Sun Life Financial Reports Third Quarter 2017 Results

The information in this document is based on the unaudited interim financial results of Sun Life Financial Inc. for the period ended September 30, 2017. Sun Life Financial Inc., its subsidiaries and, where applicable, its joint ventures and associates are collectively referred to as "the Company", "Sun Life Financial", "we", "our", and "us". Unless otherwise noted, all amounts are in Canadian dollars. Beginning in the first quarter of 2017, we stopped reporting operating net income and its related measures, operating earnings per share ("EPS") and operating return on equity ("ROE"). The adjustments previously used to derive operating net income will continue to be used to derive underlying net income.

TORONTO, Nov. 8, 2017 /CNW/ - Sun Life Financial Inc. (TSX: SLF) (NYSE: SLF) today announced its results for the third quarter ended September 30, 2017. Third quarter reported net income was $817 million and underlying net income⁽¹⁾ was $643 million.

• Minimum Continuing Capital and Surplus Requirements ("MCCSR") ratio for Sun Life Assurance Company of Canada of 232%. The MCCSR ratio for Sun Life Financial Inc. was 252%, which includes cash and other liquid assets of $1.5 billion for Sun Life Financial Inc. and its wholly-owned holding companies⁽³⁾
• Life and health sales⁽¹⁾ were $599 million in the third quarter of 2017, compared to $661 million in the same period last year. Wealth sales⁽¹⁾ were $35.8 billion in the third quarter of 2017, compared to $35.2 billion in the third quarter of 2016
• Global assets under management of $934 billion compared to $903 billion as at December 31, 2016
• An increase in the common share dividend declared of $0.02 per share, to $0.455 per share for the quarter

"Our third quarter was defined by strong earnings and good progress in all of our four business pillars," said Dean Connor, President & CEO, Sun Life Financial. "We are also pleased to announce an increase in our common share dividend by 2 cents. During the year, we've increased our dividend by 8%, a signal of our continued growth prospects, strong capital position, and commitment to meeting our medium-term financial objectives."

"This quarter showcased many examples of how we're bringing our Client-driven strategy to life," said Connor. "In Canada, Clients can now buy life insurance online in just minutes with Sun Life GO; and, we introduced Ella, an interactive digital coach that helps Clients maximize their benefits and pension plans," Connor added. "In the U.S., we enhanced our online capabilities to improve the benefit enrollment experience for plan members, and in Asia, we improved our new Client onboarding process."

Financial and Operational Highlights

Our strategy is focused on four key pillars of growth, where we aim to be a leader in the markets in which we operate. We detail our continued progress in these pillars below.

A Leader in Insurance and Wealth Solutions in our Canadian home market

SLF Canada's reported net income was $340 million in the quarter, compared to $184 million in the same period last year, reflecting favourable market related impacts largely driven by interest rates and assumption changes and management actions. Underlying net income was $222 million, compared to $226 million in the same period last year, reflecting unfavourable morbidity experience partially offset by new business gains.

We had strong growth in sales in our group businesses, with Group Benefits sales of $130 million, up 23% and Group Retirement Services sales of $2.3 billion, up 53% from the third quarter of 2016. Following a strong first six months of the year, individual insurance sales moderated to $87 million, 15% below the same period a year ago. Individual wealth sales grew 5% year over year to $1.3 billion.

During the quarter, SLGI⁽¹⁾ announced the acquisition of Excel Funds Management Inc., a Canadian firm that specializes in the emerging markets asset class, that will add approximately $700 million in AUM. This acquisition complements SLGI's product offerings, and will support growth in our wealth businesses. The acquisition is expected to close by early 2018.

Advancement of our digital capabilities continued during the third quarter, including the launch of "Ella", a new interactive digital coach for our Clients. Ella is designed to enable Clients to achieve sustainable financial security and live healthier lives by getting the full value from their benefits and pension plans. We also launched an online insurance application process, Sun Life GO, which gives Canadians the flexibility to meet health and financial needs with convenient access to insurance coverage.

A Leader in U.S. Group Benefits and International high net worth solutions

SLF U.S.'s reported net income was $195 million, down 20% in local currency from the same quarter prior year, reflecting less favourable market related impacts primarily driven by interest rates and assumption changes and management actions. Underlying net income was $161 million, up 25% in local currency compared to the same quarter last year, reflecting improved underwriting experience in Group Benefits, as our pricing actions, investments in claims management and expense initiatives continue to improve profitability.

Group Benefit sales for the year were down 8% in local currency reflecting pricing discipline throughout the year, including in the quarter. In addition, sales in the quarter reflected fewer large case sales, and we achieved sales growth in the small-case and medium-case markets. International life sales are comparable to the same quarter last year, maintaining a leadership position in this market.

We made enhancements to our Group Benefits enrollment platform to provide new functionality, including the ability to enroll newly hired employees online and digital capabilities to enable a quicker more Client friendly enrollment experience in preparation for the fourth quarter, which is the largest sales and enrollment quarter of the year. In October, we launched the new Sun Life Dental Network^SM, the largest in the U.S. with approximately 125,000 unique providers⁽²⁾, marking another milestone in the integration of the acquired Group Benefits business. We also announced a new stop-loss distribution partnership with Pareto Captive Services to expand options for the growing U.S. self-insured health plan market.

A Leader in global Asset Management

SLF Asset Management's reported net income was $185 million and underlying net income was $204 million in the third quarter of 2017, reflecting a growth of 2% and 9% compared to the same period last year, respectively, and an increase in MFS's pre-tax operating profit margin ratio⁽¹⁾ to 41%, primarily driven by higher average net assets and favourable impacts from expenses and investment income.

SLF Asset Management ended the third quarter with $648 billion in assets under management consisting of $591 billion (US$474 billion) from MFS Investment Management ("MFS") and $57 billion from Sun Life Investment Management ("SLIM"). MFS net outflows of US$2.7 billion in the quarter were partially offset by SLIM net inflows of $1.5 billion. 

MFS long-term retail fund performance remained strong with 84%, 82% and 95% of MFS's U.S. retail mutual fund assets ranked in the top half of their Lipper categories based on three-, five-, and ten-year performance, respectively, as of September 30, 2017.

A Leader in Asia through Distribution Excellence in Higher Growth Markets

SLF Asia's reported net income was $93 million, compared to $92 million in the third quarter of 2016, reflecting growth in underlying net income offset by unfavourable market related impacts primarily driven by interest rates. Underlying net income was $90 million, compared to $80 million in the third quarter of 2016, reflecting continued growth in fee income business and higher level of gains from investments.

SLF Asia life and health sales were in line with the same quarter of the prior year, with growth across most markets offset by lower sales in Hong Kong and the impact of the movement of the Canadian dollar. Strong wealth sales in Asia of $3.6 billion were up 50% over the prior year, driven by continued growth in India and Philippines mutual funds.

During the quarter, Sun Life Financial Indonesia launched a waqf⁽²⁾ feature for Syariah life insurance products that enables Clients to plan for their financial future while helping them observe their religious beliefs and doing charity. Sun Life Financial Indonesia is the first life insurance company to offer this innovative solution in accordance with the National Sharia Council of the Indonesian Ulama Council and Indonesia Waqf Board.

