Sun Life Financial : CANADIAN RESIDENTS PARTICIPATING IN THE SHARE ACCOUNT (Form 6-K)

August 05, 2021 at 06:16 am EDT

CANADIAN RESIDENTS PARTICIPATING IN THE SHARE ACCOUNT

Shareholders holding shares in the Canadian Share Account can sell their shares for $15 plus 3 cents per share. Complete Form A on the front of your Share Ownership Statement, tear it off and return it by mail to AST Trust Company (Canada).

For more information call AST Trust Company (Canada) at 1 877 224-1760.

Sun Life Reports Second Quarter 2021 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', 'we', 'our', and 'us'. We manage our operations and report our financial results in five business segments: Canada, United States ('U.S.'), Asset Management, Asia, and Corporate. The information in this document is based on the unaudited interim financial results of SLF Inc. for the period ended June 30, 2021 and should be read in conjunction with the interim management's discussion and analysis ('MD&A') and our unaudited interim consolidated financial statements and accompanying notes ('Interim Consolidated Financial Statements') for the period ended June 30, 2021, prepared in accordance with International Financial Reporting Standards ('IFRS'). We report certain financial information using non-IFRS financial measures. For more details, refer to the Non-IFRS Financial Measures section in this document. Additional information relating to SLF Inc. is available on www.sunlife.com under Investors - Financial results and reports, on the SEDAR website at www.sedar.com, and on the U.S. Securities and Exchange Commission's website at www.sec.gov. Unless otherwise noted, all amounts are in Canadian dollars.

TORONTO, ON - (August 4, 2021) - Sun Life Financial Inc.(TSX: SLF) (NYSE: SLF) today announced its results for the second quarter ended
June 30, 2021. Second quarter reported net income was $900 million and underlying net income(1) was $883 million.

'Sun Life delivered a strong second quarter driven by momentum in all four pillars, which reflects our ability to execute on our strategy, the priority Clients are placing on health and financial security and our continued focus on enhancing digital capabilities,' said Kevin Strain, President and incoming CEO of Sun Life.

Strain added, 'On behalf of our employees, advisors and partners around the world, I would like to thank Dean Connor, who will retire on August 6 after a successful 15-year career with Sun Life, including 10 years as CEO. Dean built a strong foundation for the future, including Sun Life's entry into the alternative asset management space and our growth in Asia. He put the Client at the centre of our strategy, which included accelerating digital transformation and innovation across our businesses. Dean's biggest legacy will be the development of our people and culture under his leadership, and we all wish Dean the very best.'


Quarterly results	Year-to-date
Profitability	Q2'21	Q2'20	2021	2020
Reported net income ($ millions)	900	519	1,837	910
Underlying net income ($ millions)(1)	883	739	1,733	1,509
Reported EPS($)(2)	1.53	0.88	3.12	1.55
Underlying EPS ($)(1)(2)	1.50	1.26	2.95	2.57
Reported return on equity ('ROE')(1)	16.3	%	9.4	%	16.5	%	8.3	%
Underlying ROE(1)	16.0	%	13.4	%	15.5	%	13.7	%

Growth	Q2'21	Q2'20	2021	2020
Insurance sales ($ millions)(1)	710	619	1,440	1,395
Wealth sales ($ millions)(1)(3)	55,013	56,638	120,975	116,542
Value of new business('VNB')($ millions)(1)(4)	284	206	562	459
Assets under management('AUM')($ billions)(1)(3)	1,361	1,131	1,361	1,131

Financial Strength	Q2'21	Q4'20
LICAT ratios (at period end)(5)
Sun Life Financial Inc.	147	%	147	%
Sun Life Assurance(6)	125	%	127	%
Financial leverage ratio (at period end)(1)	24.7	%	23.5	%

(1) Represents a non-IFRS financial measure. See the Non-IFRS Financial Measures section in this document and in our interim MD&A for the period ended June 30, 2021 ('Q2 2021 MD&A').

(2) All earnings per share ('EPS') measures refer to fully diluted EPS, unless otherwise stated.

(3) Effective January 1, 2021, the methodology for gross flows and outflows was updated for SLC Management. Prior period amounts have not been updated. For more details, see the Non-IFRS Financial Measures section in this document.

(4) Effective January 1, 2021, reflects a change in the timing of recognition of U.S. VNB for group policies. We have updated prior period amounts to reflect this change. For more details, see the Non-IFRS Financial Measures section in this document.

(5) For further information on the Life Insurance Capital Adequacy Test ('LICAT'), see section E - Financial Strength in the Q2 2021 MD&A.

(6) Sun Life Assurance Company of Canada ('Sun Life Assurance') is SLF Inc.'s principal operating life insurance subsidiary.

EARNINGS NEWS RELEASE Second Quarter 2021 Sun Life Financial Inc. 1

Financial and Operational Highlights - Quarterly Comparison (Q2 2021 vs. Q2 2020)

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


($ millions, unless otherwise noted)
Reported net income (loss)	Underlying net income (loss)(1)	Insurance sales(1)	Wealth sales(1)(2)
Q2'21	Q2'20	change	Q2'21	Q2'20	change	Q2'21	Q2'20	change	Q2'21	Q2'20	change
Canada	404	117	245%	290	281	3%	196	151	30%	3,825	2,608	47%
U.S.	157	118	33%	165	123	34%	191	228	(16)%	-	-	-
Asset Management	221	223	(1)%	311	259	20%	-	-	-	47,164	51,575	(9)%
Asia	143	126	13%	152	144	6%	323	240	35%	4,024	2,455	64%
Corporate	(25)	(65)	nm(3)	(35)	(68)	nm(3)	-	-	-	-	-	-
Total	900	519	73%	883	739	19%	710	619	15%	55,013	56,638	(3)%

(1) Represents a non-IFRS financial measure. See the Non-IFRS Financial Measuressection in this document and in the Q2 2021 MD&A.

(2) Effective January 1, 2021, the methodology for gross flows and outflows was updated for SLC Management. Prior period amounts have not been updated. For more details, see the Non-IFRS Financial Measures section in this document.

(3) Not meaningful.

Reported net income was $900 million in the second quarter of 2021, an increase of $381 million compared to the same period in 2020, driven by favourable market-related impacts, primarily from changes in interest rates. Underlying net income was $883 million, an increase of $144 million or 19%, driven by business growth, a lower effective tax rate(1), and favourable credit experience. These factors were partially offset by the unfavourable impacts of foreign exchange translation, lower investing activity and unfavourable expense experience. During the second quarter of 2021, the impacts of foreign exchange translation decreased reported net income and underlying net income by $70 million and $75 million, respectively. Refer to the Non-IFRS Financial Measures section in this document for a reconciliation between reported net income and underlying net income.

Our reported ROE was 16.3% in the second quarter of 2021, compared to 9.4% in the same period last year. Underlying ROE was 16.0%, compared to 13.4% in the second quarter of 2020. SLF Inc. ended the quarter with a LICAT ratio of 147% and $3.2 billion in cash and other liquid assets.

On June 30, 2021, SLF Inc. issued $1 billion principal amount of Series 2021-1 Notes. The net proceeds will be used for general corporate purposes, which may include investments in subsidiaries, repayment of indebtedness and other strategic investments.

On September 29, 2021, we intend to redeem all of the $400 million Class A Non-Cumulative Preferred Shares Series 1 and all of the $325 million Class A Non-Cumulative Preferred Shares Series 2. The redemptions are subject to regulatory approval and will be funded from existing cash and other liquid assets in SLF Inc. The redemptions will result in a reduction in SLF Inc.'s LICAT ratio and financial leverage ratio of approximately three and two percentage points, respectively. Sun Life Assurance's LICAT ratio will not be impacted.

A leader in insurance and wealth solutions in our Canadian Home Market

Canada's reported net income was $404 million in the second quarter of 2021, an increase of $287 million compared to the same period in 2020, driven by favourable market-related impacts, predominately from changes in interest rates. Underlying net income was $290 million, an increase of $9 million or 3%, driven by favourable credit experience, business growth and policyholder behaviour, partially offset by lower investing activity and less favourable mortality experience. Morbidity experience in Group Benefits ('GB') was largely in line with the prior year, as benefits from pricing actions in long-term disability were offset by higher dental and paramedical claims reflecting lower activity in the prior year as a result of the COVID-19 lockdowns.

Canada insurance sales were $196 million in the second quarter of 2021, an increase of $45 million or 30% compared to the same period in 2020, driven by higher life insurance sales in our participating business. Wealth sales were $3.8 billion, an increase of $1.2 billion or 47%, driven by increased individual wealth mutual fund and Sun GIF(2) sales, and higher sales in Group Retirement Services ('GRS') reflecting retained sales, as well as increased asset consolidations and rollovers.

We continued to put our Clients at the centre of everything we do and make it easier for them to do business with us. This quarter, we augmented our predictive underwriting models with the help of advanced data and analytics, allowing Clients aged 18 to 40 to qualify for up to $5 million in life insurance coverage without the need for lab exams. This capability enhances the Client experience and provides greater flexibility.

A leader in U.S. group benefits

U.S.'s reported net income was $157 million in the second quarter of 2021, an increase of $39 million or 33% compared to the same period in 2020, driven by higher underlying net income. Underlying net income was $165 million, an increase of $42 million or 34%, driven by favourable mortality, morbidity and credit experience and higher investing activity, partially offset by unfavourable expense experience and a gain recorded in the prior year arising from the conclusion of a legal matter. Mortality experience improved as a result of lower COVID-19-related claims in employee benefits, and favourable claims experience in In-force Management. Favourable morbidity experience was driven by medical stop-loss. This was partially offset by unfavourable short-term disability experience, and higher dental claims compared to lower activity in the prior year as a result of the COVID-19 lockdowns. The trailing four-quarter after-tax profit margin for Group Benefits(3) was 8.5% as of the second quarter of 2021 compared to 7.5% as of the second quarter of 2020.

(1) Prioryear'sunderlyingnetincomeincludes an unfavourable adjustment relating to historicalCanadian tax filings and lower tax-exemptinvestment income.

(2) Sun Life Guaranteed Investment Funds ('Sun GIF').

(3) Represents a non-IFRS financial measure. See the Non-IFRS Financial Measures section in this document and in the Q2 2021 MD&A.

2 Sun Life Financial Inc. Second Quarter 2021 EARNINGS NEWS RELEASE

U.S. insurance sales were $191 million in the second quarter of 2021, a decrease of $37 million or 16% compared to the same period in 2020, reflecting lower medical stop-loss sales, partially offset by increased employee benefits sales.

We continued to help Clients get the coverage they need through new offerings and digital capabilities. In the second quarter, FullscopeRMS announced its broadened supplemental health portfolio to help more Clients cover out-of-pocket expenses. We also expanded our online Dental Health Center capabilities enabling Clients to obtain an estimate of dental costs and access advice virtually from licensed dentists. In addition, our new core Group absence management program launched in January has already resulted in new sales covering more than 20,000 plan members. Digital enhancements in this new offering have made filing claims easier and more efficient, with online submissions up 36% compared to a year ago.

On July 1, 2021, Sun Life completed its acquisition of Pinnacle Care International, Inc. ('PinnacleCare'), which will join our U.S. medical stop-loss business. PinnacleCare provides leading health care navigation and medical intelligence services, improving the care experience, costs and outcomes for both the employee and employer.

A leader in Global Asset Management

Asset Management's reported net income was $221 million in the second quarter of 2021, in line with the same period in 2020, as higher fair value adjustments on MFS's share-based payment awards and the impact of the UK Tax Rate Change(1) in SLC Management of $21 million were offset by the increase in underlying net income. Underlying net income was $311 million, an increase of $52 million or 20%, driven by higher average net assets ('ANA') in MFS, partially offset by higher variable compensation expenses in MFS. The pre-tax net operating profit margin ratio for MFS(2) was 39% in the second quarter of 2021, compared to 36% in the same period last year.

Asset Management ended the second quarter with $989 billion in assets under management, consisting of $820 billion (US$662 billion) in MFS and $169 billion in SLC Management. MFS reported net outflows of $7 billion (US$6 billion) and SLC Management reported net inflows of $8 billion in the second quarter of 2021. SLC Management's net inflows were comprised of Client contributions and capital raising, totalling $11 billion, of which approximately $10 billion is fee-eligible, partially offset by outflows of $4 billion from Client withdrawals.

In the second quarter of 2021, 96%, 61% and 93% of MFS's U.S. retail mutual fund assets ranked in the top half of their Morningstar categories based on ten-, five- and three-year performance, respectively.

During the quarter, BentallGreenOak ('BGO') was ranked 5th in the PERE(3) 100, which ranks fund managers that raised the most institutional capital over the past five years. BGO also released their 2021 Corporate Responsibility Summary and continues to achieve top rankings in the Global Real Estate Sustainability Benchmark ('GRESB').

A leader in Asia through distribution excellence in higher growth markets

Asia's reported net income was $143 million in the second quarter of 2021, an increase of $17 million or 13% compared to the same period in 2020, driven by improved market-related impacts, reflecting favourable changes in interest rates partially offset by lower equity markets. Underlying net income was $152 million, an increase of $8 million or 6%, driven by business growth, higher new business gains and favourable credit experience. These factors were partially offset by unfavourable expense experience, the impacts of foreign exchange translation, and higher mortality from our India joint venture reflected in other experience(4).

Asia insurance sales were $323 million in the second quarter of 2021, an increase of $83 million or 35% compared to the second quarter of 2020, driven by International, the Philippines and Vietnam, partially offset by Hong Kong. Asia wealth sales were $4.0 billion, an increase of $1.6 billion or 64%, driven by mutual fund sales in India, money market sales in the Philippines, and the pension business in Hong Kong.

As part of our dedication to providing market-leading financial advice, we established a relationship with MDRT Academy(5), an association helping financial professionals accelerate their careers. This new partnership supplements Sun Life Asia's existing elite advisor training program, the Brighter Academy, as we continue our goal of having the most respected advisors in the industry. With agents enrolled across multiple countries, Sun Life is the MDRT Academy's largest membership company to date. In Vietnam, due to the rapid growth of our new bancassurance partnerships and the success of our agency force, Sun Life is now the 4th largest bancassurance player and the 6th largest life insurer based on sales. In Hong Kong, our mandatory provident fund offering continues to outperform the market and we are now ranked 1st in net inflows and 3rd in AUM(6).

Corporate

Corporate's reported net loss was $25 million in the second quarter of 2021, $40 million lower than the same period in 2020, driven by the change in underlying net loss of $33 million. Underlying net loss was $35 million, $33 million lower than the same period in 2020, driven by a lower effective tax rate(7), partially offset by unfavourable expense experience, lower gains on seed investments and lower investing activity in the UK.

(1) Amounts relate to the UK Finance Act that was signed into law on June 10, 2021, increasing the corporate tax rate from 19% to 25%, which will be take effect for future tax periods beginning April 1, 2023 ('UK Tax Rate Change'). See section C - Profitability - 5 - Income taxes in the Q2 2021 MD&A.

(2) Represents a non-IFRS financial measure. See the Non-IFRS Financial Measures section in this document and in the Q2 2021 MD&A.

(3) Private Equity Real Estate ('PERE').

(4) Experience-related items from our India, China and Malaysia joint ventures and associates are recorded within other experience.

(5) Million Dollar Round Table ('MDRT').

(6) MPF Ratings Ltd.'s based on MPF Scheme Sponsor Fund Flows and Assets as at June 30, 2021.

(7) Prioryear'sunderlyingnetincomeincludes an unfavourable adjustment relating to historicalCanadian tax filings and lower tax-exemptinvestment income.

EARNINGS NEWS RELEASE Second Quarter 2021 Sun Life Financial Inc. 3

Sun Life Financial Inc.

Management's Discussion and Analysis

For the period ended June 30, 2021

Dated August 4, 2021


Table of Contents
A.	How We Report Our Results	5
B.	Financial Summary	6
C.	Profitability	7
D.	Growth	9
E.	Financial Strength	11
F.	Performance by Business Segment	12
1.Canada	13
2.U.S.	14
3.Asset Management	15
4.Asia	17
5.Corporate	18
G.	Investments	18
H.	Risk Management	21
I.	Additional Financial Disclosure	27
J.	Legal and Regulatory Matters	30
K.	Changes in Accounting Policies	30
L.	Internal Control Over Financial Reporting	30
M.	Non-IFRS Financial Measures	30
N.	Forward-looking Statements	33

4 Sun Life Financial Inc. Second Quarter 2021 MANAGEMENT'S DISCUSSION AND ANALYSIS

About Sun Life

Sun Life is a leading international financial services organization providing insurance, wealth and asset management solutions to individual and corporate Clients. Sun Life has operations in a number of markets worldwide, including Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China, Australia, Singapore, Vietnam, Malaysia and Bermuda. As of June 30, 2021, Sun Life had total assets under management ('AUM') of $1.36 trillion. 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', 'we', 'our', and 'us'. We manage our operations and report our financial results in five business segments: Canada, United States ('U.S.'), Asset Management, 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 'Consolidated Financial Statements' collectively) and interim and annual management's discussion and analysis ('MD&A'). We prepare our unaudited Interim Consolidated Financial Statements using International Financial Reporting Standards ('IFRS'), the accounting requirements of the Office of the Superintendent of Financial Institutions ('OSFI') 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.

Unless otherwise noted, all amounts are in Canadian dollars.

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. 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. Non-IFRS financial measures should not be viewed in isolation from or as alternatives to measures of financial performance determined in accordance with IFRS. Additional information concerning 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 and 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 the Consolidated Financial Statements, the annual and interim MD&A and SLF Inc.'s Annual Information Form ('AIF') for the year ended December 31, 2020. 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&A and Interim Consolidated Financial Statements are furnished to the SEC on Form 6-Ks and are available at www.sec.gov.

4. COVID-19 Pandemic Considerations

In early 2020, the world was impacted by COVID-19, which was declared a pandemic by the World Health Organization. The overall impact of the COVID-19 pandemic is still uncertain and dependent on the progression of the virus and on actions taken by governments, businesses and individuals, which could vary by country and result in differing outcomes. Given the extent of the circumstances, it is difficult to reliably measure or predict the potential impact of this uncertainty on our future financial results.

For additional information, refer to sections B - Overview - 4 - COVID-19 and J - Risk Management - 9 - Risks relating to the COVID-19 pandemic in the 2020 Annual MD&A.

MANAGEMENT'S DISCUSSION AND ANALYSISSecond Quarter 2021 Sun Life Financial Inc. 5


B. Financial Summary

($ millions, unless otherwise noted)	Quarterly results	Year-to-date
Profitability	Q2'21	Q1'21	Q2'20	2021	2020
Net income (loss)
Reported net income (loss)	900	937	519	1,837	910
Underlying net income (loss)(1)	883	850	739	1,733	1,509
Diluted earnings per share ('EPS') ($)
Reported EPS (diluted)	1.53	1.59	0.88	3.12	1.55
Underlying EPS (diluted)(1)	1.50	1.45	1.26	2.95	2.57
Reported basic EPS ($)	1.54	1.60	0.89	3.14	1.55
Return on equity ('ROE') (%)
Reported ROE(1)	16.3	%	16.9	%	9.4	%	16.5	%	8.3	%
Underlying ROE(1)	16.0	%	15.3	%	13.4	%	15.5	%	13.7	%

Growth	Q2'21	Q1'21	Q2'20	2021	2020
Sales
Insurance sales(1)	710	730	619	1,440	1,395
Wealth sales(1)(2)	55,013	65,962	56,638	120,975	116,542
Value of new business ('VNB')(1)(3)	284	278	206	562	459
Premiums and deposits
Net premium revenue	5,717	5,126	5,521	10,843	10,667
Segregated fund deposits	3,313	3,548	2,492	6,861	5,769
Mutual fund sales(1)	30,304	37,495	35,697	67,799	73,786
Managed fund sales(1)(2)	21,521	24,906	18,810	46,427	35,688
ASO premium and deposit equivalents(1)(4)	1,787	1,690	1,774	3,477	3,585
Total premiums and deposits(1)	62,642	72,765	64,294	135,407	129,495
Assets under management(1)(5)
General fund assets	195,689	190,072	195,489
Segregated funds	133,249	127,341	112,944
Mutual funds, managed funds and other AUM(1)(5)	1,031,753	986,833	822,099
Total AUM(1)(5)	1,360,691	1,304,246	1,130,532

Financial Strength	Q2'21	Q1'21	Q4'20
LICAT ratios(6)
Sun Life Financial Inc.	147	%	141	%	147	%
Sun Life Assurance(7)	125	%	124	%	127	%
Financial leverage ratio(1)	24.7	%	22.7	%	23.5	%
Dividend
Dividend payout ratio(1)	37	%	38	%	37	%
Dividends per common share ($)	0.550	0.550	0.550
Capital
Subordinated debt and innovative capital instruments(8)	4,633	4,632	4,981
Participating policyholders' equity and non-controlling interests	1,597	1,474	1,393
Total shareholders' equity and other equity instruments	25,712	24,273	24,469
Total capital	31,942	30,379	30,843
Weighted average common shares outstanding for basic EPS (millions)	586	585	585
Closing common shares outstanding (millions)	586	585	585

(1)Represents a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document.

(2)Effective January 1, 2021, the methodology for gross flows and outflows was updated for SLC Management. Prior period amounts have not been updated. For more details, see section M - Non-IFRS Financial Measures in this document.

(3)Effective January 1, 2021, reflects a change in the timing of recognition of U.S. VNB for group policies. We have updated prior period amounts to reflect this change. For more details, see section M - Non-IFRS Financial Measures in this document.

(4)Administrative Services Only ('ASO').

(5)Effective January 1, 2021, the methodology for AUM was updated for SLC Management with respect to certain real estate and investment-grade fixed income products to include uncalled capital commitments. We have updated prior period amounts to reflect this change. For more details, see section M - Non-IFRS Financial Measures in this document.

(6)Life Insurance Capital Adequacy Test ('LICAT') ratio.

(7)Sun Life Assurance Company of Canada ('Sun Life Assurance') is SLF Inc.'s principal operating life insurance subsidiary.

(8)Innovative capital instruments consist of Sun Life ExchangEable Capital Securities ('SLEECS'), which qualify as regulatory capital. However, under IFRS they are reported as Senior debentures in the Consolidated Financial Statements. For additional information, see section I - Capital and Liquidity Management - 1 - Capital in our 2020 annual MD&A.

6 Sun Life Financial Inc. Second Quarter 2021 MANAGEMENT'S DISCUSSION AND ANALYSIS

C. Profitability

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


Quarterly results	Year-to-date
($ millions, after-tax)	Q2'21	Q1'21	Q2'20	2021	2020
Reported net income	900	937	519	1,837	910
Less: Market-related impacts(1)	91	209	(187)	300	(480)
Assumption changes and management actions(1)	2	(4)	5	(2)	(48)
Other adjustments(1)	(76)	(118)	(38)	(194)	(71)
Underlying net income(2)	883	850	739	1,733	1,509
Reported ROE(2)	16.3	%	16.9	%	9.4	%	16.5	%	8.3	%
Underlying ROE(2)	16.0	%	15.3	%	13.4	%	15.5	%	13.7	%
Impacts of other notable items on reported and underlying net income
Experience-related items(3)
Impacts of investment activity on insurance contract liabilities ('investing activity')	40	74	97	114	227
Credit	32	15	(58)	47	(73)
Mortality	3	(15)	(12)	(12)	(16)
Morbidity	37	39	27	76	36
Lapse and other policyholder behaviour ('policyholder behaviour')	(8)	(14)	(19)	(22)	(33)
Expenses	(62)	(21)	(14)	(83)	(25)
Other experience	(11)	(33)	18	(44)	(21)

(1) Represents an adjustment made to arrive at a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document for a breakdown of components within this adjustment.

(2) Represents a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document.

(3) Experience-related items reflect the difference between actual experience during the reporting period and best estimate assumptions used in the determination of our insurance contract liabilities. Experience-related items from our India, China and Malaysia joint ventures and associates are recorded within other experience.

Quarterly Comparison - Q2 2021 vs. Q2 2020

Reported net income increased by $381 million in the second quarter of 2021 compared to the same period in 2020, driven by favourable market-related impacts, primarily from changes in interest rates. Underlying net income increased by $144 million or 19%, driven by business growth, a lower effective tax rate(1), and favourable credit experience. These factors were partially offset by the unfavourable impacts of foreign exchange translation, lower investing activity and unfavourable expense experience. During the second quarter of 2021, the impacts of foreign exchange translation decreased reported net income and underlying net income by $70 million and $75 million, respectively. Refer to section M - Non-IFRS Financial Measures in this document for a reconciliation between reported net income and underlying net income.

Our reported ROE was 16.3% in the second quarter of 2021, compared to 9.4% in the same period last year. Underlying ROE was 16.0%, compared to 13.4% in the second quarter of 2020, reflecting higher underlying net income. Total common shareholders' equity remained flat as the increase from reported net income was largely offset by the impacts of foreign exchange translation in Other Comprehensive Income ('OCI') and dividend distributions.

1.Market-related impacts

Market-related impacts in the second quarter of 2021, compared to the same period in 2020, reflected favourable interest rate impacts and changes in the fair value of investment properties. See section M - Non-IFRS Financial Measures in this document for more information 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, 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.

