Sun Life Financial Reports Second Quarter 2017 Results

The information in this document is based on the unaudited interim financial results of Sun Life Financial Inc. for the period ended June 30, 2017. Sun Life Financial Inc., its subsidiaries and, where applicable, its joint ventures and associates are collectively referred to as "the Company", "Sun Life Financial", "we", "our", and "us". Unless otherwise noted, all amounts are in Canadian dollars. Beginning in the first quarter of 2017, we no longer report operating net income and its related measures, operating earnings per share ("EPS") and operating return on equity ("ROE"). The adjustments previously used to derive operating net income will continue to be used to derive underlying net income.

TORONTO, Aug. 9, 2017 /PRNewswire/ - Sun Life Financial Inc. (TSX: SLF) (NYSE: SLF) today announced its results for the second quarter ended June 30, 2017. Second quarter reported net income was $574 million and underlying net income⁽¹⁾ was $689 million.

• Minimum Continuing Capital and Surplus Requirements ("MCCSR") ratio for Sun Life Assurance Company of Canada of 229%. The MCCSR ratio for Sun Life Financial Inc. was 248%, which includes cash and other liquid assets of $1.4 billion for Sun Life Financial Inc. and its wholly-owned holding companies⁽³⁾
• Global assets under management of $944 billion compared to $903 billion as at December 31, 2016
• Common share dividend declared of $0.435 per share and approval of a share buyback program

"Our second quarter reflected strong earnings in all of our four business pillars, with underlying net income of $689 million, up 24% over the same quarter last year," said Dean Connor, President & CEO, Sun Life Financial. "The quarter reflects strong execution across our businesses with particular strength in Canada, and good progress in asset management and in integrating our U.S. Group business. Total wealth sales grew 12%, while total insurance sales had more paced growth over the prior year following a strong first quarter. We are also pleased to announce the Board of Directors' approval of a share buyback program, reflecting our strong capital position."

"During the quarter our people across the globe rallied around the launch of our new company Purpose - Helping our Clients achieve lifetime financial security and live healthier lives - which is about putting our Clients at the centre of everything we do," Connor added. "Building on this commitment, for example, this quarter we improved access to mental health care by launching a virtual cognitive behavioural therapy program to Canadian Group Clients. This innovative new online therapy option will lead to faster and easier access to treatment for Canadians living with a mental illness."

"During the quarter, we also moved our head office to the Sun Life Financial Tower at One York Street, bringing our downtown Toronto operations together in a collaborative and energetic new environment."

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

A Leader in Insurance and Wealth Solutions in our Canadian home market
Individual insurance sales, including our updated products launched in 2017, were consistent with the second quarter last year at $100 million. Individual wealth sales of $1.4 billion were 17% above the same quarter of the prior year driven by continued growth in our wealth manufactured⁽¹⁾ products, including SLGI⁽²⁾ mutual funds and Sun GIF⁽³⁾ segregated funds.

Sales in Group Benefits of $130 million increased 14% compared to second quarter 2016 driven by a few new large Client wins. Group Retirement Services sales of $2.4 billion were 53% ahead of the second quarter of 2016, due in part to a large case annuity sale in our Defined Benefit Solutions business.

During the quarter, our my Sun Life mobile app, the highest rated life insurance mobile app in Canada, reached a milestone of one million healthcare provider ratings. The app enables Clients to search and contact 65,000 peer-rated, paramedical healthcare providers across Canada, click to call for appointment bookings, and facilitate finding providers with direct billing. It also allows Clients to submit health claims, check investment balances, and quickly click to connect with their financial advisor.

A Leader in global Asset Management
SLF Asset Management ended the second quarter with $655 billion in assets under management consisting of $599 billion (US$462 billion) from MFS Investment Management ("MFS") and $56 billion from Sun Life Investment Management ("SLIM"). Net outflows of US$4.0 billion at MFS were primarily driven by institutional Client portfolio re-balancing. SLIM had net inflows of $0.9 billion. 

MFS long-term retail fund performance remained strong with 82%, 84% and 92% of MFS's U.S. retail mutual fund assets ranked in the top half of their Lipper categories based on three-, five- and ten-year performance, respectively, as of June 30, 2017.

For the sixth consecutive year, the Global Real Estate Sustainability Benchmark ranked Bentall Kennedy among the top firms globally for its commitment to sustainable investing.