About Sun Life Financial

Sun Life Financial is a leading international financial services organization providing a diverse range of insurance, wealth and asset management solutions to individuals and corporate Clients. Sun Life Financial has operations in a number of markets worldwide, including Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China, Australia, Singapore, Vietnam, Malaysia and Bermuda. As of September 30, 2017, Sun Life Financial had total assets under management of $934 billion. For more information please visit www.sunlife.com.

Sun Life Financial Inc. trades on the Toronto (TSX), New York (NYSE) and Philippine (PSE) stock exchanges under the ticker symbol SLF.

A. How We Report Our Results

Sun Life Financial Inc. ("SLF Inc."), its subsidiaries and, where applicable, its joint ventures and associates are collectively referred to as "the Company", "Sun Life Financial", "we", "our", and "us". We manage our operations and report our financial results in five business segments: Sun Life Financial Canada ("SLF Canada"), Sun Life Financial United States ("SLF U.S."), Sun Life Financial Asset Management ("SLF Asset Management"), Sun Life Financial Asia ("SLF Asia"), and Corporate. Information concerning these segments is included in our annual and interim consolidated financial statements and accompanying notes ("Annual Consolidated Financial Statements" and "Interim Consolidated Financial Statements", respectively) and annual management's discussion and analysis ("MD&A"). We prepare our unaudited Interim Consolidated Financial Statements using International Financial Reporting Standards ("IFRS"), and in accordance with the International Accounting Standard ("IAS") 34 Interim Financial Reporting. Reported net income (loss) refers to Common shareholders' net income (loss) determined in accordance with IFRS.

The information in this document is in Canadian dollars unless otherwise noted.

1. Use of Non-IFRS Financial Measures
We report certain financial information using non-IFRS financial measures, as we believe that these measures provide information that is useful to investors in understanding our performance and facilitate a comparison of our quarterly and full year results from period to period. These non-IFRS financial measures do not have any standardized meaning and may not be comparable with similar measures used by other companies. For certain non-IFRS financial measures, there are no directly comparable amounts under IFRS. These non-IFRS financial measures should not be viewed as alternatives to measures of financial performance determined in accordance with IFRS. Additional information concerning these non-IFRS financial measures and reconciliations to the closest IFRS measures are available in section M - Non-IFRS Financial Measures in this document. Non-IFRS Financial Measures and reconciliations are also included in our annual and interim MD&A and the Supplementary Financial Information packages that are available on www.sunlife.com under Investors – Financial results & reports.

2. Forward-looking Statements
Certain statements in this document are forward-looking statements within the meaning of certain securities laws, including the "safe harbour" provisions of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities legislation. Additional information concerning forward-looking statements and important risk factors that could cause our assumptions, estimates, expectations and projections to be inaccurate and our actual results or events to differ materially from those expressed in or implied by such forward-looking statements can be found in section N - Forward-looking Statements in this document.

3. Additional Information
Additional information about SLF Inc. can be found in our Annual and Interim Consolidated Financial Statements, annual and interim MD&A and Annual Information Form ("AIF"). These documents are filed with securities regulators in Canada and are available at www.sedar.com. SLF Inc.'s Annual Consolidated Financial Statements, annual MD&A and AIF are filed with the United States Securities and Exchange Commission ("SEC") in SLF Inc.'s annual report on Form 40-F and SLF Inc.'s interim MD&As and Interim Consolidated Financial Statements are furnished to the SEC on Form 6-Ks and are available at www.sec.gov.

B. Financial Summary

C. Profitability

The following table reconciles our reported net income and underlying net income. The table also sets out the impact that other notable items had on our reported net income and underlying net income. All factors discussed in this document that impact our underlying net income are also applicable to reported net income.

Q3 2017 vs. Q3 2016

Our reported net income was $817 million in the third quarter of 2017, compared to $737 million in the third quarter of 2016. Underlying net income was $643 million in the third quarter of 2017, compared to $639 million in the third quarter of 2016. Reported net income reflected favourable market related activity primarily driven by interest rates and changes in the fair values of real estate, and favourable impact of assumption changes and management actions, partially offset by the unfavourable impact of the movement of the Canadian dollar and other adjustments compared to the third quarter of 2016. Underlying net income reflected favourable mortality experience, growth in fee income on our wealth businesses and new business gains, partially offset by a lower level of gains from investing activity.

1.    Market related impacts
Market related impacts in the third quarter of 2017 compared to the third quarter of 2016 reflected favourable interest rate and credit spread movements and changes in fair values of real estate. See section M - Non-IFRS Financial Measures in this document for a breakdown of the components of market related impacts.

2.    Assumption changes and management actions
Due to the long-term nature of our business, we make certain judgments involving assumptions and estimates to value our obligations to policyholders. The valuation of these obligations is recorded in our financial statements as insurance contract liabilities and investment contract liabilities and requires us to make assumptions about equity market performance, interest rates, asset default, mortality and morbidity rates, lapses and other policyholder behaviour, expenses and inflation and other factors over the life of our products. We review assumptions each year, generally in the third quarter, and revise these assumptions if appropriate. We consider our actual experience in current and past periods relative to our assumptions as part of our annual review.

During the third quarter of 2017, the net impact of assumption changes and management actions resulted in an increase of $103 million to reported net income, compared to an increase of $54 million in the third quarter of 2016.

Assumption changes and management actions by type
The following table sets out the impact of assumption changes and management actions on our net income in the third quarter of 2017.

3.    Other adjustments
Other adjustments which decreased reported net income by $42 million in the third quarter of 2017 were comprised of Fair value adjustments on MFS's share-based payment awards of $19 million, driven largely by the increase in valuation of MFS; Acquisition, integration and restructuring amounts of $17 million, driven largely by the impact of integration costs related primarily to the U.S. employee benefits business acquired in 2016; and $6 million related to Certain hedges in SLF Canada that do not qualify for hedge accounting. See section M - Non-IFRS Financial Measures in this document for a breakdown of the components of other adjustments.

4.    Experience related items
Experience related items in the third quarter of 2017 compared to the third quarter of 2016 reflected favourable mortality experience, driven by SLF U.S. and SLF U.K., partially offset by a lower level of gains from investing activity on insurance contract liabilities.

5.    Income Taxes
In the third quarter of 2017, our effective income tax rates on reported net income and underlying net income⁽¹⁾ were 19.7% and 23.5%, respectively, compared to 18.3% and 22.2%, respectively, in the third quarter of 2016. Our statutory tax rate is normally reduced by various tax benefits, such as lower taxes on income subject to tax in foreign jurisdictions, a range of tax exempt investment income, and other sustainable tax benefits that are expected to decrease our effective tax rate to a range of 18% to 22%.

Our effective tax rate on reported net income for the third quarter is within our expected range. Our effective tax rate on underlying income is slightly above our expected range, and was impacted by earnings in jurisdictions with higher statutory income tax rates and adjustments due to the resolution of tax matters.