In the second quarter of 2021, the net impact of assumption changes and management actions was an increase of $2 million to reported net income. This compares to an increase of $5 million in the second quarter of 2020.

See section H - Risk Management in this document for sensitivities associated with Ultimate Reinvestment Rate ('URR') and Ultimate Credit Spread.

(1) Prioryear'sunderlyingnetincomeincludes an unfavourable adjustment relating to historicalCanadian tax filings and lower tax-exemptinvestment income.

MANAGEMENT'S DISCUSSION AND ANALYSISSecond Quarter 2021 Sun Life Financial Inc. 7

3.Other adjustments

Other adjustments decreased reported net income by $76 million in the second quarter of 2021, compared to a decrease of $38 million in the same period in 2020, primarily reflecting higher fair value adjustments on MFS's share-based payment awards(1) in Asset Management.

4.Experience-related items

Compared to the second quarter of 2020, the significant changes in experience-related items are as follows:

•Lower investing activity in Canada and the UK in Corporate;

•Favourable credit experience in all insurance businesses, comprising of:


Quarterly results
($ millions, after-tax)	Q2'21	Q1'21	Q2'20
Changes in ratings	5	(14)	(60)
Impairments, net of recoveries	(2)	-	(24)
Release of best estimate credit	29	29	26
Credit Experience	32	15	(58)

•Favourable mortality experience in the U.S., partially offset in Canada;

•Favourable morbidity experience in the U.S.;

•Improved policyholder behaviour experience in Canada;

•Unfavourable expense experience related to higher incentive compensation, reflecting earnings performance, VNB and Client measures(2) in the first half of the year; and

•Unfavourable other experience as the prior year included a gain arising from the conclusion of a legal matter in the U.S., and the current quarter impact of mortality in our India joint venture in Asia.

5.Income taxes

Our statutory tax rate is normally reduced by various tax benefits, such as lower taxes on income subject to tax in foreign jurisdictions, a range of tax-exempt investment income, and other sustainable tax benefits that are expected to decrease our effective tax rate.

On June 10, 2021, the UK Finance Act was signed into law, increasing the corporate tax rate from 19% to 25%, which will take effect for future tax periods beginning April 1, 2023 ('UK Tax Rate Change'). As a result, reported net income decreased by $11 million in the second quarter, reflected in Other adjustments. The decrease was comprised of a loss of $21 million on the remeasurement of deferred tax liabilities in SLC Management in Asset Management, partially offset by a gain of $10 million from the remeasurement of deferred tax assets in the UK in Corporate.

In the second quarter of 2021, our effective income tax rate on reported net income and underlying net income(3) was 14.7% and 15.9%, compared to 8.6% and 26.1% in the second quarter of 2020, respectively. In the second quarter of 2021, our effective tax rate on underlying net income was within our expected range of 15% to 20%. For additional information, refer to Note 10 in our Interim Consolidated Financial Statements for the period ended June 30, 2021.

6.Impacts of foreign exchange translation

During the second quarter of 2021, the impacts of foreign exchange translation decreased reported net income and underlying net income by $70 million and $75 million, respectively.

Year-to-Date Comparison -Q2 2021 vs. Q2 2020

Reported net income increased by $927 million in the first six months of 2021 compared to the same period in 2020, driven by favourable market-related impacts and higher underlying net income, partially offset by higher fair value adjustments on MFS's share-based payment awards. Underlying net income increased by $224 million or 15%, driven by business growth, favourable credit experience, a lower effective tax rate(4) and new business gains in Asia. These factors were partially offset by lower investing activity, the impacts of foreign exchange translation and unfavourable expense experience. During the first six months of 2021, the impacts of foreign exchange translation decreased reported net income and underlying net income by $102 million and $106 million, respectively. Refer to section M - Non-IFRS Financial Measures in this document for a reconciliation between reported net income and underlying net income.

1.Market-related impacts

Market-related impacts in the first six months of 2021, compared to the first six months of 2020, reflected higher equity markets and changes in interest rate impacts. 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

ACMA decreased reported net income by $2 million in the first six months of 2021, compared to a decrease of $48 million in the first six months of 2020.

(1) MFS Investment Management ('MFS').

(2) For more information, see the 2021 Management Information Circular under the heading Our compensation program.

(3) Our effective income tax rate on underlying net income is calculated using underlying net income and income tax expense associated with underlying net income, which excludes amounts attributable to participating policyholders.

(4) Prioryear'sunderlyingnetincomeincludes an unfavourable adjustment relating to historicalCanadian tax filings and lower tax-exemptinvestment income.

8 Sun Life Financial Inc. Second Quarter 2021 MANAGEMENT'S DISCUSSION AND ANALYSIS

3.Other adjustments

Other adjustments in the first six months of 2021 decreased reported net income by $194 million, compared to a decrease of $71 million in the same period in 2020, reflecting higher fair value adjustments on MFS's share-based payment awards.

4.Experience-related items

Compared to the first six months of 2020, the significant changes in experience-related items are as follows:

•Lower investing activity, primarily in Canada;

•Favourable credit experience in all insurance businesses, comprised of:


Year-to-date
($ millions, after-tax)	2021	2020
Changes in ratings	(9)	(99)
Impairments, net of recoveries	(2)	(25)
Release of best estimate credit	58	51
Credit Experience	47	(73)

•Favourable morbidity experience in the U.S., partially offset by Group Benefits ('GB') in Canada; and

•Unfavourable expense experience related to higher incentive compensation, reflecting earnings performance, VNB and Client measures in the first half of the year.

5.Income taxes

For the first six months of 2021, our effective tax rate on reported net income and underlying net income(1) was 19.7% and 17.0%, respectively, compared to 24.7% and 22.4%, respectively, for the first six months of 2020. In the first six months of 2021, our effective tax rate on underlying income was within our expected range of 15% to 20%.

6.Impacts of foreign exchange translation

During the first six months of 2021, the impacts of foreign exchange translation decreased reported net income and underlying net income by $102 million and $106 million, respectively.

D. Growth

1. Sales and Value of New Business


Quarterly results	Year-to-date
($ millions)	Q2'21	Q1'21	Q2'20	2021	2020
Insurance sales by business segment(1)
Canada	196	233	151	429	446
U.S.	191	154	228	345	391
Asia	323	343	240	666	558
Total insurance sales(1)	710	730	619	1,440	1,395
Wealth sales by business segment(1)
Canada	3,825	4,435	2,608	8,260	8,237
Asia	4,024	3,296	2,455	7,320	4,776
Total wealth sales excluding Asset Management	7,849	7,731	5,063	15,580	13,013
Asset Management gross flows(1)(2)	47,164	58,231	51,575	105,395	103,529
Total wealth sales(2)	55,013	65,962	56,638	120,975	116,542
Value of New Business(1)(3)	284	278	206	562	459

(1) Represents a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document.

(2) Effective January 1, 2021, the methodology for gross flows and outflows was updated for SLC Management. Prior period amounts have not been updated. For more details, see section M - Non-IFRS Financial Measures in this document.

(3) Effective January 1, 2021, reflects a change in the timing of recognition of U.S. VNB for group policies. We have updated prior period amounts to reflect this change. For more details, see section M - Non-IFRS Financial Measures in this document.

(1) Our effective income tax rate on underlying net income is calculated using underlying net income and income tax expense associated with underlying net income, which excludes amounts attributable to participating policyholders.

MANAGEMENT'S DISCUSSION AND ANALYSISSecond Quarter 2021 Sun Life Financial Inc. 9

Total Company insurance sales increased by $91 million or 15% ($149 million or 24%, excluding the impacts of foreign exchange translation) in the second quarter of 2021 compared to the same period in 2020.

•Canada insurance sales increased by 30%, driven by higher life insurance sales in our participating business.

•U.S. insurance sales decreased by 5%, excluding the unfavourable impacts of foreign exchange translation, reflecting lower medical stop-loss sales, partially offset by increased employee benefits sales.

•Asia insurance sales increased by 48%, excluding the unfavourable impacts of foreign exchange translation, driven by International, the Philippines and Vietnam, partially offset by Hong Kong.

Total Company wealth sales decreased by $1,625 million or 3% (an increase of $4,760 million or 8%, excluding the impacts of foreign exchange translation) in the second quarter of 2021 compared to the same period in 2020.

•Canada wealth sales increased by 47%, driven by increased individual wealth mutual fund and Sun GIF(1) sales, and higher sales in Group Retirement Services ('GRS') reflecting retained sales, as well as increased asset consolidations and rollovers.

•Asia wealth sales increased by 81%, excluding the unfavourable impacts of foreign exchange translation, driven by mutual fund sales in India, money market sales in the Philippines, and the pension business in Hong Kong.

•Asset Management sales increased by 3%, excluding the unfavourable impacts of foreign exchange translation, driven by higher gross flows in SLC Management, partially offset by lower mutual fund and managed fund gross flows in MFS. SLC Management's gross flows increased due to the change in methodology, the impacts of acquisitions and higher capital raising.

Total Company VNB was $284 million in the second quarter of 2021, an increase of 38% compared to the same period in 2020, reflecting strong sales in Asia and Canada, partially offset by the impacts of foreign exchange translation.

2. Premiums and Deposits


Quarterly results	Year-to-date
($ millions)	Q2'21	Q1'21	Q2'20	2021	2020
Net premium revenue	5,717	5,126	5,521	10,843	10,667
Segregated fund deposits	3,313	3,548	2,492	6,861	5,769
Mutual fund sales(1)	30,304	37,495	35,697	67,799	73,786
Managed fund sales(1)(2)	21,521	24,906	18,810	46,427	35,688
ASO premium and deposit equivalents(1)	1,787	1,690	1,774	3,477	3,585
Total premiums and deposits(1)	62,642	72,765	64,294	135,407	129,495

(1) Represents a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document.

(2) Effective January 1, 2021, the methodology for gross flows and outflows was updated for SLC Management. Prior period amounts have not been updated. For more details, see section M - Non-IFRS Financial Measures in this document.

Premiums and deposits increased by 8% in the second quarter of 2021, compared to the same period in 2020, excluding the unfavourable impacts of foreign exchange translation, driven by increases in managed fund sales, segregated fund deposits and net premium revenue, partially offset by decreases in mutual fund sales. Premiums and deposits increased by 13% in the first six months of 2021, compared to the same period in 2020, excluding the unfavourable impacts of foreign exchange translation, driven by increases in managed fund sales and segregated fund deposits.

Net premium revenue increased by 10% in the second quarter of 2021, compared to the same period in 2020, excluding the impacts of unfavourable foreign exchange translation, driven by increases in Asia. Net premium revenue increased by 5% in the first six months of 2021, compared to the same period in 2020, excluding the unfavourable impacts of foreign exchange translation, driven by increases in Asia and Canada.

Segregated fund deposits increased by 26% in the second quarter of 2021, compared to the same period in 2020, excluding the favourable impacts of foreign exchange translation, driven by increases in Canada. Segregated fund deposits increased by 26% in the first six months of 2021, compared to the same period in 2020, excluding the unfavourable impacts of foreign exchange translation, driven by increases in Canada and Asia.

Mutual fund sales decreased by 5% in the second quarter of 2021, compared to the same period in 2020, excluding the unfavourable impacts of foreign exchange translation, reflecting decreases in MFS, partially offset by increases in India and the Philippines in Asia. Mutual fund sales in the first six months of 2021 were in line with the same period in 2020, excluding the impacts of foreign exchange translation.

Managed fund sales increased by 29% in the second quarter of 2021, compared to the same period in 2020, excluding the unfavourable impacts of foreign exchange translation, driven by increases in SLC Management, partially offset by decreases in MFS. Managed fund sales increased by 41% in the first six months of 2021, compared to the same period in 2020, excluding the unfavourable impacts of foreign exchange translation, driven by increases in SLC Management, partially offset by decreases in MFS.

ASO premium and deposit equivalents increased by 3% in the second quarter of 2021, compared to the same period in 2020, excluding the unfavourable impacts of foreign exchange translation, driven by increases in GB in Canada and in Hong Kong in Asia, partially offset by GRS in Canada. ASO premium and deposit equivalents in the first six months of 2021 were in line with the same period in 2020, excluding the impacts of foreign exchange translation.

(1) Sun Life Guaranteed Investment Funds ('Sun GIF').

10 Sun Life Financial Inc. Second Quarter 2021 MANAGEMENT'S DISCUSSION AND ANALYSIS

3. Assets Under Management

AUM consists of general funds, segregated funds and other AUM. Other AUM includes mutual funds and managed funds, which include institutional and other third-party assets managed by the Company.


Quarterly results
($ millions)	Q2'21	Q1'21	Q4'20	Q3'20	Q2'20
Assets under management(1)(2)
General fund assets	195,689	190,072	197,090	196,235	195,489
Segregated funds	133,249	127,341	125,921	116,653	112,944
Mutual funds, managed funds and other AUM(1)(2)	1,031,753	986,833	932,998	882,930	822,099
Total AUM(1)(2)	1,360,691	1,304,246	1,256,009	1,195,818	1,130,532

(1) Represents a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document.

(2) Effective January 1, 2021, the methodology for AUM was updated for SLC Management with respect to certain real estate and investment-grade fixed income products to include uncalled capital commitments. We have updated prior period amounts to reflect this change. For more details, see section M - Non-IFRS Financial Measures in this document.

AUM increased by $104.7 billion or 8% as at June 30, 2021 compared to December 31, 2020, resulting from:

(i)favourable market movements on the value of mutual funds, managed funds and segregated funds of $78.3 billion;

(ii)an increase of $39.1 billion from our acquisition of a majority stake in Crescent(1) ('Crescent acquisition');

(iii)net inflows from mutual, managed and segregated funds of $14.0 billion; and

(iv)an increase of $3.5 billion from other business activities; partially offset by

(v)a decrease of $25.7 billion from the impacts of foreign exchange translation (excluding the impacts from general fund assets);

(vi)Client distributions of $3.1 billion resulting from the sale of underlying net assets in closed-end funds; and

(vii)a decrease in AUM of general fund assets of $1.4 billion.

The net inflows of mutual, managed and segregated funds of $3.3 billion in the second quarter of 2021 was driven by net inflows in SLC Management of $7.6 billion and in Asia of $2.2 billion, partially offset by net outflows of $6.9 billion in MFS.

E. Financial Strength


Quarterly results
($ millions, unless otherwise stated)	Q2'21	Q1'21	Q4'20	Q3'20	Q2'20
LICAT ratio
Sun Life Financial Inc.	147	%	141	%	147	%	144	%	146	%
Sun Life Assurance	125	%	124	%	127	%	127	%	126	%
Financial leverage ratio(1)	24.7	%	22.7	%	23.5	%	21.5	%	23.2	%
Dividend
Dividend payout ratio(1)	37	%	38	%	37	%	38	%	44	%
Dividends per common share ($)	0.550	0.550	0.550	0.550	0.550
Capital
Subordinated debt and innovative capital instruments(2)	4,633	4,632	4,981	4,235	4,734
Participating policyholders' equity and non-controlling interests	1,597	1,474	1,393	1,312	1,200
Preferred shareholders' equity and other equity instruments	3,244	2,257	2,257	2,257	2,257
Common shareholders' equity	22,468	22,016	22,212	22,323	21,962
Total capital	31,942	30,379	30,843	30,127	30,153

(1) Represents a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document.

(2) Innovative capital instruments consist of Sun Life ExchangEable Capital Securities, and qualify as regulatory capital. However, under IFRS they are reported as Senior debentures in our Consolidated Financial Statements. For additional information, see section I - Capital and Liquidity Management - 1 - Capital in our 2020 annual MD&A.

Life Insurance Capital Adequacy Test

The Office of the Superintendent of Financial Institutions has developed the regulatory capital framework referred to as the Life Insurance Capital Adequacy Test for Canada. LICAT measures the capital adequacy of an insurer using a risk-based approach and includes elements that contribute to financial strength through periods when an insurer is under stress as well as elements that contribute to policyholder and creditor protection wind-up.

SLF Inc. is a non-operating insurance company and is subject to the LICAT guideline. As at June 30, 2021, SLF Inc.'s LICAT ratio was 147% which is in line with December 31, 2020, as favourable impacts of reported net income and the issuance of $1 billion principal amount of other equity instruments were offset by the impacts of payment of dividends, the payment associated with the ACB(2) bancassurance partnership in Vietnam, the Crescent acquisition, the net change of subordinated debt and market movements.

(1) Crescent Capital Group LP ('Crescent').

(2) Asia Commercial Joint Stock Bank ('ACB').

MANAGEMENT'S DISCUSSION AND ANALYSISSecond Quarter 2021 Sun Life Financial Inc. 11

Sun Life Assurance, SLF Inc.'s principal operating life insurance subsidiary, is also subject to the LICAT guideline. As at June 30, 2021, Sun Life Assurance's LICAT ratio was 125%, 2% lower than December 31, 2020. The favourable impacts of reported net income were more than offset by the payment associated with the ACB bancassurance partnership in Vietnam, market movements and the smoothed impact of the switch in the interest rate scenario in North America for participating businesses.

The Sun Life Assurance LICAT ratios in both periods are well above OSFI's supervisory ratio of 100% and regulatory minimum ratio of 90%.

Capital

Our total capital consists of subordinated debt and other capital instruments, participating policyholders' equity, and total shareholders' equity, which includes common shareholders' equity, preferred shareholders' equity and non-controlling interests. As at June 30, 2021, our total capital was $31.9 billion, an increase of $1.1 billion compared to December 31, 2020. The increase in total capital included common shareholders' net income of $1,837 million and the issuance of $1 billion principal amount of other equity instruments. This was partially offset by the payment of $650 million of dividends on common shares of SLF Inc. ('common shares'), the impacts of foreign exchange translation of $416 million included in other comprehensive income (loss) ('OCI'), the redemption of $350 million principal amount of Series 2016-1 Subordinated Unsecured 3.10% Fixed/Floating Debentures ('Series 2016-1 Debentures'), net unrealized losses on available-for-sale ('AFS') assets of $299 million and the impact of the Crescent acquisition of $139 million.

Our capital and liquidity positions remain strong, supported by a low pro forma financial leverage ratio(1) of 24.7%, a strong LICAT ratio of 147% at SLF Inc., and $3.2 billion in cash and other liquid assets(2) as at June 30, 2021 in SLF Inc. (the ultimate parent company), and its wholly-owned holding companies ($3.1 billion as at December 31, 2020).

Capital Transactions

On February 19, 2021, SLF Inc. redeemed all of the outstanding $350 million principal amount of Series 2016-1 Debentures. The redemption was funded from existing cash and other liquid assets.

On June 30, 2021, SLF Inc. issued $1 billion principal amount of 3.60% Limited Recourse Capital Notes Series 2021-1. The net proceeds will be used for general corporate purposes, which may include investments in subsidiaries, repayment of indebtedness and other strategic investments.

On September 29, 2021, we intend to redeem all of the $400 million Class A Non-Cumulative Preferred Shares Series 1 issued by SLF Inc. on February 25, 2005 and all of the $325 million Class A Non-Cumulative Preferred Shares Series 2 issued by SLF Inc. on July 15, 2005, in accordance with the terms attached to the two series of preferred shares. The redemptions are subject to regulatory approval and will be funded from existing cash and other liquid assets in SLF Inc. The redemptions will result in a reduction in SLF Inc.'s LICAT ratio and financial leverage ratio of approximately three and two percentage points, respectively. Sun Life Assurance's LICAT ratio will not be impacted.

Subsequent Event

On July 1, 2021, we purchased Pinnacle Care International, Inc. ('PinnacleCare'), a leading U.S. health care navigation and medical intelligence provider, for $105 million (US$85 million). PinnacleCare will become part of our U.S. Group Benefits business in the medical stop-loss organization, the largest independent medical stop-loss provider in the country. The acquisition will expand our medical stop-loss business beyond the traditional model that reimburses employers after care has occurred, to one that engages employees at diagnosis to help improve the entire care experience and outcomes for both the employee and employer.

F. Performance by Business Segment


Quarterly results	Year-to-date
($ millions)	Q2'21	Q1'21	Q2'20	2021	2020
Reported net income (loss)
Canada	404	405	117	809	75
U.S.	157	211	118	368	282
Asset Management	221	230	223	451	462
Asia	143	198	126	341	226
Corporate	(25)	(107)	(65)	(132)	(135)
Total reported net income (loss)	900	937	519	1,837	910
Underlying net income (loss)(1)
Canada	290	285	281	575	537
U.S.	165	171	123	336	284
Asset Management	311	291	259	602	501
Asia	152	159	144	311	299
Corporate	(35)	(56)	(68)	(91)	(112)
Total underlying net income (loss)(1)	883	850	739	1,733	1,509

(1) Represents a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document.

(1) As at June 30, 2021, the financial leverage ratio is 24.7%. Our intention to redeem a total of $725 million preferred shares will result in a reduction in the financial leverage ratio of approximately two percentage points.

(2) Other liquid assets include cash equivalents, short-term investments, and publicly traded securities.

12 Sun Life Financial Inc. Second Quarter 2021 MANAGEMENT'S DISCUSSION AND ANALYSIS

Information describing the business segments and their respective business units is included in our 2020 annual MD&A. All factors discussed in this document that impact our underlying net income are also applicable to reported net income.

1. Canada


Quarterly results	Year-to-date
($ millions)	Q2'21	Q1'21	Q2'20	2021	2020
Individual Insurance & Wealth	251	240	(13)	491	(157)
Group Benefits	70	57	73	127	136
Group Retirement Services	83	108	57	191	96
Reported net income (loss)	404	405	117	809	75
Less: Market-related impacts(1)	114	124	(161)	238	(436)
Assumption changes and management actions(1)	-	(4)	(3)	(4)	(25)
Other(1)(2)	-	-	-	-	(1)
Underlying net income(3)	290	285	281	575	537
Reported ROE (%)(3)	20.8	%	21.8	%	6.5	%	21.3	%	2.1	%
Underlying ROE (%)(3)	14.9	%	15.3	%	15.6	%	15.1	%	15.0	%
Insurance sales(3)	196	233	151	429	446
Wealth sales(3)	3,825	4,435	2,608	8,260	8,237

(1)Represents an adjustment made to arrive at a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document for a breakdown of components within this adjustment.

(2)Other adjustments to arrive at a non-IFRS financial measure include other items that are unusual or exceptional in nature. See section M - Non-IFRS Financial Measures in this document.

(3)Represents a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document.

Profitability

Quarterly Comparison - Q2 2021 vs. Q2 2020

Canada's reported net income increased by $287 million in the second quarter of 2021 compared to the same period in 2020, driven by favourable market-related impacts, predominately from changes in interest rates. Underlying net income increased by $9 million or 3%, driven by favourable credit experience, business growth and policyholder behaviour, partially offset by lower investing activity and less favourable mortality experience. Morbidity experience in Group Benefits ('GB') was largely in line with the prior year, as benefits from pricing actions in long-term disability were offset by higher dental and paramedical claims reflecting lower activity in the prior year as a result of the COVID-19 lockdowns.

Year-to-Date Comparison - Q2 2021 vs. Q2 2020

Canada's reported net income increased by $734 million in the first six months of 2021 compared to the same period in 2020, driven by favourable market-related impacts, predominantly from higher equity markets and changes in interest rates. Underlying net income increased by $38 million or 7%, driven by favourable credit experience and business growth, partially offset by lower investing activity and morbidity experience in GB. Morbidity experience was unfavourable from higher dental and paramedical claims reflecting lower activity in the prior year as a result of the COVID-19 lockdowns, partially offset by benefits from pricing actions in long-term disability.

Growth

Quarterly Comparison - Q2 2021 vs. Q2 2020

Canada insurance sales in the second quarter of 2021 increased by $45 million or 30% compared to the same period in 2020. Individual insurance sales were $122 million, an increase of $45 million or 58%, driven by higher life insurance sales in our participating business. Sales in GB were $74 million, in line with the same period in 2020.

Canada wealth sales increased by $1.2 billion or 47% in the second quarter of 2021 compared to the same period in 2020. Individual wealth sales were $2.2 billion, an increase of $739 million or 51%, driven by increased mutual fund and Sun GIF sales. GRS sales were $1.6 billion, an increase of $478 million or 41% compared to the same period in 2020, reflecting retained sales, as well as increased asset consolidations and rollovers.

Year-to-Date Comparison - Q2 2021 vs. Q2 2020

Canada insurance sales decreased by $17 million or 4% in the first six months of 2021 compared to the same period in 2020. Individual insurance sales were $227 million, an increase of $67 million or 42%, driven by higher life insurance sales in our participating business. Sales in GB were $202 million, a decrease of $84 million or 29%, due to lower large case sales.

Canada wealth sales in the first six months of 2021 were in line with the same period in 2020. Individual wealth sales were $4.8 billion, an increase of $1.3 billion or 36%, driven by increased mutual fund and Sun GIF sales. GRS sales were $3.4 billion, a decrease of $1.3 billion or 27%, reflecting higher retained sales in the large case market in the prior year.

