SUN LIFE ASSURANCE CO OF CANADA US - FORM 10-Q

Attached files

file	filename
EX-31.2 - SUN LIFE ASSURANCE CO OF CANADA US	exhibit312.htm
EX-10.1 - SUN LIFE ASSURANCE CO OF CANADA US	exhibit101.htm
EX-32.1 - SUN LIFE ASSURANCE CO OF CANADA US	exhibit321.htm
EX-31.1 - SUN LIFE ASSURANCE CO OF CANADA US	exhibit311.htm
EX-32.2 - SUN LIFE ASSURANCE CO OF CANADA US	exhibit322.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT 0F 1934

For the quarterly period ended

March 31, 2010

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

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

(Exact name of registrant as specified in its charter)

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

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

(781) 237-6030

(Registrant’s telephone number, including area code)

NONE

(Former name, former address, and former fiscal year, if changed since last report)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer þ	(Do not check if a smaller reporting company)	Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes þ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date. Registrant has 6,437 shares of common stock outstanding as of May 14, 2010, all of which are owned by Sun Life of Canada (U.S.) Holdings, Inc.

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2010

TABLE OF CONTENTS

Page

PART I -	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2010 and 2009 (Unaudited)	3

	Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009 (Unaudited)	4

	Condensed Consolidated Statements of Comprehensive Income for the three-month periods ended March 31, 2010 and 2009 (Unaudited)	5

	Condensed Consolidated Statements of Changes in Stockholder’s Equity for the three-month periods ended March 31, 2010 and 2009 (Unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2010 and 2009 (Unaudited)	7

	Notes to the Unaudited Condensed Consolidated Financial Statements	9

Item 2.	Management's Discussion and Analysis of Financial Position and Results of Operations	63

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	76

Item 4.	Controls and Procedures	76

PART II -	OTHER INFORMATION

Item 1.	Legal Proceedings	76

Item 1A.	Risk Factors	76

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	76

Item 3.	Defaults Upon Senior Securities	76

Item 4.	(Removed and Reserved)	76

Item 5.	Other Information	76

Item 6.	Exhibits	77

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

For the three-month periods ended March 31,

	Unaudited
	2010		2009

Revenues

Premiums and annuity considerations	$	35,064	$	32,540
Net investment income (1)		443,829		143,657
Net derivative (loss) income (Note 5)		(41,450)		129,846
Net realized investment gains (losses), excluding impairment losses on available-for-sale securities		5,165		(1,897)
Other-than-temporary impairment losses (2) (Note 5)		(885)		-
Fee and other income		115,753		76,201

Total revenues		557,476		380,347

Benefits and Expenses

Interest credited		89,383		112,784
Interest expense		17,097		12,080
Policyowner benefits		34,603		101,987
Amortization of deferred policy acquisition costs and value of business and customer renewals acquired		171,709		(107,424)
Other operating expenses		80,910		46,941

Total benefits and expenses		393,702		166,368

Income from continuing operations before income tax expense		163,774		213,979

Income tax expense		52,123		72,703

Net income from continuing operations		111,651		141,276

Loss from discontinued operations, net of tax (Note 1)		-		(91,662)

Net income	$	111,651	$	49,614

(1)Net investment income includes an increase (decrease) in market value of trading fixed maturity securities of $270.4 million and $(29.9) million for the three-month periods ended March 31, 2010 and 2009, respectively.

(2)The $0.9 million other-than-temporary impairment (“OTTI”) losses for the three-month period ended March 31, 2010 represent solely credit losses. The Company incurred no non-credit OTTI losses during the three-month period ended March 31, 2010 and as such, no non-credit OTTI losses were recognized in other comprehensive income for the period.

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	Unaudited
ASSETS	March 31, 2010		December 31, 2009
Investments
Available-for-sale fixed maturity securities at fair value (amortized cost of $1,102,681 and $1,121,424 in 2010 and 2009, respectively) (Note 5)	$	1,165,962	$	1,175,516
Trading fixed maturity securities at fair value (amortized cost of $12,598,448 and $12,042,961in 2010 and 2009, respectively) (Note 5)		11,956,591		11,130,522
Mortgage loans		1,899,847		1,911,961
Derivative instruments – receivable (Note 5)		235,498		259,227
Limited partnerships		45,886		51,656
Real estate		204,336		202,277
Policy loans		710,292		722,590
Other invested assets		26,406		47,421
Short-term investments		2,051,747		1,267,311
Cash and cash equivalents		733,097		1,804,208
Total investments and cash		19,029,662		18,572,689

Accrued investment income		218,046		230,591
Deferred policy acquisition costs		2,065,562		2,173,642
Value of business and customer renewals acquired		170,600		168,845
Net deferred tax asset (Note 12)		492,062		549,764
Goodwill (Note 11)		7,299		7,299
Receivable for investments sold		14,036		12,611
Reinsurance receivable		2,360,783		2,350,207
Other assets		145,492		183,963
Separate account assets		24,269,106		23,326,323

Total assets	$	48,772,648	$	47,575,934

LIABILITIES

Contractholder deposit funds and other policy liabilities	$	16,459,748	$	16,709,589
Future contract and policy benefits		795,099		815,638
Payable for investments purchased		92,774		88,131
Accrued expenses		59,837		61,903
Debt payable to affiliates		883,000		883,000
Reinsurance payable		2,235,267		2,231,764
Derivative instruments – payable (Note 5)		549,423		572,910
Other liabilities		304,234		280,224
Separate account liabilities		24,269,106		23,326,323

Total liabilities		45,648,488		44,969,482

Commitments and contingencies (Note 8)

STOCKHOLDER’S EQUITY

Common stock, $1,000 par value – 10,000 shares authorized; 6,437 shares issued and outstanding in 2010 and 2009	$	6,437	$	6,437
Additional paid-in capital		3,927,845		3,527,677
Accumulated other comprehensive income		41,133		35,244
Accumulated deficit		(851,255)		(962,906)

Total stockholder’s equity		3,124,160		2,606,452

Total liabilities and stockholder’s equity	$	48,772,648	$	47,575,934

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

For the three-month periods ended March 31,

	Unaudited
		2010		2009

Net income	$	111,651	$	49,614

Other comprehensive income (loss):

Change in unrealized holding gains (losses) on available-for-sale fixed maturity securities, net of tax and policyholder amounts (1)		8,168		(28,601)
Reclassification adjustment for OTTI losses, net of tax (2)		104		-
Reclassification adjustments of realized investment gains into net income, net of tax (3)		(2,383)		(757)

Other comprehensive income (loss)		5,889		(29,358)

Comprehensive income	$	117,540	$	20,256

(1)	Net of tax (expense) benefit of $(4.4) million and $15.4 million for the three-month periods ended March 31, 2010 and 2009, respectively.

(2)	Represents an adjustment to OTTI losses due to the sale of other-than-temporarily impaired available-for-sale fixed maturity securities.

(3)	Net of tax benefit of $1.3 million and $0.4 million for the three-month periods ended March 31, 2010 and 2009, respectively.

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY

(in thousands)

For the three-month periods ended March 31, 2010 and 2009

Unaudited

	Common Stock		Additional Paid-In Capital		Accumulated Other Comprehensive (Loss) Income (1)		Accumulated Deficit		Total Stockholder’s Equity

Balance at December 31, 2008	$	6,437	$	2,872,242	$	(129,884)	$	(1,953,540)	$	795,255

Net income								49,614		49,614
Capital contributions from Parent				623,652						623,652
Other comprehensive loss						(29,358)				(29,358)

Balance at March 31, 2009	$	6,437	$	3,495,894	$	(159,242)	$	(1,903,926)	$	1,439,163



Balance at December 31, 2009	$	6,437	$	3,527,677	$	35,244	$	(962,906)	$	2,606,452

Net income								111,651		111,651
Tax benefit from stock options				168						168
Capital contribution from Parent				400,000						400,000
Other comprehensive income						5,889				5,889

Balance at March 31, 2010	$	6,437	$	3,927,845	$	41,133	$	(851,255)	$	3,124,160

(1) As of March 31, 2010, the total amount of after tax non-credit OTTI losses recorded in the Company’s accumulated other comprehensive income was $8.8 million.

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

For the three-month periods ended March 31,

	Unaudited
	2010		2009

Cash Flows From Operating Activities:
Net income	$	111,651	$	49,614
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums on investments		2,587		9,086
Amortization of deferred policy acquisition costs and value of business and customer renewals acquired		171,709		(107,424)
Depreciation and amortization		1,214		1,750
Net losses (gains) on derivatives		6,121		(172,661)
Net realized (gains) losses and OTTI credit losses on available-for- sale investments		(4,280)		1,897
Net (increase) decrease in fair value of trading investments		(270,435)		29,880
Net realized losses on trading investments		33,927		44,897
Undistributed loss (income) on private equity limited partnerships		1,631		(1,481)
Interest credited to contractholder deposits		89,383		112,784
Deferred federal income taxes		54,531		77,026
Changes in assets and liabilities:
Additions to deferred policy acquisition costs and value of business and customer renewals acquired		(56,139)		(88,118)
Accrued investment income		12,545		33,156
Net change in reinsurance receivable/payable		28,868		38,270
Future contract and policy benefits		(20,539)		30,889
Other, net		81,228		(141,809)
Adjustments related to discontinued operations		-		219,553

Net cash provided by operating activities		244,002		137,309

Cash Flows From Investing Activities:
Sales, maturities and repayments of:
Available-for-sale fixed maturity securities		70,492		9,715
Trading fixed maturity securities		737,625		213,506
Mortgage loans		25,096		62,182
Other invested assets		(64,561)		208,502
Purchases of:
Available-for-sale fixed maturity securities		(46,399)		(925)
Trading fixed maturity securities		(1,332,465)		(19,715)
Mortgage loans		(15,431)		(31,646)
Real estate		(904)		(414)
Other invested assets		(16,616)		(14,940)
Net change in other investments		-		(61,010)
Net change in policy loans		12,298		4,384
Net change in short-term investments (Note 1)		(784,436)		(432,897)

Net cash used in investing activities	$	(1,415,301)	$	(63,258)

Continued on next page

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(in thousands)

For the three-month periods ended March 31,

	Unaudited
	2010		2009

Cash Flows From Financing Activities:
Additions to contractholder deposit funds	$	328,615	$	740,398
Withdrawals from contractholder deposit funds		(610,810)		(720,199)
Capital contribution from Parent		400,000		623,652
Debt proceeds		-		50,000
Other, net		(17,617)		(22,605)

Net cash provided by financing activities		100,188		671,246

Net change in cash and cash equivalents		(1,071,111)		745,297

Cash and cash equivalents, beginning of period		1,804,208		1,024,668


Cash and cash equivalents, end of period	$	733,097	$	1,769,965

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

GENERAL

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

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

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for stock life insurance companies and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the three-month period ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2009.

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. As of March 31, 2010, the Company directly or indirectly owned all of the outstanding shares or members interest of SLNY, a New York life insurance company which issues individual fixed and variable annuity contracts, group life, group disability, group dental and stop loss insurance, and individual life insurance in New York; Independence Life and Annuity Company, a Rhode Island life insurance company that sold variable and whole life insurance products; Clarendon Insurance Agency, Inc., a registered broker-dealer; SLF Private Placement Investment Company I, LLC; Sun Parkaire Landing LLC; 7101 France Avenue Manager, LLC; Sun MetroNorth, LLC; SLNY Private Placement Investment Company I, LLC; and SL Investment DELRE Holdings 2009-1, LLC.

On December 31, 2009, the Company paid a dividend of all of the issued and outstanding common stock of Sun Life Financial (U.S.) Reinsurance Company (“Sun Life Vermont”) to the Parent. As a result of this transaction, Sun Life Vermont is no longer the Company’s wholly-owned subsidiary and is not included in the Company’s condensed consolidated balance sheets at March 31, 2010 and December 31, 2009, and statement of operations for the three-month period ended March 31, 2010. In addition, the net loss and changes in cash flows from the operating activities of Sun Life Vermont for the three-month period ended March 31, 2009 are presented as discontinued operations in these condensed consolidated financial statements. The following table provides a summary of operations of Sun Life Vermont for the three-month period ended March 31 (in 000’s):

	2009

Total revenues	$	(151,284)
Total benefits and expenses		(4,380)
Loss before income taxes expense		(146,904)

Net loss	$	(91,662)

See Notes 1 and 2 of the consolidated financial statements included in Part II, Item 8 of the Company’s annual report on Form 10-K for the year ended December 31, 2009 for additional information concerning this transaction.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. DESCRIPTION OF BUSINESS (CONTINUED)

BASIS OF PRESENTATION (CONTINUED)

On September 6, 2006 the Company entered into an agreement with Credit and Repackaged Securities Limited Series 2006-10 Trust (the “CARS Trust”). Pursuant to this agreement, the Company purchased a funded note, which is referenced through a credit default swap to the credit performance of a portfolio of corporate reference entities. The Company entered into this credit structure for yield enhancement. As the sole beneficiary of the CARS Trust, the Company is required to consolidate this trust under Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 810, “Consolidation.” As a result of the consolidation, the Company has recorded in its condensed consolidated balance sheets a credit default swap held by the CARS Trust. At issue, the swap had a seven-year term, maturing in 2013. Under the terms of the swap, the CARS Trust will be required to make payments to the swap counterparty upon the occurrence of a credit event, with respect to any reference entity, that is in excess of the threshold amount specified in the swap agreement. In the event the trust was required to make any payments under the swap, the underlying assets held by the trust would be liquidated to fund the payment. If the disposition of these assets is insufficient to fund the payment calculated, then under the terms of the agreement, the cash settlement amount would be capped at the amount of the proceeds from the sale of the underlying assets. At March 31, 2010, the sum of all the credit events exceeded the threshold amount and the CARS Trust made cumulative payments of $17.6 million to the swap counterparty, all of which were made during the year ended December 31, 2009. As of March 31, 2010, the maximum future payments that the CARS Trust could be required to make is $37.4 million. As of March 31, 2010 and December 31, 2009, the fair value of the assets held as collateral by the CARS Trust was $35.6 million and $35.3 million, respectively. As of March 31, 2010 and December 31, 2009, the fair value of the credit default swap was $34.6 million and $34.3 million, respectively.

The Company had a greater than or equal to 20%, but less than 50%, interest in four variable interest entities (“VIEs”) at March 31, 2010. The Company is a creditor in three trusts and one special purpose corporation. The Company’s maximum exposure to loss related to all of these VIEs is the investments’ carrying value, which was $8.8 million at March 31, 2010. The investments in these VIEs mature at various dates through January 2028. Because the Company will not absorb a majority of the VIEs expected losses or receive a majority of the expected returns, the Company is not required to consolidate these VIEs, in accordance with FASB ASC Topic 810.

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

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

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. DESCRIPTION OF BUSINESS (CONTINUED)

USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant estimates are those used in determining the fair value of financial instruments, goodwill, deferred policy acquisition costs (“DAC”), value of business acquired (“VOBA”), value of customer renewals acquired (“VOCRA”), liabilities for future contract and policyholder benefits, other-than-temporary impairments of investments, allowance for loan loss, and valuation allowance on deferred tax assets. Actual results could differ from those estimates.

CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

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

Immaterial Restatement

Subsequent to the issuance of the Company’s interim condensed consolidated financial statements for the three-month period ended March 31, 2009, the Company’s management determined that certain investments with maturities at the date of purchase of greater than three months but less than one year were improperly classified as cash and cash equivalents. As a result, the condensed consolidated balance sheet as of March 31, 2009 has been restated to reclassify $1,032.4 million from cash and cash equivalents to short-term investments. In addition, the condensed consolidated statement of cash flows for the three-month period ended March 31, 2009 has been restated as follows:

	As Previously
	Reported	Adjustments	As Restated
Net change in short-term investments	$ -	$ (432,897)	$ (432,897)
Net cash provided by (used in ) investing activities	$ 369,639	$ (432,897)	$ (63,258)
Net change in cash and cash equivalents	$ 1,178,194	$ (432,897)	$ 745,297
Cash and cash equivalents, beginning of period	$ 1,624,149	$ (599,481)	$ 1,024,668
Cash and cash equivalents, end of period	$ 2,802,343	$ (1,032,378)	$ 1,769,965

The effects of these corrections have also been reflected in the accompanying notes, where applicable. The short-term investments at December 31, 2009 were appropriately reported in the consolidated financial statement included in Part II, Item 8 of the Company’s annual report on Form 10-K for the year ended December 31, 2009.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. DESCRIPTION OF BUSINESS (CONTINUED)

ACCOUNTING PRONOUNCEMENTS

New and Adopted Accounting Pronouncements

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

Ø	The different classes of assets and liabilities measured at fair value;

Ø	The valuation techniques and inputs used;

Ø	The transfers between Levels 1, 2, and 3; and

Ø	The activity in Level 3 fair value measurements.

Certain new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 31, 2009. Disclosures about purchases, sales, issuances and settlements in the roll-forward of activities in Level 3 are effective for fiscal years beginning after December 15, 2010. The Company adopted this guidance on January 1, 2010. The enhanced disclosures required by FASB ASU 2010-06 for the periods beginning after December 31, 2009, are included in Note 4.

