were $7.8 billion. - No2 ranking for net new retail mutual fund flows in the non-proprietary channel with new flows of US$4,576 million (Year-to-date May 31, 2001) - Captured 16 per cent of retail mutual fund industry's net funds flows through the non-proprietary channel. - No4 ranking for overall mutual fund net new flows. (Year-to-date May 31, 2001). - No9 ranking by size among U.S. mutual fund companies with U5$90 billion in long term mutual fund assets under management (May 31, 2001). - 52 per cent of domestic retail mutual fund assets reside in one of MFS' 25 funds with a 4 or 5 Star Overall Morningstar Rating (May 31, 2001). United Kingdom Quarterly Results Six Month Results 2Q'1 1Q'O1 2Q'00 2001 2000 UK Net Income 50 39 33 89 50 U.K. net income was $89 million in the first half of 2001, compared to $50 million in the first six months of 2000, an increase of $39 million or 78 per cent for the period. The reduction in recurring costs associated with exiting the direct sales force distribution business led to stronger earnings in the first half of 2001. On February 15, 2001. Sun Life Financial announced its decision to exit the direct sales force distribution business in the U.K. The sales force was terminated on March 30, 2001. Earnings for the U.K. were $50 million in the second quarter of 2001, an increase of $17 million, or 51.5 per cent, relative to earnings of $33 million in the second quarter of 2000. The beneficial impact of closing the block to new business contributed to the increase in U.K. earnings. Asia Quarterly Results Six Month Results 2Q'1 1Q'O1 2Q'00 2001 2000 Asia Net Income 10 8 5 18 12 The Asian Operations earned $18 million in the first half of 2001, an increase of $6 million, or 50 per cent, relative to the $12 million earned in the first half of 2000. Improved performance in the Philippines, Hong Kong and Indonesia all contributed to the earnings increase. Earnings for Asia in the second quarter were $10 million, an increase of 5 million, or 100 per cent relative to earnings in the second quarter of 2000, largely due to increased net income in the Philippines. Current period earnings include the impact of continuing investments in the Asian market in pursuit of longer-term growth prospects.

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