MANAGEMENT'S DISCUSSION AND ANALYSISSecond Quarter 2021 Sun Life Financial Inc. 13

2. U.S.


Quarterly results	Year-to-date
(US$ millions)	Q2'21	Q1'21	Q2'20	2021	2020
Group Benefits	100	88	80	188	158
In-force Management	27	79	6	106	52
Reported net income	127	167	86	294	210
Less: Market-related impacts(1)	(5)	34	(3)	29	18
Assumption changes and management actions(1)	-	(3)	-	(3)	(17)
Acquisition, integration and restructuring(1)	(1)	-	(1)	(1)	(2)
Underlying net income(2)	133	136	90	269	211
Reported ROE (%)(2)	17.4	%	24.0	%	12.1	%	20.6	%	14.8	%
Underlying ROE (%)(2)	18.3	%	19.6	%	12.6	%	18.9	%	14.8	%
After-tax profit margin for Group Benefits (%)(2)(3)	8.5	%	8.1	%	7.5	%	8.5	%	7.5	%
Insurance sales(2)	156	121	165	277	287
(C$ millions)
Reported net income	157	211	118	368	282
Underlying net income(2)	165	171	123	336	284

(1) Represents an adjustment made to arrive at a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document for a breakdown of components within this adjustment.

(2) Represents a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document.

(3) Based on underlying net income, on a trailing four-quarter basis. See section M - Non-IFRS Financial Measures in this document.

Profitability

Quarterly Comparison - Q2 2021 vs. Q2 2020

U.S.'s reported net income increased by US$41 million ($39 million) or 48% (33%) in the second quarter of 2021 compared to the same period in 2020, driven by higher underlying net income. Underlying net income increased by US$43 million ($42 million) or 48% (34%), driven by favourable mortality, morbidity and credit experience and higher investing activity, partially offset by unfavourable expense experience and a gain recorded in the prior year arising from the conclusion of a legal matter. Mortality experience improved as a result of lower COVID-19-related claims in employee benefits, and favourable claims experience in In-force Management. Favourable morbidity experience was driven by medical stop-loss. This was partially offset by unfavourable short-term disability experience, and higher dental claims compared to lower activity in the prior year as a result of the COVID-19 lockdowns. The impacts of foreign exchange translation decreased reported net income and underlying net income by $22 million and $21 million, respectively.

The trailing four-quarter after-tax profit margin for Group Benefits was 8.5% as of the second quarter of 2021, compared to 7.5% as of the second quarter of 2020.

Year-to-Date Comparison - Q2 2021 vs. Q2 2020

U.S.'s reported net income increased by US$84 million ($86 million) or 40% (30%) in the first six months of 2021 compared to the same period in 2020, driven by less unfavourable ACMA impacts. Underlying net income increased by US$58 million ($52 million) or 27% (18%), primarily driven by favourable morbidity and mortality experience. The impacts of foreign exchange translation decreased reported net income and underlying net income by $35 million and $31 million, respectively.

Growth

Quarterly Comparison - Q2 2021 vs. Q2 2020

U.S. insurance sales decreased by US$9 million or 5% in the second quarter of 2021 compared to the same period in 2020, reflecting lower medical stop-loss sales, partially offset by increased employee benefits sales.

Year-to-Date Comparison - Q2 2021 vs. Q2 2020

U.S. insurance sales decreased by US$10 million or 3% in the first six months of 2021 compared to the same period in 2020, reflecting lower medical stop-loss sales, partially offset by increased employee benefits sales.

14 Sun Life Financial Inc. Second Quarter 2021 MANAGEMENT'S DISCUSSION AND ANALYSIS

3. Asset Management


Quarterly results	Year-to-date
Asset Management (C$ millions)	Q2'21	Q1'21	Q2'20	2021	2020
Reported net income	221	230	223	451	462
Less: Fair value adjustments on MFS's share-based payment awards(1)	(52)	(44)	(24)	(96)	(14)
Acquisition, integration and restructuring(1)(2)	(17)	(17)	(12)	(34)	(25)
Other(1)(3)	(21)	-	-	(21)	-
Underlying net income(4)	311	291	259	602	501
Assets under management (C$ billions)(4)(5)	988.6	946.4	788.1	988.6	788.1
Gross flows (C$ billions)(4)(6)	47.2	58.2	51.6	105.4	103.5
Net flows (C$ billions)(4)(6)	0.7	10.3	7.3	11.0	7.6
MFS(C$ millions)
Reported net income	234	236	205	470	445
Less: Fair value adjustments on MFS's share-based payment awards(1)	(52)	(44)	(24)	(96)	(14)
Underlying net income(4)	286	280	229	566	459
Assets under management (C$ billions)(4)	820.0	786.5	690.2	820.0	690.2
Gross flows (C$ billions)(4)	36.1	45.4	47.6	81.5	97.3
Net flows (C$ billions)(4)	(6.9)	(0.4)	7.4	(7.3)	9.8
MFS (US$ millions)
Reported net income	191	186	147	377	327
Less: Fair value adjustments on MFS's share-based payment awards(1)	(42)	(35)	(18)	(77)	(10)
Underlying net income(4)	233	221	165	454	337
Pre-tax net operating profit margin ratio for MFS(4)	39	%	39	%	36	%	39	%	36	%
Average net assets (US$ billions)(4)	655.1	619.3	479.1	637.2	491.8
Assets under management (US$ billions)(4)(7)	661.6	626.3	508.5	661.6	508.5
Gross flows (US$ billions)(4)	29.4	35.9	34.3	65.3	71.4
Net flows (US$ billions)(4)	(5.6)	(0.3)	5.4	(5.9)	7.1
Asset appreciation (depreciation) (US$ billions)	40.9	16.3	66.7	57.3	26.0
S&P 500 Index (daily average)	4,182	3,861	2,927	4,022	2,997
MSCI EAFE Index (daily average)	2,305	2,200	1,681	2,253	1,773
SLC Management (C$ millions)
Reported net income	(13)	(6)	18	(19)	17
Less: Acquisition, integration and restructuring(1)(2)	(17)	(17)	(12)	(34)	(25)
Other(1)(3)	(21)	-	-	(21)	-
Underlying net income(4)	25	11	30	36	42
Assets under management (C$ billions)(4)(5)	168.6	159.9	97.9	168.6	88.9
Gross flows (C$ billions)(4)(6)	11.1	12.8	4.0	23.9	6.2
Net flows (C$ billions)(4)(6)	7.6	10.6	(0.2)	18.2	(2.2)

(1)Represents an adjustment made to arrive at a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document for a breakdown of components within this adjustment.

(2)Amounts relate to acquisition costs for our acquisition of a majority stake in BentallGreenOak ('BGO acquisition'), our acquisition of a majority stake in InfraRed Capital Partners ('InfraRed acquisition'), and the Crescent acquisition, which include the unwinding of the discount for Other financial liabilities of $13 million and $14 million in the second and first quarter of 2021, respectively ($11 million and $10 million in the second and first quarter of 2020).

(3)Other adjustments to arrive at a non-IFRS financial measure include other items that are unusual or exceptional in nature. See section M - Non-IFRS Financial Measures in this document.

(4)Represents a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document.

(6)Effective January 1, 2021, the methodology for gross flows and outflows was updated for SLC Management. Prior period amounts have not been updated. For more details, see section M - Non-IFRS Financial Measures in this document.

(7)Monthly information on AUM is provided by MFS in its Corporate Fact Sheet, which can be found at www.mfs.com/CorpFact. The Corporate Fact Sheet also provides MFS's U.S. GAAP assets and liabilities as at June 30, 2021.

MANAGEMENT'S DISCUSSION AND ANALYSISSecond Quarter 2021 Sun Life Financial Inc. 15

Profitability

Quarterly Comparison - Q2 2021 vs. Q2 2020

Asset Management's reported net income in the second quarter of 2021 was in line with the same period in 2020, as higher fair value adjustments on MFS's share-based payment awards and the impact of the UK Tax Rate Change(1) in SLC Management of $21 million were offset by the increase in underlying net income. Underlying net income increased by $52 million or 20%, driven by higher average net assets ('ANA') in MFS, partially offset by higher variable compensation expenses in MFS. The impacts of foreign exchange translation decreased reported and underlying net income by $31 million and $37 million, respectively.

In U.S. dollars, MFS's reported net income increased by US$44 million or 30% in the second quarter of 2021 compared to the same period in 2020, driven by the change in underlying net income of US$68 million, partially offset by higher fair value adjustments on MFS's share-based payment awards. Underlying net income increased, reflecting the impact of higher ANA, partially offset by higher variable compensation expenses and an unfavourable change in net investment returns. Pre-tax net operating profit margin ratio for MFS for the second quarter of 2021 was 39%, compared to 36% in the same period of 2020.

SLC Management's reported net loss was $13 million in the second quarter of 2021, a decrease of $31 million or 172% compared to the same period in 2020, reflecting the impact of the UK Tax Rate Change(1) of $21 million. Underlying net income decreased by $5 million or 17%, driven by lower results from BGO(2) as the prior year included higher performance fees. This factor was partially offset by the results from the InfraRed and Crescent acquisitions.

Year-to-Date Comparison - Q2 2021 vs. Q2 2020

Asset Management's reported net income decreased by $11 million or 2% in the first six months of 2021 compared to the same period in 2020, reflecting higher fair value adjustments on MFS's share-based payment awards and the impact of the UK Tax Rate Change(1) in SLC Management of $21 million, partially offset by higher underlying net income. Underlying net income increased by $101 million or 20%, driven by higher ANA in MFS, partially offset by higher variable compensation expenses in MFS. The impacts of foreign exchange translation decreased reported and underlying net income by $44 million and $54 million, respectively.

In U.S. dollars, MFS's reported net income in the first six months of 2021 increased by US$50 million or 15% compared to the same period in 2020, driven by the change in underlying net income of US$117 million, partially offset by higher fair value adjustments on MFS's share-based payment awards. Underlying net income increased reflecting the impact of higher ANA, partially offset by higher variable compensation expenses and an unfavourable change in net investment returns.

SLC Management's reported net loss was $19 million in the first six months of 2021, a decrease of $36 million compared to the same period in 2020, reflecting the impact of the UK Tax Rate Change(1) of $21 million and higher acquisition costs. Underlying net income decreased by $6 million or 14%, driven by lower results from BGO as the prior year included higher performance fees, partially offset by the results from the InfraRed and Crescent acquisitions.

Growth

Asset Management's AUM increased by $96.7 billion or 11% as at June 30, 2021 compared to December 31, 2020, driven by asset appreciation and the Crescent acquisition of $41.6 billion, partially offset by the unfavourable impacts of foreign exchange translation and other items.

MFS's AUM increased by US$51.4 billion or 8% as at June 30, 2021 compared to December 31, 2020, driven by asset appreciation of US$57.3 billion, partially offset by net outflows of US$5.9 billion.

SLC Management's AUM increased by $53.5 billion or 46% as at June 30, 2021 compared to December 31, 2020, driven by the Crescent acquisition of $39.1 billion, net inflows of $18.2 billion, asset appreciation of $1.3 billion, and other items. These factors were partially offset by the unfavourable impacts of foreign exchange translation of $3.3 billion and Client distributions of $3.1 billion.

(1) For more information, See section C - Profitability - 5 - Income taxes in this document.

(2) BentallGreenOak ('BGO').

16 Sun Life Financial Inc. Second Quarter 2021 MANAGEMENT'S DISCUSSION AND ANALYSIS

4. Asia


Quarterly results	Year-to-date
($ millions)	Q2'21	Q1'21	Q2'20	2021	2020
Local Markets	55	87	66	142	131
International Hubs	88	111	60	199	95
Reported net income	143	198	126	341	226
Less: Market-related impacts(1)	(11)	36	(24)	25	(71)
Assumption changes and management actions(1)	2	3	7	5	(2)
Acquisition, integration and restructuring(1)	-	-	(1)	-	-
Underlying net income (loss)(2)	152	159	144	311	299
Reported ROE (%)(2)	9.4	%	13.0	%	8.7	%	11.2	%	8.0	%
Underlying ROE (%)(2)	10.1	%	10.5	%	9.9	%	10.3	%	10.6	%
Insurance sales(2)	323	343	240	666	558
Wealth sales(2)	4,024	3,296	2,455	7,320	4,776

(1) Represents an adjustment made to arrive at a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document for a breakdown of components within this adjustment.

(2) Represents a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document.

Profitability

Quarterly Comparison - Q2 2021 vs. Q2 2020

Asia's reported net income increased by $17 million in the second quarter of 2021 compared to the same period in 2020, driven by improved market-related impacts, reflecting favourable changes in interest rates partially offset by lower equity markets. Underlying net income increased by $8 million or 6%, driven by business growth, higher new business gains and favourable credit experience. These factors were partially offset by unfavourable expense experience, the impacts of foreign exchange translation, and higher mortality from our India joint venture reflected in other experience(1). The impacts of foreign exchange translation decreased reported and underlying net income by $16 million and $17 million, respectively.

Year-to-Date Comparison - Q2 2021 vs. Q2 2020

Asia's reported net income increased by $115 million in the first six months of 2021 compared to the same period in 2020, driven by favourable market-related impacts, reflecting changes in interest rates and equity markets. Underlying net income increased by $12 million or 4%, driven by business growth, higher new business gains and favourable credit experience. These factors were partially offset by unfavourable expense and mortality experience, and higher mortality from our India joint venture reflected in other experience(1). The impacts of foreign exchange translation decreased reported and underlying net income by $24 million and $22 million, respectively.

Growth

Quarterly Comparison - Q2 2021 vs. Q2 2020

Asia insurance sales in the second quarter of 2021 increased by 48% compared to the same period in 2020, excluding the unfavourable impacts of foreign exchange translation. Individual insurance sales were $318 million. The increase of 49%, excluding the unfavourable impacts of foreign exchange translation, was driven by International, the Philippines and Vietnam, partially offset by Hong Kong.

Asia wealth sales increased by 81% in the second quarter of 2021 compared to the same period in 2020, excluding the unfavourable impacts of foreign exchange translation, driven by mutual fund sales in India, money market sales in the Philippines, and the pension business in Hong Kong.

Year-to-Date Comparison - Q2 2021 vs. Q2 2020

Asia insurance sales increased by 27% in the first six months of 2021 compared to the same period in 2020. Individual insurance sales were $650 million. The increase of 28%, excluding the unfavourable impacts of foreign exchange translation, was driven by Vietnam, International and the Philippines, partially offset by Hong Kong.

Asia wealth sales increased by 65% in the first six months of 2021 compared to the same period in 2020, excluding the unfavourable impacts of foreign exchange translation, driven by mutual fund sales in India, the pension business in Hong Kong and money market sales in the Philippines.

(1) Experience-related items from our India, China and Malaysia joint ventures and associates are recorded within other experience.

MANAGEMENT'S DISCUSSION AND ANALYSISSecond Quarter 2021 Sun Life Financial Inc. 17

5. Corporate


Quarterly results	Year-to-date
($ millions)	Q2'21	Q1'21	Q2'20	2021	2020
UK	25	63	45	88	96
Corporate Support	(50)	(170)	(110)	(220)	(231)
Reported net income (loss)	(25)	(107)	(65)	(132)	(135)
Less: Market-related impacts(1)	(6)	5	2	(1)	3
Assumption changes and management actions(1)	-	1	1	1	2
Acquisition, integration and restructuring(1)	6	(57)	-	(51)	(28)
Other(1)(2)	10	-	-	10	-
Underlying net income (loss)(3)	(35)	(56)	(68)	(91)	(112)

(1)Represents an adjustment made to arrive at a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document for a breakdown of components within this adjustment.

(2)Other adjustments to arrive at a non-IFRS financial measure include other items that are unusual or exceptional in nature. See section M - Non-IFRS Financial Measures in this document.

(3)Represents a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document.

Profitability

Quarterly Comparison - Q2 2021 vs. Q2 2020

Corporate's reported net loss was $25 million in the second quarter of 2021, $40 million lower than the same period in 2020, driven by the change in underlying net loss of $33 million. Underlying net loss was $35 million, $33 million lower than the same period in 2020, driven by a lower effective tax rate(1), partially offset by unfavourable expense experience, lower gains on seed investments and lower investing activity in the UK.

Year-to-Date Comparison - Q2 2021 vs. Q2 2020

Corporate's reported net loss was $132 million in the first six months of 2021, in line with the same period in 2020, with the change in underlying net loss of $21 million offset by higher restructuring costs. Underlying net loss was $91 million, $21 million lower than the same period in 2020, driven by a lower effective tax rate(1), partially offset by unfavourable expense experience, lower gains on seed investments, lower investing activity in the UK and lower earnings from the run-off businesses.

G. Investments

Total general fund invested assets of $175.1 billion as at June 30, 2021, decreased by $2.8 billion compared to $177.9 billion as at December 31, 2020. The decrease was primarily due to a decline in net fair value from rising interest rates, the impacts of foreign exchange translation and declines in cash, including the funding of acquisitions and the redemption of subordinated debt, partially offset by net purchases in our invested asset portfolio. 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)


June 30, 2021	December 31, 2020
($ millions)	Carrying value	% of Total carrying value	Carrying value	% of Total carrying value
Cash, cash equivalents and short-term securities	12,435	7	%	13,527	8	%
Debt securities	85,163	49	%	89,089	50	%
Equity securities	7,975	4	%	6,631	4	%
Mortgages and loans	49,987	28	%	49,946	28	%
Derivative assets	1,527	1	%	2,160	1	%
Other invested assets	6,657	4	%	5,778	3	%
Policy loans	3,237	2	%	3,265	2	%
Investment properties	8,164	5	%	7,516	4	%
Total invested assets	175,145	100	%	177,912	100	%

(1)The values and ratios presented are based on the carrying value of the respective asset categories. Generally, the carrying values for invested assets are equal to their fair values; however our mortgages and loans are generally carried at amortized cost. For invested assets supporting insurance contracts, in the event of default, if the amounts recovered are insufficient to satisfy the related insurance contract liability cash flows that the assets are intended to support, credit exposure may be greater than the carrying value of the assets.

(1) Prioryear'sunderlyingnetincomeincludes an unfavourable adjustment relating to historicalCanadian tax filings and lower tax-exemptinvestment income.

18 Sun Life Financial Inc. Second Quarter 2021 MANAGEMENT'S DISCUSSION AND ANALYSIS

1. 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. As at June 30, 2021, 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.

Debt Securities by Geography

The carrying value of fair value through profit or loss ('FVTPL') and AFS debt securities by geographic location is presented in the following table.


June 30, 2021	December 31, 2020
($ millions)	FVTPL debt securities	AFS debt securities	Total	% of Total	FVTPL debt securities	AFS debt securities	Total	% of Total
Debt securities by geography:
Canada	31,192	4,601	35,793	42	%	34,005	4,685	38,690	44	%
United States	26,070	4,604	30,674	36	%	27,183	3,984	31,167	35	%
Europe	8,106	1,025	9,131	11	%	8,734	966	9,700	11	%
Asia	5,219	570	5,789	7	%	5,095	600	5,695	6	%
Other	2,757	1,019	3,776	4	%	2,817	1,020	3,837	4	%
Total debt securities	73,344	11,819	85,163	100	%	77,834	11,255	89,089	100	%

Our gross unrealized losses as at June 30, 2021 for FVTPL and AFS debt securities were $497 million and $81 million, respectively, compared with $94 million and $27 million, respectively, as at December 31, 2020. The increase in gross unrealized losses was largely due to the impact from rising interest rates.

Debt Securities by Credit Rating

Debt securities with a credit rating of 'A' or higher represented 72% of the total debt securities as at June 30, 2021, consistent with December 31, 2020. Debt securities with a credit rating of 'BBB' or higher represented 99% of total debt securities as at June 30, 2021, compared to 98% as at December 31, 2020.

2. Mortgages and Loans

Mortgages and loans in this section are presented at their carrying value in our Interim Consolidated Financial Statements. The mortgage portfolio consists almost entirely of first mortgages and our loan portfolio consists of private placement loans.

Mortgages and Loans by Geography

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


June 30, 2021	December 31, 2020
($ millions)	Mortgages	Loans	Total	Mortgages	Loans	Total
Mortgages and loans by geography:
Canada	9,033	12,949	21,982	9,119	13,107	22,226
United States	5,891	13,948	19,839	6,309	13,773	20,082
Europe	-	5,818	5,818	-	5,352	5,352
Asia	-	410	410	-	366	366
Other	-	1,938	1,938	-	1,920	1,920
Total mortgages and loans	14,924	35,063	49,987	15,428	34,518	49,946
% of Total Invested Assets	8	%	20	%	28	%	9	%	19	%	28	%

(1)The geographic location for mortgages is based on the location of the property and for loans it is based on the country of the creditor's parent.

As at June 30, 2021, we held $14.9 billion of mortgages, compared to $15.4 billion as at December 31, 2020. Our mortgage portfolio consists entirely of commercial mortgages, including retail, office, multi-family, industrial and land properties. As at June 30, 2021, 37% of our commercial mortgage portfolio consisted of multi-family residential mortgages; there are no single family residential mortgages. Our uninsured commercial portfolio had a weighted average loan-to-value ratio of approximately 58% as at June 30, 2021, consistent with December 31, 2020. 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 1.65 times. Of the $4.0 billion of multi-family residential mortgages in the Canadian commercial mortgage portfolio, 93% were insured by the CMHC.

As at June 30, 2021, we held $35.1 billion of loans, compared to $34.5 billion as at December 31, 2020. Private placement loans provide diversification by type of loan, industry segment and borrower credit quality. The private placement loan portfolio consists of senior secured and unsecured loans to large- and mid-market sized corporate borrowers, securitized lease/loan obligations secured by a variety of assets, and project finance loans in sectors such as power and infrastructure.

MANAGEMENT'S DISCUSSION AND ANALYSISSecond Quarter 2021 Sun Life Financial Inc. 19

Mortgages and Loans Past Due or Impaired

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


June 30, 2021
Gross carrying value	Allowance for losses
($ millions)	Mortgages	Loans	Total	Mortgages	Loans	Total
Not past due	14,897	35,031	49,928	-	-	-
Past due:
Past due less than 90 days	-	-	-	-	-	-
Past due 90 days or more	-	-	-	-	-	-
Impaired	92	80	172	65	48	113
Total	14,989	35,111	50,100	65	48	113

December 31, 2020
Gross carrying value	Allowance for losses
($ millions)	Mortgages	Loans	Total	Mortgages	Loans	Total
Not past due	15,402	34,486	49,888	-	-	-
Past due:
Past due less than 90 days	-	-	-	-	-	-
Past due 90 days or more	-	-	-	-	-	-
Impaired	92	81	173	66	49	115
Total	15,494	34,567	50,061	66	49	115

Our impaired mortgages and loans, net of allowances for losses, were $59 million as at June 30, 2021, compared to $58 million as at December 31, 2020.

3. 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.


($ millions)	June 30, 2021	December 31, 2020
Net fair value asset (liability)	(101)	416
Total notional amount	63,163	62,792
Credit equivalent amount(1)	883	904
Risk-weighted credit equivalent amount(1)	21	21

(1) Amounts presented are net of collateral received.

The net fair value of derivatives was a liability of $101 million as at June 30, 2021, compared to an asset of $416 million as at December 31, 2020. The decrease in net fair value was primarily due to the impact from upward shifts in yield curves, partially offset by the strengthening of the Canadian dollar against the U.S. dollar on foreign exchange contracts.

The total notional amount of our derivatives increased to $63.2 billion as at June 30, 2021 from $62.8 billion as at December 31, 2020. The change in notional is mainly attributable to an increase of $1.1 billion in foreign exchange contracts used for hedging foreign currency assets, partially offset by a decrease of $0.4 billion in equity futures, and $0.3 billion in interest rate contracts primarily for duration matching purposes.

4. 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 June 30, 2021 was $2,913 million compared to $3,127 million as at December 31, 2020. The decrease of $214 million was primarily due to the release of provisions on fixed income assets supporting our insurance contract liabilities, yield curve movements and the impacts of foreign exchange translation, partially offset by increases in the provisions for assets purchased net of dispositions.

A one-notch downgrade of 25% of our fixed income investment portfolio(1) would result in an increase in insurance contract liabilities of $125 million post-tax and a decrease to our common shareholders' net income. This excludes the impact from the release of best estimate credit provision and fixed income investments not impacting shareholders net income, for example assets supporting participating policyholders. Of this total amount, 60% relates to our BBB portfolio.

(1) Excluding federal and provincial securities, asset-backed securities, mortgage-backed securities and CMHC mortgages.

20 Sun Life Financial Inc. Second Quarter 2021 MANAGEMENT'S DISCUSSION AND ANALYSIS

H. Risk Management

This section includes our disclosure on market risks and should be read in conjunction with our unaudited Interim Consolidated Financial Statements for the quarter ended June 30, 2021.

We have 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: market, insurance, credit, business and strategic, operational and liquidity risks. The impact of the COVID-19 pandemic is resulting in the potential for simultaneous adverse impacts across all six major risk categories, though the time horizon and magnitude of these impacts is uncertain at this time. For additional information, refer to sections B - Overview - 4 - COVID-19 and J - Risk Management - 9 - Risks relating to the COVID-19 Pandemic in the 2020 Annual MD&A.