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

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

Refer to Note 1 of the consolidated financial statements included in Part II, Item 8 of the Company’s annual report on Form 10-K for the year ended December 31, 2009 for other accounting pronouncements that the Company adopted during the year ended December 31, 2009.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. DESCRIPTION OF BUSINESS (CONTINUED)

ACCOUNTING PRONOUNCEMENTS (CONTINUED)

Accounting Standards Not Yet Adopted

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

Ø	An embedded derivative feature relating to another type of risk (including another type of credit risk) is present in the securitized financial instrument.

Ø	The holder of an interest in a tranche of securitized financial instruments is exposed to the possibility of being required to make potential future payments because the possibility of those future payments is not created by subordination.

Ø	The holder owns an interest in a single-tranche securitization vehicle; therefore, the subordination of one tranche to another is not relevant.

The amendments in FASB ASU 2010-11 are effective for the first fiscal quarter beginning after June 15, 2010. Early adoption is permitted. The Company will adopt FASB ASU 2010-11 on July 1, 2010 and is still assessing the impact of this adoption.

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES

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

Related Party Reinsurance Transactions

As more fully described in Note 7, the Company is party to several reinsurance transactions with Sun Life Assurance Company of Canada (“SLOC”) and other affiliates. Reinsurance premiums with related parties are based on market rates.

On February 11, 2009, the Company received regulatory approval and entered into a reinsurance agreement with Sun Life Reinsurance (Barbados) No. 3 Corp. (“BarbCo 3”), an affiliate, to cede all of the risks associated with certain

in-force corporate and bank-owned variable universal life, and private placement variable universal life policies on a combination coinsurance, coinsurance with funds withheld and a modified coinsurance basis. The reinsurance agreement covered in-force policies on the effective date and new sales through December 31, 2009. Effective January 1, 2010, the Company and BarbCo3 amended the reinsurance agreement. See Note 7 for further information regarding the amendment and the impact of this agreement on the Company’s condensed consolidated financial statements.

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Capital Transactions

During the three-month period ended March 31, 2010 and the year ended December 31, 2009, the Company received capital contributions totaling $400.0 million and $748.7 million, respectively, from the Parent. The cash contributions were recorded as additional paid-in capital and were made to ensure the Company continues to exceed certain capital requirements, as prescribed by the NAIC. The NAIC has established regulations that provide minimum capitalization requirements based on risk-based capital formulas for life insurance companies. The risk-based capital formulas for life insurance companies establishes capital requirements relating to insurance, business, asset and interest rate risks, including equity, interest rate and expense recovery risks associated with variable annuities that contain death benefits or certain living benefits.

Effective December 31, 2009, the Company distributed all of the issued and outstanding common stock of Sun Life Vermont in the form of a dividend to the Parent. The Company did not declare or pay cash dividends during the three-month periods ending March 31, 2010 and 2009.

Debt Transactions

In 2002, the Company issued two promissory notes totaling $460.0 million to Sun Life (Hungary) Group Financing Limited Company (“Sun Life (Hungary) LLC”). The proceeds of the notes were used to purchase fixed rate government and corporate bonds. On May 24, 2007, the Company redeemed one of the notes with a principal balance of $380.0 million and paid $388.7 million to Sun Life (Hungary) LLC, including $8.7 million in accrued interest. On December 29, 2008, the Company redeemed $62.0 million of the $80.0 million remaining note and paid $64.3 million, including $2.3 million in accrued interest, to Sun Life (Hungary) LLC. At March 31, 2010 and December 31, 2009, the Company had $18.0 million, respectively, in promissory notes issued to Sun Life (Hungary) LLC. The Company pays interest semi-annually to Sun Life (Hungary) LLC. Related to these promissory notes, the Company incurred interest expense of $0.3 for the three-month periods ended March 31, 2010 and 2009, respectively.

At March 31, 2010 and 2009, the Company had $565.0 million of surplus notes issued to Sun Life Financial (U.S.) Finance, Inc. The Company expensed $10.6 million for interest on these surplus notes for the three-month periods ended March 31, 2010 and 2009, respectively.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Institutional Investments Contracts

On September 12, 2006, the Company issued two floating rate funding agreements totaling $900 million to Sun Life Financial Global Funding III, L.L.C. (“LLC III”). On April 7, 2008, the Company issued an additional floating rate funding agreement totaling $5.8 million to LLC III. Total interest credited for the funding agreements was $1.3 million and $4.2 million for the three-month periods ended March 31, 2010 and 2009, respectively. The Company also issued a $100 million floating rate demand note payable to LLC III on September 19, 2006. The Company expensed $0.2 million and $0.5 million for the three-month periods ended March 31, 2010 and 2009, respectively, for interest on this demand note.

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

On May 17, 2006, the Company issued a floating rate funding agreement of $900 million to Sun Life Financial Global Funding II, L.L.C. (“LLC II”). On April 7, 2008, the Company issued an additional floating rate funding agreement totaling $7.5 million to LLC II. Total interest credited for this funding agreement was $1.1 million and $3.9 million for the three-month periods ended March 31, 2010 and 2009. The Company also issued a $100 million floating rate demand note payable to LLC II on May 24, 2006. The Company expensed $0.1 million and $0.4 million for the three-month periods ended March 31, 2010 and 2009, respectively.

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

On June 3, 2005 and June 29, 2005, the Company issued two floating rate funding agreements with a combined total of $900 million to Sun Life Financial Global Funding, L.L.C. (“LLC”). On April 7, 2008, the Company issued an additional floating rate funding agreement totaling $10.0 million to LLC. Total interest credited for these funding agreements was $1.4 million and $4.1 million for the three-month periods ended March 31, 2010 and 2009, respectively. The Company also issued a $100 million floating rate demand note payable to LLC on June 10, 2005. The Company expensed $0.2 million and $0.5 million for interest on this demand note for the three-month periods ended March 31, 2010 and 2009, respectively.

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

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Administrative service agreements, rent and other

Effective December 31, 2009, the Company transferred all of its employees to an affiliate, Sun Life Financial (U.S.) Services Company, Inc. (“Sun Life Services”), with the exception of 28 employees who were transferred to Sun Life Financial Distributors, Inc. (“SLFD”), another affiliate. Neither Sun Life Services nor SLFD are included in the accompanying condensed consolidated financial statements. Concurrent with this transaction, Sun Life Services assumed the sponsorship of the Company’s retirement plans. As a result of this transaction, the Company transferred to Sun Life Services all employee-benefits related assets and liabilities, the associated deferred tax asset, and certain property, equipment and software. For more details on these transactions, see Note 3 of the consolidated financial statements included in Part II, Item 8 of the Company’s annual report on Form 10-K for the year ended December 31, 2009.

Pursuant to an administrative services agreement between the Company and Sun Life Services, Sun Life Services provides human resources services (e.g., recruiting and maintaining appropriately trained and qualified personnel and equipment necessary for the performance of actuarial, financial, legal, administrative, and other operational support functions) to the Company, and the Company reimburses Sun Life Services for the cost of such services, plus, with respect to certain of those services, pays an arms-length based profit margin agreed upon by the parties. Total payments under this agreement were $28.7 million for the three-month period ended March 31, 2010.

Effective December 31, 2009, Sun Life Services and SLOC entered into administrative services agreement, under which Sun Life Services provides to SLOC, as requested, personnel and certain services. Prior to December 31, 2009, the Company had an administrative services agreement with SLOC under which the Company provided personnel and certain services to SLOC, as requested. Reimbursements under this agreement, which were recorded as a reduction of other operating expenses, were approximately $75.6 million for the three-month period ended March 31, 2009.

The Company’s affiliates and Sun Life Services are in the process of establishing administrative services agreements under which Sun Life Services will provide personnel and certain services directly to the Company’s affiliates, as requested. Until such agreements receive regulatory approval, the Company will continue to provide personnel and certain services to affiliates, as described below.

The Company has an administrative service agreement with Sun Life Information Services Canada, Inc. (“SLISC”), under which SLISC provides administrative and support services to the Company in connection with the Company’s insurance and annuity business. Expenses under this agreement amounted to approximately $4.2 million and $3.4 million for the three-month periods ended March 31, 2010 and 2009, respectively.

The Company has a service agreement with Sun Life Information Services Ireland Limited (“SLISIL”), under which SLISIL provides various insurance related and information systems services to the Company. Expenses under this agreement amounted to approximately $5.7 million and $6.1 million for the three-month periods ended March 31, 2010 and 2009, respectively.

The Company has an administrative services agreement with Sun Life Assurance Company of Canada – U.S. Operations Holdings, Inc, under which the Company provides administrative and investor services with respect to certain open-end management investment companies for which an affiliate, Massachusetts Financial Services Company, serves as the investment adviser, and which are offered to certain of the Company’s separate accounts established in connection with the variable annuity contracts issued by the Company. Amounts received under this agreement were approximately $3.3 million and $2.7 million for the three-month periods ended March 31, 2010 and 2009, respectively.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Administrative service agreements, rent and other (continued)

The Company has an administrative services agreement with Sun Capital Advisers LLC (“SCA”), a registered investment adviser, under which the Company provides administrative services with respect to certain open-end management investment companies for which SCA serves as the investment adviser, and which are offered to certain of the Company’s separate accounts established in connection with the variable contracts issued by the Company. Amounts received under this agreement amounted to approximately $2.8 million and $0.8 million for the three-month periods ended March 31, 2010 and 2009, respectively. The Company paid $5.3 million and $4.6 million for the three-month periods ended March 31, 2010 and 2009, respectively, in investment management services fees to SCA.

During the three-month periods March 31, 2010 and 2009, the Company paid $10.5 million and $9.0 million, respectively, in distribution fees to SLFD.

The Company leases office space to SLOC under lease agreements with terms expiring on December 31, 2014 and options to extend the terms for each of twelve successive five-year terms at fair market rental value, not to exceed 125% of the fixed rent for the term which is then ending. Rent received by the Company under the leases amounted to approximately $3.0 and $2.7 million for the three-month periods ended March 31, 2010 and 2009 respectively. Rental income is reported as a component of net investment income on the Company’s condensed consolidated statement of operations.

The Company records a tax benefit through paid-in-capital for SLF stock options issued to employees of the Company. The Company recorded a tax benefit of approximately $0.2 million for the three-month periods ended March 31, 2010. Related to these stock options, the Company did not record a tax benefit for the three-month period ending March 31, 2009.

In 2004, the employees of the Company became participants in a restricted share unit (“RSU”) plan with its indirect parent, SLF. Under the RSU plan, participants are granted units that are equivalent to one common share of SLF stock and have a fair market value of a common share of SLF stock on the date of grant. RSUs earn dividend equivalents in the form of additional RSUs at the same rate as the dividends on common shares of SLF stock. The redemption value, upon vesting, is the fair market value of an equal number of common shares of SLF stock. The Company incurred expenses of $1.9 million and $1.5 million relating to RSUs for the three-month periods ended March 31, 2010 and 2009, respectively.

In 2007, SLNY entered into a series of agreements with Sun Life and Health Insurance Company (U.S.) (“SLHIC”), through which the New York issued business of SLHIC was transferred to SLNY. As part of these agreements, SLNY received certain intangible assets totaling $31.3 million. These assets included the value of distribution acquired, VOBA, and VOCRA. The value of distribution acquired of $7.5 million is being amortized on a straight-line basis over its projected economic life of 25 years.

VOBA of $7.6 million is subject to amortization based upon expected premium income over the period from acquisition to the first customer renewal, generally not more than two years. VOBA was fully amortized as of December 31, 2009. VOCRA of $16.2 million is subject to amortization based upon expected premium income over the projected life of the in-force business acquired, which is 20 years. The Company recorded amortization for these intangible assets for the periods identified as follows (in 000’s):

	Value of Distribution		VOBA		VOCRA
Three-month period ended March 31, 2010	$	75	$	-	$	297
Three-month period ended March 31, 2009	$	75	$	22	$	726

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. SEGMENT INFORMATION

As described below, the Company conducts business primarily in three operating segments and maintains a Corporate Segment to provide for the capital needs of the three operating segments and to engage in other financing related activities. Each segment is defined consistently with the way results are evaluated by the chief operating decision-maker.

Net investment income is allocated based on segmented assets, including allocated capital, by line of business. Allocations of operating expenses among segments are made using both standard rates and actual expenses incurred. Management evaluates the results of the operating segments on an after-tax basis. The Company does not depend on one or a few customers, brokers or agents for a significant portion of its operations.

Wealth Management

The Wealth Management Segment markets, sells and administers funding agreements, individual and group variable annuity products, individual and group fixed annuity products and other retirement benefit products. These contracts may contain any of a number of features including variable or fixed interest rates and equity index options and may be denominated in foreign currencies. The Company uses derivative instruments to manage the risks inherent in the contract options. Additionally, the Company consolidates the CARS Trust as components of the Wealth Management Segment.

Individual Protection

The Individual Protection Segment markets, sells and administers a variety of life insurance products sold to individuals and corporate owners of life insurance. The products include whole life, universal life and variable life products.

Group Protection

The Group Protection Segment markets, sells and administers group life, group long-term disability, group short-term disability, group dental and group stop loss insurance products to small and mid-size employers in the State of New York through the Company’s subsidiary, SLNY.

Corporate

The Corporate Segment includes the unallocated capital of the Company, its debt financing, its consolidated investments in VIEs, and items not otherwise attributable to the other segments.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. SEGMENT INFORMATION (CONTINUED)

The following amounts pertain to the various business segments (in 000’s):

	Three-month period ended March 31, 2010

	Wealth	Individual	Group
	Management	Protection	Protection	Corporate	Totals
Total revenues	$ 542,125	$ 15,226	$ 32,261	$ (32,136)	$ 557,476
Total benefits and expenses	337,465	14,215	31,148	10,874	393,702
Income (loss) before income tax expense (benefit)	204,660	1,011	1,113	(43,010)	163,774
Net income (loss)	$ 138,135	$ 711	$ 723	$ (27,918)	$ 111,651

	Three-month period ended March 31, 2009

	Wealth	Individual	Group
	Management	Protection	Protection	Corporate	Totals
Total revenues	$ 338,430	$ 12,515	$ 33,390	$ (3,988)	$ 380,347
Total benefits and expenses	118,985	14,221	26,891	6,271	166,368
Income (loss) from continuing operations before income tax expense (benefit)	219,445	(1,706)	6,499	(10,259)	213,979

Net income (loss) from continuing operations	147,863	(4,941)	4,224	(5,870)	141,276
Loss from discontinued operations, net of tax	-	(91,662)	-	-	(91,662)

Net income (loss)	$ 147,863	$ (96,603)	$ 4,224	$ (5,870)	$ 49,614

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT

On January 1, 2008, the Company adopted FASB ASC Topic 820, which defines fair value, establishes a framework for measuring fair value, establishes a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. The Company utilizes valuation techniques that maximize the use of observable inputs and minimizes the use of unobservable inputs.

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three-level hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

On April 1, 2009, the FASB issued additional guidance on estimating fair value when the volume and level of activity for the asset or liability have significantly decreased, as well as guidance on identifying circumstances that indicate a transaction is not orderly. The Company reviewed its pricing sources and methodologies and has concluded that its various pricing sources and methodologies are in compliance with this guidance.

Refer to Note 6 regarding the valuation techniques utilized by the Company to measure the fair values included herein. During the three-month period ended March 31, 2010, there were no changes to these valuation techniques and the related inputs.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy

Financial assets and liabilities recorded at fair value in the Company’s condensed consolidated balance sheets are categorized as follows:

Level 1

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

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

Level 2

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

Level 2 inputs include the following:

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

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

c)	Inputs other than quoted market prices that are observable, and

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

The types of assets and liabilities utilizing Level 2 valuations generally include U.S. Government securities not backed by the full faith and credit of the Government, municipal bonds, structured notes and certain mortgage-backed securities (“MBS”), asset-backed securities (“ABS”), collateralized mortgage obligations (“CMO”), residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), certain corporate debt, certain private equity investments and certain derivatives.