A Leader in U.S. Group Benefits and International high net worth solutions
Sales in SLF U.S., including Group Benefits and International, were consistent with the second quarter of 2016. We continue to make strides in the integration of our U.S. employee benefits business acquired in 2016. To date, we have achieved over half of our expected expense synergies, and continue to expect to achieve the full $100 million pre-tax run-rate synergies by the end of 2019. We are rolling out our newly combined portfolio of employee benefits products and services, representing our best offerings, under the Sun Life brand.

A Leader in Asia through Distribution Excellence in Higher Growth Markets
SLF Asia individual insurance sales were consistent with the second quarter of the prior year, driven by organic growth and increases in ownership of our Indonesia and Vietnam businesses, partially offset by sales in Hong Kong reflecting a moderated level following a strong 2016.

Continuing strong Asia wealth sales of $2.9 billion, up 66% over prior year, were led by growth in our joint venture mutual fund company in India, Aditya Birla Sun Life AMC Limited, which now manages over $44 billion in AUM and is the fourth largest mutual fund operation in the country⁽⁴⁾.

During the quarter, Sun Life Malaysia announced a partnership with U Mobile, one of Malaysia's fastest growing telecommunications companies, to offer life insurance via a telco service. For the first time, Malaysians will be able to apply, subscribe and manage their coverage entirely on their mobile device. The products are targeted for launch later this year.

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

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

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

Updates to Non-IFRS measures
Beginning in first quarter of 2017, we no longer report operating net income and its related measures, operating earnings per share ("EPS") and operating return on equity ("ROE"), in order to streamline our use of non-IFRS financial measures. The adjustments previously used to derive operating net income will continue to be used to derive underlying net income. 

Non-IFRS measures
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 impact of the following items that create volatility in our results under IFRS and when removed assist in explaining our results from period to period:

Underlying EPS also excludes the dilutive impact of convertible instruments.

Other non-IFRS financial measures that we use include reported ROE, adjusted revenue, administrative services only ("ASO") premium and deposit equivalents, mutual fund assets and sales, managed fund assets and sales, life and health sales, premiums and deposits, adjusted premiums and deposits, assets under management ("AUM"), assets under administration, pre-tax operating profit margin for MFS, measures based on a currency adjusted basis, real estate market sensitivities, assumption changes and management actions, and effective income tax rate on an underlying net income basis.

All EPS measures in this document refer to fully diluted EPS, unless otherwise stated. As noted above, underlying EPS exclude the dilutive impact of convertible instruments.

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

Financial Summary

Q2 2017 vs. Q2 2016

The following table reconciles our reported net income and underlying net income and sets out the impact that other notable items had on our reported net income and underlying net income in the second quarters of 2017 and 2016.

Our reported net income was $574 million in the second quarter of 2017, compared to $480 million in the second quarter of 2016. Reported net income in the second quarter of 2017 reflected the unfavourable effect of market related impacts, driven by interest rate changes. Reported net income also reflected the unfavourable impact of acquisition, integration and restructuring amounts, fair value adjustments on MFS's share-based payment awards, and certain hedges in SLF Canada that do not qualify for hedge accounting. Reported net income also included the impact of assumption changes and management actions. Reported net income also reflected the factors discussed in underlying net income below.

Underlying net income was $689 million, compared to $554 million in the second quarter of 2016. Underlying net income in the second quarter of 2017 reflected business growth, gains from investing activity on insurance contract liabilities, positive credit experience and favourable morbidity and mortality experience. This was partially offset by unfavourable lapse and other policyholder experience, unfavourable expense experience, including investment in growing our businesses, and unfavourable other experience, including the impact related to relocating our head office.

Reported net income in the second quarter of 2016 reflected the unfavourable effect of market related impacts primarily driven by interest rates, partially offset by equity markets. Reported net income also reflected the favourable impact of fair value adjustments on MFS's share-based payment awards, partially offset by the unfavourable impact of acquisition, integration, restructuring amounts, assumption changes and management actions, and certain hedges in SLF Canada that do not qualify for hedge accounting. Reported net income also reflected the factors discussed in underlying net income below.

Underlying net income in the second quarter of 2016 reflected unfavourable morbidity experience, mainly in SLF U.S. Group Benefits notably from the stop-loss insurance business, and expense experience including investment in growing our businesses, partially offset by gains from investment activity on insurance contract liabilities and positive credit experience.

Q2 2017 vs. Q2 2016 (year-to-date)

The following table reconciles our net income measures and sets out the impact that other notable items had on our net income for the six months ended June 30, 2017 and 2016.