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 Corporate.

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 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 Consolidated Financial Statements. Refer to Additional Cautionary Language and Key Assumptions Related to Sensitivities in this section for important additional information regarding these estimates.

The market value of our investments in fixed income and equity securities fluctuates based on movements in interest rates and equity markets. The market value of fixed income assets designated as AFS that are held primarily in our surplus segment increases with declining interest rates and decreases with rising interest rates. The market value of equities designated as AFS and held primarily in our surplus segment increases with rising equity markets and decreases with declining equity markets. Changes in the market value of AFS assets flow through 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 $46 million (pre-tax) in net gains on the sale of AFS assets during the second quarter of 2021 ($43 million , pre-tax, in the second quarter of 2020). The net unrealized (losses) gains within our Accumulated OCI position on AFS fixed income and equity assets were $256 million and $77 million, respectively, net of tax, as at June 30, 2021 ($556 million and $76 million, respectively, net of tax, as at December 31, 2020).

(1) Net income in section H - Risk Management in this document refers to common shareholders' net income.

MANAGEMENT'S DISCUSSION AND ANALYSISSecond Quarter 2021 Sun Life Financial Inc. 21

1. Equity Market Sensitivities

The following table sets out the estimated immediate impact on, or sensitivity of, our net income and OCI, and Sun Life Assurance's LICAT ratio to certain instantaneous changes in equity market prices as at June 30, 2021 and December 31, 2020.

It is important to note that these estimates are illustrative and performance of our segregated fund dynamic hedging program may differ as actual equity-related exposures vary from broad market indices (the impact of active management, basis risk, and other factors) and higher or lower volatility level than assumed.


As at June 30, 2021
($ millions, unless otherwise noted)
Change in Equity Markets(1)	25% decrease	10% decrease	10% increase	25% increase
Potential impact on net income(2)(3)	$	(400)	$	(150)	$	150	$	350
Potential impact on OCI(3)	$	(50)	$	(50)	$	50	$	50
Potential impact on LICAT(2)(4)	0.0% point change	0.0% point change	0.0% point change	0.5% point decrease

As at December 31, 2020
($ millions, unless otherwise noted)
Change in Equity Markets(1)	25% decrease	10% decrease	10% increase	25% increase
Potential impact on net income(2)(3)	$	(400)	$	(150)	$	150	$	300
Potential impact on OCI(3)	$	(50)	$	-	$	-	$	50
Potential impact on LICAT(2)(4)	0.0% point change	0.0% point change	0.0% point change	0.5% point decrease

(1)Represents the respective change across all equity markets as at June 30, 2021and December 31, 2020. Assumes that actual equity exposures consistently and precisely track the broader equity markets. Since in actual practice equity-related exposures generally differ from broad market indices (due to the impact of active management, basis risk, and other factors), realized sensitivities may differ significantly from those illustrated above. Sensitivities include the impact of re-balancing equity hedges for dynamic hedging programs at 2% intervals (for 10% changes in equity markets) and at 5% intervals (for 25% changes in equity markets).

(2)The market risk sensitivities include the estimated mitigation impact of our hedging programs in effect as at June 30, 2021 and December 31, 2020, and include new business added and product changes implemented prior to such dates.

(3)Net income and OCI sensitivities have been rounded to $50 million. The sensitivities exclude the market impacts on the income from our joint ventures and associates, which we account for on an equity basis.

(4)The LICAT sensitivities illustrate the impact on Sun Life Assurance as at June 30, 2021 and December 31, 2020. The sensitivities assume that a scenario switch does not occur in the quarter. LICAT ratios are rounded to the nearest 0.5%.

2. Interest Rate Sensitivities

The following table sets out the estimated immediate impact on, or sensitivity of, our net income, OCI and Sun Life Assurance's LICAT ratio to certain instantaneous changes in interest rates as at June 30, 2021 and December 31, 2020.

Our LICAT sensitivities may be non-linear and can change due to the interrelationship between market rates and spreads, actuarial assumptions and our LICAT calculations.


($ millions, unless otherwise noted)	As at June 30, 2021	As at December 31, 2020
Change in Interest Rates(1)	50 basis point decrease	50 basis point increase	50 basis point decrease	50 basis point increase
Potential impact on net income(2)(3)(4)	$	(100)	$	50	$	(100)	$	100
Potential impact on OCI(3)	$	250	$	(250)	$	250	$	(250)
Potential impact on LICAT(2)(5)	1.5% point increase	1.0% point decrease	3.5% point increase	1.5% point decrease

(1)Interest rate sensitivities assume a parallel shift in assumed interest rates across the entire yield curve as at June 30, 2021 and December 31, 2020 with no change to the Actuarial Standards Board ('ASB') promulgated URR. Variations in realized yields based on factors such as different terms to maturity and geographies may result in realized sensitivities being significantly different from those illustrated above. Sensitivities include the impact of re-balancing interest rate hedges for dynamic hedging programs at 10 basis point intervals (for 50 basis point changes in interest rates).

(4)The majority of interest rate sensitivity, after hedging, is attributed to individual insurance products. We also have interest rate sensitivity, after hedging, from our fixed annuity and segregated funds products.

(5)The LICAT sensitivities illustrate the impact on Sun Life Assurance as at June 30, 2021 and December 31, 2020. The sensitivities assume that a scenario switch does not occur in the quarter. LICAT ratios are rounded to the nearest 0.5%.

The above sensitivities were determined using a 50 basis point change in interest rates and a 10% change in our equity markets because we believe that these market shocks were reasonably possible as at June 30, 2021. We have also disclosed the impact of a 25% change in equity markets to illustrate that significant changes in equity market levels may result in other than proportionate impacts on our sensitivities.

22 Sun Life Financial Inc. Second Quarter 2021 MANAGEMENT'S DISCUSSION AND ANALYSIS

Interest rate sensitivities do not include any impact from changes to the ASB promulgated URR. In 2014, ASB made changes to the Canadian actuarial standards of practice with respect to economic reinvestment assumptions used in the valuation of insurance contract liabilities. The changes relate to assumed future interest rates, credit spreads and the use of non-fixed income assets supporting fixed obligations. Based on current assumptions, as at June 30, 2021, our estimated sensitivity to a 15 basis point decrease in the URR and a 5 basis point increase to ultimate maximum credit spreads would have been a decrease in reported net income of approximately $100 million after-tax. The actual impact could differ from the Company's estimate. The statements concerning expected URR and ultimate maximum credit spreads changes are forward-looking.

3. Credit Spread and Swap Spread Sensitivities

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.

The following table sets out the estimated immediate impact or sensitivity of our net income and Sun Life Assurance's LICAT ratio attributable to certain instantaneous changes in credit and swap spreads as at June 30, 2021 and December 31, 2020.


($ millions, unless otherwise noted)	As at June 30, 2021	As at December 31, 2020
Change in Credit Spreads(1)	50 basis point decrease	50 basis point increase	50 basis point decrease	50 basis point increase
Potential impact on net income(2)	$	(100)	$	50	$	(125)	$	75
Potential impact on LICAT(3)	0.5% point decrease	0.0% point change	0.5% point decrease	0.5% point increase

(1)In most instances, credit spreads are assumed to revert to long-term insurance contract liability assumptions generally over a five-year period.

(2)Sensitivities have been rounded to $25 million.

(3)The LICAT sensitivities illustrate the impact on Sun Life Assurance as at June 30, 2021 and December 31, 2020. The sensitivities assume that a scenario switch does not occur in the quarter. LICAT ratios are rounded to the nearest 0.5%.


($ millions, unless otherwise noted)	As at June 30, 2021	As at December 31, 2020
Change in Swap Spreads	20 basis point decrease	20 basis point increase	20 basis point decrease	20 basis point increase
Potential impact on net income(1)	$	25	$	(25)	$	50	$	(50)

(1)Sensitivities have been rounded to $25 million.

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

LICAT Interest Rate Scenario Switch

The LICAT interest rate risk is assessed under four different interest rate scenarios, and the scenario leading to the highest capital requirement is chosen as the worst scenario for each geographic region as defined by the LICAT guideline. Changes and interaction between the level and term movements in interest rates and credit spreads can shift the interest rate scenario applied in the LICAT calculation causing a discontinuity where capital requirements change materially. In 2020, OSFI updated the LICAT guideline for interest rate risk requirements for participating businesses to be smoothed over six quarters. As a result, the actual impact to the LICAT ratio from participating businesses in any quarter will reflect the scenarios from current quarter as well as the prior five quarters and switching from either an adverse or beneficial scenario would have the effect of offsetting the previous impacts over time. As per OSFI's communication, this new treatment will remain in place until at least December 31, 2023. It should be noted that the changing of the scenario can also change the direction of the credit spread sensitivities.

In the second quarter of 2020, Sun Life Assurance experienced a switch in the interest rate scenario in North America. As a result of OSFI's new methodology for interest rate risk for participating lines of business, Sun Life Assurance's LICAT ratio was reduced by approximately one LICAT percentage point in the quarter. The cumulative impact so far has been a reduction of three LICAT percentage points and the remaining impact of approximately one LICAT percentage point will come through next quarter, if we remain in the current scenario. While SLF Inc. also experienced a scenario switch in the second quarter of 2020, last quarter, SLF Inc. experienced a switch back to the previous interest rate scenario. As a result, there was no smoothing impact this quarter as well as last quarter. However, over the next four quarters, SLF Inc. would expect an increase of approximately two LICAT percentage points, if we remain on the current scenario. SLA has not switched back to the previous scenario.

4. General Account Insurance and Annuity Products

Most of our expected sensitivity to changes in interest rates and about three-quarters 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.

MANAGEMENT'S DISCUSSION AND ANALYSISSecond Quarter 2021 Sun Life Financial Inc. 23

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.

5. Segregated Fund Guarantees

Approximately one-quarter of our equity market sensitivity and a small amount of interest rate risk sensitivity as at June 30, 2021 are derived from segregated fund products. These products provide benefit guarantees, which are linked to underlying fund performance and may be triggered upon death, maturity, withdrawal or annuitization. The cost of providing these guarantees is uncertain and depends upon a number of factors including general capital market conditions, our hedging strategies, policyholder behaviour and mortality experience, each of which may result in negative impacts on net income and capital.

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


As at June 30, 2021
($ millions)	Fund value	Amount at Risk(1)	Value of guarantees(2)	Insurance contract liabilities(3)
Canada	13,290	194	10,975	362
Asia	1,829	156	1,782	58
Corporate(4)	2,558	143	907	184
Total	17,677	493	13,664	604

As at December 31, 2020
($ millions)	Fund value	Amount at Risk(1)	Value of guarantees(2)	Insurance contract liabilities(3)
Canada	12,533	410	10,954	787
Asia	2,003	180	1,975	97
Corporate(4)	2,548	167	964	221
Total	17,084	757	13,893	1,105

(1)The Amount at Risk represents the excess of the value of the guarantees over fund values on all policies where the value of the guarantees exceeds the fund value. The Amount at Risk is not currently payable as the guarantees are only payable upon death, maturity, withdrawal or annuitization if fund values remain below guaranteed values.

(2)For guaranteed lifetime withdrawal benefits, the value of guarantees is calculated as the present value of the maximum future withdrawals assuming market conditions remain unchanged from current levels. For all other benefits, the value of guarantees is determined assuming 100% of the claims are made at the valuation date.

(3)The insurance contract liabilities represent management's provision for future costs associated with these guarantees and include a provision for adverse deviation in accordance with Canadian actuarial standards of practice.

(4)Corporate includes Run-off reinsurance, a closed block of reinsurance. The Run-off reinsurance business includes risks assumed through reinsurance of variable annuity products issued by various North American insurance companies between 1997 and 2001.

24 Sun Life Financial Inc. Second Quarter 2021 MANAGEMENT'S DISCUSSION AND ANALYSIS

The movement of the items in the table above from December 31, 2020 to June 30, 2021, primarily resulted from the following factors:

(i)the total fund values increased due to an increase in equity markets, which was partially offset by higher interest rates and net redemptions from products closed to new business;

(ii)the total amount at risk decreased due to increases in equity markets and interest rates;

(iii)the total value of guarantees decreased due to net redemptions from products closed to new business; and

(iv)the total insurance contract liabilities decreased due to increases in interest rates and equity markets.

6. Segregated Fund Hedging

Our hedging programs use derivative instruments to mitigate the interest and equity related exposure of our segregated fund contracts. As at June 30, 2021, over 90% of our segregated fund contracts, as measured by associated fund values, were included in a hedging program. While a large percentage of contracts are included in the hedging program, not all of our market risk exposure related to these contracts is hedged. For those segregated fund contracts included in the hedging program, we generally hedge the value of expected future net claims costs and associated margins.

The following table illustrates the impact of our hedging program related to our sensitivity to a 50 basis point decrease in interest rates and a 10% and 25% decrease in equity markets for segregated fund contracts as at June 30, 2021 and December 31, 2020.

Impact of Segregated Fund Hedging


June 30, 2021
($ millions)	Changes in interest rates(3)	Changes in equity markets(4)
Net income sensitivity(1)(2)	50 basis point decrease	10% decrease	25% decrease
Before hedging	(150)	(150)	(350)
Hedging impacts	150	100	250
Net of hedging	-	(50)	(100)

December 31, 2020
($ millions)	Changes in interest rates(3)	Changes in equity markets(4)
Net income sensitivity(1)(2)	50 basis point decrease	10% decrease	25% decrease
Before hedging	(200)	(150)	(450)
Hedging impacts	200	100	350
Net of hedging	-	(50)	(100)

(1)Net income sensitivities have been rounded to $50 million.

(2)Since the fair value of benefits being hedged will generally differ from the financial statement value (due to different valuation methods and the inclusion of valuation margins in respect of financial statement values), this will result in residual volatility to interest rate and equity market shocks in net income and capital. The general availability and cost of these hedging instruments may be adversely impacted by a number of factors, including volatile and declining equity and interest rate market conditions.

(3)Represents a parallel shift in assumed interest rates across the entire yield curve as at June 30, 2021 and December 31, 2020, with no change to the ASB promulgated URR. Variations in realized yields based on factors such as different terms to maturity and geographies may result in realized sensitivities being significantly different from those illustrated above. Sensitivities include the impact of re-balancing interest rate hedges for dynamic hedging programs at 10 basis point intervals (for 50 basis point changes in interest rates).

(4)Represents the change across all equity markets as at June 30, 2021 and December 31, 2020. Assumes that actual equity exposures consistently and precisely track the broader equity markets. Since in actual practice equity-related exposures generally differ from broad market indices (due to the impact of active management, basis risk, and other factors), realized sensitivities may differ significantly from those illustrated above. Sensitivities include the impacts of re-balancing equity hedges for dynamic hedging programs at 2% intervals (for 10% changes in equity markets) and at 5% intervals (for 25% changes in equity markets).

Our hedging strategy is applied both at the line of business or product level and at the Company level using a combination of dynamic hedging techniques (i.e., frequent re-balancing of short-dated interest rate and equity derivative contracts) and longer-dated put options. We actively monitor our overall market exposure and may implement tactical hedge overlay strategies in order to align expected earnings sensitivities with risk management objectives.

MANAGEMENT'S DISCUSSION AND ANALYSISSecond Quarter 2021 Sun Life Financial Inc. 25

7. Real Estate Risk

Real estate risk is the potential for financial loss arising from fluctuations in the value of, or future cash flows from, our investments in real estate. We are exposed to real estate risk and may experience financial losses resulting from the direct ownership of real estate investments or indirectly through fixed income investments secured by real estate property, leasehold interests, ground rents, and purchase and leaseback transactions. Real estate price risk may arise from external market conditions, inadequate property analysis, inadequate insurance coverage, inappropriate real estate appraisals, or from environmental risk exposures. We hold direct real estate investments that support general account liabilities and surplus, and fluctuations in value will impact our profitability and financial position. A material and sustained increase in interest rates may lead to deterioration in real estate values. An instantaneous 10% decrease in the value of our direct real estate investments as at June 30, 2021 would decrease net income(1) by approximately $325 million ($275 million decrease as at December 31, 2020). Conversely, an instantaneous 10% increase in the value of our direct real estate investments as at June 30, 2021 would increase net income by approximately $300 million ($250 million increase as at December 31, 2020).

8. Additional Cautionary Language and Key Assumptions Related to Sensitivities

The market risk sensitivities are measures of estimated changes in net income and OCI for changes in interest rates and equity market price levels described above, based on interest rates, equity market prices and business mix in place as at the respective calculation dates. These sensitivities are calculated independently for each risk factor, generally assuming that all other risk variables stay constant. The sensitivities do not take into account indirect effects such as potential impacts on goodwill impairment or valuation allowances on deferred tax assets. The sensitivities are provided for the consolidated entity and may not be proportional across all reporting segments. Actual results can differ materially from these estimates for a variety of reasons, including differences in the pattern or distribution of the market shocks, the interaction between these risk factors, model error, or changes in other assumptions such as business mix, effective tax rates, policyholder behaviour, currency exchange rates and other market variables relative to those underlying the calculation of these sensitivities. The extent to which actual results may differ from the indicative ranges will generally increase with larger capital market movements. Our sensitivities as at December 31, 2020 have been included for comparative purposes only.

We have also provided measures of our net income sensitivity to instantaneous changes in credit spreads, swap spreads, real estate price levels, and capital sensitivities to changes in interest rates and equity price levels. The real estate sensitivities are non-IFRS financial measures. For additional information, see section M - Non-IFRS Financial Measures in this document. The cautionary language which appears in this section is also applicable to the credit spread, swap spread, real estate, and LICAT ratio sensitivities. In particular, these sensitivities are based on interest rates, credit and swap spreads, equity market, and real estate price levels as at the respective calculation dates and assume that all other risk variables remain constant. Changes in interest rates, credit and swap spreads, equity market, and real estate prices in excess of the ranges illustrated may result in other-than-proportionate impacts.

As these market risk sensitivities reflect an instantaneous impact on net income, OCI and Sun Life Assurance's LICAT ratio, they do not include impacts over time such as the effect on fee income in our asset management businesses.

The sensitivities reflect the composition of our assets and liabilities as at June 30, 2021 and December 31, 2020, respectively. Changes in these positions due to new sales or maturities, asset purchases/sales, or other management actions could result in material changes to these reported sensitivities. In particular, these sensitivities reflect the expected impact of hedging activities based on the hedge programs in place as at the June 30 and December 31 calculation dates. The actual impact of hedging activity can differ materially from that assumed in the determination of these indicative sensitivities due to ongoing hedge re-balancing activities, changes in the scale or scope of hedging activities, changes in the cost or general availability of hedging instruments, basis risk (i.e., the risk that hedges do not exactly replicate the underlying portfolio experience), model risk, and other operational risks in the ongoing management of the hedge programs or the potential failure of hedge counterparties to perform in accordance with expectations.

The sensitivities are based on methods and assumptions in effect as at June 30, 2021 and December 31, 2020, as applicable. Changes in the regulatory environment, accounting or actuarial valuation methods, models, or assumptions (including changes to the ASB promulgated URR) after those dates could result in material changes to these reported sensitivities. Changes in interest rates and equity market prices in excess of the ranges illustrated may result in other than proportionate impacts.

Our hedging programs may themselves expose us to other risks, including basis risk (i.e., the risk that hedges do not exactly replicate the underlying portfolio experience), volatility risk, derivative counterparty credit risk, and increased levels of liquidity risk, model risk and other operational risks. These factors may adversely impact the net effectiveness, costs, and financial viability of maintaining these hedging programs and therefore adversely impact our profitability and financial position. While our hedging programs are intended to mitigate these effects (e.g., hedge counterparty credit risk is managed by maintaining broad diversification, dealing primarily with highly-rated counterparties, and transacting through over-the-counter ('OTC') contracts cleared through central clearing houses, exchange-traded contracts or bilateral OTC contracts negotiated directly between counterparties that include credit support annexes), residual risk, potential reported earnings and capital volatility remain.

For the reasons outlined above, our sensitivities should only be viewed as directional estimates of the underlying sensitivities of each factor under these specialized assumptions, and should not be viewed as predictors of our future net income, OCI, and capital. Given the nature of these calculations, we cannot provide assurance that actual impact will be consistent with the estimates provided.

Information related to market risk sensitivities and guarantees related to segregated fund products should be read in conjunction with the information contained in section M - Accounting and Control Matters - 1 - Critical Accounting Policies and Estimates in our 2020 annual MD&A. Additional information on market risk can be found in Note 6 of our 2020 Annual Consolidated Financial Statements and the Risk Factors section in the AIF.

(1) Sensitivities have been rounded to $25 million.

26 Sun Life Financial Inc. Second Quarter 2021 MANAGEMENT'S DISCUSSION AND ANALYSIS

I. Additional Financial Disclosure

1. Revenue


Quarterly results	Year-to-date
($ millions)	Q2'21	Q1'21	Q2'20	2021	2020
Premiums
Gross	6,345	5,731	6,160	12,076	11,899
Less: Ceded	628	605	639	1,233	1,232
Net premiums	5,717	5,126	5,521	10,843	10,667
Net investment income (loss)
Interest and other investment income	1,401	1,395	1,403	2,796	2,827
Fair value(1) and foreign currency changes on assets and liabilities	3,564	(6,946)	6,623	(3,382)	4,814
Net gains (losses) on available-for-sale assets	46	54	43	100	113
Net Investment income (loss)	5,011	(5,497)	8,069	(486)	7,754
Fee income	1,941	1,885	1,596	3,826	3,235
Total revenue	12,669	1,514	15,186	14,183	21,656

(1) Represents the change in FVTPL assets and liabilities.

Revenue decreased by $2.5 billion or 17% in the second quarter of 2021 compared to the same quarter in 2020, predominantly due to fair value changes on assets, as the prior year benefited from narrowing credit spreads. Revenue decreased by $7.5 billion or 35% in the first six months of 2021 compared to the same period in 2020, reflecting a decline in the fair value of assets, primarily due to rising interest rates. The impacts of foreign exchange translation in the second quarter of 2021 and the first six months of 2021 decreased revenue by $774 million and $875 million, respectively.

2. Changes in the Statements of Financial Position and in Shareholders' Equity

Total general fund assets were $195.7 billion as at June 30, 2021, compared to $197.1 billion as at December 31, 2020. The decrease largely reflects a decline of $3.4 billion in the fair value of assets and a decrease of $2.3 billion from the impacts of foreign exchange translation, partly offset by other business activities of $4.2 billion.

Insurance contract liabilities balances before other policy liabilities of $134.1 billion as at June 30, 2021 decreased by $3.7 billion compared to December 31, 2020, mainly due to the impacts of changes in balances on in-force policies (which include fair value changes on assets supporting insurance contract liabilities) and the impacts of foreign exchange translation, partially offset by balances arising from new policies.

Total shareholders' equity, including preferred share capital, was $25.7 billion as at June 30, 2021, compared to $24.5 billion as at December 31, 2020. The change in total shareholders' equity included:

(i)total shareholders' net income of $1,883 million, before preferred share dividends of $46 million;

(ii)the issuance of $1 billion principal amount of other equity instruments; partially offset by

(iii)common share dividend payments of $650 million; and

(iv)a decrease from the impacts of foreign exchange translation in OCI of $417 million;

(v)net unrealized losses on AFS assets in OCI of $299 million.

As at July 23, 2021, SLF Inc. had 585,665,203 common shares, 3,390,514 options to acquire SLF Inc. common shares, and 92,200,000 Class A Shares outstanding.

MANAGEMENT'S DISCUSSION AND ANALYSISSecond Quarter 2021 Sun Life Financial Inc. 27

3. Cash Flows


Quarterly results	Year-to-date
($ millions)	Q2'21	Q2'20	2021	2020
Net cash and cash equivalents, beginning of period	8,204	6,340	10,648	6,685
Cash flows provided by (used in):
Operating activities	271	3,094	(742)	2,938
Investing activities	(80)	(94)	(893)	(191)
Financing activities	484	569	(71)	120
Changes due to fluctuations in exchange rates	(56)	(163)	(119)	194
Increase (decrease) in cash and cash equivalents	619	3,406	(1,825)	3,061
Net cash and cash equivalents, end of period	8,823	9,746	8,823	9,746
Short-term securities, end of period	3,612	2,045	3,612	2,045
Net cash, cash equivalents and short-term securities, end of period	12,435	11,791	12,435	11,791

Our operating activities generate cash flows which include net premium revenue, net investment income, fee income, and the sale and maturity of investments. They are the principal source of funds to pay for policyholder claims and benefits, commissions, operating expenses, and the purchase of investments. Cash flows used in investing activities primarily include transactions related to associates, joint ventures and acquisitions. Cash flows provided by and used in financing activities largely reflect capital transactions including payments of dividends, the issuance and repurchase of shares, as well as the issuance and retirement of debt instruments and preferred shares.

The cash flows provided by financing activities in the second quarter of 2021 compared to the same period last year decreased due to higher repayment of borrowing from credit facilities.

4. Quarterly Financial Results

The following table provides a summary of our results for the eight most recently completed quarters. A more complete discussion of our historical quarterly results can be found in our interim and annual MD&A for the relevant periods.