Level 3

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

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table presents the Company's categories for its assets measured at fair value on a recurring basis as of March 31, 2010 (in 000’s):

	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale fixed maturity securities:
Asset-backed securities	$	-	$	897	$	29	$	926
Residential mortgage-backed securities		-		44,868		-		44,868
Commercial mortgage-backed securities		-		14,199		1,135		15,334
Foreign government & agency securities		-		551		-		551
U.S. states and political subdivisions securities		-		217		-		217
U.S. treasury and agency securities		39,073		-		-		39,073
Corporate securities		-		1,064,054		939		1,064,993
Total available-for-sale fixed maturity securities		39,073		1,124,786		2,103		1,165,962

Trading fixed maturity securities:
Asset-backed securities		-		351,180		48,924		400,104
Residential mortgage-backed securities		-		955,600		105,554		1,061,154
Commercial mortgage-backed securities		-		657,708		12,892		670,600
Foreign government & agency securities		-		67,861		15,093		82,954
U.S. states and political subdivisions securities		-		617		-		617
U.S. treasury and agency securities		1,058,776		34,270		-		1,093,046
Corporate securities		-		8,551,463		96,653		8,648,116
Total trading fixed maturity securities		1,058,776		10,618,699		279,116		11,956,591
		-
Derivative instruments - receivable:
Interest rate contracts		-		136,611		-		136,611
Foreign currency contracts		-		34,462		-		34,462
Equity contracts		10,106		33,639		11,956		55,701
Futures		8,724		-		-		8,724
Total derivative instruments - receivable		18,830		204,712		11,956		235,498

Other invested assets		871		-		-		871
Short-term investments		2,051,747		-		-		2,051,747
Cash and cash equivalents		733,097		-		-		733,097
Total investments and cash		3,902,394		11,948,197		293,175		16,143,766

Separate account assets:
Mutual fund investments		18,548,247		34,125		-		18,582,372
Equity investments		193,637		6,910		7		200,554
Fixed income investments		537,319		5,181,105		313,747		6,032,171
Alternative investments		8,197		89,590		259,762		357,549
Other investments		3,890		10		725		4,625
Total separate account assets (1) (2)		19,291,290		5,311,740		574,241		25,177,271

Total assets measured at fair value on a recurring basis	$	23,193,684	$	17,259,937	$	867,416	$	41,321,037

(1) Pursuant to the conditions set forth in FASB ASC Topic 944, the value of separate account liabilities is set to equal the fair value of the separate account assets.

(2) Excludes $908.2 million, primarily related to investment sales receivable, net of investment purchases payable, that are not subject to FASB ASC Topic 820.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table presents the Company's categories for its liabilities measured at fair value on a recurring basis as of March 31, 2010 (in 000’s):

	Level 1		Level 2		Level 3		Total
Liabilities
Other policy liabilities:
Guaranteed minimum withdrawal benefit liability	$	-	$	-	$	106,601	$	106,601
Guaranteed minimum accumulation benefit liability		-		-		46,030		46,030
Derivatives embedded in reinsurance contracts		-		29,580		-		29,580
Fixed index annuities		-		-		139,012		139,012
Total other policy liabilities		-		29,580		291,643		321,223

Derivative instruments – payable:
Interest rate contracts		-		511,140		-		511,140
Foreign currency contracts		-		2,505		-		2,505
Credit contracts		-		-		34,612		34,612
Futures		1,166		-		-		1,166
Total derivative instruments – payable		1,166		513,645		34,612		549,423

Other liabilities:
Bank overdrafts		42,251		-		-		42,251

Total liabilities measured at fair value on a recurring basis	$	43,417	$	543,225	$	326,255	$	912,897

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table presents the Company’s categories for its assets measured at fair value on a recurring basis as of December 31, 2009:

	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale fixed maturity securities:
Asset-backed securities	$	-	$	952	$	37	$	989
Residential mortgage-backed securities		-		47,701		-		47,701
Commercial mortgage-backed securities		-		14,150		1,930		16,080
Foreign government & agency securities		-		760		-		760
U.S. treasury and agency securities		39,131		-		-		39,131
Corporate securities		-		1,062,919		7,936		1,070,855
Total available-for-sale fixed maturity securities		39,131		1,126,482		9,903		1,175,516

Trading fixed maturity securities:
Asset-backed securities		-		355,613		111,650		467,263
Residential mortgage-backed securities		-		886,340		154,551		1,040,891
Commercial mortgage-backed securities		-		624,845		14,084		638,929
Foreign government & agency securities		-		67,925		15,323		83,248
U.S. treasury and agency securities		503,123		34,407		-		537,530
Corporate securities		-		8,254,775		107,886		8,362,661
Total trading fixed maturity securities		503,123		10,223,905		403,494		11,130,522

Derivative instruments - receivable		14,922		235,484		8,821		259,227
Other invested assets		20,242		206		-		20,448
Short-term investments		1,267,311		-		-		1,267,311
Cash and cash equivalents		1,804,208		-		-		1,804,208
Total investments and cash		3,648,937		11,586,077		422,218		15,657,232

Other assets
Separate account assets (1) (2)		18,045,908		5,233,602		547,841		23,827,351

Total assets measured at fair value on a recurring basis	$	21,694,845	$	16,819,679	$	970,059	$	39,484,583

(1) Pursuant to the conditions set forth in FASB ASC Topic 944, the value of separate account liabilities is set to equal the fair value of the separate account assets.

(2)Excludes $501.0 million, primarily related to investment sales receivable, net of investment purchases payable, that are not subject to FASB ASC Topic 820.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table presents the Company's categories for its liabilities measured at fair value on a recurring basis as of December 31, 2009 (000’s):

	Level 1		Level 2		Level 3		Total
Liabilities
Other policy liabilities:
Guaranteed minimum withdrawal benefit liability	$	-	$	-	$	168,786	$	168,786
Guaranteed minimum accumulation benefit liability		-		-		81,669		81,669
Derivatives embedded in reinsurance contracts		-		15,035		-		15,035
Fixed index annuities		-		-		140,966		140,966
Total other policy liabilities		-		15,035		391,421		406,456

Derivative instruments – payable		5,256		533,305		34,349		572,910

Other liabilities:
Bank overdrafts		60,037		-		-		60,037

Total liabilities measured at fair value on a recurring basis	$	65,293	$	548,340	$	425,770	$	1,039,403

Assets Measured at Fair Value on a Nonrecurring Basis

The following table presents the Company’s categories for its assets measured at fair value on a nonrecurring basis as of December 31, 2009:

	Level 1		Level 2		Level 3		Total Fair Value		Total Gains (Losses)
Asset
VOCRA	$	-	$	-	$	5,766	$	5,766	$	(2,600)

At December 31, 2009, the Company determined that the VOCRA asset was impaired and recorded an impairment charge of $2.6 million. The impairment charge was allocated to the Group Protection Segment. The fair value of VOCRA was calculated as the sum of the undiscounted cash flows the Company expects to realize, based on the segment’s anticipated long-term profit margins.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table shows a reconciliation of the beginning and ending balances for assets which are categorized as Level 3 for the three-month period ended March 31, 2010 (in 000’s):

Assets	Beginning balance		Total realized and unrealized gains (losses)		Purchases, issuances, and settlements (net)	Transfers in and/or (out) of level 3	Ending balance	Change in total gains (losses) included in earnings relating to instruments still held at the reporting date
Assets	Beginning balance		Included in earnings	Included in other comprehensive income	Purchases, issuances, and settlements (net)	Transfers in and/or (out) of level 3	Ending balance

Available-for-sale fixed maturity securities:
Asset-backed securities	$ 37		$ (12)	$ 4	$ -	$ -	$ 29	$ -
Residential mortgage-backed securities	-		-	-	-	-	-	-
Commercial mortgage-backed securities	1,930		(243)	(552)	-	-	1,135	-
Foreign government & agency securities	-		-	-	-	-	-	-
U.S. states and political subdivisions securities	-		-	-	-	-	-	-
U.S. treasury and agency securities	-		-	-	-	-	-	-
Corporate securities	7,936		(5)	(4)	196	(7,184)	939	-
Total available-for-sale fixed maturity securities	9,903		(260)	(552)	196	(7,184)	2,103	-

Trading fixed maturity securities:
Asset-backed securities	111,650		(8,909)	-	(15,660)	(38,157)	48,924	8,858
Residential mortgage-backed securities	154,551		(242)	-	(3,226)	(45,529)	105,554	2,279
Commercial mortgage-backed securities	14,084		(496)	-	-	(696)	12,892	(769)
Foreign government & agency securities	15,323	(230)		-	-	-	15,093	161
U.S. states and political subdivisions securities	-		-	-	-	-	-	-
U.S. treasury and agency securities	-		-	-	-	-	-	-
Corporate securities	107,886		1,571	-	4,620	(17,424)	96,653	1,475
Total trading fixed maturity securities	403,494		(8,306)	-	(14,266)	(101,806)	279,116	12,004

Derivative instruments – receivable:
Interest rate contracts	-		-	-	-	-	-	-
Foreign currency contracts	-		-	-	-	-	-	-
Equity contracts	8,821		1,531	-	1,604	-	11,956	1,531
Futures	-		-	-	-	-	-	-
Total derivative instruments– receivable	8,821		1,531	-	1,604	-	11,956	1,531

Other invested assets	-		-	-	-	-	-	-
Short-term investments	-		-	-	-	-	-	-
Cash and cash equivalents	-		-	-	-	-	-	-
Total investments and cash	422,218		(7,035)	(552)	(12,466)	(108,990)	293,175	13,535

Separate account assets:
Mutual fund investments	-		-	-	-	-	-	-
Equity investments	7		-	-	-	-	7	-
Fixed income investments	276,530		6,667	-	30,550	-	313,747	5,752
Alternative investments	267,196		(465)	-	(4,000)	(2,969)	259,762	(1,013)
Other investments	4,108		(2,355)	-	(1,028)	-	725	(3,383)
Total separate account assets (1)	547,841		3,847	-	25,522	(2,969)	574,241	1,356

Total assets measured at fair value on a recurring basis	$970,059		$(3,188)	$ (552)	$ 13,056	$ (111,959)	$ 867,416	$ 14,891

(1)	The realized/unrealized gains (losses) included in net income for separate account assets are offset by an equal amount for separate account liabilities which results in a net zero impact on net income for the Company.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table shows a reconciliation of the beginning and ending balances for liabilities which are categorized as Level 3 for the three-month period ended March 31, 2010 (in 000’s):

Liabilities	Beginning balance	Total realized and unrealized (gains) losses		Purchases, issuances, and settlements (net)	Transfers in and/or (out) of level 3	Ending balance	Change in total gains (losses) included in earnings relating to instruments still held at the reporting date
Liabilities	Beginning balance	Included in earnings	Included in other comprehensive income	Purchases, issuances, and settlements (net)	Transfers in and/or (out) of level 3	Ending balance

Other policy liabilities:
Guaranteed minimum withdrawal benefit liability	$168,786	$(92,939)	$ -	$ 30,754	$ -	$106,601	$ (92,908)
Guaranteed minimum accumulation benefit liability	81,669	(41,679) )	-	6,040	-	46,030	(41,642)
Derivatives embedded in reinsurance contracts	-	-	-	-	-	-	-
Fixed index annuities	140,966	(5,355)	-	3,401	-	139,012	4,001
Total other policy liabilities	391,421	(139,973)	-	40,195	-	291,643	(130,549)

Derivative instruments – payable:
Interest rate contracts	-	-	-	-	-	-	-
Foreign currency contracts	-	-	-	-	-	-	-
Credit contracts	34,349	263	-	-	-	34,612	263
Futures	-	-	-	-	-	-	-
Total derivative instruments – payable	34,349	263	-	-	-	34,612	263


Other liabilities:
Bank overdrafts	-	-	-	-	-	-	-

Total liabilities measured at fair value on a recurring basis	$ 425,770	$(139,710)	$ -	$ 40,195	$ -	$ 326,255	$ (130,286)

Total realized and unrealized gains (losses), related to Level 3 assets and liabilities, included in the Company’s condensed consolidated statements of operations for the three-month period ended March 31, 2010, are reported as follows (in 000’s):

		Total realized gains (losses) included in earnings		Change in unrealized gains (losses) related to assets still held at the reporting date
Net investment (loss) income	$	(8,306)	$	12,004
Net derivative income		141,241		131,817
Net realized investment losses, excluding impairment losses on available-for-sale securities		(260)		-
Net gains	$	132,675	$	143,821

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table shows a reconciliation of the beginning and ending balances for assets which are categorized as Level 3 for the three-month period ended March 31, 2009 (in 000’s):

Assets	Beginning balance	Total realized and unrealized gains (losses)		Purchases, issuances, and settlements (net)	Transfers in and/or (out) of level 3 (2)	Ending balance	Change in unrealized (gains) losses included in earnings relating to instruments still held at the reporting date
Assets	Beginning balance	Included in earnings	Included in other comprehensive income	Purchases, issuances, and settlements (net)	Transfers in and/or (out) of level 3 (2)	Ending balance
Available-for-sale fixed maturity securities:
Asset-backed and mortgage- backed securities	$ 4,466	$ (46)	$ (489)	$ -	$ (1,343)	$ 2,588	$ -
Foreign government & agency securities	-	-	-	-	-	-	-
U.S. states and political subdivisions securities	-	-	-	-	-	-	-
U.S. treasury and agency securities	-	-	-	-	-	-	-
Corporate securities	7,888	123	(131)	(162)	(5,969)	1,749	-
Total available-for-sale fixed maturity securities	12,354	77	(620)	(162)	(7,312)	4,337	-

Trading fixed maturity securities:
Asset-backed and mortgage- backed securities	462,253	(49,017)	-	(8,335)	(27,408)	377,493	(1,488)
Foreign government & agency securities	9,200	250	-	-	-	9,450	250
U.S. states and political subdivisions securities	-	-	-	-	-	-	-
U.S. treasury and agency securities	-	-	-	-	-	-	-
Corporate securities	134,505	15,311	-	(3,121)	(47,838)	98,857	4,234
Total trading fixed maturity securities	605,958	(33,456)	-	(11,456)	(75,246)	485,800	2,996

Derivative instruments – receivable	2,668	(328)	-	21	-	2,361	(328)
Other invested assets	-	-	-	-	-	-	-
Cash and cash equivalents	-	-	-	-	-	-	-
Total investments and cash	620,980	(33,707)	(620)	(11,597)	(82,558)	492,498	2,668

Other assets
Separate account assets (1)	801,873	5,836	-	(60,598)	(188,344)	558,767	25,428

Total assets measured at fair value on a recurring basis	$1,422,853	$ (27,871)	$ (620)	$ (72,195)	$ (270,902)	$1,051,265	$ 28,096

(1) The realized/unrealized gains (losses) included in net income for separate account assets are offset by an equal amount for separate account liabilities which results in a net zero impact on net income for the Company.

(2) Transfers in and/or (out) of level 3 during the three-month period ended March 31, 2009 are primarily attributable to changes in the observability of inputs used to price the securities.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table shows a reconciliation of the beginning and ending balances for liabilities which are categorized as Level 3 for the three-month period ended March 31, 2009 (in 000’s):

Liabilities	Beginning balance	Total realized and unrealized (gains) losses		Purchases, issuances, and settlements (net)	Transfers in and/or (out) of level 3	Ending balance	Change in unrealized (gains) losses included in earnings relating to instruments still held at the reporting date
Liabilities	Beginning balance	Included in earnings	Included in other comprehensive income	Purchases, issuances, and settlements (net)	Transfers in and/or (out) of level 3	Ending balance

Other policy liabilities:
Guaranteed minimum withdrawal benefit liability	$ 335,612	$ 30,956	$ -	$ 11,021	$ -	$ 377,589	$ 34,571
Guaranteed minimum accumulation benefit liability	358,604	(37,081)	-	4,582	-	326,105	(34,033)
Derivatives embedded in reinsurance contracts	-	-	-	-	-	-	-
Fixed index annuities	106,619	(9,910)	-	(6,654)	-	90,055	(14,970)
Total other policy liabilities	800,835	(16,035)	-	8,949	-	793,749	(14,432)

Derivative instruments – payable	42,066	(2,923)	-	-	-	39,143	(2,923)

Total liabilities measured at fair value on a recurring basis	$ 842,901	$ (18,958)	$ -	$ 8,949	$ -	$ 832,892	$ (17,355)

		Total realized gains (losses) included in earnings		Change in unrealized gains (losses) related to assets still held at the reporting date
Net investment (loss) income	$	(33,456)	$	2,996
Net derivative income		18,630		17,027
Net realized investment gains, excluding impairment losses on available-for-sale securities		77		-
Net (losses) gains	$	(14,749)	$	20,023

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

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

During the three-month period ended March 31, 2010, the Company transferred the following assets into (out of) Levels 1, 2 and 3:

	Level 1 Transfers		Level 2 Transfers		Level 3 Transfers
	Into	(Out of)	Into	(Out of)	Into	(Out of)
Assets
Available-for-sale fixed maturity securities:
Asset-backed securities	$ -	$ -	$ -	$ -	$ -	$ --
Residential mortgage-backed securities	-	-	-	-	-	-
Commercial mortgage-backed securities	-	-	-	-	-	-
Foreign government & agency securities	-	-	-	-	-	-
U.S. states and political subdivisions securities	-	-	-	-	-	-
U.S. treasury and agency securities	-	-	-	-	-	-
Corporate securities	-	-	7,184	-	-	(7,184)
Total available-for-sale fixed maturity securities	-	-	7,184	-	-	(7,184)

Trading fixed maturity securities:
Asset-backed securities	-	-	47,432	(9,275)	9,275	(47,432)
Residential mortgage-backed securities	-	-	80,597	(35,068)	35,068	(80,597)
Commercial mortgage-backed securities	-	-	696		-	(696)
Foreign government & agency securities	-	-	-	-	-	-
U.S. states and political subdivisions securities	-	-	-	-	-	-
U.S. treasury and agency securities	-	-	-	-	-	-
Corporate securities	-	-	17,424	-	-	(17,424)
Total trading fixed maturity securities	-	-	146,149	(44,343)	44,343	(146,149)