6.    Impact of Foreign Exchange Rates
During the third quarter of 2017, our reported net income and underlying net income decreased by $26 million and $22 million, respectively, as a result of the impact of the movement of the Canadian dollar in the third quarter of 2017 relative to the average exchange rates in the third quarter of 2016.

Q3 2017 vs. Q3 2016 (year-to-date)

Our reported net income was $1,942 million for the first nine months of 2017, compared to $1,757 million in the first nine months of 2016. Underlying net income was $1,905 million, compared to $1,775 million in the first nine months of 2016. Reported net income reflected the increased favourable impact of assumption changes and management actions and market related impacts, partially offset by the unfavourable impact of the movement of the Canadian dollar and other adjustments in the first nine months of 2017. Underlying net income in the first nine months of 2017, compared to the same period last year, reflected favourable mortality and morbidity experience, growth in fee income on our wealth businesses and new business gains, partially offset by a lower level of gains from investing activity and unfavourable lapse and other policyholder behaviour experience.

1.    Market related impacts
Market related impacts in the first nine months of 2017 compared to the first nine months of 2016 was primarily driven by favourable changes in fair values of real estate and less unfavourable interest rates movements. See section M - Non-IFRS Financial Measures in this document for a breakdown of the components of market related impacts.

2.   Assumption changes and management actions
Assumption changes and management actions were $115 million in the first nine months of 2017, compared to $35 million in the first nine months of 2016. Assumption changes and management actions were primarily driven by the impact of assumption changes and management actions in third quarter of 2017, discussed in the previous section Q3 2017 vs. Q3 2016. See section M - Non-IFRS Financial Measures in this document for more details including references to notable impacts in previous quarters.

3.   Other adjustments
Other adjustments in the first nine months of 2017 which decreased reported net income by $128 million were comprised of Fair value adjustments on MFS's share-based payment awards of $47 million, driven largely by the increase in valuation of MFS; Acquisition, integration and restructuring amounts of $63 million, driven largely by the impact of integration costs related primarily to the U.S. employee benefits business acquired in 2016; and $18 million related to Certain hedges in SLF Canada that do not qualify for hedge accounting.

4.   Experience related items
Experience related items in the first nine months of 2017 compared to the first nine months of 2016 reflected favourable mortality and morbidity experience. Experience related items also reflected a lower level of gains from investing activity on insurance contract liabilities and unfavourable lapse and other policyholder behaviour experience. Both periods had favourable credit experience and unfavourable expense experience.

5.   Income Taxes
For the first nine months of 2017, our effective tax rates on reported and underlying net income⁽¹⁾ were 14.1% and 20.1%, respectively, compared to 17.3% and 22.2%, respectively, for the first nine months of 2016. Our statutory tax rate is normally reduced by various tax benefits, such as lower taxes on income subject to tax in foreign jurisdictions, a range of tax exempt investment income, and other sustainable tax benefits that are expected to decrease our effective tax rate to a range of 18% to 22%.

Our reported effective tax rate for the first nine months of 2017 was most notably impacted by higher earnings in jurisdictions with lower statutory income tax rates and losses in jurisdictions with higher statutory income tax rates, in particular impacts arising from assumption changes and management actions in SLF U.S., as well as the finalization of prior years' tax filings, which have resulted in an unusually low effective tax rate on a reported basis during the first nine months of 2017. Our effective tax rate on an underlying basis is within our expected range.

6.   Impact of Foreign Exchange Rates
During the first nine months of 2017, our reported net income and underlying net income decreased by $41 million and $34 million, respectively, as a result of the impact of the movement of the Canadian dollar in the first nine months of 2017 relative to the average exchange rates in the first nine months of 2016.

Driving Client Strategy and Enhancing Business Processes

To advance our Client strategy and support our ongoing expense discipline, we will be taking actions to enhance business processes and organizational structures and capabilities. These actions balance our commitment to financial discipline with continued investments in enhanced service models, digital transformation and acceleration of various Client initiatives. As a result of these actions, we expect to take a restructuring charge of $40-$60 million ($30-$45 million after-tax), in the fourth quarter of 2017.

The actual restructuring charge in the fourth quarter of 2017 could differ from the Company's estimate. See Forward-looking Statements in section N. of this document.

D. Growth

1.    Sales

Total Company life and health sales were $599 million in the third quarter of 2017, compared to $661 million in the same period last year.

• SLF Canada life and health sales were $217 million in the third quarter of 2017, compared to $208 million in the third quarter of 2016 mainly due to higher sales in Group Benefits, partially offset by lower individual life insurance sales
• SLF U.S. life and health sales were $219 million in the third quarter of 2017, compared to $285 million in the third quarter of 2016, mainly reflecting lower employee benefits and stop-loss sales primarily due to fewer large case sales and the impact of currency
• SLF Asia life and health sales were $163 million in the third quarter of 2017, compared to $168 million in the third quarter of 2016, mainly attributable to the currency impact from the change in the Canadian dollar and lower sales in Hong Kong, partially offset by growth in most markets

Total Company wealth sales were $35.8 billion in the third quarter of 2017, compared to $35.2 billion in the third quarter of 2016.

• SLF Canada wealth sales were $3.6 billion in the third quarter of 2017, compared to $2.7 billion in the third quarter of 2016, largely reflecting higher sales in Group Retirement Services ("GRS") and individual wealth
• SLF Asia wealth sales were $3.6 billion in the third quarter of 2017, compared to $2.4 billion in the third quarter of 2016, primarily led by growth in the Philippines and India, as well as higher sales in Hong Kong, partially offset by lower sales in China and the currency impact from the change in the Canadian dollar
• SLF Asset Management gross sales were $28.6 billion in the third quarter of 2017, compared to $30.0 billion in the third quarter of 2016, largely attributable to lower mutual fund sales in MFS and the currency impact from the change in the Canadian dollar, partially offset by higher managed fund sales in MFS and increased fund sales from SLIM.

2.  Premiums and Deposits

Net premium revenue was $3.7 billion in the third quarter of 2017, compared to $3.9 billion in the third quarter of 2016. The decrease was primarily driven by decreases in Hong Kong in SLF Asia, Group Benefits in SLF U.S., GRS in SLF Canada and the currency impact from the change in the Canadian dollar, partially offset by higher premiums in In-force management in SLF U.S. due to the impact of recapturing certain reinsurance treaties, and Individual and Group Benefits in SLF Canada. Net premium revenue was $11.2 billion in the first nine months of 2017, compared to $10.6 billion in the same period of 2016. The increase was primarily driven by higher premiums in all business units in SLF Canada and SLF U.S., partially offset by decreases in Hong Kong in SLF Asia and the currency impact from the change in the Canadian dollar.

Segregated fund deposits were $2.2 billion in the third quarter of 2017, compared to $2.3 billion in the third quarter of 2016, primarily due to decreases in the Philippines in SLF Asia and the currency impact from the change in the Canadian dollar. Segregated fund deposits were $8.2 billion in the first nine months of 2017, compared to $7.9 billion for the same period last year. The increase was primarily driven by increases in GRS in SLF Canada and Indonesia in SLF Asia, partially offset by the currency impact from the change in the Canadian dollar and decrease in the Philippines in SLF Asia.