Quarterly results
($ millions, unless otherwise noted)	Q2'21	Q1'21	Q4'20	Q3'20	Q2'20	Q1'20	Q4'19	Q3'19
Total revenue	12,669	1,514	11,649	10,032	15,186	6,470	8,525	9,616
Common shareholders' net income (loss)
Reported	900	937	744	750	519	391	719	681
Underlying(1)	883	850	862	842	739	770	792	809
Diluted EPS ($)
Reported	1.53	1.59	1.27	1.28	0.88	0.67	1.22	1.15
Underlying(1)	1.50	1.45	1.47	1.44	1.26	1.31	1.34	1.37
Basic reported EPS ($)
Reported	1.54	1.60	1.27	1.28	0.89	0.67	1.22	1.15
Reported net income (loss) by segment
Canada	404	405	255	387	117	(42)	275	223
U.S.	157	211	88	(113)	118	164	131	(186)
Asset Management	221	230	267	251	223	239	228	221
Asia	143	198	132	236	126	100	136	170
Corporate	(25)	(107)	2	(11)	(65)	(70)	(51)	253
Total reported net income (loss)	900	937	744	750	519	391	719	681
Underlying net income (loss) by segment(1)
Canada	290	285	243	293	281	256	264	268
U.S.	165	171	148	136	123	161	137	135
Asset Management	311	291	333	294	259	242	281	251
Asia	152	159	116	164	144	155	143	138
Corporate	(35)	(56)	22	(45)	(68)	(44)	(33)	17
Total underlying net income (loss)(1)	883	850	862	842	739	770	792	809

(1) Represents a non-IFRS financial measure. See section M - Non-IFRS Financial Measures in this document.

28 Sun Life Financial Inc. Second Quarter 2021 MANAGEMENT'S DISCUSSION AND ANALYSIS

First Quarter 2021

Reported net income increased by $546 million in the first quarter of 2021 compared to the same period in 2020, driven by market-related impacts, reflecting favourable equity markets and interest rate changes, partially offset by unfavourable credit spread movements. This was partially offset by higher fair value adjustments on MFS's share-based payment awards and higher restructuring costs. An after-tax restructuring charge of $57 million was recorded in the first quarter of 2021 that related to our strategy for our workspace and redefining the role of the office. Underlying net income increased by $80 million or 10%, driven by business growth, favourable morbidity experience in the U.S. and favourable credit experience in Canada, partially offset by lower investing activity gains in Canada and the U.S. During the first quarter of 2021, the impacts of foreign exchange translation decreased reported net income and underlying net income by $33 million and $31 million, respectively.

Fourth Quarter 2020

Reported net income increased by $25 million or 3% in the fourth quarter of 2020 compared to the same period in 2019, driven by the change in underlying net income of $70 million, partially offset by unfavourable ACMA impacts in the U.S. and higher fair value adjustments on MFS's share-based payment awards. Underlying net income increased driven by business growth, favourable morbidity experience related to Canada and the U.S., partially offset by lower investing activity reflecting losses in Canada in the current quarter due to asset repositioning, lower AFS gains reflecting an impairment in Asia, and less favourable credit experience in Asia and the U.S. Across the Company, mortality experience was in line with the prior year, as unfavourable experience in Canada was offset by favourable experience in Corporate. Furthermore, in the U.S., the unfavourable impact of COVID-19 claims in 2020 was comparable to the impacts of large case claims in In-force Management in the fourth quarter of 2019.

Third Quarter 2020

Reported net income was $750 million in the third quarter of 2020, an increase of $69 million or 10% compared to the same period in 2019, driven by favourable market-related impacts and lower acquisition costs, partially offset by unfavourable ACMA and fair value adjustments on MFS's share-based payment awards. Favourable market-related impacts were predominantly driven by interest rates and the rise in equity markets, partially offset by changes in the fair value of investment properties. Underlying net income was $842 million in the third quarter of 2020, an increase of $33 million or 4%, compared to the same period in 2019, driven by business growth, favourable results in GB in Canada, favourable morbidity experience in the U.S., higher new business gains and higher investing activity, partially offset by tax matters that were favourable in the third quarter of 2019, unfavourable credit experience, lower net investment returns on surplus, unfavourable mortality experience and lower available-for-sale gains.

Second Quarter 2020

Reported net income decreased by $76 million or 13% in the second quarter of 2020 compared to the same period in 2019, reflecting unfavourable market-related impacts and impacts from fair value adjustments on MFS's share-based payments, partially offset by ACMA. Unfavourable market-related impacts reflected interest rate impacts and changes in the fair value of investment properties, partially offset by equity market impacts. Underlying net income was in line with the same period in 2019, with positive impacts from business growth, investing activity, morbidity experience and higher net investment returns on surplus, largely offset by unfavourable tax impacts, credit experience and expense experience.

First Quarter 2020

Reported net income decreased by $232 million or 37% in the first quarter of 2020 compared to the same period in 2019, reflecting unfavourable market-related and ACMA impacts and higher acquisition, integration and restructuring costs, partially offset by favourable fair value adjustments on MFS's share-based payment awards. Market-related impacts predominantly reflected the decline in equity markets, partially offset by the impact of credit spreads. Underlying net income increased by $53 million or 7%, driven by higher investing activity in Canada and the U.S., business growth, higher AFS gains, higher new business gains and improved credit experience compared to the first quarter of 2019. These were partially offset by lower net investment returns on surplus in Canada and Corporate, unfavourable expense and mortality experience, less favourable morbidity experience and unfavourable other experience.

Fourth Quarter 2019

Reported net income increased by $139 million or 24% in the fourth quarter of 2019 compared to the same period in 2018, driven by favourable market-related impacts, primarily from equity markets, partially offset by higher fair value adjustments on MFS's share-based payment awards, unfavourable ACMA impacts and higher acquisition, integration and restructuring costs. Underlying net income increased by $74 million or 10%, driven by business growth, tax benefits in Corporate and favourable credit experience, partially offset by unfavourable morbidity experience in Canada and unfavourable expense experience, predominantly resulting from higher incentive compensation costs reported in Corporate.

Third Quarter 2019

Reported net income increased by $114 million or 20% in the third quarter of 2019 compared to the same period in 2018, driven by improved impacts from ACMA, partially offset by unfavourable market-related impacts, predominantly from interest rates, and higher acquisition costs related to our acquisition of a majority stake in BentallGreenOak. Underlying net income increased by $79 million or 11% in the third quarter of 2019, compared to the same period in 2018, which includes the favourable impact of tax matters from prior years of $78 million - $58 million in Corporate and $20 million in Canada. Underlying net income also reflected business growth, favourable credit experience, a gain from a mortgage investment prepayment in the U.S. and higher available-for-sale gains, offset by unfavourable morbidity experience in Canada and the U.S., and lower investing activity gains.

MANAGEMENT'S DISCUSSION AND ANALYSISSecond Quarter 2021 Sun Life Financial Inc. 29

J. Legal and Regulatory Matters

Information concerning legal and regulatory matters is provided in our Annual Consolidated Financial Statements, our annual MD&A, and the AIF, in each case for the year ended December 31, 2020, and in our Interim Consolidated Financial Statements for the period ended June 30, 2021.

Sun Life is subject to regulation and supervision by government authorities in the jurisdictions in which it does business. Various regulators have introduced new measures or adjustments to respond to the evolving situation with the COVID-19 pandemic. OSFI, which supervises the activities of Sun Life, has announced various measures to support the resilience of the financial institutions that it regulates. On March 13, 2020, OSFI set an expectation for all federally regulated financial institutions that dividend increases and share buybacks should be halted for the time being. On April 9, 2020, OSFI announced a smoothing mechanism to LICAT interest rate risk requirements to reduce increased and unwarranted volatility in required capital. In the U.S., the National Association of Insurance Commissioners issued guidance to U.S. insurers on March 27, 2020 encouraging insurers to work with borrowers who may be unable to meet obligations because of the effects of the COVID-19 pandemic and on April 15, 2020 adopted interpretations of statutory accounting principles applicable to U.S. insurers related to, among other things, direct mortgage loans and Schedule BA mortgages. This guidance has been extended through December 31, 2021.

K. Changes in Accounting Policies

We have adopted several amended IFRS standards in the current year. The adoption of these amendments had no material impact on our Consolidated Financial Statements. In addition, new IFRS amendments were issued in the current year that are expected to be adopted in 2022 or later. For additional information, refer to Note 2 in our Interim Consolidated Financial Statements for the period ended June 30, 2021.

L. Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of the Company's financial reporting and the preparation of its financial statements in accordance with IFRS.

There were no changes in the Company's internal control over financial reporting during the period, which began on April 1, 2021 and ended on June 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

M. Non-IFRS Financial Measures

1. Underlying Net Income and Underlying EPS

Underlying net income (loss) and financial measures based on underlying net income (loss), including underlying EPS or underlying loss per share, and underlying ROE, are non-IFRS financial measures. Underlying net income (loss) removes from reported net income (loss) the impacts of the following items in our results under IFRS and when removed assist in explaining our results from period to period:

(a) market-related impacts that differ from our best estimate assumptions, which include: (i) impacts of returns in equity markets, net of hedging, for which our best estimate assumptions are approximately 2% per quarter. This also includes the impact of the basis risk inherent in our hedging program, which is the difference between the return on underlying funds of products that provide benefit guarantees and the return on the derivative assets used to hedge those benefit guarantees; (ii) the impacts of changes in interest rates in the reporting period and on the value of derivative instruments used in our hedging programs including changes in credit and swap spreads, and any changes to the assumed fixed income reinvestment rates in determining the actuarial liabilities; and (iii) the impacts of changes in the fair value of investment properties in the reporting period;

(b) assumption changes and management actions, which include: (i) the impacts of revisions to the methods and assumptions used in determining our liabilities for insurance contracts and investment contracts; and (ii) the impacts on insurance contracts and investment contracts of actions taken by management in the current reporting period, referred to as management actions which include, for example, changes in the prices of in-force products, new or revised reinsurance on in-force business, and material changes to investment policies for assets supporting our liabilities; and

i.certain hedges in Canada that do not qualify for hedge accounting - this adjustment enhances the comparability of our net income from period to period, as it reduces volatility to the extent it will be offset over the duration of the hedges;

ii.fair value adjustments on MFS's share-based payment awards that are settled with MFS's own shares and accounted for as liabilities and measured at fair value each reporting period until they are vested, exercised and repurchased - this adjustment enhances the comparability of MFS's results with publicly traded asset managers in the United States;

iii.acquisition, integration and restructuring costs; and

iv.other items that are unusual or exceptional in nature.

All factors discussed in this document that impact our underlying net income are also applicable to reported net income.

All EPS measures in this document refer to fully diluted EPS, unless otherwise stated. As noted below, underlying EPS excludes the dilutive impacts of convertible instruments.

30 Sun Life Financial Inc. Second Quarter 2021 MANAGEMENT'S DISCUSSION AND ANALYSIS

The following table sets out the amounts that were excluded from our underlying net income (loss) and underlying EPS, and provides a reconciliation to our reported net income (loss) and EPS based on IFRS.

Reconciliations of Select Net Income Measures


Quarterly results	Year-to-date
($ millions, unless otherwise noted)	Q2'21	Q1'21	Q2'20	2021	2020
Reported net income	900	937	519	1,837	910
Market-related impacts
Equity market impacts
Impacts from equity market changes	95	67	105	162	(198)
Basis risk impacts	4	5	(46)	9	(103)
Equity market impacts	99	72	59	171	(301)
Interest rate impacts(1)
Impacts of interest rate changes	(50)	161	(123)	111	(210)
Impacts of credit spread movements	(10)	(8)	(72)	(18)	55
Impacts of swap spread movements	24	(12)	(10)	12	29
Interest rate impacts	(36)	141	(205)	105	(126)
Impacts of changes in the fair value of investment properties	28	(4)	(41)	24	(53)
Less: Market-related impacts	91	209	(187)	300	(480)
Less: Assumption changes and management actions	2	(4)	5	(2)	(48)
Other adjustments
Fair value adjustments on MFS's share-based payment awards	(52)	(44)	(24)	(96)	(14)
Acquisition, integration and restructuring(2)(3)	(13)	(74)	(14)	(87)	(56)
Other(4)(5)	(11)	-	-	(11)	(1)
Less: Total of other adjustments	(76)	(118)	(38)	(194)	(71)
Underlying net income	883	850	739	1,733	1,509
Reported EPS (diluted) ($)	1.53	1.59	0.88	3.12	1.55
Less: Market-related impacts ($)	0.16	0.37	(0.32)	0.50	(0.82)
Assumption changes and management actions ($)	-	(0.01)	0.01	-	(0.08)
Fair value adjustments on MFS's share-based payment awards ($)	(0.09)	(0.08)	(0.04)	(0.16)	(0.02)
Acquisition, integration and restructuring ($)	(0.02)	(0.13)	(0.03)	(0.15)	(0.10)
Other ($)	(0.02)	-	-	(0.02)	-
Impact of convertible securities on diluted EPS ($)	-	(0.01)	-	-	-
Underlying EPS (diluted) ($)	1.50	1.45	1.26	2.95	2.57

(1)Our exposure to interest rates varies by product type, line of business, and geography. Given the long-term nature of our business, we have a higher degree of sensitivity in respect of interest rates at long durations.

(2)Amounts relate to acquisition costs for the BGO acquisition, the InfraRed acquisition and the Crescent acquisition, which include the unwinding of the discount for Other financial liabilities of $13 million and $14 million in the second and first quarter of 2021, respectively ($11 million and $10 million in the second and first quarter of 2020, respectively).

(3)The restructuring charge of $57 million in the first quarter of 2021 related to our strategy for our workspace and redefining the role of the office ($20 million and $28 million in the fourth quarter and first quarter of 2020, respectively).

(4)Amounts relate to the UK Finance Act that was signed into law on June 10, 2021, increasing the corporate tax rate from 19% to 25%, which will be take effect for future tax periods beginning April 1, 2023. As a result, reported net income decreased by $11 million in the second quarter. See section C - Profitability - 5 - Income taxes in the Q2 2021 MD&A. See section M - Non-IFRS Financial Measures in this document.

(5)Certain hedges in Canada that do not qualify for hedge accounting decreased reported net income by $1 million in the first quarter of 2020.

2. Additional Non-IFRS Measures

Management also uses the following non-IFRS financial measures:

Return on equity. IFRS does not prescribe the calculation of ROE and therefore a comparable measure under IFRS is not available. To determine reported ROE and underlying ROE, respectively, reported net income (loss) and underlying net income (loss) is divided by the total weighted average common shareholders' equity for the period. The quarterly ROE is annualized.

Financial leverage ratio. This total debt to total capital ratio is ratio of debt plus preferred shares to total capital, where debt consists of all capital qualifying debt securities. Capital qualifying debt securities consist of subordinated debt and innovative capital instruments.

Dividend payout ratio. This is the ratio of dividends paid per share to diluted underlying EPS for the period.

MANAGEMENT'S DISCUSSION AND ANALYSISSecond Quarter 2021 Sun Life Financial Inc. 31

Sales. In Canada, insurance sales consist of sales of individual insurance and group benefits products; wealth sales consist of sales of individual wealth products and sales in GRS. In the U.S., insurance sales consist of sales by Group Benefits. In Asia, insurance sales consist of the individual and group insurance sales by our subsidiaries and joint ventures and associates, based on our proportionate equity interest, in the Philippines, Indonesia, India, China, Malaysia, Vietnam, International and Hong Kong; wealth sales consist of Hong Kong wealth sales, Philippines mutual fund sales, wealth sales by our India and China insurance joint ventures and associates, and Aditya Birla Sun Life AMC Limited's equity and fixed income mutual fund sales based on our proportionate equity interest, including sales as reported by our bank distribution partners. Asset Management sales consist of gross flows for retail and institutional Clients; SLC Management gross flows include capital raising, such as uncalled capital commitments and fund leverage. We exclude the impacts of foreign exchange translation from sales to provide greater comparability across reporting periods. There is no directly comparable IFRS measure.

Effective January 1, 2021, the methodology for Assets Under Management was updated for SLC Management with respect to certain real estate and investment-grade fixed income products to add uncalled capital commitments not previously included. This will align SLC Management's AUM with market conventions applied across asset classes. We have updated prior period amounts for all quarters of 2020 to reflect this change in methodology. Subsequent to the fourth quarter of 2020, increases and decreases in all capital raising, including uncalled capital commitments and fund leverage, for the aforementioned products will be reflected in gross flows, outflows and net flows as applicable. Gross flows is a component of managed fund sales and total wealth sales. Client distributions from the sale of underlying assets in closed-end funds will no longer be reported in net flows.

Value of New Business. VNB represents the present value of our best estimate of future distributable earnings, net of the cost of capital, from new business contracts written in a particular time period, except new business in our Asset Management pillar. The assumptions used in the calculations are generally consistent with those used in the valuation of our insurance contract liabilities except that discount rates used approximate theoretical return expectations of an equity investor. Capital required is based on the higher of Sun Life Assurance's LICAT operating target and local (country specific) operating target capital. VNB is a useful metric to evaluate the present value created from new business contracts. There is no directly comparable IFRS measure.

Effective January 1, 2021, VNB reflects a change in the timing of recognition of U.S. group policies sold or renewed with an effective date of January 1, which will recognize VNB for these policies in the prior year rather than the first quarter, to align with the timing of U.S. renewals and reported insurance sales. We have updated prior period amounts to reflect this change.

Pre-tax net operating profit margin ratio for MFS. This ratio is a measure of the profitability of MFS, which excludes the impact of fair value adjustments on MFS's share-based payment awards, investment income, and certain commission expenses that are offsetting. These commission expenses are excluded in order to neutralize the impact these items have on the pre-tax net operating profit margin ratio and have no impact on the profitability of MFS. There is no directly comparable IFRS measure.

After-tax profit margin for U.S. Group Benefits. This ratio assists in explaining our results from period to period and is a measure of profitability that expresses U.S. employee benefits and medical stop-loss underlying net income as a percentage of net premiums. This ratio is calculated by dividing underlying net income (loss) by net premiums for the trailing four quarters. There is no directly comparable IFRS measure.

Impacts of foreign exchange translation. Items impacting our Consolidated Statements of Operations, such as Revenue, Benefits and expenses, and Total net income (loss), are translated into Canadian dollars using average exchange rates for the respective period. For items impacting our Consolidated Statements of Financial Position, such as Assets and Liabilities, period end rates are used for currency translation purposes.

Assumption changes and management actions. In this document the impacts of ACMA on shareholders' net income (after-tax) is included in reported net income and is excluded in calculating underlying net income, as described in section C - Profitability in this document.

Real estate market sensitivities. Real estate market sensitivities are non-IFRS financial measures for which there are no directly comparable measures under IFRS so it is not possible to provide a reconciliation of these amounts to the most directly comparable IFRS measures.

Other. Management also uses the following non-IFRS financial measures for which there are no comparable financial measures in IFRS: (i) ASO premium and deposit equivalents, mutual fund sales, managed fund sales, insurance sales, and total premiums and deposits; (ii) AUM, mutual fund assets, managed fund assets, other AUM, and assets under administration; (iii) VNB which is used to measure the estimated lifetime profitability of new sales and is based on actuarial calculations; and (iv) ACMA, which is a component of our sources of earnings disclosure. Sources of earnings is an alternative presentation of our Consolidated Statements of Operations that identifies and quantifies various sources of income. The Company is required to disclose its sources of earnings by its principal regulator, OSFI.

Effective January 1, 2021, expected profit for U.S. group policies includes previously classified new business gains, aligning group business sources of earnings reporting across business groups. We have updated prior period amounts to reflect this change.

32 Sun Life Financial Inc. Second Quarter 2021 MANAGEMENT'S DISCUSSION AND ANALYSIS

N. Forward-looking Statements

From time to time, we make written or oral forward-looking statements within the meaning of certain securities laws, including the 'safe harbour' provisions of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities legislation. Forward-looking statements contained in this document include statements (i) relating to our strategies, (ii) relating to our intention to redeem on September 29, 2021, all of the $400 million Class A Non-Cumulative Preferred Shares Series 1 issued by SLF Inc. on February 25, 2005 and all of the $325 million Class A Non-Cumulative Preferred Shares Series 2 issued by SLF Inc. on July 15, 2005, including the related change to SLF Inc.'s LICAT ratio and financial leverage ratio, (iii) relating to our growth initiatives and other business objectives, (iv) relating to the plans we have implemented in response to the COVID-19 pandemic and related economic conditions and their impact on the Company, (v) related to our expected tax range for future years, (vi) set out in this document under the heading H - Risk Management - Market Risk Sensitivities - Interest Rate Sensitivities, (vii) that are predictive in nature or that depend upon or refer to future events or conditions, and (vii) that include words such as 'achieve', 'aim', 'ambition', 'anticipate', 'aspiration', 'assumption', 'believe', 'could', 'estimate', 'expect', 'goal', 'initiatives', 'intend', 'may', 'objective', 'outlook', 'plan', 'project', 'seek', 'should', 'strategy', 'strive', 'target', 'will', and similar expressions. Forward-looking statements include the information concerning our possible or assumed future results of operations. These statements represent our current expectations, estimates, and projections regarding future events and are not historical facts, and remain subject to change, particularly in light of the ongoing and developing COVID-19 pandemic and its impact on the global economy and its uncertain impact on our business.

Forward-looking statements are not a guarantee of future performance and involve risks and uncertainties that are difficult to predict. Future results and shareholder value may differ materially from those expressed in these forward-looking statements due to, among other factors, the impact of the COVID-19 pandemic and related economic conditions on our operations, liquidity, financial conditions or results and the matters set out in this document under the headings C - Profitability - 5 - Income taxes, E - Financial Strength and H - Risk Management and in SLF Inc.'s 2020 AIF under the heading Risk Factors and the factors detailed in SLF Inc.'s other filings with Canadian and U.S. securities regulators, which are available for review at www.sedar.com and www.sec.gov, respectively.

Important risk factors that could cause our assumptions and estimates, and expectations and projections to be inaccurate and our actual results or events to differ materially from those expressed in or implied by the forward-looking statements contained in this document, including our medium-term financial objectives, are set out below. The realization of our forward-looking statements, including our ability to meet our medium-term financial objectives, essentially depends on our business performance which, in turn, is subject to many risks, which have been further heightened with the current COVID-19 pandemic given the uncertainty of its duration and impact. Factors that could cause actual results to differ materially from expectations include, but are not limited to: market risks - related to the performance of equity markets; changes or volatility in interest rates or credit spreads or swap spreads; real estate investments; and fluctuations in foreign currency exchange rates; insurance risks - related to policyholder behaviour; mortality experience, morbidity experience and longevity; product design and pricing; the impact of higher-than-expected future expenses; and the availability, cost and effectiveness of reinsurance; credit risks - related to issuers of securities held in our investment portfolio, debtors, structured securities, reinsurers, counterparties, other financial institutions and other entities; business and strategic risks - related to global economic and political conditions; the design and implementation of business strategies; changes in distribution channels or Client behaviour including risks relating to market conduct by intermediaries and agents; the impact of mergers, acquisitions, strategic investments and divestitures; the impact of competition; the performance of our investments and investment portfolios managed for Clients; changes in the legal or regulatory environment, including capital requirements; the environment and social, environmental laws and regulations; operational risks - related to breaches or failure of information system security and privacy, including cyber-attacks; our ability to attract and retain employees; legal, regulatory compliance and market conduct, including the impact of regulatory inquiries and investigations; our information technology infrastructure; a failure of information systems and Internet-enabled technology; dependence on third-party relationships, including outsourcing arrangements; business continuity; model errors; information management; liquidity risks - the possibility that we will not be able to fund all cash outflow commitments as they fall due; and other risks - COVID-19 matters, including the severity, duration and spread of COVID-19; its impact on the global economy, and its impact on Sun Life's business, financial condition and or results; risks associated with IFRS 17 Insurance Contracts and IFRS 9 Financial Instruments; our international operations, including our joint ventures; market conditions that affect our capital position or ability to raise capital; downgrades in financial strength or credit ratings; and tax matters, including estimates and judgements used in calculating taxes.

The Company does not undertake any obligation to update or revise its forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events, except as required by law.