Separate account assets:
Mutual fund investments	-	-	-	-	-	-
Equity investments	3,764	-	-	(3,764)	-	-
Fixed income investments	-	-	-	-	-	-
Alternative investments	-	-	2,969	-	-	(2,969)
Other investments	-	-	-	-	-	-
Total separate account assets	3,764	-	-	-	-	-

Total assets measured at fair value on a recurring basis	$ 3,764	$ -	$ 156,302	$ (48,107)	$ 44,343	$ (156,302)

The Company did not change the categorization of its financial instruments during the three-month period ended March 31, 2010. The transfers into (out of) Level 2 and Level 3 were primarily due to changes in the level of observability of inputs used to price these securities.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS

Fixed Maturity Securities

The amortized cost and fair value of fixed maturity securities at March 31, 2010, were as follows (in 000’s):

Available-for-sale fixed maturity securities	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Temporary Losses	OTTI Losses(1)	Fair Value
Non-corporate securities:
Asset-backed securities	$ 899	$ 43	$ (16)	$ -	$ 926
Residential mortgage-backed securities	42,455	2,413	-	-	44,868
Commercial mortgage-backed securities	17,905	406	(2,977)	-	15,334
Foreign government & agency securities	508	43	-	-	551
U.S. states and political subdivisions securities	219	-	(2)	-	217
U.S. treasury and agency securities	38,089	1,216	(232)	-	39,073
Total non-corporate securities	100,075	4,121	(3,227)	-	100,969

Corporate securities	1,002,606	87,533	(11,558)	(13,588)	1,064,993

Total available-for-sale fixed maturity securities	$ 1,102,681	$ 91,654	$ (14,785)	$ (13,588)	$ 1,165,962


Trading fixed maturity securities	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
Non-corporate securities:
Asset-backed securities	$ 571,550	$ 7,622	$ (179,068)	$ 400,104
Residential mortgage-backed securities	1,439,157	15,142	(393,145)	1,061,154
Commercial mortgage-backed securities	944,843	26,092	(300,335)	670,600
Foreign government & agency securities	75,515	7,439	-	82,954
U.S. states and political subdivisions securities	607	10	-	617
U.S. treasury and agency securities	1,078,381	15,839	(1,174)	1,093,046
Total non-corporate securities	4,110,053	72,144	(873,722)	3,308,475

Corporate securities	8,488,395	347,010	(187,289)	8,648,116

Total trading fixed maturity securities	$ 12,598,448	$ 419,154	$ (1,061,011)	$ 11,956,591

(1) Represents the before tax non-credit OTTI loss recorded as a component of accumulated other comprehensive income (“AOCI”) for assets still held at the reporting date.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Fixed Maturity Securities (continued)

The amortized cost and fair value of fixed maturity securities at December 31, 2009, were as follows (in 000’s):

Available-for-sale fixed maturity securities	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Temporary Losses	OTTI Losses (1)	Fair Value
Non-corporate securities:
Asset-backed securities	$ 966	$ 42	$ (19)	$ -	$ 989
Residential mortgage-backed securities	45,531	2,170	-	-	47,701
Commercial mortgage-backed securities	18,566	114	(2,600)	-	16,080
Foreign government & agency securities	728	39	(7)	-	760
U.S. treasury and agency securities	38,063	1,156	(88)	-	39,131
Total non-corporate securities	103,854	3,521	(2,714)	-	104,661

Corporate securities	1,017,570	86,026	(18,993)	(13,748)	1,070,855

Total available-for-sale fixed maturity securities	$ 1,121,424	$ 89,547	$ (21,707)	$ (13,748)	$ 1,175,516


Trading fixed maturity securities	Amortized Cost	Gross Unrealized Gains	Gross Unrealized Losses	Fair Value
Non-corporate securities:
Asset-backed securities	$ 658,864	$ 6,766	$ (198,367)	$ 467,263
Collateralized mortgage obligations	-	-	-	-
Residential mortgage-backed securities	1,437,147	13,051	(409,307)	1,040,891
Commercial mortgage-backed securities	972,971	23,199	(357,241)	638,929
Foreign government & agency securities	76,971	6,277	-	83,248
U.S. treasury and agency securities	525,758	14,122	(2,350)	537,530
Total non-corporate securities	3,671,711	63,415	(967,265)	2,767,861

Corporate securities	8,371,250	300,777	(309,366)	8,362,661

Total trading fixed maturity securities	$ 12,042,961	$ 364,192	$(1,276,631)	$11,130,522

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Fixed Maturity Securities (continued)

The amortized cost and estimated fair value by maturity periods for fixed maturity investments held at March 31, 2010 are shown below (in 000’s). Actual maturities may differ from contractual maturities on structured securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

		Amortized Cost	Fair Value
Maturities of available-for-sale fixed securities:
	Due in one year or less	$ 5,472	$ 5,511
	Due after one year through five years	361,355	421,588
	Due after five years through ten years	105,208	119,323
	Due after ten years	569,387	558,412
Subtotal – Maturities of available-for-sale fixed securities		1,041,422	1,104,834
ABS, RMBS and CMBS securities(1)		61,259	61,128
Total available-for-sale fixed securities		$ 1,102,681	$ 1,165,962

Maturities of trading fixed securities:
	Due in one year or less	$ 639,772	$ 652,434
	Due after one year through five years	5,137,661	5,295,782
	Due after five years through ten years	2,417,190	2,495,350
	Due after ten years	1,448,275	1,381,167
	Subtotal – Maturities of trading fixed securities	9,642,898	9,824,733
ABS, RMBS and CMBS securities(1)		2,955,550	2,131,858
	Total trading fixed securities	$ 12,598,448	$ 11,956,591

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

Gross gains of $21.1 million and gross losses of $19.3 million were realized on the sale of available-for-sale fixed maturity securities for the three-month period ended March 31, 2010.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Unrealized Losses

The following table shows the fair value and gross unrealized losses, which includes temporary unrealized losses and the portion of non-credit OTTI losses recognized in AOCI, of the Company’s available-for-sale fixed maturity investments, aggregated by investment category and length of time that the individual securities had been in an unrealized loss position at March 31, 2010 (in 000’s).

	Less Than Twelve Months		Twelve Months Or More		Total

	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses

Non-corporate securities:
Asset-backed securities	$ 29	$ (16)	$ -	$ -	$ 29	$ (16)
Residential mortgage-backed securities	-	-	-	-	-	-
Commercial mortgage-backed securities	3,969	(2,977)	-	-	3,969	(2,977)
Foreign government & agency securities	-	-	-	-	-	-
U.S. states and political subdivisions	217	(2)	-	-	217	(2)
U.S. treasury and agency securities	-	-	16,800	(232)	16,800	(232)
Total non-corporate securities	4,215	(2,995)	16,800	(232)	21,015	(3,227)

Corporate securities	179,794	(22,838)	105,648	(2,308)	285,442	(25,146)

Total	$184,009	$(25,833)	$122,448	$ (2,540)	$306,457	$ (28,373)

The following table shows the fair value and gross unrealized losses of the Company’s available-for-sale fixed maturity investments, which were deemed to be temporarily impaired, aggregated by investment category and length of time that the individual securities had been in an unrealized loss position at December 31, 2009 (in 000’s).

	Less Than Twelve Months		Twelve Months Or More		Total

	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses	Fair Value	Gross Unrealized Losses

Non-corporate securities:
Asset-backed securities	$ -	$ -	$ 37	$ (19)	$ 37	$ (19)
Commercial mortgage-backed securities	499	(1)	6,597	(2,599)	7,096	(2,600)
Foreign government & agency securities	-	-	212	(7)	212	(7)
U.S. treasury and agency securities	16,942	(88)	-	-	16,942	(88)
Total non-corporate securities	17,441	(89)	6,846	(2,625)	24,287	(2,714)

Corporate securities	83,967	(6,208)	183,430	(26,533)	267,397	(32,741)

Total	$ 101,408	$ (6,297)	$ 190,276	$ (29,158)	$ 291,684	$ (35,455)

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Other-Than-Temporary Impairment

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

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

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

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

Discrete credit events, such as a ratings downgrade, are also used to identify securities that may be other-than-temporarily impaired. The securities identified are then evaluated based on issuer-specific facts and circumstances, such as the issuer’s ability to meet current and future interest and principal payments, an evaluation of the issuer’s financial position and its near term recovery prospects, difficulties being experienced by an issuer’s parent or affiliate, and management’s assessment of the outlook for the issuer’s sector. In making these evaluations, the Credit Committee exercises considerable judgment. Based on this evaluation, issues or issuers are considered for inclusion on one of the Company’s following credit lists:

“Monitor List”- Management has concluded that the Company’s amortized cost will be recovered through timely collection of all contractually specified cash flows, but that changes in issuer-specific facts and circumstances require monitoring on a quarterly basis. No OTTI charge is recorded in the Company’s condensed consolidated statements of operations for unrealized loss on securities related to these issuers.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Other-Than-Temporary Impairment (continued)

“Watch List”- Management has concluded that the Company’s amortized cost will be recovered through timely collection of all contractually specified cash flows, but that changes in issuer-specific facts and circumstances require continued monitoring during the quarter. A security is moved from the Monitor List to the Watch List when changes in issuer-specific facts and circumstances increase the possibility that a security may become impaired within the next 24 months. No OTTI charge is recorded in the Company’s condensed consolidated statements of operations for unrealized loss on securities related to these issuers.

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

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

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Other-Than-Temporary Impairment (continued)

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

The Company recorded credit OTTI losses in its condensed consolidated statement of operations totaling $0.9 million for the three-month period ended March 31, 2010 for OTTI on its available-for-sale fixed maturity securities. The $0.9 million credit loss OTTI recorded during the three-month period ended March 31, 2010 was concentrated in corporate debt of financial institutions. These impairments were driven primarily by adverse financial conditions of the issuers.

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

		Three-month Period Ended March 31, 2010 (in 000’s)

Beginning balance, at January 1, 2010		$ 9,148
Add: Credit losses remaining in accumulated deficit related to the adoption of FASB ASC Topic 320		-
Add: Credit losses on OTTI not previously recognized		885
Less: Credit losses on securities sold		(968)
Less: Credit losses on securities impaired due to intent to sell		-
Add: Credit losses on previously impaired securities		-
Less: Increases in cash flows expected on previously impaired securities		(1,089)
Ending balance, at March 31, 2010		$ 7,976

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Derivative Instruments and Hedging Activities

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

The Company does not employ hedge accounting. The Company believes that its derivatives provide economic hedges and the cost of formally documenting hedge effectiveness in accordance with the provisions of FASB ASC Topic 815, is not justified. As a result, all changes in the fair value of derivatives are recorded in the current period operations as a component of net derivative income or loss.

Credit enhancements such as mutual put features and collateral are used to improve the credit risk of longer term derivative contracts.

The primary types of derivatives held by the Company include swap agreements, swaptions, futures, call/put options and embedded derivatives, as described below.

Swap Agreements

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

Interest rate swaps are generally used to change the character of cash flows (e.g. fixed payments to floating rate payments) for duration matching purposes and to manage exposures to changes in the risk-free interest rate.

Foreign currency swaps are utilized as an economic hedge against changes in foreign currencies associated with certain non-U.S. dollar denominated cash flows. From 2000 through 2002, and again in 2005, the Company marketed GICs to unrelated third parties. Each transaction is highly-individualized, but typically involves the issuance of foreign currency denominated contracts backed by cross currency swaps or equity-linked cross currency swaps. The combination of the currency swaps with interest rate swaps allows the Company to lock in U.S. dollar fixed rate payments for the life of the contract.

On September 6, 2006, the Company entered into an agreement with the CARS Trust. Through this agreement, the Company purchased a funded note, which is referenced through a credit default swap, as the seller of credit protection, to the credit performance of a portfolio of corporate reference entities. See Note 1 for additional information on the CARS Trust.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Derivative Instruments and Hedging Activities (continued)

Swaptions

The Company utilizes payer swaptions to hedge exposure to interest rate risk. Swaptions give the buyer the option to enter into an interest rate swap per the terms of the original swaption agreement. A premium is paid on settlement date and no further cash transactions occur until the positions settle or expire. At expiration, the swaption either cash settles for value, settles into an interest rate swap, or expires worthless per the terms of the original swaption agreement.

Futures

Futures contracts, both long and short, are entered into for purposes of hedging liabilities on fixed index and domestic variable annuity products with GMDB and guaranteed minimum living benefit features, with cash flows based on changes in equity indices. Certain futures are also utilized to hedge interest rate risk associated with these products. On the trade date, an initial cash margin is exchanged. Daily cash is exchanged to settle the daily variation margin.

Call/Put Options

In addition to short futures, the Company also utilizes over-the-counter (“OTC”) put options on major indices to hedge against stock market exposure inherent in the guaranteed minimum death benefit and living benefit features of the Company's variable annuities. Unlike futures, however, these options require initial cash outlays. The Company also purchases OTC call options on major indices to economically hedge its obligations under certain fixed annuity contracts, as well as enhance income on the underlying assets.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Derivative Instruments and Hedging Activities (continued)

Embedded Derivatives

The Company performs a quarterly analysis of its new contracts, agreements and financial instruments for embedded derivatives. No embedded derivatives require bifurcation from financial assets. However, the Company issues certain annuity contracts and enters into reinsurance agreements that contain a derivative instrument that is embedded in the contract. Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract or reinsurance agreement) and is carried at fair value. See Note 7 for further information regarding derivatives embedded in reinsurance contracts; see Note 10 for further information regarding derivatives embedded in annuity contracts.

The following is a summary of the Company’s derivative positions at:

	At March 31, 2010				At December 31, 2009
	Number of		Principal Notional		Number of		Principal Notional
		Contracts		Contracts		Contracts		Contracts

Interest rate swaps		88		$ 8,584,000		102		$ 8,883,000
Currency swaps		11		352,591		10		351,740
Credit default swaps		1		55,000		1		55,000
Equity swaps		2		4,908		2		4,908
Swaptions		3		850,000		5		1,150,000
Futures (1)		(17,578)		2,494,972		(13,811)		2,378,216
Index call options		8,515		1,520,255		7,345		1,313,381
Index put options		4,100		383,057		7,100		682,499
Total				$ 14,244,783				$ 14,818,744

(1) Amount represents the Company’s short position

Since December 31, 2008, short future positions have been added to hedge against potential adverse movements in the stock market as the U.S. economy continues to recover.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Derivative Instruments and Hedging Activities (continued)

With the exception of embedded derivatives, all derivatives are carried at fair value in derivative instruments – receivable or derivative instruments – payable in the Company’s condensed consolidated balance sheets. Embedded derivatives related to reinsurance agreements and annuity contracts are carried at fair value in contractholder deposit funds and other policy liabilities in the Company’s condensed consolidated balance sheets. The following is a summary of the Company’s derivative asset and liability positions by primary risk exposure (in 000’s).

	At March 31, 2010				At December 31, 2009
	Asset Derivatives		Liability Derivatives		Asset Derivatives		Liability Derivatives
		Fair Value (a)		Fair Value (a)		Fair Value (a)		Fair Value (a)

Interest rate contracts		$ 136,611		$ 511,140		$ 130,178		$ 532,401
Foreign currency contracts		34,462		2,505		56,032		905
Equity contracts		55,701		-		58,692		-
Credit contracts		-		34,612		-		34,349
Futures (b)		8,724		1,166		14,325		5,255
Derivative instruments		235,498		549,423		259,227		572,910
Embedded derivatives (c)		209		321,432		11,308		417,764
Total		$ 235,707		$ 870,855		$ 270,535		$ 990,674

(a)	Amounts are presented without consideration of cross-transaction netting and collateral.

(b)	Futures include both interest rate and equity price risks.

(c)	Embedded derivatives expose the Company to a combination of credit, interest rate and equity price risks.

All realized and unrealized derivative gains and losses are recorded in net derivative (loss) income included in the Company’s condensed consolidated statements of operations. The following is a summary of the Company’s realized and unrealized gains and losses by derivative type for the three-month periods ended March 31, (in 000’s):

	2010	2009

Interest rate contracts	$ (42,444)	$ 67,966
Foreign currency contracts	(3,459)	4,662
Equity contracts	(5,229)	7,706
Credit contracts	(263)	2,923
Futures	(71,775)	38,250
Embedded derivatives	81,720	8,339
Net derivative (loss) income from continuing operations	$ (41,450)	$ 129,846
Net derivative income from discontinued operations	$ -	$ 13,453

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

5. INVESTMENTS (CONTINUED)

Derivative Instruments and Hedging Activities (continued)

Concentration of Credit Risk

Credit risk relates to the uncertainty of an obligor’s continued ability to make timely payments in accordance with the contractual terms of the instrument or contract. With derivative instruments, the Company is primarily exposed to credit risk through its counterparty relationships. The Company primarily manages credit risk through policies which address the quality of counterparties, contractual requirements for transacting with counterparties and collateral support agreements, and limitations on counterparty concentrations. Exposures by counterparty are monitored closely, as well as counterparty credit ratings. All contracts are held with counterparties rated A- or higher. As of March 31, 2010, the Company’s liability positions were linked to a total of 14 counterparties, of which the largest single unaffiliated counterparty payable had credit exposure of $76.4 million to the Company. As of March 31, 2010, the Company’s net asset positions were linked to a total of 18 counterparties, of which the largest single unaffiliated counterparty receivable had credit exposure of $109.1 million.