Sales of mutual funds were $20.7 billion in the third quarter of 2017, a decrease of $2.4 billion over the third quarter of 2016. The lower mutual fund sales largely reflected lower sales in MFS and the currency impact from the change in the Canadian dollar, partially offset by increased sales from the Philippines and India in SLF Asia. Sales of mutual funds were $66.2 billion for the first nine months of 2017, compared to $62.4 billion in the same period in 2016. The higher mutual fund sales was primarily driven by growth in India and the Philippines in SLF Asia, increased sales from MFS and SLGI in SLF Canada, partially offset by the currency impact from the change in the Canadian dollar.

Sales of managed funds were $11.7 billion in the third quarter of 2017, compared to $9.3 billion in the third quarter of 2016. The increased managed fund sales were primarily due to higher sales in MFS, SLIM and Hong Kong in SLF Asia, partially offset by the currency impact from the change in the Canadian dollar. Sales of managed funds were $32.9 billion for the first nine months of 2017, compared to $30.0 billion in the same period in 2016. The increased managed fund sales were primarily due to increases from SLIM as well as Hong Kong in SLF Asia, partially offset by the currency impact from the change in the Canadian dollar and lower sales in MFS.

ASO premium and deposit equivalents in the third quarter of 2017 and for the first nine months of 2017 were both up compared to the same periods last year. In both cases, the increase was attributable to increases in GRS and GB in SLF Canada, partially offset by decreases in Hong Kong in SLF Asia.

The currency impact for total premium and deposits for the third quarter of 2017 from the change in the Canadian dollar relative to average exchange rates in the third quarter of 2016 decreased total premiums and deposits by approximately $1.3 billion. The currency impact for total premium and deposits for the first nine months of 2017 from the change in the Canadian dollar relative to average exchange rates in the first nine months of 2016 decreased total premiums and deposits by approximately $1.1 billion.

3.  Assets Under Management
AUM consist of general funds, segregated funds, and other AUM. Other AUM includes mutual funds and managed funds, which include institutional and other third-party assets managed by the Company.

AUM were $933.6 billion as at September 30, 2017, compared to AUM of $903.3 billion as at December 31, 2016. The increase in AUM of $30.3 billion between December 31, 2016 and September 30, 2017 resulted primarily from:

E. Financial Strength

Our total capital consists of subordinated debt and other capital instruments, participating policyholders' equity, and total shareholders' equity which includes common shareholders' equity and preferred shareholders' equity. As at September 30, 2017, our total capital was $26.7 billion, compared to $26.9 billion as at December 31, 2016. The decrease in total capital was primarily due to the redemption of $800 million of subordinated debt detailed below, the payment of $792 million of dividends on common shares and unfavourable foreign currency translation impact of $890 million included in other comprehensive loss, partially offset by common shareholders' net income of $1,942 million.

The legal entity, SLF Inc. (the ultimate parent company), and its wholly-owned holding companies had $1,526 million in cash and other liquid assets as at September 30, 2017 ($1,616 million as at December 31, 2016). The decrease in liquid assets in these holding companies in the first nine months of 2017 was primarily attributable to the redemption of $800 million subordinated debt detailed below and the payment of shareholder dividends which was partially offset by cash generated from the businesses during the period. Liquid assets as noted above include cash and cash equivalents, short-term investments, and publicly traded securities.

On March 2, 2017, SLF Inc. redeemed all of its outstanding $800 million principal amount of Series 2012-1 Subordinated Unsecured 4.38% Fixed/Floating Debentures.

As at September 30, 2017, Sun Life Assurance's MCCSR ratio was 232%, compared to 226% as at December 31, 2016. The increase in Sun Life Assurance's MCCSR ratio over the period primarily resulted from the contribution of earnings net of dividends.

As at September 30, 2017, SLF Inc.'s MCCSR ratio was 252%, compared to 253% as at December 31, 2016. The primary difference between the MCCSR ratio of SLF Inc. and Sun Life Assurance relates to cash and liquid assets held at the holding company level of $1,526 million as discussed above and capital related to certain insurance subsidiaries held directly by SLF Inc.

Life Insurance Capital Adequacy Test
The Office of the Superintendent of Financial Institutions ("OSFI") will implement a revised regulatory capital framework in Canada effective January 1, 2018. The Life Insurance Capital Adequacy Test ("LICAT") Guideline will replace the MCCSR Guideline. The LICAT Guideline defines a new framework that is intended by OSFI to improve the overall quality of available capital, provide greater risk sensitivity, better measurement of certain risks and closer alignment of risk measures with the economics of the life insurance business. The new Guideline is not expected to significantly change the level of excess capital in the industry, however capital requirements by company may change. Results as measured under LICAT are fundamentally different than under MCCSR and will not be directly comparable to MCCSR.

OSFI released its LICAT Guideline in September, 2016. Since then OSFI and the industry have completed impact assessments of the guideline, including sensitivity testing and based on these assessments and testing OSFI released revisions to the Guideline on June 23, 2017 for public consultation. A final version of the Guideline is expected to be published by OSFI this fall. Sun Life Financial will continue to participate in further testing and dialogue with OSFI and industry participants during the assessment period and subsequent implementation.

We currently have a strong capital position under the MCCSR framework and expect that to continue under the LICAT framework.

Normal Course Issuer Bid
On August 14, 2017, SLF Inc. launched a normal course issuer bid under which it is authorized to purchase up to 11.5 million common shares between August 14, 2017 and August 13, 2018. During the third quarter of 2017, SLF Inc. purchased and cancelled approximately 1.8 million common shares at a total cost of $88 million.

F. Performance by Business Group

Information describing the business groups and their respective business units is included in our 2016 annual MD&A. All factors discussed in this document that impact our underlying net income are also applicable to reported net income.

1. SLF Canada

Profitability

Q3 2017 vs. Q3 2016
SLF Canada's reported net income was $340 million in the third quarter of 2017, compared to $184 million in the third quarter of 2016. Underlying net income in the third quarter of 2017 was $222 million, compared to $226 million in the third quarter of 2016.

Reported net income in the third quarter of 2017 compared to the third quarter of 2016 reflected favourable market related impacts primarily driven by interest rates, increases in the fair value of real estate, partially offset by less favourable equity markets. The impact of assumption changes and management actions in the third quarter of 2017 was primarily in Individual Insurance & Wealth. Underlying net income in the third quarter of 2017 compared to the same period last year reflected growth in fee income on our wealth businesses and strong new business gains in GRS and individual insurance, and improved expense experience, offset by lower investing activity gains on insurance contract liabilities and unfavourable morbidity experience in Group Benefits.

Q3 2017 vs. Q3 2016(year-to-date)
Reported net income was $791 million for the first nine months of 2017, compared to $538 million for the nine months ended September 30, 2016. Underlying net income was $717 million in the first nine months ended September 30, 2017, compared to $644 million in the same period last year.