MANAGEMENT'S DISCUSSION AND ANALYSISSecond Quarter 2021 Sun Life Financial Inc. 33

CONSOLIDATED STATEMENTS OF OPERATIONS


For the three months ended	For the six months ended
(unaudited, in millions of Canadian dollars, except for per share amounts)	June 30 2021	June 30 2020	June 30 2021	June 30 2020
Revenue
Premiums
Gross	$	6,345	$	6,160	$	12,076	$	11,899
Less: Ceded	628	639	1,233	1,232
Net premiums	5,717	5,521	10,843	10,667
Net investment income (loss):
Interest and other investment income	1,401	1,403	2,796	2,827
Fair value and foreign currency changes on assets and liabilities (Note 5)	3,564	6,623	(3,382)	4,814
Net gains (losses) on available-for-sale assets	46	43	100	113
Net investment income (loss)	5,011	8,069	(486)	7,754
Fee income (Note 9)	1,941	1,596	3,826	3,235
Total revenue	12,669	15,186	14,183	21,656
Benefits and expenses
Gross claims and benefits paid (Note 6)	4,488	4,778	9,268	9,196
Increase (decrease) in insurance contract liabilities (Note 6)	4,570	8,603	(2,278)	8,372
Decrease (increase) in reinsurance assets (Note 6)	(10)	(3)	46	(54)
Increase (decrease) in investment contract liabilities (Note 6)	14	34	(14)	41
Reinsurance expenses (recoveries) (Note 7)	(542)	(609)	(1,224)	(1,140)
Commissions	741	619	1,403	1,267
Net transfer to (from) segregated funds (Note 12)	(43)	(922)	(64)	(1,308)
Operating expenses	2,036	1,771	4,122	3,504
Premium taxes	109	112	202	220
Interest expense	84	90	164	180
Total benefits and expenses	11,447	14,473	11,625	20,278
Income (loss) before income taxes	1,222	713	2,558	1,378
Less: Income tax expense (benefit) (Note 10)	180	61	505	340
Total net income (loss)	1,042	652	2,053	1,038
Less: Net income (loss) attributable to participating policyholders	119	105	172	70
Net income (loss) attributable to non-controlling interests	-	4	(2)	10
Shareholders' net income (loss)	923	543	1,883	958
Less: Preferred shareholders' dividends	23	24	46	48
Common shareholders' net income (loss)	$	900	$	519	$	1,837	$	910

Average exchange rates during the reporting periods: U.S. dollars	1.23	1.39	1.25	1.36

Earnings (loss) per share (Note 14)
Basic	$	1.54	$	0.89	$	3.14	$	1.55
Diluted	$	1.53	$	0.88	$	3.12	$	1.55

Dividends per common share	$	0.550	$	0.550	$	1.100	$	1.100

The attached notes form part of these Interim Consolidated Financial Statements.

34 Sun Life Financial Inc. Second Quarter 2021INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)


For the three months ended	For the six months ended
(unaudited, in millions of Canadian dollars)	June 30 2021	June 30 2020	June 30 2021	June 30 2020
Total net income (loss)	$	1,042	$	652	$	2,053	$	1,038
Other comprehensive income (loss), net of taxes:
Items that may be reclassified subsequently to income:
Change in unrealized foreign currency translation gains (losses):
Unrealized gains (losses)	(194)	(482)	(417)	562
Change in unrealized gains (losses) on available-for-sale assets:
Unrealized gains (losses)	111	519	(211)	279
Reclassifications to net income (loss)	(38)	(27)	(88)	(83)
Change in unrealized gains (losses) on cash flow hedges:
Unrealized gains (losses)	(7)	(14)	(1)	9
Reclassifications to net income (loss)	7	21	6	(23)
Share of other comprehensive income (loss) in joint ventures and associates:
Unrealized gains (losses)	(11)	(27)	(55)	37
Total items that may be reclassified subsequently to income	(132)	(10)	(766)	781
Items that will not be reclassified subsequently to income:
Remeasurement of defined benefit plans	-	(149)	(54)	(30)
Total items that will not be reclassified subsequently to income	-	(149)	(54)	(30)
Total other comprehensive income (loss)	(132)	(159)	(820)	751
Total comprehensive income (loss)	910	493	1,233	1,789
Less: Participating policyholders' comprehensive income (loss)	117	103	167	76
Non-controlling interests' comprehensive income (loss)	-	4	(2)	10
Shareholders' comprehensive income (loss)	$	793	$	386	$	1,068	$	1,703

INCOME TAXES INCLUDED IN OTHER COMPREHENSIVE INCOME (LOSS)


For the three months ended	For the six months ended
(unaudited, in millions of Canadian dollars)	June 30 2021	June 30 2020	June 30 2021	June 30 2020
Income tax benefit (expense):
Items that may be reclassified subsequently to income:
Unrealized foreign currency translation gains (losses)	$	(1)	$	1	$	(1)	$	-
Unrealized gains (losses) on available-for-sale assets	(27)	(127)	65	(82)
Reclassifications to net income for available-for-sale assets	7	9	11	24
Unrealized gains (losses) on cash flow hedges	(1)	(4)	(6)	7
Reclassifications to net income for cash flow hedges	-	1	4	(2)
Total items that may be reclassified subsequently to income	(22)	(120)	73	(53)
Items that will not be reclassified subsequently to income:
Remeasurement of defined benefit plans	(1)	48	6	9
Total items that will not be reclassified subsequently to income	(1)	48	6	9
Total income tax benefit (expense) included in other comprehensive income (loss)	$	(23)	$	(72)	$	79	$	(44)

The attached notes form part of these Interim Consolidated Financial Statements.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Sun Life Financial Inc. Second Quarter 2021 35

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION


As at
(unaudited, in millions of Canadian dollars)	June 30 2021	December 31 2020
Assets
Cash, cash equivalents and short-term securities (Note 5)	$	12,435	$	13,527
Debt securities (Note 5)	85,163	89,089
Equity securities (Note 5)	7,975	6,631
Mortgages and loans	49,987	49,946
Derivative assets	1,527	2,160
Other invested assets (Note 5)	6,657	5,778
Policy loans	3,237	3,265
Investment properties (Note 5)	8,164	7,516
Invested assets	175,145	177,912
Other assets	5,571	5,152
Reinsurance assets (Note 6)	3,738	3,843
Deferred tax assets	1,568	1,634
Intangible assets	3,226	2,477
Goodwill	6,441	6,072
Total general fund assets	195,689	197,090
Investments for account of segregated fund holders (Note 12)	133,249	125,921
Total assets	$	328,938	$	323,011
Liabilities and equity
Liabilities
Insurance contract liabilities (Note 6)	$	142,081	$	145,773
Investment contract liabilities (Note 6)	3,507	3,189
Derivative liabilities	1,628	1,744
Deferred tax liabilities	414	383
Other liabilities (Note 8)	15,817	14,858
Senior debentures	500	500
Subordinated debt	4,433	4,781
Total general fund liabilities	168,380	171,228
Insurance and investment contracts for account of segregated fund holders (Note 12)	133,249	125,921
Total liabilities	$	301,629	$	297,149
Equity
Issued share capital and contributed surplus	$	11,601	$	10,591
Shareholders' retained earnings and accumulated other comprehensive income	14,111	13,878
Total shareholders' equity	25,712	24,469
Participating policyholders' equity	1,535	1,368
Non-controlling interests' equity	62	25
Total equity	$	27,309	$	25,862
Total liabilities and equity	$	328,938	$	323,011

Exchange rates at the end of the reporting periods: U.S. dollars	1.24	1.27

The attached notes form part of these Interim Consolidated Financial Statements.

Approved on behalf of the Board of Directors on August 4, 2021.



Dean A. Connor	Barbara G. Stymiest
Chief Executive Officer	Director

36 Sun Life Financial Inc. Second Quarter 2021INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY


For the six months ended
(unaudited, in millions of Canadian dollars)	June 30 2021	June 30 2020
Shareholders:
Preferred shares and other equity instruments
Balance, beginning of period	$	2,257	$	2,257
Issued during the period (Note 11)	1,000	-
Issuance costs	(13)	-
Balance, end of period	3,244	2,257
Common shares (Note 11)
Balance, beginning of period	8,262	8,289
Stock options exercised	23	14
Common shares purchased for cancellation	-	(50)
Balance, end of period	8,285	8,253
Contributed surplus
Balance, beginning of period	72	73
Share-based payments	4	3
Stock options exercised	(4)	(4)
Balance, end of period	72	72
Retained earnings
Balance, beginning of period	12,289	11,318
Net income (loss)	1,883	958
Dividends on common shares	(650)	(647)
Dividends on preferred shares	(46)	(48)
Common shares purchased for cancellation (Note 11)	-	(150)
Changes attributable to acquisition (Note 3)	(139)	-
Balance, end of period	13,337	11,431
Accumulated other comprehensive income (loss), net of taxes (Note 15)
Balance, beginning of period	1,589	1,461
Total other comprehensive income (loss) for the period	(815)	745
Balance, end of period	774	2,206
Total shareholders' equity, end of period	$	25,712	$	24,219
Participating policyholders:
Balance, beginning of period	$	1,368	$	1,091
Net income (loss) (Note 11)	172	70
Total other comprehensive income (loss) for the period (Note 15)	(5)	6
Total participating policyholders' equity, end of period	$	1,535	$	1,167
Non-controlling interests:
Balance, beginning of period	$	25	$	19
Changes attributable to acquisition (Note 3)	15	-
Net income (loss)	(2)	10
Additional contribution	38	9
Distribution to non-controlling interests	(14)	(5)
Total non-controlling interests' equity, end of period	$	62	$	33
Total equity	$	27,309	$	25,419

The attached notes form part of these Interim Consolidated Financial Statements.

INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Sun Life Financial Inc. Second Quarter 2021 37

CONSOLIDATED STATEMENTS OF CASH FLOWS


For the three months ended	For the six months ended
(unaudited, in millions of Canadian dollars)	June 30 2021	June 30 2020	June 30 2021	June 30 2020
Cash flows provided by (used in) operating activities
Income (loss) before income taxes	$	1,222	$	713	$	2,558	$	1,378
Adjustments:
Interest expense related to financing activities	46	55	92	110
Increase (decrease) in insurance and investment contract liabilities	4,584	8,637	(2,292)	8,413
Decrease (increase) in reinsurance assets	(10)	(3)	46	(54)
Realized and unrealized (gains) losses and foreign currency changes on invested assets	(3,610)	(6,666)	3,282	(4,927)
Sales, maturities and repayments of invested assets	15,362	20,005	30,429	38,841
Purchases of invested assets	(17,934)	(21,013)	(33,298)	(41,124)
Income taxes received (paid)	(283)	(97)	(531)	(182)
Mortgage securitization (Note 5)	(70)	79	(70)	166
Other operating activities(1)	964	1,384	(958)		317
Net cash provided by (used in) operating activities	271	3,094	(742)	2,938
Cash flows provided by (used in) investing activities
Net (purchase) sale of property and equipment	(32)	(37)	(38)	(74)
Investment in and transactions with joint ventures and associates	8	3	5	9
Dividends received from joint ventures and associates	5	-	21	20
Acquisitions, net cash and cash equivalents acquired (Note 3)(2)	(8)	-	(308)	-
Other investing activities	(53)	(60)	(573)	(146)
Net cash provided by (used in) investing activities	(80)	(94)	(893)	(191)
Cash flows provided by (used in) financing activities
Increase in (repayment of) borrowed funds	10	26	21	(30)
Issuance of subordinated debt, net of issuance costs	-	995	-	995
Repayment of senior financing(1)	-	(38)	-	(38)
Increase in (repayment of) borrowing from credit facility(1)	(80)	-	75		239
Redemption of senior debentures and subordinated debt	-	-	(350)	-
Issuance of preferred shares and other equity instruments, net (Note 11)	987	-	987	-
Issuance of common shares on exercise of stock options	9	3	19	10
Transactions with non-controlling interests	(9)	4	24	4
Common shares purchased for cancellation (Note 11)	-	-	-	(200)
Dividends paid on common and preferred shares	(339)	(341)	(678)	(682)
Payment of lease liabilities	(39)	(35)	(73)	(72)
Interest expense paid	(55)	(45)	(96)	(106)
Net cash provided by (used in) financing activities	484	569	(71)	120
Changes due to fluctuations in exchange rates	(56)	(163)	(119)	194
Increase (decrease) in cash and cash equivalents	619	3,406	(1,825)	3,061
Net cash and cash equivalents, beginning of period	8,204	6,340	10,648	6,685
Net cash and cash equivalents, end of period	8,823	9,746	8,823	9,746
Short-term securities, end of period	3,612	2,045	3,612	2,045
Net cash, cash equivalents and short-term securities, end of period (Note 5)	$	12,435	$	11,791	$	12,435	$	11,791

(1) Reflects a change in presentation for credit facility effective January 1, 2020. We have updated our prior period to reflect this change in presentation.

(2) Consists of total cash consideration paid of $12, less cash and cash equivalents acquired of $4 for the three months ended June 30, 2021.

(Total consideration paid of $336, less cash and cash equivalents acquired of $28 for the six months ended June 30, 2021).

The attached notes form part of these Interim Consolidated Financial Statements.

38 Sun Life Financial Inc. Second Quarter 2021INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Condensed Notes to the Interim Consolidated Financial Statements

(Unaudited, in millions of Canadian dollars, except for per share amounts and where otherwise stated. All amounts stated in U.S. dollars are in millions.)

1. Significant Accounting Policies

Description of Business

Sun Life Financial Inc. ('SLF Inc.') is a publicly traded company domiciled in Canada and is the holding company of Sun Life Assurance Company of Canada ('Sun Life Assurance'). SLF Inc. and its subsidiaries are collectively referred to as 'us', 'our', 'ours', 'we', or 'the Company'.

Our Interim Consolidated Financial Statements have been prepared in accordance with International Accounting Standard ('IAS') 34 Interim Financial Reporting as issued and adopted by the International Accounting Standards Board ('IASB'). We have used accounting policies which are consistent with our accounting policies in our 2020 Annual Consolidated Financial Statements, except as disclosed in Note 2 below. Our Interim Consolidated Financial Statements should be read in conjunction with our 2020 Annual Consolidated Financial Statements, as interim financial statements do not include all the information incorporated in annual consolidated financial statements prepared in accordance with International Financial Reporting Standards as issued by the IASB ('IFRS').

COVID-19 Pandemic Considerations

In early 2020, the world was impacted by COVID-19, which was declared a global pandemic by the World Health Organization. The overall impact of the COVID-19 pandemic is still uncertain and dependent on the progression of the virus and on actions taken by governments, businesses and individuals, which could vary by country and result in differing outcomes.

The application of our accounting policies requires estimates, assumptions and judgments as they relate to matters that are inherently uncertain. We have established procedures to ensure that our accounting policies are applied consistently and that the processes for changing methodologies for determining estimates are controlled and occur in an appropriate and systematic manner. For our insurance contract liabilities, no material COVID-19 specific provisions or adjustments to our long-term assumptions have been made, and we continue to monitor our experience and exposure to the COVID-19 pandemic. For additional information, please refer to Note 1 of our 2020 Annual Consolidated Financial Statements.

2. Changes in Accounting Policies

2.A New and Amended International Financial Reporting Standards Adopted in 2021

We adopted the following amendments on January 1, 2021:

In August 2020, the IASB issued the Interest Rate Benchmark Reform Phase 2, which includes amendments to IFRS 9 Financial Instruments ('IFRS 9'), IAS 39 Financial Instruments: Recognition and Measurement ('IAS 39'), IFRS 7 Financial Instruments: Disclosures ('IFRS 7'), IFRS 4 Insurance Contracts ('IFRS 4') and IFRS 16 Leases ('IFRS 16'). The amendments address issues that arise from the implementation of the reforms, including the replacement of one benchmark with an alternative one. The adoption of these amendments did not have a material impact on our Consolidated Financial Statements.

The United Kingdom ('UK') Financial Conduct Authority ('FCA') announced on March 5, 2021 that panel bank submissions for UK London Interbank Offered Rate ('LIBOR') will cease after December 31, 2021 and for key United States ('U.S.') LIBOR tenors, after June 30, 2023. A broader market-wide initiative is underway to transition from the various Interbank Offer Rate ('IBOR') -based rates in use to alternative reference rates ('ARRs'). This move away from IBOR-based rates is happening across various jurisdictions including the U.S., the UK, Japan, Switzerland, and the Eurozone.

We have created an IBOR Transition Program ('the Program') to manage the transition to ARRs. The Program is cross-functional in nature and comprises key stakeholders across our organization and operates with executive oversight. The Program is on track in executing its transition plan, and is mindful of incorporating market developments as they arise. We also actively participate in industry associations and incorporate best practice guidance from these industry associations, as well as regulatory bodies into the transition plan, such as reviewing all existing and new U.S. LIBOR contracts for appropriate fallback language in contracts.

Areas of risk relating to the replacement of IBOR include the negotiations with borrowers, updating systems and processes which capture IBOR referenced contracts, amendments to those contracts, or existing fallback/transition clauses not operating as anticipated. Other transition risks that may arise because of the new ARRs are predominantly limited to interest rate risk and the risk of losing value or return on existing instruments. In 2020, all our entities exposed to U.S. LIBOR adhered to the International Swaps and Derivatives Association IBOR Fallbacks Protocol facilitating the transition of legacy derivative contracts.

Our exposure to interest rate benchmarks subject to IBOR reforms is predominately related to U.S. LIBOR. As at June 30, 2021, financial assets of $4,037, financial liabilities of $68, and derivative notional of $8,187 have not yet transitioned to an ARR and excludes financial instruments maturing by June 30, 2023.

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Sun Life Financial Inc. Second Quarter 2021 39

We adopted the following amendment on April 1, 2021:

In March 2021, the IASB issued the COVID-19-Related Rent Concessions beyond 30 June 2021 amendment to IFRS 16. The amendment extends the application period of the practical expedient in IFRS 16 to help lessees account for COVID-19-related rent concessions by one year. The original amendment was issued in May 2020 to make it easier for lessees to account for COVID-19-related rent concessions, such as rent holidays and temporary rent reductions, while continuing to provide useful information about their leases to investors. The adoption of this amendment did not have a material impact on our Consolidated Financial Statements.

2.B New and Amended International Financial Reporting Standards to be Adopted in 2022 or Later

We are currently assessing the impact that these amendments will have on our Consolidated Financial Statements:

In May 2021, the IASB issued amendments to IAS 12 Income Taxes ('IAS 12'). The amendments, Deferred Tax related to Assets and Liabilities arising from a Single Transaction, narrow the scope of the recognition exemption in IAS 12 so that it no longer applies to transactions that, on initial recognition, give rise to equal taxable and deductible temporary differences. The amendment to IAS 12 will be effective for annual reporting periods beginning on or after January 1, 2023, with early application permitted.

In February 2021, the IASB issued amendments to IAS 1 Presentation of Financial Statements ('IAS 1') and IFRS Practice Statement 2 Making Materiality Judgments ('IFRS Practice Statement 2'). The amendments to IAS 1 require companies to disclose their material accounting policy information rather than their significant accounting policies. The amendments to IFRS Practice Statement 2 provide guidance on how to apply the concept of materiality to accounting policy disclosures. The amendment to IAS 1 will be effective for annual reporting periods beginning on or after January 1, 2023, with early application permitted.

In February 2021, the IASB issued amendments to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors ('IAS 8'). The amendments clarify how companies should distinguish changes in accounting policies from changes in accounting estimates. The amendment to IAS 8 will be effective for annual reporting periods beginning on or after January 1, 2023, with early application permitted.

3. Acquisitions

Crescent Capital Group LP

On January 5, 2021, we purchased 51% of Crescent Capital Group LP ('Crescent'), a U.S. based global alternative credit investment manager, as well as the ability to acquire the remaining interest in the future. Crescent will form part of our Asset Management business segment. Consideration included $308 in cash and $6 of contingent consideration to the former owners of Crescent. The acquisition will extend SLC Management's solutions in alternative credit.

The fair values of the identifiable assets and liabilities acquired were:


As at January 5, 2021
Intangible assets	$	317
Net liabilities	(120)
Total identifiable net assets at fair value	197
Non-controlling interest(1)	(317)
Goodwill arising on acquisition	434
Total consideration	$	314

(1) We have elected to measure non-controlling interest ('NCI') at fair value for this acquisition. The fair value was determined by calculating the proportionate share of the present value of future cash flows relating to NCI. Significant assumptions inherent in the valuation of NCI include the estimated after-tax cash flows expected to be received and an assessment of the appropriate discount rate.

The fair values of the identifiable assets and liabilities are subject to refinement and may be retroactively adjusted to reflect new information obtained about facts and circumstances that existed at the acquisition date during the measurement period.

Crescent minority shareholders also have the option to require us to purchase their shares ('put option') in 2026. We have a call option to acquire the remaining outstanding shares held by these minority shareholders commencing in 2026. The fair value of the put option liability was recognized in Other financial liabilities and any excess over the carrying amounts arising from transactions relating to non-controlling shareholders was recorded as a reduction to Retained earnings. Any changes to the carrying value of the financial liability after the acquisition date will be recognized in the Consolidated Statements of Operations. The agreement also includes a contingent payment based on the achievement of certain milestones.

40 Sun Life Financial Inc. Second Quarter 2021 CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

At the date of acquisition, the impact to our assets, liabilities and equity is as follows:


As at January 5, 2021	Share purchase	Put option adjustments	Total
Cash consideration	$	(308)	$	-	$	(308)
Intangible assets	317	-	317
Goodwill(1)	434	-	434
Total assets	$	443	$	-	$	443
Net liabilities	$	(120)	$	-	$	(120)
Other financial liabilities - Contingent consideration	(6)	-	(6)
Other financial liabilities - Put option	-	(441)	(441)
Total liabilities	$	(126)	$	(441)	$	(567)
Non-controlling interest(2)	$	(317)	$	302	$	(15)
Retained earnings	-	139	139
Total equity	$	(317)	$	441	$	124

(1) Goodwill of $434 reflects non-contractual customer relationships and is tax deductible.

(2) The remaining $15 represents specifically identifiable assets where the risks and rewards accrue to the minority shareholders of Crescent Capital Group, and the related NCI interests are not a party to the put option.

Acquisitions in Asia

On November 18, 2020, we entered into a 15-year exclusive bancassurance partnership with Asia Commercial Joint Stock Bank ('ACB') effective January 1, 2021. The partnership significantly expands our distribution capabilities in Asia. An initial payment of $471 was made in January 2021, based on the contractual terms of the agreement. The initial payment was capitalized as an intangible asset and will be amortized over the life of the contract based on a units-of-production method.

On February 1, 2021, the second stage of our acquisition of the pension business of FWD Life Insurance Company (Bermuda) Limited ('FWD') was completed for net proceeds of $17. Included in the acquisition were $480 in Invested assets and $480 of Investment contract liabilities.

4. Segmented Information

We have five reportable business segments: Canada, U.S., Asset Management, Asia and Corporate. These business segments operate in the financial services industry and reflect our management structure and internal financial reporting. Corporate includes the results of our UK business unit and our Corporate Support operations, which include run-off reinsurance operations, as well as investment income, expenses, capital and other items not allocated to our other business groups.

Revenues from our business segments are derived primarily from life and health insurance, investment management and annuities, and mutual funds. Revenues not attributed to the strategic business units are derived primarily from Corporate investments and earnings on capital. Transactions between segments are executed and priced at an arm's-length basis in a manner similar to transactions with third parties.

The expenses in each business segment may include costs or services directly incurred or provided on their behalf at the enterprise level. For other costs not directly attributable to one of our business segments, we use a management reporting framework that uses assumptions, judgments, and methodologies for allocating overhead costs and indirect expenses to our business segments.

Intersegment transactions consist primarily of internal financing agreements which are measured at fair values prevailing when the arrangements are negotiated. Intersegment investment income consists primarily of interest paid by U.S. to Corporate. Intersegment fee income is primarily asset management fees paid by our business segments to Asset Management. SLC Management collects fee income and incurs the operational expenses associated with the management of the general fund assets. Intersegment transactions are eliminated in the Consolidation adjustments column in the following tables.

Management considers its external Clients to be individuals and corporations. We are not reliant on any individual Client as none is individually significant to our operations.