Credit-related Contingent Features

All derivative transactions are covered under standardized contractual agreements with counterparties all of which include credit-related contingent features. Certain counterparty relationships may also include supplementary agreements with such tailored terms as additional triggers for early terminations, acceptable practices related to cross transaction netting, or minimum thresholds for determining collateral.

Credit-related triggers include failure to pay or deliver on an obligation past certain grace periods, bankruptcy or the downgrade of credit ratings to below a stipulated level. These triggers apply to both the Company and its counterparty. The aggregate value of all derivative instruments with credit risk-related contingent features that were in a liability position at March 31, 2010 was approximately $549.4 million.

In the event of an early termination, the Company might be required to accelerate payments to counterparties, up to the current value of its liability positions, offset by the value of previously pledged collateral and cross-transaction netting. If payments cannot be exchanged simultaneously at early termination, funds will also be held in escrow to facilitate settlement. If an early termination was triggered on March 31, 2010, the Company would be expected to settle a net obligation of approximately $130.0 million.

If counterparties are unable to meet accelerated payment obligations, the Company may also be exposed to uncollectible asset positions, offset by the value of collateral that has been posted with the Company.

At March 31, 2010, the Company had collateral of $247.8 million pledged to counterparties, including a combination of cash and U.S. treasury securities and other collateral. The Company was holding cash collateral posted by counterparties of $64.2 million.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

FASB ASC Topic 825 “Financial Instruments” excludes certain insurance liabilities and other non-financial instruments from its disclosure requirements. The fair value amounts presented herein do not include the expected interest margin (interest earnings over interest credited) to be earned in the future on investment-type products or other intangible items. Accordingly, the aggregate fair value amounts presented herein do not necessarily represent the underlying value to the Company. Likewise, care should be exercised in deriving conclusions about the Company's business or financial condition based on the fair value information presented herein.

The following table presents the carrying amounts and estimated fair values of the Company's financial instruments (in 000’s) at:

		March 31, 2010		December 31, 2009
		Carrying	Estimated	Carrying	Estimated
		Amount	Fair Value	Amount	Fair Value
Financial assets:
	Fixed maturity securities	$ 13,122,553	$ 13,122,553	$ 12,306,038	$ 12,306,038
	Mortgage loans	1,899,847	1,944,419	1,911,961	1,937,199
	Derivative instruments -receivable	235,498	235,498	259,227	259,277
	Policy loans	710,292	830,324	722,590	837,029
	Other invested assets	871	871	20,448	20,448
	Short-term investments	2,051,747	2,051,747	1,267,311	1,267,311
	Cash and cash equivalents	733,097	733,097	1,804,208	1,804,208
	Separate account assets	24,269,106	24,269,106	23,326,323	23,326,323

Financial liabilities:
	Contractholder deposit funds and other policy liabilities	13,819,157	13,611,998	14,104,892	13,745,774
	Debt payable to affiliates	883,000	883,000	883,000	883,000
	Derivative instruments - payable	549,423	549,423	572,910	572,910
	Other liabilities	42,251	42,251	60,037	60,037
	Separate account liabilities	24,269,106	24,269,106	23,326,323	23,326,323

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

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

Fixed maturity securities: The Company determines the fair value of its publicly traded fixed maturity securities using three primary pricing methods: third-party pricing services, non-binding broker quotes and pricing models. Prices are first sought from third-party pricing services; the remaining unpriced securities are priced using one of the remaining two methods. Third-party pricing services derive the security prices through recently reported trades for identical or similar securities with adjustments for trading volumes and market observable information through the reporting date. In the event that there are no recent market trades, pricing services and brokers may use pricing models to develop a security price based on future expected cash flows discounted at an estimated market rate using collateral performance and vintages. The Company generally does not adjust quotes or prices obtained from brokers or pricing services.

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

For privately-placed fixed maturity securities, fair values are estimated using models which take into account credit spreads for publicly traded securities of similar credit risk, maturity, prepayment and liquidity characteristics. A portion of privately-placed fixed maturity securities are also priced using market prices or broker quotes.

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

Derivative instruments, receivables and payables: The fair values of swaps are based on current settlement values, dealer quotes and market prices. Fair values for options and futures are also based on dealer quotes and market prices. The Company also uses credit valuation adjustments (“CVAs”) to properly reflect the component of fair value of certain derivative instruments that arises from default risk. CVAs are based on a methodology that uses credit default swap spreads as a key input in determining an implied level of expected loss over the total life of the derivative contact. The counterparty or the Company’s credit spreads from bond yields are used where no observable credit default swap spreads are available. CVAs are intended to achieve a fair value of the underlying contracts and are normally based on publicly available information. The CVAs also takes into account contractual factors designed to reduce the Company’s credit exposure to each counterparty, such as collateral and legal rights of offset.

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

Other invested assets: This financial instrument primarily consists of equity securities for which the fair value is based on quoted market prices.

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)

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

Contractholder deposit funds and other policy liabilities: The fair values of the Company’s general account insurance reserves and contractholder deposits under investment-type contracts (insurance, annuity and pension contracts that do not involve mortality or morbidity risks) are estimated using discounted cash flow analyses or surrender values based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for all contracts being valued. Those contracts that are deemed to have short-term guarantees have a carrying amount equal to the estimated market value. The fair values of other deposits with future maturity dates are estimated using discounted cash flows. The fair values of S&P 500 Index and other equity-linked embedded derivatives are produced using standard derivative valuation techniques. Guaranteed minimum accumulation benefit (“GMAB”) or guaranteed minimum withdrawal benefit (“GMWB”) are considered to be derivatives under FASB ASC Topic 815 and are included in contractholder deposit funds and other policy liabilities in the Company’s condensed consolidated balance sheets. Consistent with the provisions of FASB ASC Topic 820, the Company incorporates risk margins and the Company’s own credit standing, as well as changes in assumptions regarding policyholder behavior, in the calculation of the fair value of embedded derivatives.

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

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. REINSURANCE

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

Wealth Management Segment

The Wealth Management Segment manages a closed block of single premium whole life (“SPWL”) insurance policies, a retirement-oriented tax-advantaged life insurance product. The Company discontinued sales of the SPWL product in response to certain tax law changes in the 1980s. The Company had SPWL policyholder balances of $1.5 billion at March 31, 2010 and December 31, 2009, respectively. This entire block of business is reinsured on a funds withheld basis with SLOC, an affiliate. Pursuant to this reinsurance agreement, the Company held the following assets and liabilities (in thousands) at:

	March 31,		December 31,
	2010		2009
Assets Reinsurance receivable	$	1,497,205	$	1,540,697

Liabilities Contractholder deposit funds and other policy liabilities		1,488,154		1,493,145
Future contract and policy benefits		2,104		2,104
Reinsurance payable		1,572,374		1,603,711

The funds withheld assets of $1.6 billion and $1.5 billion at March 31, 2010 and December 31, 2009, respectively, are comprised of bonds, mortgage loans, policy loans, derivative instruments, and cash and cash equivalents that are managed by the Company. The coinsurance treaty with funds withheld gives rise to an embedded derivative requiring that it be separated from the host reinsurance contract. The change in value of this embedded derivative decreased derivative income by $10.4 million and $0.4 million for the three-month periods ended March 31, 2010 and 2009, respectively.

By reinsuring the SPWL product, the Company reduced net investment income by $17.6 million and $27.2 million for the three-month periods ended March 31, 2010 and 2009, respectively. The Company also reduced interest credited by $17.5 million and $19.0 million for the three-month periods ended March 31, 2010 and 2009, respectively. In addition, the Company increased net investment income relating to an experience rate refund under the reinsurance agreement by $3.1 million and $0.7 million for the three-month periods ended March 31, 2010 and 2009, respectively.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. REINSURANCE (CONTINUED)

Individual Protection Segment

The following are the Company’s significant reinsurance agreements that impact the Individual Protection Segment:

On February 11, 2009, the Company received regulatory approval and entered into a reinsurance agreement with BarbCo 3, an affiliate, to cede all of the risks associated with certain corporate and bank-owned variable universal life and private placement variable universal life businesses on a combination coinsurance, coinsurance with funds withheld and a modified coinsurance basis. The reinsurance agreement covered in-force policies on the effective date and new sales through December 31, 2009.

Effective January 1, 2010, the Company and BarbCo3 amended the agreement to include coverage of certain corporate and bank-owned variable universal life and private placement variable universal life insurance cases sold between January 1, 2010 and March 31, 2010, inclusive.

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

	March 31,		December 31,
	2010		2009
Assets Reinsurance receivable	$	436,504	$	422,486

Liabilities Contractholder deposit funds and other policy liabilities		475,938		466,899
Reinsurance payable		438,298		430,528

At March 31, 2010 and December 31, 2009, reinsurance payable includes a funds withheld liability of $321.5 million and $307.8 million, respectively, and a deferred gain of $116.8 million and $118.9 million, respectively. The funds withheld assets are comprised of bonds, policy loans, and cash and cash equivalents that are managed by the Company. The coinsurance treaty with funds withheld gives rise to an embedded derivative requiring that it be separated from the host reinsurance contract. At March 31, 2010 and December 31, 2009, the fair value of the embedded derivative increased contractholder deposit funds and other policy liabilities by $29.0 million and $26.3 million, respectively. The change in fair value of the embedded derivative resulted in a (decrease) increase of derivative income by $(2.7) million and $3.3 million for the three-month periods ended March 31, 2010 and 2009, respectively. During the three-month periods ended March 31, 2010 and 2009, the reinsurance agreement resulted in revenues decreasing by $8.4 million and $8.1 million, respectively, and in expenses decreasing by $10.3 million and $9.3 million, respectively.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. REINSURANCE (CONTINUED)

Individual Protection Segment (continued)

Effective December 31, 2007, the Company’s subsidiary, SLNY, entered into a reinsurance agreement with SLOC under which SLOC will fund AXXX reserves attributable to certain UL policies sold by SLNY. Under this agreement, SLNY ceded, and SLOC assumed, on a funds withheld 90% coinsurance basis certain in-force policies at December 31, 2007. Future new business will also be reinsured under this agreement. Pursuant to this agreement, SLNY held the following assets and liabilities at (in thousands):

	March 31,		December 31,
	2010		2009
Assets Reinsurance receivable	$	117,224	$	103,802

Liabilities Contractholder deposit funds and other policy liabilities		96,111		84,606
Future contract and policy benefits		10,870		10,518
Reinsurance payable		194,049		182,000

Reinsurance payable to affiliate includes a funds withheld liability of $142.6 million and $128.4 million at March 31, 2010 and December 31, 2009, respectively; and a deferred gain of $50.8 million and $50.3 million at March 31, 2010 and December 31, 2009, respectively. The funds withheld assets comprised of trading fixed maturity securities and mortgage loans are being managed by the Company. The coinsurance treaty with funds withheld gives rise to an embedded derivative requiring that it be separated from the host reinsurance contract. The fair value of the embedded derivative increased (decreased) contractholder deposit funds and other policy liabilities by $0.8 million and $(0.7) million at March 31, 2010 and December 31, 2009, respectively. The change in fair value of this embedded derivative (decreased) increased derivative income by $(1.4) million and $1.5 million for the three-month periods ended March 31, 2010 and 2009, respectively.

The reinsurance agreement between SLOC and SLNY decreased revenues by approximately $7.0 million and $2.3 million for the three-month periods ended March 31, 2010 and 2009, respectively. This agreement also decreased benefits and expenses by approximately $4.6 million and $5.3 million for the three-month periods ended March 31, 2010 and 2009, respectively.

The Company has other reinsurance agreements with SLOC and several unrelated companies, which provide reinsurance for portions of the net-amount-at-risk under certain individual variable universal life, individual private placement variable universal life, bank-owned life insurance (“BOLI”) and corporate-owned life insurance (“COLI”) policies. These amounts are reinsured on a monthly renewable term, a yearly renewable term or a modified coinsurance basis. These other agreements have decreased revenues by approximately $39.0 million and $43.1 million for the three-month periods ended March 31, 2010 and 2009, respectively. These agreements have also decreased expenses by approximately $41.6 million and $30.0 million for the three-month periods ended March 31, 2010 and 2009, respectively.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

7. REINSURANCE (CONTINUED)

Group Protection Segment

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

SLNY has a reinsurance agreement, effective May 31, 2007, to assume the net risks of SLHIC’s New York issued contracts. At March 31, 2010 and December 31, 2009, SLNY held policyholder liabilities related to this agreement of $28.8 million and $30.3 million, respectively. In addition, the reinsurance agreement increased revenues by $12.4 million and $14.0 million for the three-month periods ended March 31, 2010 and 2009, respectively. This agreement also increased benefits and expenses by $10.6 million and $10.7 million for the three-month periods ended March 31, 2010 and 2009, respectively.

8. COMMITMENTS AND CONTINGENCIES

Regulation and Regulatory Developments

Under insurance guaranty fund laws in each state, the District of Columbia and Puerto Rico, insurers licensed to do business can be assessed by state insurance guaranty associations for certain obligations of insolvent insurance companies to policyholders and claimants. Most of these laws do provide, however, that an assessment may be excused or deferred if it would threaten an insurer's solvency and further provide annual limits on such assessments. Part of the assessments paid by the Company pursuant to these laws may be used as credits for a portion of the associated premium taxes.

Litigation, Income Taxes and Other Matters

In Revenue Ruling 2007-61, issued on September 25, 2007, the Internal Revenue Service (“IRS”) announced its intention to issue regulations with respect to certain computational aspects of the dividends-received-deduction (the “DRD”) on separate account assets held in connection with variable annuity contracts. Revenue Ruling 2007-61 suspended Revenue Ruling 2007-54, issued on August 16, 2007, that purported to change accepted industry and IRS interpretations of the statutes governing computational questions impacting the DRD. New DRD regulations that the IRS proposes for issuance on this matter will be subject to public comment, at which time the insurance industry and other interested parties will have the opportunity to raise comments and questions about the content, scope and application of new regulations. The timing, substance and effective date of the new regulations are unknown, but they could result in the elimination of some or all of the separate account DRD tax benefit that the Company ultimately receives. For the three-month periods ended March 31, 2010 and 2009, the Company recorded benefits of $4.1 million, respectively, related to the separate account DRD.

The Company is not aware of any contingent liabilities arising from litigation or other matters that could have a material effect upon the financial position, results of operations or cash flows of the Company.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

8. COMMITMENTS AND CONTINGENCIES (CONTINUED)

Indemnities

In the normal course of its business, the Company has entered into agreements that include indemnities in favor of third parties, such as contracts with advisors and consultants, outsourcing agreements, underwriting and agency agreements, information technology agreements, distribution agreements and service agreements. The Company has also agreed to indemnify its directors and certain of its officers and employees in accordance with the Company’s by-laws. The Company believes any potential liability under these agreements is neither probable nor estimatable. Therefore, the Company has not recorded any associated liability.

9. RETIREMENT PLANS

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

Prior to the December 31, 2009 employee transfer, the Company sponsored the staff qualified pension plan and the staff nonqualified pension plan (collectively, the “Pension Plans”) for its employees and certain affiliated employees. Expenses related to the Pension Plans were allocated to participating companies in a manner consistent with the allocation of employee compensation expenses.

Prior to the December 31, 2009 employee transfer, the Company sponsored a postretirement benefit plan for its employees and certain affiliated employees providing certain health, dental and life insurance benefits for retired employees and dependents (the “Other Benefit Plan”). Expenses were allocated to participating companies based on the number of participants.

For the three-month period ended March 31, 2010, expenses of $0.8 million and $1.1 million were allocated by Sun Life Services to the Company for the Pension Plans and Other Benefit Plan, respectively.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

10. LIABILITIES FOR CONTRACT GUARANTEES

The Company offers various guarantees to certain policyholders, including a return of no less than (a) total deposits made on the contract, adjusted for any customer withdrawals, (b) total deposits made on the contract, adjusted for any customer withdrawals, plus a minimum return, or (c) the highest contract value on a specified anniversary date, minus any customer withdrawals following the contract anniversary. These guarantees include benefits that are payable in the event of death, upon annuitization, or at specified dates during the accumulation period of an annuity.