Reported net income in the first nine months of 2017 compared to the first nine months of 2016 reflected favourable market related impacts driven by the impact of interest rate changes and increases in the fair value of real estate with partially offsetting impacts from less favourable equity markets and swap spreads. The impact of assumption changes and management actions in the first nine months of 2017 was primarily in Individual Insurance & Wealth. Underlying net income in the first nine months of 2017 compared to the first nine months of 2016 reflected strong new business gains in GRS and individual insurance, and favourable mortality experience in our individual wealth business and GRS. This was partially offset by lower gains from investing activity on insurance contract liabilities.

Growth

Q3 2017 vs. Q3 2016
SLF Canada life and health sales were $217 million in the third quarter of 2017, compared to $208 million in the third quarter of 2016. Individual insurance sales were 15% lower than the third quarter of last year at $87 million following a strong first six months of the year. Sales in Group Benefits of $130 million increased 23% compared to third quarter 2016, driven by a few large Client sales.

SLF Canada wealth sales were $3.6 billion in the third quarter of 2017, compared to $2.7 billion in the third quarter of 2016. Individual wealth sales of $1.3 billion were 5% above the same quarter of the prior year driven by continued growth in our wealth manufactured⁽¹⁾ products, including SLGI⁽²⁾ mutual funds and Sun GIF⁽³⁾ segregated funds. GRS sales of $2.3 billion were 53% ahead of the third quarter of 2016, due to increased renewal activity.

Q3 2017 vs. Q3 2016(year-to-date)
SLF Canada life and health sales were $898 million in the first nine months of 2017, compared to $642 million in the same period last year. Individual insurance sales of $331 million were up 22% over the same period in the prior year, driven by solid demand for the new product suite and the impact of third-party sales in the first quarter as a result of tax legislation changes. Sales in Group Benefits of $567 million increased 53% compared to third quarter 2016 driven by several large case sales.

SLF Canada wealth sales were $11.8 billion in the first nine months of 2017, compared to $8.5 billion in the same period last year. Individual wealth sales of $4.4 billion were up 13% in the first nine months of 2017 compared to the same period last year, driven by continued growth in our wealth manufactured⁽¹⁾ products, including SLGI⁽²⁾ mutual funds and Sun GIF⁽³⁾ segregated funds. GRS sales of $7.4 billion were 61% ahead of the first nine months in 2016, due to large case defined contribution sales, a large Defined Benefit Solutions sale, and increased renewal activity.

2. SLF U.S.

Profitability

Q3 2017 vs. Q3 2016
SLF U.S.'s reported net income was US$156 million ($195 million) in the third quarter of 2017, compared to US$194 million ($253 million) in the third quarter of 2016. Underlying net income was US$129 million ($161 million), compared to US$103 million ($135 million) in the third quarter of 2016. The impact from the movement of the Canadian dollar in the third quarter of 2017 relative to average exchange rates in the third quarter of 2016 decreased reported net income and underlying net income by $8 million and $6 million, respectively.

Reported net income in the third quarter of 2017 compared to the third quarter of 2016 reflected less favourable impact of market related impacts driven by interest rates. Assumption changes and management actions in the third quarter of 2017 had net favourable impacts in International and Group Benefits, and net unfavourable impacts in In-force Management. Acquisition, integration and restructuring amounts were consistent with the same quarter in prior year. Underlying net income in the third quarter of 2017 compared to the third quarter of 2016 reflected improved morbidity experience in stop-loss and favourable mortality experience in the group life business, both driven by improved underwriting experience in Group Benefits, as our pricing actions, investments in claims management and expense initiatives continue to improve profitability. This was partially offset by unfavourable lapse and other policyholder behaviour.

Q3 2017 vs. Q3 2016 (year-to-date)
SLF U.S.'s reported net income was US$259 million ($333 million) for the first nine months ended September 30, 2017, compared to reported net income of US$305 million ($402 million) for the same period last year. Underlying net income was US$293 million ($381 million) in the first nine months of 2017, compared to US$274 million ($360 million) in the same period of 2016. The impact from the movement in the Canadian dollar in the first nine months of 2017 relative to average exchange rates in the first nine months of 2016 decreased reported net income and underlying net income by $4 million.

Reported net income in the first nine months of 2017 compared to the first nine months of 2016 reflected favourable market impacts primarily driven by interest rates and equity markets partially offset by unfavourable impact from acquisition, integration and restructuring amounts. The impact of assumption changes and management actions in the first nine months of 2017 was an unfavourable impact in In-force Management largely offset by a favourable impact in International, primarily driven by the impact in the second quarter of 2017 which is described in section M - Non-IFRS Financial Measures in this document.

Underlying net income in the first nine months of 2017 compared to the first nine months of 2016 reflected an increase in gains from investing activities on insurance contract liabilities, improved morbidity experience in Group Benefits, improved mortality experience in the group life business, and a full nine months of income from the acquired group benefits business purchased in the prior year. These items were partially offset by unfavourable policyholder behaviour in In-force Management and less favourable mortality experience in International.

Growth

Q3 2017 vs. Q3 2016
SLF U.S. life and health sales were US$174 million in the third quarter of 2017, compared to US$218 million in the third quarter of 2016. Group Benefits sales decreased 22% compared to the third quarter of 2016, with decreases in both employee benefits and medical stop-loss due to pricing discipline. In addition, we had fewer large case sales and we achieved sales growth in the small-case and medium-case markets. International sales were consistent with the third quarter of the prior year.

Q3 2017 vs. Q3 2016 (year-to-date)
SLF U.S. life and health sales were US$426 million in the first nine months of 2017, compared to US$450 million in the same period of 2016. Group Benefits sales decreased 8% compared to the first nine months of 2016, with decreases in both employee benefits and medical stop loss in light of pricing discipline and fewer large case sales. International sales were up 14% in the first nine months in 2017 compared to the same period last year.

3. SLF Asset Management

Profitability

Q3 2017 vs. Q3 2016
SLF Asset Management's reported net income was $185 million in the third quarter of 2017, compared to $181 million in the third quarter of 2016. SLF Asset Management had underlying net income of $204 million in the third quarter of 2017, compared to $188 million in the third quarter of 2016. The impact from the movement of the Canadian dollar in the third quarter of 2017 relative to average exchange rates in the third quarter of 2016 decreased reported net income and underlying net income by $7 million and $8 million, respectively.

SLF Asset Management's reported net income and underlying net income increased compared to the same quarter in 2016 due to MFS's results as described below.

In U.S. dollars, MFS's reported net income was US$143 million in the third quarter of 2017, compared to US$133 million in the third quarter of 2016. MFS's underlying net income was US$159 million in the third quarter of 2017, compared to US$138 million in the third quarter of 2016. MFS's reported net income and underlying net income increased in the third quarter of 2017 compared to the same period in 2016, primarily due to higher average net assets. MFS's pre-tax operating profit margin ratio was 41% in the third quarter of 2017, up from 38% in the third quarter of 2016 due primarily to higher average net assets and favourable impacts from expenses and investment income.

SLIM's reported net income was $5 million compared to $7 million in the third quarter of 2016.

Q3 2017 vs. Q3 2016 (year-to-date)
SLF Asset Management's reported net income for the first nine months ended September 30, 2017 was $539 million, compared to $531 million for the same period last year. Underlying net income was $586 million for the first nine months of 2017, compared to $511 million for the nine months ended September 30, 2016. The impact from the movement of the Canadian dollar in the first nine months of 2017 relative to average exchange rates in the first nine months of 2016 decreased reported net income and underlying net income by $6 million.