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Sun Life Financial Inc. Second Quarter 2021 41

Results by segment for the three months ended June 30, 2021 and June 30, 2020 are as follows:


Canada	U.S.	Asset Management	Asia	Corporate	Consolidation adjustments	Total
2021
Gross premiums:
Annuities	$	508	$	-	$	-	$	3	$	5	$	-	$	516
Life insurance	1,475	357	-	1,354	20	-	3,206
Health insurance	1,481	1,127	-	8	7	-	2,623
Total gross premiums	3,464	1,484	-	1,365	32	-	6,345
Less: Ceded premiums	390	187	-	48	3	-	628
Net investment income (loss)	2,826	929	10	1,085	198	(37)	5,011
Fee income	389	17	1,421	155	27	(68)	1,941
Total revenue	6,289	2,243	1,431	2,557	254	(105)	12,669
Less:
Total benefits and expenses	5,753	2,045	1,099	2,364	291	(105)	11,447
Income tax expense (benefit)	51	41	111	12	(35)	-	180
Total net income (loss)	$	485	$	157	$	221	$	181	$	(2)	$	-	$	1,042
Less:
Net income (loss) attributable to participating policyholders	81	-	-	38	-	-	119
Net income (loss) attributable to non-controlling interests	-	-	-	-	-	-	-
Shareholders' net income (loss)	$	404	$	157	$	221	$	143	$	(2)	$	-	$	923
2020
Gross premiums:
Annuities	$	533	$	-	$	-	$	35	$	3	$	-	$	571
Life insurance	1,307	402	-	1,074	22	-	2,805
Health insurance	1,596	1,173	-	9	6	-	2,784
Total gross premiums	3,436	1,575	-	1,118	31	-	6,160
Less: Ceded premiums	402	180	-	53	4	-	639
Net investment income (loss)	4,823	1,165	32	1,534	525	(10)	8,069
Fee income	306	21	1,176	134	26	(67)	1,596
Total revenue	8,163	2,581	1,208	2,733	578	(77)	15,186
Less:
Total benefits and expenses	8,121	2,433	905	2,569	522	(77)	14,473
Income tax expense (benefit)	(158)	30	76	16	97	-	61
Total net income (loss)	$	200	$	118	$	227	$	148	$	(41)	$	-	$	652
Less:
Net income (loss) attributable to participating policyholders	83	-	-	22	-	-	105
Net income (loss) attributable to non-controlling interests	-	-	4	-	-	-	4
Shareholders' net income (loss)	$	117	$	118	$	223	$	126	$	(41)	$	-	$	543

42 Sun Life Financial Inc. Second Quarter 2021 CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Results by segment for the six months ended June 30, 2021 and June 30, 2020 are as follows:


Canada	U.S.	Asset Management	Asia	Corporate	Consolidation adjustments	Total
2021
Gross premiums:
Annuities	$	1,070	$	-	$	-	$	16	$	9	$	-	$	1,095
Life insurance	2,808	728	-	2,137	40	-	5,713
Health insurance	2,944	2,292	-	17	15	-	5,268
Total gross premiums	6,822	3,020	-	2,170	64	-	12,076
Less: Ceded premiums	767	366	-	93	7	-	1,233
Net investment income (loss)	(465)	(87)	2	263	(150)	(49)	(486)
Fee income	765	33	2,796	315	54	(137)	3,826
Total revenue	6,355	2,600	2,798	2,655	(39)	(186)	14,183
Less:
Total benefits and expenses	5,151	2,136	2,158	2,245	121	(186)	11,625
Income tax expense (benefit)	271	96	191	21	(74)	-	505
Total net income (loss)	$	933	$	368	$	449	$	389	$	(86)	$	-	$	2,053
Less:
Net income (loss) attributable to participating policyholders	124	-	-	48	-	-	172
Net income (loss) attributable to non-controlling interests	-	-	(2)	-	-	-	(2)
Shareholders' net income (loss)	$	809	$	368	$	451	$	341	$	(86)	$	-	$	1,883
2020
Gross premiums:
Annuities	$	960	$	-	$	-	$	65	$	6	$	-	$	1,031
Life insurance	2,583	800	-	1,975	44	-	5,402
Health insurance	3,114	2,320	-	22	10	-	5,466
Total gross premiums	6,657	3,120	-	2,062	60	-	11,899
Less: Ceded premiums	776	346	-	102	8	-	1,232
Net investment income (loss)	4,080	1,823	18	1,380	474	(21)	7,754
Fee income	647	41	2,361	270	54	(138)	3,235
Total revenue	10,608	4,638	2,379	3,610	580	(159)	21,656
Less:
Total benefits and expenses	10,421	4,278	1,751	3,384	603	(159)	20,278
Income tax expense (benefit)	19	78	156	23	64	-	340
Total net income (loss)	$	168	$	282	$	472	$	203	$	(87)	$	-	$	1,038
Less:
Net income (loss) attributable to participating policyholders	93	-	-	(23)	-	-	70
Net income (loss) attributable to non-controlling interests	-	-	10	-	-	-	10
Shareholders' net income (loss)	$	75	$	282	$	462	$	226	$	(87)	$	-	$	958

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Sun Life Financial Inc. Second Quarter 2021 43

5. Total Invested Assets and Related Net Investment Income

5.A Asset Classification

The carrying values of our Debt securities, Equity securities and Other invested assets presented in our Interim Consolidated Statements of Financial Position consist of the following:


As at	Fair value through profit or loss	Available- for-sale	Other(1)	Total
June 30, 2021
Debt securities	$	73,344	$	11,819	$	-	$	85,163
Equity securities	$	7,328	$	647	$	-	$	7,975
Other invested assets	$	3,602	$	745	$	2,310	$	6,657
December 31, 2020
Debt securities	$	77,834	$	11,255	$	-	$	89,089
Equity securities	$	6,369	$	262	$	-	$	6,631
Other invested assets	$	3,339	$	828	$	1,611	$	5,778

(1) Other consists primarily of investments accounted for using the equity method of accounting, as well as loans measured at amortized cost.

Crescent, a subsidiary within our Asset Management business segment, issues and manages Collateralized Loan Obligations ('CLO'). Each CLO is a special purpose vehicle that owns a portfolio of investments, consisting primarily of senior secured loans, and issues various tranches of senior and subordinated notes to third parties for the purpose of financing the purchase of those investments. Assets of the special purpose vehicle are included in Other invested assets and the associated liabilities are included in Other liabilities. See Note 8 for the associated liabilities for the CLO.

As at June 30, 2021, the carrying value of the assets supporting the CLOs are $728, which consists of cash and accounts receivable of $68 and loans of $660 ($nil as at December 31, 2020). Loans are measured at amortized cost. These underlying loans are mainly below investment grade. Our maximum contractual exposure to loss related to the CLOs is limited to our investment of $67 ($nil as at December 31, 2020) in the most subordinated tranche.

5.B Fair Value and Foreign Currency Changes on Assets and Liabilities

Fair value and foreign currency changes on assets and liabilities presented in our Interim Consolidated Statements of Operations consist of the following:


For the three months ended	For the six months ended
June 30 2021	June 30 2020	June 30 2021	June 30 2020
Fair value change:
Cash, cash equivalents and short-term securities	$	(2)	$	(3)	$	(4)	$	(1)
Debt securities	1,992	5,741	(4,090)	4,596
Equity securities	418	533	713	(251)
Derivative investments	908	766	(197)	434
Other invested assets	172	(106)	227	(169)
Total change in fair value through profit or loss assets and liabilities(1)	3,488	6,931	(3,351)	4,609
Fair value changes on investment properties	228	(63)	365	(61)
Foreign exchange gains (losses)(2)	(152)	(245)	(396)	266
Fair value and foreign currency changes on assets and liabilities	$	3,564	$	6,623	$	(3,382)	$	4,814

(1) There are no fair value changes on other financial liabilities during the three and six months ended June 30, 2021 and June 30, 2020.

(2) Primarily arises from the translation of foreign currency denominated available-for-sale assets and mortgages and loans. Any offsetting amounts arising from foreign currency derivatives are included in the fair value change on derivative investments.

5.C Impairment of Available-for-Sale Assets

We recognized no net impairment losses on available-for-sale assets for the three and six months ended June 30, 2021 ($(2) and $1 net impairment losses for the three and six months ended June 30, 2020).

44 Sun Life Financial Inc. Second Quarter 2021 CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

5.D Cash, Cash Equivalents and Short-Term Securities

Cash, cash equivalents and short-term securities presented in our Interim Consolidated Statements of Financial Position and Net cash, cash equivalents and short-term securities presented in our Interim Consolidated Statements of Cash Flows consist of the following:


As at	June 30 2021	December 31 2020	June 30 2020
Cash	$	2,795	$	2,498	$	2,560
Cash equivalents	6,028	8,156	7,187
Short-term securities	3,612	2,873	2,045
Cash, cash equivalents and short-term securities	12,435	13,527	11,792
Less: Bank overdraft, recorded in Other liabilities	-	6	1
Net cash, cash equivalents and short-term securities	$	12,435	$	13,521	$	11,791

5.E Mortgage Securitization

We securitize certain insured fixed rate commercial mortgages as described in Note 5 of our 2020 Annual Consolidated Financial Statements.

The carrying value and fair value of the securitized mortgages as at June 30, 2021 are $1,686 and $1,730, respectively ($1,781 and $1,873, respectively, as at December 31, 2020). The carrying value and fair value of the associated liabilities as at June 30, 2021 are $1,841 and $1,899, respectively ($1,912 and $2,032, respectively, as at December 31, 2020). The carrying value of asset-backed securities in the principal reinvestment account ('PRA') as at June 30, 2021 and December 31, 2020 are $144 and $145, respectively. There are $nil cash and cash equivalents in the PRA as at June 30, 2021 and December 31, 2020, respectively.

The fair value of the secured borrowings from mortgage securitization is based on the methodologies and assumptions for asset-backed securities as described in Note 5 of our 2020 Annual Consolidated Financial Statements. The fair value of these liabilities is categorized in Level 2 of the fair value hierarchy as at June 30, 2021 and December 31, 2020.

5.F Fair Value Measurement

The fair value methodologies and assumptions for assets and liabilities carried at fair value, as well as disclosures on unobservable inputs, sensitivities and valuation processes for Level 3 assets can be found in Note 5 of our 2020 Annual Consolidated Financial Statements.

5.F.i Fair Value Hierarchy

Our assets and liabilities that are carried at fair value on a recurring basis by hierarchy level are as follows:


As at	June 30, 2021	December 31, 2020
Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
Assets
Cash, cash equivalents and short-term securities	$	11,156	$	1,279	$	-	$	12,435	$	12,428	$	1,099	$	-	$	13,527
Debt securities - fair value through profit or loss	1,800	71,368	176	73,344	1,537	76,072	225	77,834
Debt securities - available-for-sale	1,282	10,484	53	11,819	796	10,392	67	11,255
Equity securities - fair value through profit or loss	4,228	2,952	148	7,328	3,777	2,411	181	6,369
Equity securities - available-for-sale	470	129	48	647	144	71	47	262
Derivative assets	31	1,496	-	1,527	36	2,124	-	2,160
Other invested assets	907	385	3,055	4,347	1,094	428	2,645	4,167
Investment properties	-	-	8,164	8,164	-	-	7,516	7,516
Total invested assets	$	19,874	$	88,093	$	11,644	$	119,611	$	19,812	$	92,597	$	10,681	$	123,090
Investments for account of segregated fund holders	28,021	104,682	546	133,249	26,832	98,539	550	125,921
Total assets measured at fair value	$	47,895	$	192,775	$	12,190	$	252,860	$	46,644	$	191,136	$	11,231	$	249,011
Liabilities
Investment contract liabilities	$	-	$	-	$	9	$	9	$	-	$	-	$	2	$	2
Derivative liabilities	4	1,624	-	1,628	13	1,731	-	1,744
Total liabilities measured at fair value	$	4	$	1,624	$	9	$	1,637	$	13	$	1,731	$	2	$	1,746

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Sun Life Financial Inc. Second Quarter 2021 45

Debt securities - fair value through profit or loss consist of the following:


As at	June 30, 2021	December 31, 2020
Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
Canadian federal government	$	-	$	4,263	$	14	$	4,277	$	-	$	4,546	$	14	$	4,560
Canadian provincial and municipal government	-	15,353	-	15,353	-	16,909	-	16,909
U.S. government and agency	1,800	132	-	1,932	1,537	141	-	1,678
Other foreign government	-	4,802	7	4,809	-	5,274	7	5,281
Corporate	-	40,381	150	40,531	-	42,507	157	42,664
Asset-backed securities:
Commercial mortgage-backed securities	-	2,107	5	2,112	-	2,199	6	2,205
Residential mortgage-backed securities	-	2,301	-	2,301	-	2,459	-	2,459
Collateralized debt obligations	-	349	-	349	-	389	-	389
Other	-	1,680	-	1,680	-	1,648	41	1,689
Total debt securities - fair value through profit or loss	$	1,800	$	71,368	$	176	$	73,344	$	1,537	$	76,072	$	225	$	77,834

Debt securities - available-for-sale consist of the following:


As at	June 30, 2021	December 31, 2020
Level 1	Level 2	Level 3	Total	Level 1	Level 2	Level 3	Total
Canadian federal government	$	-	$	1,979	$	-	$	1,979	$	-	$	1,929	$	-	$	1,929
Canadian provincial and municipal government	-	1,176	-	1,176	-	1,333	-	1,333
U.S. government and agency	1,282	2	-	1,284	796	1	-	797
Other foreign government	-	749	1	750	-	822	1	823
Corporate	-	4,503	50	4,553	-	4,258	52	4,310
Asset-backed securities:
Commercial mortgage-backed securities	-	736	2	738	-	750	2	752
Residential mortgage-backed securities	-	490	-	490	-	292	-	292
Collateralized debt obligations	-	488	-	488	-	531	-	531
Other	-	361	-	361	-	476	12	488
Total debt securities - available-for-sale	$	1,282	$	10,484	$	53	$	11,819	$	796	$	10,392	$	67	$	11,255

There were no significant transfers between Level 1 and Level 2 for the three and six months ended June 30, 2021 and June 30, 2020.

46 Sun Life Financial Inc. Second Quarter 2021 CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table provides a reconciliation of the beginning and ending balances for assets and liabilities that are categorized in Level 3:


For the three months ended	Debt securities - fair value through profit or loss	Debt securities - available-for-sale	Equity securities - fair value through profit or loss	Equity securities - available-for-sale	Other invested assets	Investment properties	Total invested assets measured at fair value	Investments for account of segregated fund holders	Total assets measured at fair value
June 30, 2021
Beginning balance	$	235	$	64	$	143	$	34	$	2,840	$	7,635	$	10,951	$	539	$	11,490
Included in net income(1)(2)(3)	1	-	4	-	135	220	360	11	371
Included in OCI(2)	-	-	-	-	15	-	15	-	15
Purchases	1	-	3	15	175	335	529	2	531
Sales / Payments	-	-	(1)	-	(99)	(10)	(110)	1	(109)
Settlements	(2)	-	-	-	-	-	(2)	-	(2)
Transfers (out) of Level 3(4)	(57)	(10)	-	-	-	-	(67)	-	(67)
Foreign currency translation(5)	(2)	(1)	(1)	(1)	(11)	(16)	(32)	(7)	(39)
Ending balance	$	176	$	53	$	148	$	48	$	3,055	$	8,164	$	11,644	$	546	$	12,190
Gains (losses) included in earnings relating to instruments still held at the reporting date(1)	$	1	$	-	$	4	$	-	$	132	$	225	$	362	$	8	$	370
June 30, 2020(6)
Beginning balance	$	205	$	53	$	203	$	38	$	2,753	$	7,359	$	10,611	$	535	$	11,146
Included in net income(1)(2)(3)	11	-	2	-	(221)	(73)	(281)	4	(277)
Included in OCI(2)	-	3	-	(1)	(12)	-	(10)	-	(10)
Purchases	21	-	1	33	118	169	342	2	344
Sales / Payments	(1)	-	-	-	(43)	-	(44)	(2)	(46)
Settlements	(1)	-	(15)	-	-	-	(16)	-	(16)
Transfers (out) of Level 3(4)	(22)	(1)	-	-	-	-	(23)	-	(23)
Foreign currency translation(5)	(2)	(1)	(3)	(1)	(30)	(51)	(88)	(15)	(103)
Ending balance	$	211	$	54	$	188	$	69	$	2,565	$	7,404	$	10,491	$	524	$	11,015
Gains (losses) included in earnings relating to instruments still held at the reporting date(1)	$	8	$	-	$	2	$	-	$	(220)	$	(73)	$	(283)	$	(11)	$	(294)

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Sun Life Financial Inc. Second Quarter 2021 47


For the six months ended	Debt securities - fair value through profit or loss	Debt securities - available-for-sale	Equity securities - fair value through profit or loss	Equity securities - available-for-sale	Other invested assets	Investment properties	Total invested assets measured at fair value	Investments for account of segregated fund holders	Total assets measured at fair value
June 30, 2021
Beginning balance	$	225	$	67	$	181	$	47	$	2,645	$	7,516	$	10,681	$	550	$	11,231
Included in net income(1)(2)(3)	(4)	-	(7)	-	179	349	517	6	523
Included in OCI(2)	-	-	-	-	8	-	8	-	8
Purchases	29	-	5	15	393	406	848	3	851
Sales / Payments	-	-	(24)	(13)	(149)	(72)	(258)	-	(258)
Settlements	(13)	(2)	(5)	-	-	-	(20)	-	(20)
Transfers (out) of Level 3(4)	(57)	(10)	-	-	-	-	(67)	-	(67)
Foreign currency translation(5)	(4)	(2)	(2)	(1)	(21)	(35)	(65)	(13)	(78)
Ending balance	$	176	$	53	$	148	$	48	$	3,055	$	8,164	$	11,644	$	546	$	12,190
Gains (losses) included in earnings relating to instruments still held at the reporting date(1)	$	(4)	$	-	$	(7)	$	-	$	176	$	355	$	520	$	8	$	528
June 30, 2020(6)
Beginning balance	$	248	$	50	$	188	$	35	$	2,445	$	7,306	$	10,272	$	549	$	10,821
Included in net income(1)(2)(3)	6	-	5	-	(125)	(102)	(216)	(32)	(248)
Included in OCI(2)	-	3	-	-	(2)	-	1	-	1
Purchases	21	-	6	33	314	235	609	17	626
Sales / Payments	(10)	-	-	-	(98)	(96)	(204)	(11)	(215)
Settlements	(2)	-	(15)	-	-	-	(17)	-	(17)
Transfers (out) of Level 3(4)	(59)	(1)	-	-	-	-	(60)	-	(60)
Foreign currency translation(5)	7	2	4	1	31	61	106	1	107
Ending balance	$	211	$	54	$	188	$	69	$	2,565	$	7,404	$	10,491	$	524	$	11,015
Gains (losses) included in earnings relating to instruments still held at the reporting date(1)	$	4	$	-	$	5	$	-	$	(124)	$	(97)	$	(212)	$	(34)	$	(246)

(1) Included in Net investment income (loss) for Total invested assets measured at fair value in our Interim Consolidated Statements of Operations.

(2) Total gains and losses in net income (loss) and other comprehensive income ('OCI') are calculated assuming transfers into or out of Level 3 occur at the beginning of the period. For an asset or liability that transfers into Level 3 during the reporting period, the entire change in fair value for the period is included in the table above. For transfers out of Level 3 during the reporting period, the change in fair value for the period is excluded from the table above.

(3) Investment properties included in net income are comprised of fair value changes on investment properties of $228 and $365 for the three and six months ended June 30, 2021, respectively ($(63) and $(61) for the three and six months ended June 30, 2020, respectively), net of amortization of leasing commissions and tenant inducements of $8 and $16 for the three and six months ended June 30, 2021, respectively ($10 and $41 for the three and six months ended June 30, 2020, respectively). For the key unobservable inputs used in the valuation of investment properties, please refer to Note 5.A.iii Fair Value Hierarchy in our 2020 Annual Consolidated Financial Statements.

(4) Transfers out of Level 3 occur when the pricing inputs become more transparent and satisfy the Level 1 or 2 criteria and are primarily the result of observable market data being available at the reporting date, thus removing the requirement to rely on inputs that lack observability.

(5) Foreign currency translation relates to the foreign exchange impact of translating Level 3 assets and liabilities of foreign subsidiaries from their functional currencies to Canadian dollars.

(6) Other financial liabilities are carried at amortized cost. Effective December 31, 2020, we have updated our disclosures to reflect this classification and have excluded these items from Note 5.A.iii Fair Value Hierarchy in our 2020 Annual Consolidated Financial Statements.

48 Sun Life Financial Inc. Second Quarter 2021 CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6. Insurance Contract Liabilities and Investment Contract Liabilities

6.A Insurance Contract Liabilities

6.A.i Changes in Insurance Contract Liabilities and Reinsurance Assets

Changes in Insurance contract liabilities and Reinsurance assets are as follows:


For the three months ended
June 30, 2021	June 30, 2020
Insurance contract liabilities	Reinsurance assets	Net	Insurance contract liabilities	Reinsurance assets	Net
Balances before Other policy liabilities and assets, beginning of period	$	130,151	$	3,028	$	127,123	$	127,669	$	3,710	$	123,959
Change in balances on in-force policies	3,735	(11)	3,746	7,833	(19)	7,852
Balances arising from new policies	811	23	788	827	22	805
Method and assumption changes	24	(2)	26	(57)	-	(57)
Increase (decrease) in Insurance contract liabilities and Reinsurance assets	4,570	10	4,560	8,603	3	8,600
Foreign exchange rate movements	(661)	(40)	(621)	(1,993)	(120)	(1,873)
Balances before Other policy liabilities and assets	134,060	2,998	131,062	134,279	3,593	130,686
Other policy liabilities and assets	8,021	740	7,281	8,222	722	7,500
Total Insurance contract liabilities and Reinsurance assets, end of period	$	142,081	$	3,738	$	138,343	$	142,501	$	4,315	$	138,186


For the six months ended
June 30, 2021	June 30, 2020
Insurance contract liabilities	Reinsurance assets	Net	Insurance contract liabilities	Reinsurance assets	Net
Balances before Other policy liabilities and assets, beginning of period	$	137,733	$	3,126	$	134,607	$	123,894	$	3,395	$	120,499
Change in balances on in-force policies	(3,704)	(84)	(3,620)	6,865	3	6,862
Balances arising from new policies	1,394	40	1,354	1,494	50	1,444
Method and assumption changes	32	(2)	34	13	1	12
Increase (decrease) in Insurance contract liabilities and Reinsurance assets	(2,278)	(46)	(2,232)	8,372	54	8,318
Foreign exchange rate movements	(1,395)	(82)	(1,313)	2,013	144	1,869
Balances before Other policy liabilities and assets	134,060	2,998	131,062	134,279	3,593	130,686
Other policy liabilities and assets	8,021	740	7,281	8,222	722	7,500
Total Insurance contract liabilities and Reinsurance assets, end of period	$	142,081	$	3,738	$	138,343	$	142,501	$	4,315	$	138,186

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Sun Life Financial Inc. Second Quarter 2021 49

6.B Investment Contract Liabilities

6.B.i Changes in Investment Contract Liabilities

Changes in investment contract liabilities without discretionary participation features ('DPF') are as follows:


For the three months ended
June 30, 2021	June 30, 2020
Measured at fair value	Measured at amortized cost	Measured at fair value	Measured at amortized cost
Balances, beginning of period	$	9	$	2,664	$	2	$	2,585
Deposits	-	74	-	135
Interest	-	15	-	15
Withdrawals	-	(156)	-	(72)
Fees	-	(2)	-	(3)
Change in fair value	-	-	-	-
Other	-	3	-	4
Foreign exchange rate movements	-	-	-	(1)
Balances, end of period	$	9	$	2,598	$	2	$	2,663


For the six months ended
June 30, 2021	June 30, 2020
Measured at fair value	Measured at amortized cost	Measured at fair value	Measured at amortized cost
Balances, beginning of period	$	2	$	2,690	$	2	$	2,612
Deposits	-	168	-	214
Interest	-	30	-	31
Withdrawals	-	(292)	-	(198)
Fees	-	(4)	-	(4)
Change in fair value	7	-	-	-
Other	-	6	-	8
Foreign exchange rate movements	-	-	-	-
Balances, end of period	$	9	$	2,598	$	2	$	2,663

Changes in investment contract liabilities with DPF are as follows:


For the three months ended	For the six months ended
June 30, 2021	June 30, 2020	June 30, 2021	June 30, 2020
Balances, beginning of period	$	911	$	533	$	497	$	502
Change in liabilities on in-force policies	(1)	19	(51)	10
Increase (decrease) in liabilities	(1)	19	(51)	10
Acquisitions	-	-	471	-
Foreign exchange rate movements	(10)	(19)	(17)	21
Balances, end of period	$	900	$	533	$	900	$	533

6.C Gross Claims and Benefits Paid

Gross claims and benefits paid consist of the following:


For the three months ended	For the six months ended
June 30, 2021	June 30, 2020	June 30, 2021	June 30, 2020
Maturities and surrenders	$	779	$	763	$	1,540	$	1,473
Annuity payments	495	497	985	982
Death and disability benefits	1,077	1,212	2,459	2,271
Health benefits	1,755	1,610	3,551	3,431
Policyholder dividends and interest on claims and deposits	382	696	733	1,039
Total gross claims and benefits paid	$	4,488	$	4,778	$	9,268	$	9,196

50 Sun Life Financial Inc. Second Quarter 2021 CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

7. Reinsurance (Expenses) Recoveries

Reinsurance (expenses) recoveries consist of the following:


For the three months ended	For the six months ended
June 30, 2021	June 30, 2020	June 30, 2021	June 30, 2020
Recovered claims and benefits	$	502	$	561	$	1,140	$	1,046
Commissions	14	17	28	34
Reserve adjustments	6	10	16	20
Operating expenses and other	20	21	40	40
Total reinsurance (expenses) recoveries	$	542	$	609	$	1,224	$	1,140

8. Other Liabilities

Included in Other liabilities are the liabilities associated with the special purpose vehicles that invest in Collateralized Loan Obligations ('CLO'), as described in Note 5. As at June 30, 2021, we have recognized $658 ($nil as at December 31, 2020) in Other Liabilities in our Consolidated Statement of Financial Position.

9. Fee Income

Fee income consists of the following:


For the three months ended	For the six months ended
June 30, 2021	June 30, 2020	June 30, 2021	June 30, 2020
Fee income from insurance contracts	$	280	$	243	$	558	$	502
Fee income from service contracts:
Distribution fees	234	204	460	416
Fund management and other asset-based fees	1,211	976	2,381	1,953
Administrative service and other fees	216	173	427	364
Total fee income	$	1,941	$	1,596	$	3,826	$	3,235

Distribution fees and Fund management and other asset-based fees are primarily earned in the Asset Management segment. Administrative service and other fees are primarily earned in the Canada segment. The fee income by business segment is presented in Note 4.