The table below represents information regarding the Company’s variable annuity contracts with guarantees at March 31, 2010 (in 000’s, except for age data):

Benefit Type	Account Balance	Net Amount at Risk 1	Average Attained Age
Minimum death	$ 17,830,243	$ 2,197,992	66.9
Minimum income	$ 195,707	$ 74,466	61.6
Minimum accumulation or withdrawal	$ 9,769,021	$ 149,539	63.8

The table below represents information regarding the Company’s variable annuity contracts with guarantees at December 31, 2009:

Benefit Type	Account Balance	Net Amount at Risk 1	Average Attained Age
Minimum death	$ 16,947,362	$ 2,459,360	66.2
Minimum income	$ 194,780	$ 84,591	61.5
Minimum accumulation or withdrawal	$ 8,866,525	$ 212,371	63.0

1 Net amount at risk represents the difference between guaranteed benefits and account balance.

The following roll-forward summarizes the change in reserves for the Company’s guaranteed minimum death and income benefits at March 31, 2010 (in 000’s):

	Guaranteed Minimum Death Benefit	Guaranteed Minimum Income Benefit	Total
Balance at December 31, 2009	$ 96,267	$ 10,058	$ 106,325

Benefit ratio change / Assumption changes	(7,222)	(400)	(7,622)
Incurred guaranteed benefits	2,086	360	2,446
Paid guaranteed benefits	(7,134)	(1,296)	(8,430)
Interest	6,768	178	6,946

Balance at March 31, 2010	$ 90,765	$ 8,900	$ 99,665

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

10. LIABILITIES FOR CONTRACT GUARANTEES (CONTINUED)

The following roll-forward summarizes the change in reserves for the Company’s guaranteed minimum death and income benefits at March 31, 2009 (in 000’s):

	Guaranteed Minimum Death Benefit	Guaranteed Minimum Income Benefit	Total
Balance at December 31, 2008	$ 201,648	$ 18,773	$ 220,421

Benefit ratio change / Assumption changes	48,727	5,201	53,928
Incurred guaranteed benefits	10,436	1,146	11,582
Paid guaranteed benefits	(36,172)	(963)	(37,135)
Interest	4,058	340	4,398

Balance at March 31, 2009	$ 228,697	$ 24,497	$ 253,194

The liability for death and income benefit guarantees is established equal to a benefit ratio, multiplied by the cumulative contract charges earned, plus accrued interest less contract benefit payments. The benefit ratio is calculated as the estimated present value of all expected contract benefits divided by the present value of all expected contract charges. The benefit ratio may be in excess of 100%. For guarantees in the event of death, benefits represent the current guaranteed minimum death payments in excess of the current account balance. For guarantees at annuitization, benefits represent the present value of the minimum guaranteed annuity benefits in excess of the current account balance.

Projected benefits and assessments used in determining the liability for guarantees are developed using models and stochastic scenarios that are also used in the development of estimated expected future gross profits. Underlying assumptions for the liability related to income benefits include assumed future annuitization elections based upon factors such as eligibility conditions and the annuitant’s attained age.

The liability for guarantees is re-evaluated regularly, and adjustments are made to the liability balance through a charge or credit to policyholder benefits.

GMABs and GMWBs are considered to be derivatives under FASB ASC Topic 815 and are recorded at fair value through earnings. The Company incorporates actively-managed volatility adjustments, a credit standing adjustment, and a behavior risk margin in its calculation of the embedded derivative. The net balance of GMABs and GMWBs constituted a liability in the amount of $152.6 million and $250.5 million at March 31, 2010 and December 31, 2009, respectively. The Company records GMAB and GMWB liabilities in its condensed consolidated balance sheets as part of contractholder deposit funds and other policy liabilities.

11. GOODWILL

The Company’s goodwill represents the intangible asset related to the transfer of goodwill to SLNY, based on the SLHIC to SLNY asset transfer, effective May 31, 2007. Goodwill is allocated to the Group Protection Segment. In accordance with FASB ASC Topic 350, “Intangibles-Goodwill, and Other,” goodwill is tested for impairment on an annual basis. The Company completed the required impairment tests of goodwill and indefinite-lived intangible assets during the second quarter of 2009 and concluded that these assets were not impaired.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

12. INCOME TAXES

The Company accounts for current and deferred income taxes and recognizes reserves for income taxes in accordance with FASB ASC Topic 740, “Income Taxes.”

Under the applicable asset and liability method for recording deferred income taxes, deferred taxes are recognized when assets and liabilities have different values for financial statement and tax reporting purposes, using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.

The Company performs the required recoverability (realizability) test in terms of its ability to realize its recorded net deferred tax assets. In making this determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. In projecting future taxable income and sources of capital gains, the Company utilizes historical and current operating results and incorporates assumptions including the amount of future federal and state pre-tax operating income, the reversal of temporary differences, and the implementation of prudent and feasible tax planning strategies.

The Company’s net deferred tax asset at March 31, 2010 was comprised of gross deferred tax assets and gross deferred tax liabilities. The gross deferred tax assets are primarily related to unrealized investment security losses, actuarial liabilities and net operating loss (“NOL”) carryforwards, as well as capital loss carryforwards. If unutilized, the NOL carryforwards and a majority of the capital loss carryforwards will begin to expire in 2023 and 2014, respectively. The Company’s net deferred tax asset was $492.1 million and $549.8 million at March 31, 2010 and December 31, 2009, respectively.

As of March 31, 2010, no valuation allowance has been recorded against deferred tax assets for investment losses, because the Company believes that it is more likely than not that the deferred tax assets related to the impairment losses will be realized due to tax planning strategies related to certain mortgage-backed securities, the Company’s intent and ability to hold the related investment securities to maturity, and other tax planning strategies. For the remaining unrealized investment losses, the Company believes that it is more likely than not that the related deferred tax assets will be realized due to the Company’s intent and ability to hold the related investment securities to recovery of amortized cost.

13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The following Condensed Consolidating financial statements are provided in compliance with Regulation S-X of the U.S. Securities and Exchange Commission (the “SEC”) and in accordance with SEC Rule 12h-5.

The Company’s wholly-owned subsidiary, SLNY, sells, among other products, combination fixed and variable annuity contracts (the “Contracts”) in the State of New York. The Contracts contain a fixed investment option, where interest is paid at a guaranteed rate for a specified period of time, and withdrawals made before the end of the specified period may be subject to a market value adjustment that can increase or decrease the amount of the withdrawal proceeds (the “fixed investment option period”). Effective September 27, 2007, the Company provided a full and unconditional guarantee (the “guarantee”) of SLNY’s obligation related to the fixed investment option period related to Contracts currently in-force or sold on or after that date. The guarantee relieves SLNY of its obligation to file annual, quarterly, and current reports with the SEC on Form 10-K, Form 10-Q, and Form 8-K.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

In the following presentation of condensed consolidating financial statements, the term “SLUS as Parent” is used to denote the Company as a stand alone entity, isolated from its subsidiaries, and the term “Other Subs” is used to denote the Company's other subsidiaries, with the exception of SLNY. All condensed consolidating financial statements are presented in thousands.

Condensed Consolidating Statements of Operations

For the three-month period ended March 31, 2010

	SLUS as Parent		SLNY		Other Subs		Elimination		Consolidated Company

Revenues

Premiums and annuity considerations	$	5,091	$	29,973	$	-	$	-	$	35,064
Net investment income (1)		404,410		38,299		1,120		-		443,829
Net derivative (loss) income		(47,949)		6,499		-		-		(41,450)
Net realized investment gains, excluding impairment losses on available-for-sale securities		4,370		396		399		-		5,165
Other-than-temporary impairment losses		(735)		(150)		-		-		(885)
Fee and other income		108,717		5,007		2,029		-		115,753

Total revenues		473,904		80,024		3,548		-		557,476

Benefits and Expenses

Interest credited		76,656		12,533		194		-		89,383
Interest expense		17,112		(15)		-		-		17,097
Policyowner benefits		10,586		23,984		33		-		34,603
Amortization of DAC, VOBA and VOCRA		135,321		36,388		-		-		171,709
Other operating expenses		69,986		8,982		1,942		-		80,910

Total benefits and expenses		309,661		81,872		2,169		-		393,702

Income (loss) before income tax expense (benefit)		164,243		(1,848)		1,379		-		163,774

Income tax expense (benefit)		52,485		(783)		421		-		52,123
Equity in the net loss of subsidiaries		(107)		-		-		107		-

Net income (loss)	$	111,651	$	(1,065)	$	958	$	107	$	111,651

(1)SLUS’, SLNY’s and Other Subs’ net investment income includes an increase in market value of trading fixed maturity securities of $253.3 million, $17.1 million and $0.0 million, respectively, for the three-month period ended March 31, 2010.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Operations

For the three-month period ended March 31, 2009

	SLUS as Parent		SLNY		Other Subs		Elimination		Consolidated Company

Revenues

Premiums and annuity considerations	$	1,513	$	31,027	$	-	$	-	$	32,540
Net investment income (1)		125,567		16,796		1,294		-		143,657
Net derivative income		129,250		596		-		-		129,846
Net realized investment (losses) gains, excluding impairment losses on available-for-sale securities		(1,946)		(1)		50		-		(1,897)
Other-than-temporary impairment losses		-		-		-		-		-
Fee and other income		76,114		(987)		1,074		-		76,201

Total revenues		330,498		47,431		2,418		-		380,347

Benefits and Expenses

Interest credited		100,107		12,212		465		-		112,784
Interest expense		11,278		802		-		-		12,080
Policyowner benefits		82,554		19,088		345		-		101,987
Amortization of DAC, VOBA and VOCRA		(96,718)		(10,706)		-		-		(107,424)
Other operating expenses		36,358		9,802		781		-		46,941

Total benefits and expenses		133,579		31,198		1,591		-		166,368

Income from continuing operations before income tax expense		196,919		16,233		827		-		213,979

Income tax expense		68,394		3,958		351		-		72,703
Equity in the net loss of subsidiaries		(78,911)		-		-		78,911		-

Net income from continuing operations		49,614		12,275		476		78,911		141,276

Loss from discontinued operations, net of tax		-		-		(91,662)		-		(91,662)

Net income (loss)	$	49,614	$	12,275	$	(91,186)	$	78,911	$	49,614

(1)SLUS’, SLNY’s and Other Subs’ net investment income includes a decrease in market value of trading fixed maturity securities of $28.7 million, $1.2 million and $0.0 million, respectively, for the three-month period ended March 31, 2009.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Balance Sheets at March 31, 2010

	SLUS as Parent		SLNY		Other Subs		Elimination		Consolidated Company
ASSETS

Investments
Available-for-sale fixed maturity securities at fair value	$	915,326	$	199,732	$	50,904	$	-	$	1,165,962
Trading fixed maturity securities at fair value		10,483,115		1,473,476		-		-		11,956,591
Investment in subsidiaries		534,900		-		-		(534,900)		-
Mortgage loans		1,695,133		176,944		27,770				1,899,847
Derivative instruments – receivable		235,498		-		-		-		235,498
Limited partnerships		45,886		-		-		-		45,886
Real estate		159,048		-		45,288		-		204,336
Policy loans		688,247		925		21,120		-		710,292
Other invested assets		26,335		71		-		-		26,406
Short-term investments		1,959,755		89,992		2,000		-		2,051,747
Cash and cash equivalents		645,213		75,844		12,040		-		733,097
Total investments and cash		17,388,456		2,016,984		159,122		(534,900)		19,029,662

Accrued investment income		197,646		18,736		1,664		-		218,046
Deferred policy acquisition costs		1,909,023		156,539		-		-		2,065,562
Value of business and customer renewals acquired		165,131		5,469		-		-		170,600
Net deferred tax asset		481,794		5,982		4,286		-		492,062
Goodwill		-		7,299		-		-		7,299
Receivable for investments sold		14,001		12		23		-		14,036
Reinsurance receivable		2,216,985		143,760		38		-		2,360,783
Other assets		99,876		44,816		800		-		145,492
Separate account assets		23,155,439		1,072,781		40,886		-		24,269,106

Total assets	$	45,628,351	$	3,472,378	$	206,819	$	(534,900)	$	48,772,648

LIABILITIES

Contractholder deposit funds and other policy liabilities	$	14,833,319	$	1,601,666	$	24,763	$	-	$	16,459,748
Future contract and policy benefits		695,875		99,017		207		-		795,099
Payable for investments purchased		87,744		5,030		-		-		92,774
Accrued expenses		48,724		10,850		263		-		59,837
Debt payable to affiliates		883,000		-		-		-		883,000
Reinsurance payable		2,017,680		217,551		36		-		2,235,267
Derivative instruments – payable		549,423		-		-		-		549,423
Other liabilities		232,987		45,737		25,510		-		304,234
Separate account liabilities		23,155,439		1,072,781		40,886		-		24,269,106

Total liabilities	$	42,504,191	$	3,052,632	$	91,665	$	-	$ ,488	45,648,488

STOCKHOLDER’S EQUITY

Common stock	$	6,437	$	2,100	$	2,542	$	(4,642)	$	6,437
Additional paid-in capital		3,927,845		389,963		93,507		(483,470)		3,927,845
Accumulated other comprehensive income (loss)		41,133		(1,968)		976		992		41,133
(Accumulated deficit) retained earnings		(851,255)		29,651		18,129		(47,780)		(851,255)

Total stockholder’s equity		3,124,160		419,746		115,154		(534,900)		3,124,160

Total liabilities and stockholder’s equity	$	45,628,351	$	3,472,378	$	206,819	$	(534,900)	$	48,772,648

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Balance Sheets at December 31, 2009

	SLUS as Parent		SLNY		Other Subs		Elimination		Consolidated Company
ASSETS

Investments
Available-for-sale fixed maturity securities at fair value	$	959,156	$	164,158	$	52,202	$	-	$	1,175,516
Trading fixed maturity securities at fair value		9,724,195		1,406,327		-		-		11,130,522
Investment in subsidiaries		518,560		-		-		(518,560)		-
Mortgage loans		1,736,358		161,498		14,105		-		1,911,961
Derivative instruments – receivable		259,227		-		-		-		259,227
Limited partnerships		51,656		-		-		-		51,656
Real estate		158,170		-		44,107		-		202,277
Policy loans		700,974		270		21,346		-		722,590
Other invested assets		46,410		542		469		-		47,421
Short-term investments		1,208,320		58,991		-		-		1,267,311
Cash and cash equivalents		1,616,991		175,322		11,895		-		1,804,208
Total investments and cash		16,980,017		1,967,108		144,124		(518,560)		18,572,689

Accrued investment income		211,725		17,051		1,815		-		230,591
Deferred policy acquisition costs		1,989,676		183,966		-		-		2,173,642
Value of business and customer renewals acquired		163,079		5,766		-		-		168,845
Net deferred tax asset		539,323		5,830		4,611		-		549,764
Goodwill		-		7,299		-		-		7,299
Receivable for investments sold		11,969		642		-		-		12,611
Reinsurance receivable		2,232,651		117,460		96		-		2,350,207
Other assets		114,177		69,161		1,975		(1,350)		183,963
Separate account assets		22,293,989		989,939		42,395		-		23,326,323

Total assets	$	44,536,606	$	3,364,222	$	195,016	$	(519,910)	$	47,575,934

LIABILITIES

Contractholder deposit funds and other policy liabilities	$	15,078,201	$	1,605,038	$	26,350	$	-	$	16,709,589
Future contract and policy benefits		716,176		99,255		207		-		815,638
Payable for investments purchased		87,554		577		-		-		88,131
Accrued expenses and taxes		51,605		10,202		1,446		(1,350)		61,903
Debt payable to affiliates		883,000		-		-		-		883,000
Reinsurance payable		2,040,864		190,863		37		-		2,231,764
Derivative instruments – payable		572,910		-		-		-		572,910
Other liabilities		205,855		48,608		25,761		-		280,224
Separate account liabilities		22,293,989		989,939		42,395		-		23,326,323

Total liabilities	$	41,930,154	$	2,944,482	$	96,196	$	(1,350)	$	44,969,482

STOCKHOLDER’S EQUITY

Common stock	$	6,437	$	2,100	$	2,542	$	(4,642)	$	6,437
Additional paid-in capital		3,527,677		389,963		78,409		(468,372)		3,527,677
Accumulated other comprehensive income (loss)		35,244		(3,039)		701		2,338		35,244
(Accumulated deficit) retained earnings		(962,906)		30,716		17,168		(47,884)		(962,906)

Total stockholder’s equity		2,606,452		419,740		98,820		(518,560)		2,606,452

Total liabilities and stockholder’s equity	$	44,536,606	$	3,364,222	$	195,016	$	(519,910)	$	47,575,934

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Cash Flow

For the three-month period ended March 31, 2010

	SLUS as Parent		SLNY		Other Subs		Elimination		Consolidated Company

Cash Flows From Operating Activities:
Net income (loss)	$	111,651	$	(1,065)	$	958	$	107	$	111,651
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net amortization of premiums on investments		1,873		552		162		-		2,587
Amortization of DAC, VOBA and VOCRA		135,321		36,388		-		-		171,709
Depreciation and amortization		925		78		211		-		1,214
Net losses (gains) on derivatives		12,620		(6,499)		-		-		6,121
Net realized gains and OTTI credit losses on available-for-sale investments		(3,635)		(246)		(399)		-		(4,280)
Net increase in fair value of trading investments		(253,291)		(17,144)		-		-		(270,435)
Net realized losses (gains) on trading investments		37,752		(3,825)		-		-		33,927
Undistributed loss in private equity limited partnerships		1,631		-		-		-		1,631
Interest credited to contractholder deposits		76,656		12,533		194		-		89,383
Equity in net loss of subsidiaries		107		-		-		(107)		-
Deferred federal income taxes		55,083		(729)		177		-		54,531
Changes in assets and liabilities:
Additions to DAC, VOBA and VOCRA		(49,149)		(6,990)		-		-		(56,139)
Accrued investment income		14,079		(1,685)		151		-		12,545
Net change in reinsurance receivable/payable		27,338		1,473		57		-		28,868
Future contract and policy benefits		(20,301)		(238)		-		-		(20,539)
Other, net		55,946		25,560		(278)		-		81,228