MFS's reported net income for the nine months ended September 30, 2017 was US$399 million, compared to US$386 million for the same period last year. MFS's underlying net income was US$436 million for the first nine months of 2017, compared to US$371 million for the nine months ended September 30, 2016. MFS's reported net income reflected the impact of Fair value adjustments on MFS's share-based payment awards compared to the same period last year. MFS's reported and underlying net incomes in U.S. dollars for the first nine months of 2017 increased compared to the same period last year driven primarily by higher average net assets and lower taxes.

SLIM's reported net income for the nine months ended September 30, 2017 was $18 million compared to $20 million for the same period last year.

Growth
SLF Asset Management's AUM was $647.7 billion as at September 30, 2017, compared to $624.8 billion as at December 31, 2016. The increase in AUM was primarily due to asset appreciation, partially offset by unfavourable currency impact and net outflows. MFS's AUM was US$474.2 billion ($591.2 billion) as at September 30, 2017, compared to US$425.6 billion ($571.6 billion) as at December 31, 2016. The increase of US$48.6 billion was primarily driven by gross sales of US$61.9 billion and asset appreciation of US$66.4 billion, partially offset by redemptions of US$79.7 billion. Net outflows at MFS were primarily driven by institutional Client portfolio re-balancing and the trend to passive investing. 84%, 82% and 95% of MFS's retail fund assets ranked in the top half of their Lipper categories based on three-, five-, and ten-year performance, respectively, as of September 30, 2017.

SLIM's AUM was $56.5 billion as at September 30, 2017, compared to $53.2 billion as at December 31, 2016. This increase was primarily due to net sales of $4.5 billion.

4. SLF Asia

Profitability

Q3 2017 vs. Q3 2016
SLF Asia's reported net income was $93 million in the third quarter of 2017, compared to reported net income of $92 million in the third quarter of 2016. Underlying net income was $90 million, compared to $80 million in the third quarter of 2016. The impact from the movement of the Canadian dollar in the third quarter of 2017 relative to average exchange rates in the third quarter of 2016 reduced reported net income and underlying net income by $8 million and $7 million, respectively.

Reported net income in the third quarter of 2017 compared to the third quarter of 2016 reflected unfavourable market related impacts, primarily driven by interest rates and equity market changes, partially offset by the favourable impact of assumption changes and management actions. Underlying net income in the third quarter of 2017, compared to the third quarter of 2016, reflected growth in fee income business and higher level of gains from available-for-sale ("AFS") assets.

Q3 2017 vs. Q3 2016 (year-to-date)
Reported net income was $243 million for the first nine months of 2017, compared to $251 million for the same period last year. Underlying net income for the first nine months of 2017 was $250 million, compared to $233 million in the same period last year. The unfavourable impact of the change in the Canadian dollar in the first nine months of 2017 relative to average exchange rates in the same period last year decreased reported net income and underlying net income by $12 million and $13 million, respectively.

Reported net income in the first nine months of 2017 compared to the first nine months of 2016 reflected favourable impact from assumption changes and management actions. The first nine months of 2016 reflected the favourable impact of acquisition, integration and restructuring amounts related to remeasuring our existing investment to fair value upon acquiring control over the operations of Sun Life Vietnam and over the operations of CIMB Sun Life in Indonesia. Underlying net income for the first nine months of 2017 compared to first nine months of 2016 reflected growth in fee income business and higher level of gains from AFS assets.

Growth

Q3 2017 vs. Q3 2016
SLF Asia life and health sales were $163 million in the third quarter of 2017, compared to $168 million in the third quarter of 2016. Total individual insurance sales decreased 4% compared to the third quarter of 2016 due to the strengthening of the Canadian dollar and lower sales in Hong Kong. On a constant currency basis, individual insurance sales increased 3%. Momentum in our Most Respected Advisor initiative drove higher agency sales and continues to deepen our relationship with key distribution partners across the region.

SLF Asia wealth sales were $3.6 billion in the third quarter of 2017, compared to $2.4 billion in the third quarter of 2016. Strong wealth sales were led by growth in equity and fixed income funds in our Indian joint venture mutual fund company, Aditya Birla Sun Life AMC Limited, and our asset management company in the Philippines, as well as our growing pensions business in Hong Kong.

Q3 2017 vs. Q3 2016 (year-to-date)
SLF Asia life and health sales were $484 million in the first nine months of 2017, compared to $452 million in the first nine months of 2016. Total individual insurance sales in the first nine months of 2017 increased 8% from the first nine months of 2016. On a constant currency basis, individual insurance sales increased 12%. Sales increased in all markets with the exception of Hong Kong driven by organic growth as well as our increase in ownership in Indonesia, Vietnam and India.

SLF Asia wealth sales were $9.5 billion in the first nine months of 2017, compared to $5.8 billion in the first nine months of 2016. Exceptional wealth sales were driven by growth in our mutual fund operations in India and the Philippines, as well as our Hong Kong pensions business.

5. Corporate

Profitability

Q3 2017 vs. Q3 2016
Corporate had reported net income of $4 million in the third quarter of 2017, compared to $27 million in the third quarter of 2016. Reported net income in Corporate in the third quarter of 2017 reflected the favourable impact of assumption changes and management actions. Underlying net loss was $34 million, compared to underlying net income of $10 million in the third quarter of 2016. The impact from the movement of the Canadian dollar relative to the U.K. pound in the third quarter of 2017 relative to average exchange rates in the third quarter of 2016 decreased reported net income by C$3 million and increased underlying net loss by $1 million.

SLF U.K.'s reported net income in the third quarter of 2017 compared to the third quarter of 2016 reflected favourable mortality and favourable impact of assumption changes and management actions offset by lower level of gains from investing activity on insurance contract liabilities compared to strong gains in the third quarter of 2016.

Corporate Support had a reported net loss of $68 million in the third quarter of 2017, compared to a reported net loss of $59 million in the third quarter of 2016. The increase in loss was primarily due to higher expenses and the resolution of tax matters in the quarter.

Q3 2017 vs. Q3 2016 (year-to-date)
The reported net income was $36 million in the Corporate segment for the nine months ended September 30, 2017, compared to a reported net income of $35 million for the same period last year. Reported net income in Corporate in the first nine months of 2017 reflected favourable impact of assumption changes and management actions.

Underlying net loss was $29 million in the nine months ended September 30, 2017, compared to an underlying net income of $27 million in the nine months ended September 30, 2016. The impact from the movement of the Canadian dollar relative to the U.K. pound in the first nine months of 2017 relative to average exchange rates in the same period last year decreased reported net income by $19 million and increased underlying net loss by $11 million.

SLF U.K.'s reported net income in the nine months ended September 30, 2017 compared to the same period in 2016 reflected the favourable impact of assumption changes and management actions, improved equity markets and favourable mortality experience, partially offset by lower level of gains from investing activity on insurance contract liabilities compared to strong gains in the same period of 2016.