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Sun Life Financial Inc. Second Quarter 2021 51

10. Income Taxes

Our effective income tax rate differs from the combined Canadian federal and provincial statutory income tax rate as follows:


For the three months ended	For the six months ended
June 30, 2021	June 30, 2020	June 30, 2021	June 30, 2020
%	%	%	%
Total net income (loss)	$	1,042	$	652	$	2,053	$	1,038
Add: Income tax expense (benefit)	180	61	505	340
Total net income (loss) before income taxes	$	1,222	$	713	$	2,558	$	1,378
Taxes at the combined Canadian federal and provincial statutory income tax rate	$	321	26.3	$	189	26.5	$	672	26.3	$	365	26.5
Increase (decrease) in rate resulting from:
Higher (lower) effective rates on income subject to taxation in foreign jurisdictions	(50)	(4.1)	(39)	(5.5)	(122)	(4.8)	(79)	(5.7)
Tax-exempt investment (income) loss	(106)	(8.7)	(153)	(21.4)	(70)	(2.7)	(14)	(1.0)
Adjustments in respect of prior periods, including resolution of tax disputes	(1)	(0.1)	53	7.4	3	0.1	53	3.8
Tax (benefit) cost of unrecognized tax losses and tax credits	4	0.3	3	0.4	4	0.1	8	0.6
Tax rate and other legislative changes	10	0.8	-	-	10	0.4	(5)	(0.4)
Other	2	0.2	8	1.2	8	0.3	12	0.9
Total income tax expense (benefit) and effective income tax rate	$	180	14.7	$	61	8.6	$	505	19.7	$	340	24.7

Due to an enacted corporate tax rate change in the province of Alberta, our statutory tax rate decreased from 26.5% to 26.25% (rounded to 26.3% in the table above) on January 1, 2021.

Statutory income tax rates in other jurisdictions in which we conduct business range from 0% to 30%, which creates a tax rate differential and corresponding tax provision difference compared to the Canadian federal and provincial statutory rate when applied to foreign income not subject to tax in Canada. Generally, higher earnings in jurisdictions with higher statutory tax rates result in an increase of our tax expense, while earnings arising in tax jurisdictions with statutory rates lower than 26.25% reduce our tax expense. These differences are reported in Higher (lower) effective rates on income subject to taxation in foreign jurisdictions. The benefit reported for the three months and six months ended June 30, 2021 included higher income in jurisdictions with low statutory income tax rates compared to the three months and six months ended June 30, 2020.

Tax-exempt investment (income) loss includes tax rate differences related to various types of investment income or losses that are taxed at rates lower than our statutory income tax rate. Examples include, but are not limited to, dividend income, capital gains arising in Canada and changes in market values including those resulting from fluctuations in foreign exchange rates.

Adjustments in respect of prior periods, including the resolution of tax disputes, for the three months ended June 30, 2021 and June 30, 2020 related mainly to the finalization of prior years' Canadian tax filings. The six months ended June 30, 2021 and June 30, 2020 included other prior year adjustments in Canada.

Tax (benefit) cost of unrecognized tax losses and tax credits for the three months and six months ended June 30, 2021 and June 30, 2020 primarily reflected unrecognized losses in Asia. The three months ended June 30, 2021 also reflected capital losses in Canada.

Tax rate and other legislative changes for the three months and six months ended June 30, 2021 included a remeasurement of our deferred tax balances in the UK due to an enacted corporate tax rate increase from 19% to 25%, which takes effect April 1, 2023. Tax rate and other legislative changes for the six months ended June 30, 2020 included a remeasurement of our deferred tax balances in the UK due to the reversal of an enacted future corporate tax rate reduction.

Other for the three and six months ended June 30, 2021 and June 30, 2020 primarily reflected withholding taxes on distributions from our foreign subsidiaries and the benefit relating to investments in joint ventures in Asia.

11. Capital Management

11.A Capital

Our capital base is structured to exceed minimum regulatory and internal capital targets and to maintain strong credit and financial strength ratings while maintaining a capital efficient structure. We strive to achieve an optimal capital structure by balancing the use of debt and equity financing. Capital is managed both on a consolidated basis under the principles that consider all the risks associated with the business, as well as at the business group level under the principles appropriate to the jurisdiction in which each business operates. We manage the capital for all of our international subsidiaries on a local statutory basis in a manner commensurate with their individual risk profiles. Further details on our capital, and how it is managed, are included in Note 21 of our 2020 Annual Consolidated Financial Statements.

52 Sun Life Financial Inc. Second Quarter 2021 CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SLF Inc. is a non-operating insurance company and is subject to the Life Insurance Capital Adequacy Test ('LICAT') guideline. As at June 30, 2021, SLF Inc.'s LICAT ratio exceeded the regulatory minimum target as set out by the Office of the Superintendent of Financial Institutions ('OSFI'). Sun Life Assurance, SLF Inc.'s principal operating life insurance subsidiary in Canada, is also subject to the LICAT guideline. As at June 30, 2021, Sun Life Assurance's LICAT ratio exceeded OSFI's minimum regulatory target; as well as OSFI's supervisory target applicable to operating life insurance companies.

In the U.S., Sun Life Assurance operates through a branch which is subject to U.S. regulatory supervision and it exceeded the levels under which regulatory action would be required as at June 30, 2021. In addition, other subsidiaries of SLF Inc. that must comply with local capital or solvency requirements in the jurisdiction in which they operate maintained capital levels above minimum local requirements as at June 30, 2021.

Our capital base consists mainly of common shareholders' equity, preferred shareholders' equity, participating policyholders' equity, non-controlling interest's equity and certain other capital securities that qualify as regulatory capital.

11.B Significant Capital Transactions

11.B.i Common Shares

Changes in common shares issued and outstanding were as follows:


For the six months ended
June 30, 2021	June 30, 2020
Common shares (in millions of shares)	Number of shares	Amount	Number of shares	Amount
Balance, beginning of period	585.1	$	8,262	587.8	$	8,289
Stock options exercised	0.5	23	0.3	14
Common shares purchased for cancellation	-	-	(3.5)	(50)
Balance, end of period	585.6	$	8,285	584.6	$	8,253

On August 14, 2019, SLF Inc. launched a normal course issuer bid to purchase and cancel up to 15 million common shares of SLF Inc.('common shares') between August 14, 2019 and August 13, 2020 (the '2019 NCIB') and implemented an automatic repurchase plan with its designated broker in order to facilitate purchases of common shares under such bid.

On March 13, 2020, OSFI set the expectation for all federally regulated financial institutions that dividend increases and share buybacks should be halted for the time being.

On August 13, 2020, the 2019 NCIB expired and was not renewed. Under this program, SLF Inc. purchased and cancelled approximately 3.5 million common shares at an average price per share of $56.86 for a total amount of $200. The total amount paid to purchase the shares is allocated to Common shares based on the average cost per common share and amounts paid above the average cost are allocated to Retained earnings.

11.B.ii Preferred Shares and Other Equity Instruments

On June 30, 2021, SLF Inc. issued $1,000 principal amount of 3.60% Limited Recourse Capital Notes Series 2021-1 Subordinated Debentures ('Series 2021-1 Notes'), maturing on June 30, 2081. The Series 2021-1 Notes bear interest at a fixed rate of 3.60% payable semi-annually, until June 30, 2026. On June 30, 2026 and every five years thereafter until June 30, 2076, the interest rate on the Series 2021-1 Notes will be reset at an interest rate equal to the five-year Government of Canada yield as defined in the prospectus, plus 2.604%. The net proceeds will be used for general corporate purposes, which may include investments in subsidiaries, repayment of indebtedness and other strategic investments.

In connection with the issuance of the Series 2021-1 Notes, SLF Inc. issued 1 million Class A Non-Cumulative Rate Reset Preferred Shares Series 14 (the 'Series 14 Shares') to be held by Computershare Trust Company of Canada as trustee of a newly formed trust (the 'Limited Recourse Trust'). The Series 14 Shares are eliminated on SLF Inc.'s Consolidated Statements of Financial Position while being held within the Limited Recourse Trust. In case of non-payment of interest on or principal of the Series 2021-1 Notes when due, the recourse of each noteholder will be limited to that holder's proportionate share of the Limited Recourse Trust's assets, which will consist of Series 14 Shares except in limited circumstances. Holders of Series 14 Shares are entitled to receive non-cumulative preferential cash dividends on a semi-annual basis, as and when declared by the Board of Directors.

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Sun Life Financial Inc. Second Quarter 2021 53

12. Segregated Funds

12.A Investments for Account of Segregated Fund Holders

The carrying value of investments held for segregated fund holders are as follows:


As at	June 30 2021	December 31 2020
Segregated and mutual fund units	$	119,243	$	111,789
Equity securities	9,844	9,733
Debt securities	3,483	3,874
Cash, cash equivalents and short-term securities	794	693
Investment properties	393	387
Mortgages	18	19
Other assets	81	140
Total assets	$	133,856	$	126,635
Less: Liabilities arising from investing activities	607	714
Total investments for account of segregated fund holders	$	133,249	$	125,921

12.B Changes in Insurance Contracts and Investment Contracts for Account of Segregated Fund Holders

Changes in insurance contracts and investment contracts for account of segregated fund holders are as follows:(1)


For the three months ended	For the six months ended
June 30, 2021	June 30, 2020	June 30, 2021	June 30, 2020
Balances, beginning of period	$	127,341	$	102,824	$	125,921	$	116,973
Additions to segregated funds:
Deposits	3,313	2,492	6,861	5,769
Net transfer (to) from general funds	(43)	(922)	(64)	(1,308)
Net realized and unrealized gains (losses)	6,001	11,211	8,090	(3,237)
Other investment income	270	262	576	629
Total additions	$	9,541	$	13,043	$	15,463	$	1,853
Deductions from segregated funds:
Payments to policyholders and their beneficiaries	2,996	2,087	6,851	5,283
Management fees	313	267	615	547
Taxes and other expenses	109	117	216	177
Foreign exchange rate movements	215	452	453	(125)
Total deductions	$	3,633	$	2,923	$	8,135	$	5,882
Net additions (deductions)	5,908	10,120	7,328	(4,029)
Balances, end of period	$	133,249	$	112,944	$	133,249	$	112,944

(1) Effective December 31, 2020, we combined our Insurance contracts for account of segregated fund holders and Investment contracts for account of segregated fund holders. We have updated the prior period to reflect this change in presentation.

13. Commitments, Guarantees and Contingencies

Guarantees of Sun Life Assurance Preferred Shares and Subordinated Debentures

SLF Inc. has provided a guarantee on the $150 of 6.30% subordinated debentures due 2028 issued by Sun Life Assurance. Claims under this guarantee will rank equally with all other subordinated indebtedness of SLF Inc. SLF Inc. has also provided a subordinated guarantee of the preferred shares issued by Sun Life Assurance from time to time, other than such preferred shares which are held by SLF Inc. and its affiliates. Sun Life Assurance has no outstanding preferred shares subject to the guarantee. As a result of these guarantees, Sun Life Assurance is entitled to rely on exemptive relief from most continuous disclosure and the certification requirements of Canadian securities laws.

54 Sun Life Financial Inc. Second Quarter 2021 CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following tables set forth certain consolidating summary financial information for SLF Inc. and Sun Life Assurance (consolidated):


For the three months ended	SLF Inc. (unconsolidated)	Sun Life Assurance (consolidated)	Other subsidiaries of SLF Inc. (combined)	Consolidation adjustments	SLF Inc. (consolidated)
June 30, 2021
Revenue	$	89	$	10,645	$	2,718	$	(783)	$	12,669
Shareholders' net income (loss)	$	923	$	627	$	250	$	(877)	$	923
June 30, 2020
Revenue	$	71	$	13,293	$	2,794	$	(972)	$	15,186
Shareholders' net income (loss)	$	543	$	243	$	268	$	(511)	$	543


For the six months ended	SLF Inc. (unconsolidated)	Sun Life Assurance (consolidated)	Other subsidiaries of SLF Inc. (combined)	Consolidation adjustments	SLF Inc. (consolidated)
June 30, 2021
Revenue	$	154	$	10,178	$	4,066	$	(215)	$	14,183
Shareholders' net income (loss)	$	1,883	$	1,234	$	582	$	(1,816)	$	1,883
June 30, 2020
Revenue	$	113	$	17,945	$	4,846	$	(1,248)	$	21,656
Shareholders' net income (loss)	$	958	$	350	$	567	$	(917)	$	958


As at	SLF Inc. (unconsolidated)	Sun Life Assurance (consolidated)	Other subsidiaries of SLF Inc. (combined)	Consolidation adjustments	SLF Inc. (consolidated)
June 30, 2021
Invested assets	$	28,006	$	168,927	$	11,043	$	(32,831)	$	175,145
Total other general fund assets	$	7,823	$	24,215	$	21,152	$	(32,646)	$	20,544
Investments for account of segregated fund holders	$	-	$	133,182	$	67	$	-	$	133,249
Insurance contract liabilities	$	-	$	142,277	$	9,921	$	(10,117)	$	142,081
Investment contract liabilities	$	-	$	3,507	$	-	$	-	$	3,507
Total other general fund liabilities	$	9,007	$	25,013	$	14,799	$	(26,027)	$	22,792
December 31, 2020
Invested assets	$	26,019	$	172,439	$	9,974	$	(30,520)	$	177,912
Total other general fund assets	$	7,800	$	24,327	$	20,691	$	(33,640)	$	19,178
Investments for account of segregated fund holders	$	-	$	125,859	$	62	$	-	$	125,921
Insurance contract liabilities	$	-	$	145,949	$	10,637	$	(10,813)	$	145,773
Investment contract liabilities	$	-	$	3,189	$	-	$	-	$	3,189
Total other general fund liabilities	$	9,350	$	25,920	$	13,741	$	(26,745)	$	22,266

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Sun Life Financial Inc. Second Quarter 2021 55

14. Earnings (Loss) Per Share

Details of the calculation of the net income (loss) and the weighted average number of shares used in the earnings per share computations are as follows:


For the three months ended	For the six months ended
June 30, 2021	June 30, 2020	June 30, 2021	June 30, 2020
Common shareholders' net income (loss) for basic earnings per share	$	900	$	519	$	1,837	$	910
Add: Increase in income due to convertible instruments(1)	3	3	5	5
Common shareholders' net income (loss) on a diluted basis	$	903	$	522	$	1,842	$	915
Weighted average number of common shares outstanding for basic earnings per share (in millions)	586	585	585	586
Add: Dilutive impact of stock options(2) (in millions)	1	-	1	1
Dilutive impact of convertible instruments(2) (in millions)	3	4	4	4
Weighted average number of common shares outstanding on a diluted basis (in millions)	590	589	590	591
Basic earnings (loss) per share	$	1.54	$	0.89	$	3.14	$	1.55
Diluted earnings (loss) per share	$	1.53	$	0.88	$	3.12	$	1.55

(1) The convertible instruments are the Sun Life ExchangEable Capital Securities ('SLEECS') - Series B issued by Sun Life Capital Trust.

(2) Excludes the impact of 1 million stock options for both the three and six months ended June 30, 2021, respectively, because these stock options were anti-dilutive for the periods (2 million for both the three and six months ended June 30, 2020).

15. Accumulated Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive income (loss), net of taxes, are as follows:


For the three months ended
June 30, 2021	June 30, 2020
Balance, beginning of period	Other comprehensive income (loss)	Balance, end of period	Balance, beginning of period	Other comprehensive income (loss)	Balance, end of period
Items that may be reclassified subsequently to income:
Unrealized foreign currency translation gains (losses), net of hedging activities	$	932	$	(194)	$	738	$	2,403	$	(482)	$	1,921
Unrealized gains (losses) on available-for-sale assets	260	73	333	17	492	509
Unrealized gains (losses) on cash flow hedges	(8)	-	(8)	(28)	7	(21)
Share of other comprehensive income (loss) in joint ventures and associates	(86)	(11)	(97)	31	(27)	4
Items that will not be reclassified subsequently to income:
Remeasurement of defined benefit plans	(337)	-	(337)	(186)	(149)	(335)
Revaluation surplus on transfers to investment properties	145	-	145	145	-	145
Total	$	906	$	(132)	$	774	$	2,382	$	(159)	$	2,223
Total attributable to:
Participating policyholders	$	2	$	(2)	$	-	$	19	$	(2)	$	17
Shareholders	904	(130)	774	2,363	(157)	2,206
Total	$	906	$	(132)	$	774	$	2,382	$	(159)	$	2,223

56 Sun Life Financial Inc. Second Quarter 2021 CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


For the six months ended
June 30, 2021	June 30, 2020
Balance, beginning of period	Other comprehensive income (loss)	Balance, end of period	Balance, beginning of period	Other comprehensive income (loss)	Balance, end of period
Items that may be reclassified subsequently to income:
Unrealized foreign currency translation gains (losses), net of hedging activities	$	1,155	$	(417)	$	738	$	1,359	$	562	$	1,921
Unrealized gains (losses) on available-for-sale assets	632	(299)	333	313	196	509
Unrealized gains (losses) on cash flow hedges	(13)	5	(8)	(7)	(14)	(21)
Share of other comprehensive income (loss) in joint ventures and associates	(42)	(55)	(97)	(33)	37	4
Items that will not be reclassified subsequently to income:
Remeasurement of defined benefit plans	(283)	(54)	(337)	(305)	(30)	(335)
Revaluation surplus on transfers to investment properties	145	-	145	145	-	145
Total	$	1,594	$	(820)	$	774	$	1,472	$	751	$	2,223
Total attributable to:
Participating policyholders	$	5	$	(5)	$	-	$	11	$	6	$	17
Shareholders	1,589	(815)	774	1,461	745	2,206
Total	$	1,594	$	(820)	$	774	$	1,472	$	751	$	2,223

16. Legal and Regulatory Proceedings

We are regularly involved in legal actions, both as a defendant and as a plaintiff. Legal actions naming us as a defendant ordinarily involve our activities as a provider of insurance protection and wealth management products, as an investor and investment advisor, and as an employer. In addition, government and regulatory bodies in Canada, the U.S., the UK, and Asia, including federal, provincial, and state securities and insurance regulators and government authorities, from time to time, make inquiries and require the production of information or conduct examinations or investigations concerning our compliance with insurance, securities, and other laws.

Provisions for legal proceedings related to insurance contracts, such as for disability and life insurance claims and the cost of litigation, are included in Insurance contract liabilities in our Consolidated Statements of Financial Position. Other provisions are established outside of the Insurance contract liabilities if, in the opinion of management, it is both probable that a payment will be required and a reliable estimate can be made of the amount of the obligation. Management reviews the status of all proceedings on an ongoing basis and exercises judgment in resolving them in such manner as management believes to be in our best interest.

Two class action lawsuits have been filed against Sun Life Assurance in connection with sales practices relating to, and the administration of, individual policies issued by the Metropolitan Life Insurance Company ('MLIC'). These policies were assumed by Clarica when Clarica acquired the bulk of MLIC's Canadian operations in 1998 and subsequently assumed by Sun Life Assurance as a result of its amalgamation with Clarica. One of the lawsuits (Fehr et al v Sun Life Assurance Company of Canada) is issued in Ontario and the other (Alamwala v Sun Life Assurance Company of Canada) is in British Columbia. The Fehr action has been certified as a class action and notice has been made to class members. Sun Life Assurance has brought a motion scheduled for mid-February 2022 for summary judgment seeking to dismiss all of the claims. The other action (Alamwala v Sun Life Assurance Company of Canada) has remained largely dormant since it was commenced in 2011 and has not been certified. We will continue to vigorously defend against the claims in these actions. In connection with the acquisition of the Canadian operations of MLIC, MLIC agreed to indemnify Clarica for certain losses, including those incurred relating to the sales of its policies. Should either of the Fehr or the Alamwala lawsuits result in a loss, Sun Life Assurance will seek recourse against MLIC under that indemnity through arbitration.

Management does not believe that the probable conclusion of any current legal or regulatory matter, either individually or in the aggregate, will have a material adverse effect on the Consolidated Statements of Financial Position or the Consolidated Statements of Operations.

17. Subsequent Event

On July 1, 2021, we purchased Pinnacle Care International, Inc. ('PinnacleCare'), a leading U.S. health care navigation and medical intelligence provider for $105 in cash. The fair value of net assets acquired mainly relate to intangible assets and goodwill. Due to the recent close of this transaction, the fair value determination and purchase accounting have not been completed. PinnacleCare will become part of our U.S. Group Benefits business, which provides a variety of employee benefits products including medical stop-loss insurance within our U.S. segment.

CONDENSED NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Sun Life Financial Inc. Second Quarter 2021 57

Corporate and Shareholder Information


For information about Sun Life, corporate	United States	Direct deposit of dividends
news and financial results, please visit	American Stock Transfer & Trust	Common shareholders residing in Canada
sunlife.com.	Company, LLC	or the U.S. may have their dividend
6201 15th Ave.	payments deposited directly into their
Corporate office	Brooklyn, NY 11219	bank account.
Sun Life Financial Inc.	Tel: 1-877-224-1760
1 York Street	Email: sunlifeinquiries@astfinancial.com	The Request for Electronic Payment of
Toronto, Ontario	Dividends Form is available for
Canada M5J 0B6	United Kingdom	downloading from the AST Trust
Tel: 416-979-9966	Link Group	Company (Canada) website,
Website: www.sunlife.com	10th Floor, Central Square	www.astfinancial.com/ca-en, or you can
29 Wellington Street	contact AST Trust Company (Canada) to
Investor Relations	Leeds LS1 4DL	have a form sent to you.
For financial analysts, portfolio managers	Tel: +44 (0) 345-602-1587
and institutional investors requiring	Email:	Canadian dividend reinvestment
information, please contact:	shareholderenquiries@linkgroup.co.uk	and share purchase plan
Investor Relations	Canadian-resident common shareholders
Fax: 416-979-4080	Philippines	can enroll in the Dividend Reinvestment
Email: investor.relations@sunlife.com	Rizal Commercial Banking Corporation	and Share Purchase Plan. For details visit
Please note that financial information can	(RCBC)	our website at sunlife.com or contact the
also be obtained from www.sunlife.com.	RCBC Stock Transfer Processing Section	Plan Agent, AST Trust Company (Canada)
Ground Floor, West Wing,	at sunlifeinquiries@astfinancial.com
Transfer agent	GPL (Grepalife) Building,
For information about your shareholdings,	221 Senator Gil Puyat Avenue	Stock exchange listings
dividends, change in share registration or	Makati City, 1200,	Sun Life Financial Inc. common shares are
address, estate transfers, lost certificates,	Philippines	listed on the Toronto (TSX), New York
or to advise of duplicate mailings, please	From Metro Manila: 632-5318-8567	(NYSE) and Philippine (PSE) stock
contact the Transfer Agent in the country	From the Provinces: 1-800-1-888-2422	exchanges. Ticker Symbol: SLF
where you reside. If you do not live in any	Email: rcbcstocktransfer@rcbc.com
of the countries listed, please contact the	Sun Life Financial Inc. Class A Preferred
Canadian Transfer Agent.	Hong Kong, SAR	Shares are listed on the Toronto Stock
Computershare Hong Kong Investor	Exchange (TSX).
Canada	Services Limited
AST Trust Company (Canada)	17M Floor, Hopewell Centre	Ticker Symbols:	Series 1 - SLF.PR.A
P.O. Box 700	183 Queen's Road East	Series 2 - SLF.PR.B
Station B	Wanchai, Hong Kong	Series 3 - SLF.PR.C
Montreal, Quebec	Tel: 852-2862-8555	Series 4 - SLF.PR.D
Canada H3B 3K3	Email: hkinfo@computershare.com.hk	Series 5 - SLF.PR.E
Within North America:	Series 8R - SLF.PR.G
Tel: 1-877-224-1760	Shareholder services	Series 9QR - SLF.PR.J
Outside of North America:	For shareholder account inquiries, please	Series 10R - SLF.PR.H
Tel: 416-682-3865	contact the Transfer Agent in the country	Series 11QR - SLF.PR.K
Fax: 1-888-249-6189	where you reside, or Shareholder Services:	Series 12R - SLF.PR.I
Email: sunlifeinquiries@astfinancial.com	Fax: 416-598-3121
Website: www.astfinancial.com/ca-en	English Email:
Shareholders can view their account	shareholderservices@sunlife.com
details using AST Trust Company	French Email:
(Canada)'s Internet service, Investor	servicesauxactionnaires@sunlife.com
Central.
Register at https://www.astfinancial.com/	2021 dividend dates
ca-en/login	Common Shares

Record dates	Payment dates
March 1, 2021	March 31, 2021
May 26, 2021	June 30, 2021
August 25, 2021	September 29, 2021
November 24, 2021*	December 31, 2021*
* Subject to approval by the Board of Directors

58 Sun Life Financial Inc. Second Quarter 2021 CORPORATE AND SHAREHOLDER INFORMATION

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Sun Life Financial Inc. published this content on 05 August 2021 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 05 August 2021 10:15:09 UTC.

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