Net cash provided by operating activities		204,606		38,163		1,233		-		244,002

Cash Flows From Investing Activities:
Sales, maturities and repayments of:
Available-for-sale fixed maturity securities		59,278		8,902		2,312		-		70,492
Trading fixed maturity securities		561,184		176,441		-		-		737,625
Mortgage loans		37,645		2,444		71		(15,064)		25,096
Real estate		-		1,000		-		(1,000)		-
Other invested assets		(65,565)		502		502		-		(64,561)
Purchases of:
Available-for-sale fixed maturity securities		(3,501)		(42,645)		(253)		-		(46,399)
Trading fixed maturity securities		(1,114,393)		(218,072)		-		-		(1,332,465)
Mortgage loans		3,409		(18,840)		(15,064)		15,064		(15,431)
Real estate		(1,685)		-		(219)		1,000		(904)
Other invested assets		(16,616)		-		-		-		(16,616)
Net change in policy loans		12,727		(655)		226		-		12,298
Net change in short-term investments		(751,435)		(31,001)		(2,000)		-		(784,436)

Net cash used in investing activities	$	(1,278,952)	$	(121,924)	$	(14,425)	$	-	$	(1,415,301)

Continued on next page

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Cash Flow (continued)

For the three-month period ended March 31, 2010

	SLUS as Parent		SLNY		Other Subs		Elimination		Consolidated Company

Cash Flows From Financing Activities:
Additions to contractholder deposit funds	$	284,686	$	43,929	$	-	$	-	$	328,615
Withdrawals from contractholder deposit funds		(552,936)		(56,094)		(1,780)		-		(610,810)
Additional capital contributed to subsidiaries		(15,097)		-		-		15,097		-
Capital contribution from Parent		400,000		-		15,097		(15,097)		400,000
Other, net		(14,085)		(3,552)		20		-		(17,617)

Net cash provided by (used in) financing activities		102,568		(15,717)		13,337		-		100,188

Net change in cash and cash equivalents		(971,778)		(99,478)		145		-		(1,071,111)

Cash and cash equivalents, beginning of period		1,616,991		175,322		11,895		-		1,804,208

Cash and cash equivalents, end of period	$	645,213	$	75,844	$	12,040	$	-	$	733,097

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Cash Flow

For the three-month period ended March 31, 2009

	SLUS as Parent		SLNY		Other Subs		Elimination		Consolidated Company

Cash Flows From Operating Activities:
Net income (loss)	$	49,614	$	12,275	$	(91,186)	$	78,911	$	49,614
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Net amortization of premiums on investments		8,934		146		6		-		9,086
Amortization of DAC, VOBA and VOCRA		(96,718)		(10,706)		-		-		(107,424)
Depreciation and amortization		1,457		78		215		-		1,750
Net (gains) losses on derivatives		(172,068)		(596)		3		-		(172,661)
Net realized losses (gains) on available-for-sale investments		1,946		1		(50)		-		1,897
Net decrease in fair value of trading investments		28,698		1,182		-		-		29,880
Net realized losses on trading investments		44,848		49		-		-		44,897
Undistributed income in private equity limited partnerships		(1,481)		-		-		-		(1,481)
Interest credited to contractholder deposits		100,107		12,212		465		-		112,784
Equity in net loss of Subsidiaries		78,911		-		-		(78,911)		-
Deferred federal income taxes		71,915		4,999		112		-		77,026
Equity in net income of subsidiaries		-		-		-		-		-
Changes in assets and liabilities:
Additions to DAC, VOBA and VOCRA		(78,536)		(9,581)		(1)		-		(88,118)
Accrued investment income		31,885		1,194		77		-		33,156
Net reinsurance receivable/payable		44,162		(6,055)		163		-		38,270
Future contract and policy benefits		29,745		1,144		-		-		30,889
Other, net		(704)		(141,216)		111		-		(141,809)
Adjustment related to discontinued operations		-		-		219,553		-		219,553

Net cash provided by (used in) operating activities		142,715		(134,874)		129,468		-		137,309

Cash Flows From Investing Activities:
Sales, maturities and repayments of:
Available-for-sale fixed maturity securities		9,570		60		85		-		9,715
Trading fixed maturity securities		170,164		28,748		14,594		-		213,506
Mortgage loans		59,542		2,640		-		-		62,182
Other invested assets		206,907		1,595		-		-		208,502
Purchases of:								-
Available-for-sale fixed maturity securities		(925)		-		-		-		(925)
Trading fixed maturity securities		(19,163)		-		(552)		-		(19,715)
Mortgage loans		(26,113)		-		(5,533)		-		(31,646)
Real estate		(399)		-		(15)		-		(414)
Other invested assets		(14,925)		(15)		-		-		(14,940)
Net change in other investments		(59,107)		(1,903)		-		-		(61,010)
Net change in policy loans		3,711		3		670		-		4,384
Net change in short-term investments		(428,582)		(15,015)		10,700		-		(432,897)

Net cash (used in) provided by investing activities	$	(99,320)	$	16,113	$	19,949	$	-	$	(63,258)

Continued on next page

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

13. CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)

Condensed Consolidating Statements of Cash Flow (continued)

For the three-month period ended March 31, 2009

	SLUS as Parent		SLNY		Other Subs		Elimination		Consolidated Company

Cash Flows From Financing Activities:
Additions to contractholder deposit funds	$	620,364	$	106,564	$	13,470	$	-	$	740,398
Withdrawals from contractholder deposit funds		(651,886)		(66,169)		(2,144)		-		(720,199)
Additional capital contributed to subsidiaries		(45,551)		-		-		45,551		-
Capital contribution from Parent		623,652		-		45,551		(45,551)		623,652
Debt proceeds		-		-		50,000		-		50,000
Other, net		(18,280)		(4,325)		-		-		(22,605)
								-
Net cash provided by financing activities		528,299		36,070		106,877		-		671,246

Net change in cash and cash equivalents		571,694		(82,691)		256,294		-		745,297

Cash and cash equivalents, beginning of period		733,518		261,989		29,161		-		1,024,668

Cash and cash equivalents, end of period	$	1,305,212	$	179,298	$	285,455	$	-	$	1,769,965

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Item 2. Management’s Discussion and Analysis of Financial Position and Results of Operations.

Pursuant to General Instruction H(2)(a) of Form 10-Q, the registrant, Sun Life Assurance Company of Canada (U.S.) (the “Company”), elects to omit the Management’s Discussion and Analysis of Financial Position and Results of Operations. Below is an analysis of the Company’s results of operations that explains material changes in the Condensed Consolidated Statements of Operations between the three-month periods ended March 31, 2010 and March 31, 2009.

Cautionary Statement

This Form 10-Q may include forward-looking statements by the Company under the Private Securities Litigation Reform Act of 1995. These statements are not matters of historical fact; they relate to such topics as future product sales, volume growth, market share, market and interest rate risk and financial goals. It is important to understand that these forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those that the statements anticipate, including but not limited to those set forth in Part I, Item IA, Risk Factors, in the Company's annual report on Form 10-K for the year ended December 31, 2009.

CRITICAL ACCOUNTING POLICIES

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

The Company has identified the following estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability: deferred policy acquisition costs (“DAC”), the value of business acquired (“VOBA”), the value of customer renewals acquired (“VOCRA”), the fair value of financial instruments, policy liabilities and accruals, other-than-temporary impairments of investments, goodwill, allowance for loan loss and income taxes. In developing these estimates, management makes subjective and complex judgments that are inherently uncertain and subject to material change as facts and circumstances develop. Although variability is inherent in these estimates, management believes the amounts provided are appropriate based upon the facts available upon compilation of the financial statements. For discussion of the Company’s critical accounting estimates, see Management’s Discussion and Analysis of Financial Position and Result of Operations in the Company’s annual report on Form 10-K for the year ended December 31, 2009.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULTS OF OPERATIONS

Three-month period ended March 31, 2010 compared to the three-month period ended March 31, 2009:

Net Income

The Company’s net income was $111.7 million and $49.6 million for the three-month periods ended March 31, 2010 and 2009, respectively. The significant changes are described below.

Discontinued Operations

On December 31, 2009, the Company paid a dividend of all of the issued and outstanding common stock of the Company’s wholly-owned subsidiary, Sun Life Financial (U.S.) Reinsurance Company (“Sun Life Vermont”), to Sun Life of Canada (U.S.) Holdings, Inc. (the “Parent”). As a result of this transaction, Sun Life Vermont is no longer the Company’s wholly-owned subsidiary and is not included in the Company’s condensed consolidated balance sheets at March 31, 2010 and December 31, 2009, and statement of operation for the three-month period ended March 31, 2010. In addition, Sun Life Vermont’s net loss for the three-month period ended March 31, 2009 is separately presented as a loss from discontinued operations. The following table provides a summary of operations of Sun Life Vermont for the three-month period ended March 31 (in 000’s):

	2009

Total revenues	$	(151,284)
Total benefits and expenses		(4,380)
Loss before income taxes expense		(146,904)

Net loss	$	(91,662)

Continuing Operations

The significant changes in the Company’s statement of operations during the three-month period ending March 31, 2010 and 2009, respectively, excluding Sun Life Vermont are described below:

REVENUES

Total revenues were $557.5 million and $380.3 million for the three-month periods ended March 31, 2010 and 2009, respectively. The increase of $177.2 million was primarily due to the following:

Premium and annuity considerations - were $35.1 million and $32.5 million for the three-month periods ended March 31, 2010 and 2009, respectively. The $2.6 million change was primarily attributable to an increase in annuity considerations.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULTS OF OPERATIONS (CONTINUED)

Net investment income - was $443.8 million and $143.7 million for the three-month periods ended March 31, 2010 and 2009, respectively. Investment income, excluding the mark-to-market of the trading portfolio, partnership income and ceded investment income, was $196.2 million and $201.6 million for the three-month periods ended March 31, 2010 and 2009, respectively. The decrease of $5.4 million during 2010, as compared to 2009, was the result of a lower average investment yield which decreased investment income by $6.4 million, offset by an increase in average invested assets, which increased investment income by $1.0 million.

The change in investment income related to the mark-to-market of the trading portfolio was $300.2 million. The Company earned $270.3 million of investment income during the three-month period ended March 31, 2010 as compared to a $(29.9) million investment loss during the three-month period ended March 31, 2009, related to changes in the market value of the trading portfolio in the respective periods. The market value of the Company’s trading portfolio increased during the three-month period ended March 31, 2010, due to significant tightening of credit spreads with greater improvement in market conditions. Credit spreads widened slightly during the three-month period ended March 31, 2009, which resulted in a decrease in the market value of the Company’s trading portfolio. The $300.2 million change in the trading portfolio was partially offset by a $4.0 million decrease in the fair value of limited partnership investments.

Investment income on funds withheld reinsurance portfolios is included as a component of net investment income in the Company’s condensed consolidated statements of operations. The Company ceded net investment income of $21.4 million and $30.7 million for the three-month periods ended March 31, 2010 and 2009, respectively, related to the funds withheld reinsurance agreements between the Company and certain of its affiliates related to the Company’s single premium whole life (“SPWL”) and certain universal life (“UL”) policies.

Net derivative (loss) income - was $(41.5) million and $129.8 million for the three-month periods ended March 31, 2010 and 2009, respectively. The Company’s realized and unrealized gains and losses by derivative type for the three-month periods ended March 31 consisted of the following (in 000’s):

	2010	2009

Interest rate contracts	$ (42,444)	$ 67,966
Foreign currency contracts	(3,459)	4,662
Equity contracts	(5,229)	7,706
Credit contracts	(263)	2,923
Futures	(71,775)	38,250
Embedded derivatives	81,720	8,339
Net derivative (loss) income	$ (41,450)	$ 129,846

The $(171.3) million change in net derivative (loss) income in the three-month period ended March 31, 2010, as compared to the same period in 2009, was primarily due to net changes in net unrealized (loss) income of $(134.7) million related to swap contracts and $(110.0) million related to futures contracts. These changes were partially offset by a $73.4 million change in net unrealized gain related to embedded derivatives.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULTS OF OPERATIONS (CONTINUED)

Net derivative (loss) income (continued)

The $(134.7) million change in net derivative (loss) income related to swap contracts, was primarily due to interest rate swaps. Changes in the fair value of interest rate swaps result from changes in notional amounts, duration and overall swap curve. The decrease in the fair value of interest rate swap agreements for the three-month period ended March 31, 2010, as compared to the three-month period ended March 31, 2009, was primarily a result of a change in the applicable interest rate.

The $110.0 million change in net derivative (loss) income related to futures contracts for the three-month periods ending March 31, 2010 and 2009 was primarily related to the Company’s short exposure to the change in the equity market. During the year ended December 31, 2008, the Company added short future positions to its derivative instruments portfolio to hedge against potential adverse movements in the equity markets.

The $73.4 million increase in embedded derivative income during the three-month period ended March 31, 2010, as compared to the three-month period ended March 31, 2009, was primarily due to a decrease in the fair value liability for guaranteed minimum accumulation benefits (“GMAB”) and guaranteed minimum withdrawal benefits (“GMWB”) on certain of the Company’s variable annuity products. The decrease in the liability for GMAB and GMWB resulted from a change in projected benefits related to improvements in the equity markets.

Net realized investment gains (losses), excluding impairment losses on available-for-sale securities - were $5.2 million and $(1.9) million for the three-month periods ended March 31, 2010 and 2009, respectively. The $5.2 million in gains during the three-month period ended March 31, 2010 were primarily related to the sale of available-for-sale fixed maturity securities. The $1.9 million in losses during the three-month period ended March 31, 2009 was primarily related to impairments on the Company’s mortgage loan asset.

Fees and other income – were $115.8 million and $76.2 million for the three-month periods ended March 31, 2010 and 2009, respectively. Fees and other income consist primarily of mortality and expense charges, rider fees, surrender charges and other income. Mortality and expense charges and rider fees are based on the market values of the assets in the separate accounts supporting the contract. Mortality and expense charges and rider fees combined were $88.0 million and $59.3 million for the three-month periods ended March 31, 2010 and 2009, respectively. Variable product fees represented 1.48% and 1.25% of the average variable annuity separate account balances for the three-month periods ended March 31, 2010 and 2009, respectively. Average separate account assets were $23.8 billion and $20.2 billion for the three-month periods ended March 31, 2010 and 2009, respectively.

Surrender charges represent revenues earned on the early withdrawal of fixed, fixed index, variable annuity, UL and variable universal life (“VUL”) policyholder balances. Surrender charges on fixed, fixed index and variable annuities, UL and VUL surrenders generally are assessed at declining rates applied to policyholder surrenders during the first four to ten years of the contract. Total surrender charges were $4.3 million and $7.1 million for the three-month periods ended March 31, 2010 and 2009, respectively.

Other income represents fees charged for the cost of insurance, investment advisory services, asset participation fees and administrative service fees. Other income was $23.5 million and $9.8 million for the three-month periods ended March 31, 2010 and 2009, respectively. The $13.7 million increase in other income was primarily due to decreases in deferred unearned revenue and in ceded fee income.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULTS OF OPERATIONS (CONTINUED)

BENEFITS AND EXPENSES

Total benefits and expenses were $393.7 million and $166.4 million for the three-month periods ended March 31, 2010 and 2009, respectively. The increase of $227.3 million was primarily due to the following:

Interest credited - to policyholders was $89.4 million and $112.8 million for the three-month periods ended March 31, 2010 and 2009, respectively. The decrease of $23.4 million was primarily the result of a lower average crediting rate, decreasing interest credited by $15.3 million, partially offset by higher average policyholder balances, which increased interest credited by $1.2 million.

Interest expense - was $17.1 million and $12.1 million for the three-month periods ended March 31, 2010 and 2009, respectively. The $5.0 million increase was primarily due to an increase in interest expense related to unrecognized tax benefits during the three-month period ended March 31, 2010, as compared to the three-month period ended March 31, 2009.

Policyowner benefits - were $34.6 million and $102.0 million for the three-month periods ended March 31, 2010 and 2009, respectively. The $67.4 million decrease in 2010 as compared to 2009 was primarily due to a $33.4 million decrease in reserves, a $27.9 million decrease in death benefits, a $7.1 million decrease in annuity payments and a $1.1 million decrease in other benefits partially offset by a $2.1 million increase in health benefits. The decrease in reserves was mainly attributable to a decrease in reserves for guaranteed minimum death benefits (“GMDB”) on variable annuity products. The decrease in GMDB reserves represents a decrease in the difference between guaranteed benefits and variable annuity account values. Variable annuity account value increases were driven primarily by improvement in the equity markets during the three-month period ended March 31, 2010 as compared to the three-month period ended March 31, 2009.