In Corporate Support, the reported net loss for the nine months ended September 30, 2017 was $139 million compared to a reported net loss of $123 million for the same period last year. The first nine months of 2017 reflected higher expenses.

G. Investments

We had total general fund invested assets of $141.5 billion as at September 30, 2017, compared to $142.4 billion as at December 31, 2016. The decrease in general fund invested assets of $0.9 billion was primarily due to the currency impact of the strengthening Canadian dollar and the redemption of subordinated debt, partially offset by changes in operating activity and net fair value growth. Our general fund invested assets are well diversified across investment types, geographies, and sectors with the majority of our portfolio invested in fixed income high quality assets.

The following table sets out the composition of our general fund invested assets.⁽¹⁾

1. Energy
As a leading international financial services organization we have a highly diversified portfolio that includes a variety of investment types spread across a broad range of sectors and geographies. As at September 30, 2017, our direct exposure to energy through our debt securities and loan holdings was approximately $5.0 billion or 4% of total invested assets, and our indirect exposure through our mortgage and real estate holdings was approximately $2.9 billion⁽¹⁾ or 2% of total invested assets.

Debt Securities and Loans
As at September 30, 2017, our holdings in debt securities and loans in the energy sector were $5.0 billion (compared to $5.4 billion as at December 31, 2016). The credit quality of our portfolio is stable and remains strong at 94% investment grade⁽²⁾.

Mortgage and Real Estate
Our mortgage and real estate portfolio includes office, industrial, retail, and multi-family buildings occupied by tenants in diversified industries. Our most significant property holdings impacted by the oil and gas sector are located in Alberta, where our real estate holdings represented approximately 18% of our global real estate portfolio and our uninsured mortgage holdings represented approximately 5% of our global mortgage portfolio as at September 30, 2017. As energy prices remain below peak 2014 levels, market fundamentals within the province continue to deteriorate resulting in rising vacancy levels and lower rental rates. The Alberta office market has softened due to a combination of new supply and the effects of the downturn in the energy sector. Should these trends continue, there may be further reductions in real estate valuations in the province particularly in the office sector.

Within our Alberta mortgage and real estate portfolio, there has been no significant increase in arrears, mortgage defaults, and tenant insolvencies. There has been downward pressure on real estate in the province of Alberta, and we continue to closely monitor the effects of market changes in the energy sector on the real estate and mortgage portfolios.    

2. Debt Securities
Our debt securities portfolio is actively managed through a regular program of purchases and sales aimed at optimizing yield, quality, and liquidity, while ensuring that it remains well diversified and duration-matched to insurance contract liabilities.

With the exception of certain countries where we have business operations, including Canada, the United States, the United Kingdom and the Philippines, our exposure to debt securities from any single country did not exceed 1% of total invested assets on our Consolidated Statements of Financial Position as at September 30, 2017.

Debt securities with a credit rating of "A" or higher represented 70.6% of the total debt securities as at September 30, 2017, compared to 69.6% as at December 31, 2016. Debt securities with a credit rating of "BBB" or higher represented 98.3% of total debt securities as at September 30, 2017, compared to 97.6% as at December 31, 2016.

The carrying value of debt securities of governments and financial institutions by geographic location is presented in the following table.

Debt Securities of Governments and Financial Institutions by Geography

Our gross unrealized losses as at September 30, 2017 for FVTPL and AFS debt securities were $0.50 billion and $0.12 billion, respectively, compared with $0.72 billion and $0.14 billion, respectively, as at December 31, 2016.

Our debt securities as at September 30, 2017 included $6.0 billion of asset-backed securities, representing 8.5% of our total debt securities, or 4.2% of our total invested assets. This compares to $5.9 billion, representing 8.3% of total debt securities, or 4.2% of our total invested assets as at December 31, 2016.

3. Mortgages and Loans
Mortgages and loans disclosures in this section are presented at their carrying value on our Consolidated Statements of Financial Position. As at September 30, 2017, we had $41.2 billion in mortgages and loans, representing 29.1% of our total invested assets, compared to $40.8 billion representing 28.6% as at December 31, 2016. Our mortgage portfolio consisted almost entirely of first mortgages, and our loan portfolio consisted of private placement assets.

The carrying value of mortgages and loans by geographic location is presented in the following table.⁽¹⁾

Mortgages and Loans by Geography

As at September 30, 2017, we held $15.2 billion of mortgages, compared to $15.4 billion as at December 31, 2016. Our mortgage portfolio consists entirely of commercial mortgages, including retail, office, multi-family, industrial, and land properties. As at September 30, 2017, 28.9% of our commercial mortgage portfolio consisted of multi-family residential mortgages; there are no single family mortgages. Our uninsured commercial portfolio had a weighted average loan-to-value ratio of 55% as at September 30, 2017, consistent with December 31, 2016. While we generally limit the maximum loan-to-value ratio to 75% at issuance, we may invest in mortgages with a higher loan-to-value ratio in Canada if the mortgage is insured by the Canada Mortgage and Housing Corporation ("CMHC"). The estimated weighted average debt service coverage for our uninsured commercial portfolio is 1.78 times. Of the $3.2 billion of multi-family residential loans in the Canadian commercial mortgage portfolio, 90.3% were insured by the CMHC.

As at September 30, 2017, we held $26.1 billion of loans, compared to $25.4 billion as at December 31, 2016. Private placement assets provide diversification by type of loan, industry segment, and borrower credit quality. The loan portfolio consists of senior secured and unsecured loans to large- and mid-market sized corporate borrowers, securitized lease/loan obligations secured by a variety of assets, and project finance loans in sectors such as power and infrastructure. Our strategy is to continue to focus our efforts on the origination of new private placement assets.

The gross carrying value and allowance for mortgages and loans past due or impaired is presented in the following table.

Mortgages and Loans Past Due or Impaired

Our impaired mortgages and loans, net of allowance for losses, were $70 million as at September 30, 2017, compared to $16 million as at December 31, 2016. The increase of $54 million in impaired loans was primarily due to the addition of two creditors in the first quarter of 2017.

4. Derivative Financial Instruments
The values associated with our derivative instruments are presented in the following table. Notional amounts serve as the basis for payments calculated under derivatives contracts and are generally not exchanged.

Derivative Instruments

The total notional amount of derivatives in our portfolio decreased to $53.4 billion as at September 30, 2017, from $54.4 billion as at December 31, 2016.

The fair value of derivatives was a net liability of $313 million as at September 30, 2017, compared to a net liability of $904 million as at December 31, 2016. The increase in net fair value was due primarily to increases in fair value of our foreign exchange contracts, partially offset by a decrease in fair value of our interest rate contracts.

5. Asset Default Provision
We make provisions for possible future credit events in the determination of our insurance contract liabilities. The amount of the provision for asset default included in insurance contract liabilities is based on possible reductions in future investment yields that vary by factors such as type of asset, asset credit quality (rating), duration, and country of origin. To the extent that an asset is written off, or disposed of, any amounts that were set aside in our insurance contract liabilities for possible future asset defaults in respect of that asset are released.