Our reported net income was $1,125 million for the first six months of 2017, compared to $1,020 million in the first six months of 2016. Reported net income for the first six months of 2017 reflected the unfavourable effect of market related impacts, primarily driven by interest rates, partially offset by equity markets and increases in the fair value of real estate. Reported net income also reflected the unfavourable impact of acquisition, integration and restructuring amounts and fair value adjustments on MFS's share-based payment awards, and certain hedges in SLF Canada that do not qualify for hedge accounting. Reported net income also included the impact of assumption changes and management actions. Reported net income also reflected the factors discussed in underlying net income below.

Underlying net income was $1,262 million, compared to $1,136 million in the first six months of 2016. Underlying net income for the first six months of 2017 reflected business growth, gains from investing activity on insurance contract liabilities in the U.S., favourable mortality experience in SLF Canada and SLF U.K., positive credit experience and favourable morbidity experience. This was partially offset by lapse and other policyholder experience, unfavourable expense experience, including investment in growing our businesses, and unfavourable other experience, including the impact related to relocating our head office.

Reported net income for the first six months of 2016 reflected the unfavourable effect of market related impacts primarily driven by interest rates. Reported net income also reflected the unfavourable impact of certain hedges in SLF Canada that do not qualify for hedge accounting and assumption changes and management actions, offset by the favourable impact of acquisition, integration and restructuring amounts and fair value adjustments on MFS's share-based payment awards. Reported net income also reflected the factors discussed in underlying net income below.

Underlying net income for the first six months of 2016 reflected the positive impact of strong investing activities in the period, positive mortality, and credit experience, partially offset by morbidity experience and expense experience including investment in growing our businesses.

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

In the second quarter of 2017, the net impact of assumption changes and management actions was an increase of $11 million in reported net income compared to a decrease of $8 million in the second quarter of 2016. The impact this quarter was due to various enhancements and other changes, the largest items being changes related to reinsurance and taxes in SLF U.S. In SLF U.S. In-force Management, the unfavourable impact of assumption changes and management actions was due to the expected impact of recapturing certain reinsurance treaties, the expected cost of reinsurance in certain other treaties, and increases in general provisions for the risk related to changes in reinsurance market conditions, partially offset by the favourable impact on actuarial liabilities from the resolution of tax uncertainties in a U.S. subsidiary. In SLF U.S. International, the favourable impact of assumption changes and management actions was due to changes in the expected cost of reinsurance in certain treaties. For additional information, refer to Reconciliation of Non-IFRS Financial Measures - Assumption changes and management actions.

On July 28, 2017, the Actuarial Standards Board ("ASB") announced a decrease of 10 basis points to the promulgated Ultimate Reinvestment Rate ("URR") with an effective date of October 28, 2017 with early implementation allowed. Our estimated sensitivity as at June 30, 2017 to a 10 basis point decrease in the URR is a decrease in reported net income of approximately $75 million. The actual impact of this change, when implemented in the third quarter of 2017, could differ from the Company's estimate. Also in late July, the ASB finalized promulgations for future mortality improvement assumptions and calibration criteria for stochastic modelling of equity investment and risk-free interest returns.

The annual review of actuarial methods and assumptions, including ASB changes, is in progress.  It is not possible to determine whether the overall impact in the third quarter net income will be positive or negative.

Impact of Foreign Exchange Rates
We have operations in many markets worldwide, including Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China, Australia, Singapore, Vietnam, Malaysia, and Bermuda, and generate revenues and incur expenses in local currencies in these jurisdictions, which are translated to Canadian dollars.

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. The following table provides the most relevant foreign exchange rates over the past five quarters and two year-to-date periods.

In general, our net income benefits from a weakening Canadian dollar and is adversely affected by a strengthening Canadian dollar as net income from the Company's international operations is translated back to Canadian dollars. However, in a period of losses, the weakening of the Canadian dollar has the effect of increasing the losses. The relative impact of foreign exchange in any given period is driven by the movement of foreign exchange rates as well as the proportion of earnings generated in our foreign operations. We generally express the impact of foreign exchange on net income on a year-over-year basis.

During the second quarter of 2017, our reported net income and underlying net income increased by $8 million and $13 million, respectively, as a result of the impact of the movement of the Canadian dollar in the second quarter of 2017 relative to the average exchange rates in the second quarter of 2016.