Other operating expenses - were $80.9 million and $46.9 million for the three-month periods ended March 31, 2010 and 2009, respectively. The $34.0 million change in 2010 as compared to 2009 was primarily due to a $16.0 million increase in non-deferrable commission expense related to an increase in the sale of certain annuity products and a $7.3 million decrease in other operating expenses.

Amortization of DAC - relates to the costs of acquiring new business, which vary with and are primarily related to the production of new business. Such acquisition costs include commissions, costs of policy issuance and underwriting and selling expenses. Amortization expense was $173.5 million and $(123.2) million for the three-month periods ended March 31, 2010 and 2009, respectively. The $296.7 million change in amortization expense during the three-month period ended March 31, 2010, as compared to the three-month period ended March 31, 2009, was attributable to a $309.0 million change in current period amortization expense and interest on the DAC asset, offset by $12.3 million decrease in expense, related to increases in estimated gross profits.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULTS OF OPERATIONS (CONTINUED)

Amortization of DAC (continued)

The $309.0 million increase in current period amortization expense and interest was primarily due to improvement in actual gross profits in 2010 relative to 2009. The improvement in actual gross profits primarily related to changes in the liabilities held for guaranteed minimum benefits on certain variable annuity products and changes in the fair value of fixed maturity investments during the periods. At March 31, 2009, DAC assets for certain fixed and fixed annuity products were capped at historical accumulated deferrals, plus interest. The Company tests its DAC asset for loss recognition expense on a quarterly basis. Amortization expense for the three-month periods ended March 31, 2010 and 2009 includes an expense of $14.5 million and $12.3 million, respectively, due to loss recognition expense recorded for certain annuity products.

The $12.3 million decrease in current period amortization expense related to increases in estimated gross profits was primarily driven by updates to profitability projections due to actual changes to in-force policies and assumption changes primarily related to variable annuity products.

Amortization of VOBA and VOCRA - relates to the actuarially-determined value of in-force business from the Company’s acquisition of Keyport Life Insurance Company (“Keyport”) on November 1, 2001 and at May 31, 2007, the effective date that the Company’s subsidiary, Sun Life Insurance and Annuity Company of New York (“SLNY”) entered into agreements with Sun Life and Health Insurance Company (U.S.) (“SLHIC”), an affiliate, pursuant to which the existing and future New York issued business of SLHIC was transferred to SLNY (collectively the “SLHIC to SLNY asset transfer”). This amount is amortized in proportion to the projected emergence of profits or premium income over the estimated lives of the contracts. Amortization was $(1.8) million and $15.8 million for the three-month periods ended March 31, 2010 and 2009, respectively. The change was primarily due to adjustments related to a methodology change in the calculation of VOBA assets for certain fixed annuity products during the three-month period ended March 31, 2009.

Income tax expense (benefit) - was $52.1 million and $72.7 million for the three-month periods ended March 31, 2010 and 2009, respectively. The effective tax rates for the same periods were 31.8% and 34.0%, respectively. The effective tax rate for the three-month period ended March 31, 2010 differs from the U.S. federal statutory tax rate of 35% primarily due to tax benefits from the separate account dividends received deduction and tax credits. The effective tax rate for the three-month period ended March 31, 2009 differs from the U.S. federal statutory tax rate of 35% primarily due to tax benefits from the separate account dividends received deduction and tax credits, partially offset by an increase in the valuation allowance against deferred tax assets for investment losses.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULTS OF OPERATIONS (CONTINUED)

Results of Operations by Segment

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

The following provides a summary of net income (loss) from operations by segment, excluding Sun Life Vermont.

Wealth Management Segment

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

The segment’s principal products are described below:

Variable Annuities - Variable annuities offer a selection of underlying investment alternatives that may satisfy a variety of policyholder risk/return objectives. Under a variable annuity, the policyholder has the opportunity to select separate account investment options (consisting of underlying mutual funds), which pass the investment risk directly to the policyholder in return for the potential of higher returns. Variable annuities also include guaranteed fixed interest options and benefits. The Company has several different variable annuity products that offer various separate account investment choices, depending on the product, and guaranteed fixed interest options.

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

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

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULTS OF OPERATIONS (CONTINUED)

Wealth Management Segment (continued

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

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

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

The Company issued floating rate funding agreements to its affiliates, Sun Life Financial Global Funding III, L.L.C., Sun Life Financial Global Funding II, L.L.C., and Sun Life Financial Global Funding, L.L.C. The impact of these agreements is described in Note 2 of the Company’s condensed consolidated financial statements presented in Part I, Item I of this quarterly report on Form 10-Q.

Other - The Wealth Management Segment manages a closed block of SPWL insurance policies, a retirement-oriented tax-advantaged life insurance product. The Company discontinued sales of the SPWL product in response to certain tax law changes in the 1980s. The Company had SPWL policyholder balances of $1.5 billion at March 31, 2010 and December 31, 2009, respectively. This entire block of business is reinsured on a funds-withheld, coinsurance basis with Sun Life Assurance Company of Canada (“SLOC”), an affiliate.

The Company markets its annuity products through an affiliated wholesale distribution organization, Sun Life Financial Distributors, Inc. (“SLFD”), and through a variety of unaffiliated retail and wholesale organizations, including securities brokers, financial institutions, insurance agents and financial advisers.

On September 6, 2006, the Company entered into an agreement with Credit and Repackaged Securities Limited Series 2006-10 Trust (the “CARS Trust”), whereby the Company is the sole beneficiary of the CARS Trust. The impact of this agreement on the Company’s financial statements is described in Note 1 of the Company’s condensed consolidated financial statements included in Part I, Item I of this quarterly report on Form 10-Q.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

Wealth Management Segment (continued)

The following is a summary of operations for the Wealth Management Segment for the three-month periods ended March 31 (in 000’s):

	2010		2009

Total revenues	$	542,125	$	338,430
Total benefits and expenses		337,465		118,985
Income before income tax expense		204,660		219,445

Net income	$	138,135	$	147,863

Pre-tax income was $204.7 million and $219.4 million for the three-month periods ended March 31, 2010 and 2009, respectively. The significant changes are described below.

Total revenues were $542.1 million and $338.4 million for the three-month periods ended March 31, 2010 and 2009, respectively. The $203.7 million increase was primarily due to increases of $315.0 million in net investment income, $28.9 million in fee and other income and $3.7 million in net realized investment income. These favorable results were offset by a $147.6 million decrease in net derivative income.

The increase of $315.0 million in net investment income resulted primarily from a $295.2 million increase in the fair market value of securities in the trading portfolio, primarily due to improvement in the market conditions in the three-month period ended March 31, 2010, as compared to three-month period ended March 31, 2009. The increase in net investment income was also due a $24.0 million increase in ceded investment income related to the reinsurance of the SPWL policies to SLOC. The increases were offset by a decrease in net investment income related to lower average investment yields in 2010, as compared to 2009.

The $28.9 million increase in fee and other income was primarily due to decreases in mortality and expense charges which related to an increase in the average variable annuity separate account balances during the three-month period ended March 31, 2010, as compared to the three-month period ended March 31, 2009.

The $147.6 million change in net derivative income in 2010, as compared to 2009, primarily related to a decrease in the fair value of equity futures, which was negatively impacted by the improvement in the equity markets, changes in the fair value of interest rate swap agreements, as well as by increases related to net interest expense on interest rate swaps. The decrease was offset by an increase in income related to a decrease in the fair value of the embedded derivative liabilities, primarily due to improvement in the equity markets during the three-month period ended March 31, 2010, as compared to the three-month period ended March 31, 2009.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULT OF OPERATIONS (CONTINUED)

Wealth Management Segment (continued)

Total benefits and expenses were $337.5 million and $119.0 million for the three-month periods ended March 31, 2010 and 2009, respectively. The increase of $218.5 million was primarily due to a $277.0 million increase in DAC and VOBA amortization expense and a $30.2 million increase in other operating expenses. The increase in benefits and expenses was offset by decreases of $71.8 million and $23.7 million related to policyowner benefits and interest credited, respectively.

The $277.0 million increase in DAC and VOBA amortization was attributable to a $310.4 million increase in current period amortization expense and interest on the DAC asset, offset by $33.6 million decrease in expenses related to changes in estimated gross profits. The $30.2 million change in other operating expenses was primarily due to an increase in non-deferrable commission expense which was attributable to an increase in sales in certain variable annuity products.

The $71.8 million decrease in policyowner benefits for the three-month period ended March 31, 2010, as compared to 2009, was primarily due to decreases of $34.3 million in reserves, $29.6 million in death benefits paid and $7.1 million in annuity payments. The decrease in reserves was mainly attributable to reserves for GMDB on variable annuity products. The $23.7 decrease in interest credited was primarily the result of a lower average crediting rate.

Individual Protection Segment

The Individual Protection Segment sells individual UL and variable life insurance products, including VUL products marketed to individuals, corporate-owned life insurance (“COLI”) and bank owned life insurance (“BOLI”). UL products allow for flexible premiums and feature an investment return to policyholders at a specified rate declared by the Company. VUL products allow for flexible premiums and variable rates of investment return; however, the policyholder directs how the cash value is invested and bears the investment risk.

In this business segment, the Company maintains funds withheld reinsurance agreements with affiliates. Pursuant to a reinsurance agreement with Sun Life Reinsurance (Barbados) No. 3 Corp. (“BarbCo 3”), an affiliate, the Company has ceded all risks associated with certain in-force VUL policies. In addition, the Company’s subsidiary, SLNY, has a reinsurance agreement with SLOC under which SLOC funds AXXX reserves attributable to certain UL policies sold by SLNY. Further detail on these agreements are disclosed in Notes 1 and 7 of the Company’s condensed consolidated financial statements, included in Part I, Item I of this quarterly report on Form 10-Q.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULTS OF OPERATIONS (CONTINUED)

Individual Protection Segment (continued)

The following provides a summary of operations for the Individual Protection Segment, excluding the discontinued operations of Sun Life Vermont, for the years ended March 31 (in 000’s):

	2010		2009

Total revenues	$	15,226	$	12,515
Total benefits and expenses		14,215		14,221
Income (loss) before income tax expense (benefit)		1,011		(1,706)

Net income (loss)	$	711	$	(4,941)

Total revenues were $15.2 million and $12.5 million for the three-month periods ended March 31, 2010 and 2009, respectively. The $2.7 million increase in total revenues primarily resulted from a decrease of $8.9 million in embedded derivative income, offset by increases in net investment income, and fee and other income of $3.1 million, and $8.0 million, respectively.

The decrease of $8.9 million in embedded derivative income resulted from an increase in the embedded derivative liabilities associated with the segment’s reinsurance agreements with affiliates. The increase in the embedded derivative liabilities was due primarily to the recovery in fair value of funds-withheld assets.

The increase of $3.1 million in net investment income resulted primarily from an increase of $5.0 million in the fair value of securities in the trading portfolio, offset by a $0.9 million decrease in investment income related to the segment’s ceding of investment income, and a $1.2 million decrease in interest income. The $5.0 million increase in the fair value of securities in the trading portfolio resulted from the continued tightening of credit spreads.

The increase of $8.0 million in fee and other income resulted primarily from a favorable decrease in the deferrals of unearned revenue by $4.3 million, and a favorable decrease in the ceding of fee income by $2.9 million.

Total benefits and expenses were $14.2 million for both of the three-month periods ended March 31, 2010 and 2009. Although benefits and expenses remained steady overall, the segment did have an increase in DAC amortization of $2.6 million, offset by a decrease in other operating expenses of $3.2 million. The increase in DAC amortization resulted from improvements in actual gross profits.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULTS OF OPERATIONS (CONTINUED)

Group Protection Segment

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

The following provides a summary of operations for the Group Protection Segment for the three-month periods ended March 31 (in 000’s):

	2010	2009
Total revenues	$ 32,261	$ 33,390
Total benefits and expenses	31,148	26,891
Income before income tax expense	1,113	6,499

Net income	$ 723	$ 4,224

The Group Protection Segment had pretax income of $1.1 million and $6.5 million for the three-month periods ended March 31, 2010 and 2009, respectively. Total revenues for the three-month period ended March 31, 2010 decreased by $1.1 million in comparison to the three-month period ended March 31, 2009. The decrease in revenues resulted primarily from a decrease in premiums of $1.2 million, driven primarily by a decrease of in-force group life business.

Total benefits and expenses in 2010 increased by $4.3 million as compared to 2009. The increase in benefits and expenses resulted primarily from an increase in policyowner benefits due to increases in health and other benefits in group stop loss, group disability, and group life of $2.0 million, $1.4 million and $0.9 million, respectively. These increases resulted from unfavorable claims experience during the three-month period ended March 31, 2010.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

RESULTS OF OPERATIONS (CONTINUED)

Corporate Segment

The Corporate Segment consists of the unallocated capital of the Company, its debt financing and items not otherwise attributable to the other segments. The Company maintains the Corporate Segment to provide for the capital needs of the three operating segments and to engage in other financing related activities. Net investment income is allocated based on segmented assets, including allocated capital, by line of business. Allocations of operating expenses among segments are made using both standard rates and actual expenses incurred.

The following provides a summary of operations for the Corporate Segment for the three-month periods ended

March 31 (in 000’s):

	2010	2009
Total revenues	$ (32,136)	$ (3,988)
Total benefits and expenses	10,874	6,271
Loss before income tax benefit	(43,010)	(10,259)

Net loss	$ (27,918)	$ (5,870)

The Corporate Segment had a pre-tax loss of $43.0 million and $10.3 million for the three-month periods ended March 31, 2010 and 2009, respectively. The $32.7 million decrease in pre-tax income was primarily attributable to a decrease in net investment income of $18.0 million and a decrease in derivative income of $14.7 million.

The decrease in net investment income of $18.0 million resulted primarily from an increase in the allocation of net investment income to the three operating segments, decreasing net investment income by $22.5 million and lower earnings related to limited partnership investments income which was decreased by $3.1 million. These decreases were offset by an increase of $7.3 million in interest income from available-for-sale fixed maturity securities.

The decrease in derivative income of $14.7 million was primarily related to the decrease in fair value of interest rate swap agreements as a result of changes in the applicable interest rate and currency exchange rates.

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

(A Wholly-Owned Subsidiary of Sun Life of Canada (U.S.) Holdings, Inc.)

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Omitted pursuant to Instruction H(2)(c) of Form 10-Q.

Item 4. Controls and Procedures.

Management's Report on Internal Control over Financial Reporting

The Company's management, including the Company's principal executive officer and principal financial officer, have evaluated the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and concluded that they were effective as of the end of the period covered by this report based on such evaluation. There has been no change in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) that occurred during the quarter ended March 31, 2010 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings.

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

Item 1A. Risk Factors.

For discussion of the Company's risk factors, see Part I, Item IA, Risk Factors, in the Company's annual report on Form 10-K for the year ended December 31, 2009.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Omitted pursuant to Instruction H(2)(b) of Form 10-Q.

Item 3. Defaults Upon Senior Securities.

Omitted pursuant to Instruction H(2)(b) of Form 10-Q.

Item 4. (Removed and Reserved).

Item 5. Other Information.

a) On May 5, 2010, the Company received regulatory approval of its Administrative Services Agreement with Sun Life Financial (U.S.) Services Company, Inc., an affiliate, which was effective December 31, 2009. Pursuant to the agreement, Sun Life Services provides human resources services (e.g., recruiting and maintaining appropriately trained and qualified personnel and equipment necessary for the performance of actuarial, financial, legal, administrative and other operational support functions) to the Company, and the Company reimburses Sun Life Services for the cost of such services, plus, with respect to certain of those services, pays an arms-length based profit margin agreed upon by the parties. This description is qualified by reference to the actual form of the Administrative Services Agreement, which is Exhibit 10.1 to this quarterly report on Form 10-Q.

(b) Not applicable.

Item 6. Exhibits.

Index to exhibits:

Exhibit No.

10.1	Administrative Services Agreement, effective as of 11:59 p.m. Eastern Standard Time on December 31, 2009, by and between Sun Life Assurance Company of Canada (U.S.) and Sun Life Financial (U.S.) Services Company, Inc.

31.1	Certification pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2	Certification pursuant to Rule 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2	Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

Pursuant to the requirements 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 Assurance Company of Canada (U.S.)

(Registrant)

May 14, 2010	/s/ Westley V. Thompson
Date	Westley V. Thompson, President, SLF U.S.
	(Principal Executive Officer)

May 14, 2010	/s/ Douglas C. Miller
Date	Douglas C. Miller, Vice President and Controller
	(Chief Accounting Officer)

SUN LIFE ASSURANCE CO OF CANADA US - FORM 10-Q - May 14, 2010

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SUN LIFE ASSURANCE CO OF CANADA US Reports