Our asset default provision reflects the provision relating to future credit events for fixed income assets currently held by the Company that support our insurance contract liabilities. Our asset default provision as at September 30, 2017 was $2,203 million compared to $2,247 million as at December 31, 2016. The decrease of $44 million was primarily due to strengthening of the Canadian dollar and the release of provisions on fixed income assets supporting our insurance contract liabilities, partially offset by increases in the provision for assets purchased, net of dispositions.

H. Risk Management

The Company has established a Risk Management Framework to assist in identifying, measuring, managing, monitoring and reporting risks. The Risk Management Framework covers all risks and these have been grouped into six major categories: credit, market, insurance, business and strategic, operational and liquidity risks.

Through our enterprise risk management processes, we oversee the various risk factors identified in the Risk Management Framework and provide reports to senior management and to the Board Committees at least quarterly. Our enterprise risk management processes and risk factors are described in our annual MD&A and AIF.

When referring to segregated funds in this section, it is inclusive of segregated fund guarantees, variable annuities and investment products and includes Run-off reinsurance in our Corporate business segment.

1. Market Risk Sensitivities
Our net income⁽¹⁾ is affected by the determination of policyholder obligations under our annuity and insurance contracts. These amounts are determined using internal valuation models and are recorded in our Annual Consolidated Financial Statements, primarily as Insurance contract liabilities. The determination of these obligations requires management to make assumptions about the future level of equity market performance, interest rates, credit and swap spreads and other factors over the life of our products. Differences between our actual experience and our best estimate assumptions are reflected in our Annual Consolidated Financial Statements. Refer to 7 - Additional Cautionary Language and Key Assumptions Related to Sensitivities in this section for important additional information regarding these estimates.

The market value of our investments in fixed income and equity securities fluctuates based on movements in interest rates and equity markets. The market value of fixed income assets designated as AFS that are held primarily in our surplus segment increases with declining interest rates and decreases with rising interest rates. The market value of equities designated as AFS and held primarily in our surplus segment increases (decreases) with rising (declining) equity markets. Changes in the market value of AFS assets flow through other comprehensive income ("OCI") and are only recognized in net income when realized upon sale, or when considered impaired. The amount of realized gains (losses) recorded in net income in any period is equal to the unrealized gains (losses) or OCI position at the start of the period plus the change in market value during the current period up to the point of sale for those securities that were sold during the period. The sale or impairment of AFS assets held in surplus can therefore have the effect of modifying our net income sensitivity.

We realized $41 million (pre-tax) in net gains on the sale of AFS assets during the third quarter of 2017 ($53 million pre-tax in the third quarter of 2016). The net unrealized gains or OCI position on AFS fixed income and equity assets were $119 million and $142 million, respectively, after-tax as at September 30, 2017 ($86 million and $125 million, respectively, after-tax as at December 31, 2016). 

The following table sets out the estimated immediate impact on or sensitivity of our net income and OCI, and Sun Life Assurance's MCCSR ratio to certain instantaneous changes in interest rates and equity market prices as at September 30, 2017 and December 31, 2016.

Interest Rate and Equity Market Sensitivities

Our net income and MCCSR sensitivities to interest rates have changed since December 31, 2016. The increase in sensitivity to interest rates is primarily the result of assumption changes and management actions in the first nine months of 2017.

2. Credit Spread and Swap Spread Sensitivities
We have estimated the immediate impact or sensitivity of our net income attributable to certain instantaneous changes in credit and swap spreads. The credit spread sensitivities reflect the impact of changes in credit spreads on our asset and liability valuations (including non-sovereign fixed income assets, provincial governments, corporate bonds, and other fixed income assets). The swap spread sensitivities reflect the impact of changes in swap spreads on swap-based derivative positions and liability valuations.

Credit Spread Sensitivities ($ millions, after-tax)

Swap Spread Sensitivities ($ millions, after-tax)

The credit and swap spread sensitivities assume a parallel shift in the indicated spreads across the entire term structure. Variations in realized spread changes based on different terms to maturity, geographies, asset classes and derivative types, underlying interest rate movements, and ratings may result in realized sensitivities being significantly different from those provided above. The credit spread sensitivity estimates exclude any credit spread impact that may arise in connection with asset positions held in segregated funds. Spread sensitivities are provided for the consolidated entity and may not be proportional across all reporting segments. Refer to 7 - Additional Cautionary Language and Key Assumptions Related to Sensitivities in this section for important additional information regarding these estimates.

3. General Account Insurance and Annuity Products
Most of our expected sensitivity to changes in interest rates and about two-thirds of our expected sensitivity to changes in equity markets are derived from our general account insurance and annuity products. We have implemented market risk management strategies to mitigate a portion of the market risk related to our general account insurance and annuity products.

Individual insurance products include universal life and other long-term life and health insurance products. Major sources of market risk exposure for individual insurance products include the reinvestment risk related to future premiums on regular premium policies, asset reinvestment risk on both regular premium and single premium policies, and the guaranteed cost of insurance. Interest rate risk for individual insurance products is typically managed on a duration basis, within tolerance ranges set out in the applicable investment policy or guidelines. Targets and limits are established so that the level of residual exposure is commensurate with our risk appetite. Exposures are monitored frequently, and assets are re-balanced as necessary to maintain compliance within policy limits using a combination of assets and derivative instruments. A portion of the longer-term cash flows are backed with equities and real estate.

For participating insurance products and other insurance products with adjustability features, the investment strategy objective is to provide a total rate of return given a constant risk profile over the long term.

Fixed annuity products generally provide the policyholder with a guaranteed investment return or crediting rate. Interest rate risk for these products is typically managed on a duration basis, within tolerance ranges set out in the applicable investment guidelines. Targets and limits are established such that the level of residual exposure is commensurate with our risk appetite. Exposures are monitored frequently, and are re-balanced as necessary to maintain compliance within prescribed tolerances using a combination of fixed income assets and derivative instruments.

Certain insurance and annuity products contain minimum interest rate guarantees. Market risk management strategies are implemented to limit potential financial loss due to reductions in asset earned rates relative to contract guarantees. These typically involve the use of hedging strategies utilizing interest rate derivatives such as interest rate floors, swaps, and swaptions.

Certain insurance and annuity products contain features which allow the policyholders to surrender their policy at book value. Market risk management strategies are implemented to limit the potential financial loss due to changes in interest rate levels and policyholder behaviour. These typically involve the use of hedging strategies such as dynamic option replication and the purchase of interest rate swaptions.

Certain products have guaranteed minimum annuitization rates. Market risk management strategies are implemented to limit the potential financial loss and typically involve the use of fixed income assets, interest rate swaps, and swaptions.

4. Segregated Fund Guarantees
Approximately one-third of our equity market sensitivity and a small amount of interest rate risk sensitivity as at September 30, 2017 are derived from segregated fund products. These products provide benefit guarantees, which are linked to underlying fund performance and may be triggered upon death, maturity, withdrawal or annuitization. The cost of providing these guarantees is uncertain and depends upon a number of factors including general capital market conditions, our hedging strategies, policyholder behaviour and mortality experience, each of which may result in negative impacts on net income and capital.

The following table provides information with respect to the guarantees provided for our segregated fund products.