During the first six months of 2017, our reported net income and underlying net income decreased by $18 million and $14 million, respectively, as a result of the impact of the movement of the Canadian dollar in the first six months of 2017 relative to the average exchange rates in the first six months of 2016.

Performance by Business Group

SLF Canada
SLF Canada is the Canadian market leader in the group market segments and is a leading provider of retail holistic advice, providing products and services to over six million people across Canada. Our distribution breadth, strong service culture, technology leadership and brand recognition provide an excellent platform for growth. SLF Canada has three main business units - Individual Insurance & Wealth, Group Benefits ("GB") and Group Retirement Services ("GRS") - which offer a full range of insurance, wealth and income products and services to employers, group members of company sponsored plans and individuals in their communities across Canada.

Q2 2017 vs. Q2 2016

SLF Canada's reported net income was $185 million in the second quarter of 2017, equaling our results in the second quarter of 2016. Reported net income in the second quarter of 2017 reflected significant unfavourable market related impacts primarily driven by interest rates, equity markets and credit spreads. Reported net income in SLF Canada also includes the impact of assumption changes and management actions and the impact of certain hedges that do not qualify for hedge accounting, which are set out in the table above. Reported net income also reflected the factors discussed in underlying net income below.

Underlying net income in the second quarter of 2017 was $266 million, compared to $200 million in the second quarter of 2016. Underlying net income in the second quarter of 2017 included business growth and strong new business gains in GRS and individual insurance, and favourable morbidity experience in GB, including favourable disability and extended health care costs. Results in the quarter also reflected positive credit experience, offset by expense experience, including investment in growing our individual wealth business.

Reported net income in the second quarter of 2016 reflected the unfavourable effect of market related impacts primarily driven by interest rates partially offset by equity markets, and the unfavourable impact of certain hedges that do not qualify for hedge accounting, and assumption changes and management actions. Reported net income also reflected the factors discussed in underlying net income below.

Underlying net income in the second quarter of 2016 reflected gains from investment activities on insurance contract liabilities, partially offset by growth in our expenses including investment in our individual wealth business. Mortality and morbidity experience were largely in line with best estimate assumptions.

Individual insurance sales, including our updated products launched in 2017, were consistent with the second quarter last year at $100 million. Individual wealth sales of $1.4 billion were 17% above the same quarter of the prior year driven by continued growth in our wealth manufactured⁽¹⁾ products, including SLGI⁽²⁾ mutual funds and Sun GIF⁽³⁾ segregated funds.

Sales in Group Benefits of $130 million increased 14% compared to second quarter 2016 driven by a few large Clients. Group Retirement Services sales of $2.4 billion were 53% ahead of the second quarter of 2016, due in part to a large case annuity sale in our Defined Benefit Solutions business.

Q2 2017 vs. Q2 2016 (year-to-date)

Reported net income was $451 million for the first six months of 2017, compared to $354 million for the six months ended June 30, 2016. Reported net income in the first six months of 2017 reflected unfavourable market related impacts primarily driven by interest rates, swap spreads and credit spreads. Reported net income in SLF Canada also includes the impact of assumption changes and management actions and the impact of certain hedges that do not qualify for hedge accounting, which are set out in the table above. Reported net income also reflected the factors discussed in underlying net income below.

Underlying net income was $495 million in the first six months ended June 30, 2017, compared to $418 million in the same period last year. Underlying net income in the first six months of 2017 reflected strong new business gains in GRS and individual insurance, favourable morbidity experience in GB, including favourable disability and extended health care costs, and favourable mortality experience in our individual wealth business and GRS. This was partially offset by expense experience, including investment in growing our individual wealth business.

Reported net income in the first six months of 2016 reflected the unfavourable effect of market related impacts primarily driven by interest rates partially offset by equity markets and swap spreads. Reported net income in SLF Canada also includes the unfavourable impact of certain hedges that do not qualify for hedge accounting and assumption changes and management actions, which are set out in the table above. Reported net income also reflected the factors discussed in underlying net income below.

Underlying net income in the first six months of 2016 reflected gains from investment activities on insurance contract liabilities and net realized gains on available-for-sale ("AFS") assets, partially offset by expense experience, including investment in growing our individual wealth business.

SLF U.S.
SLF U.S. has three business units: Group Benefits, International and In-force Management. Group Benefits provides insurance solutions to employers and employees including group life, disability, medical stop-loss, dental, and vision insurance products. Group Benefits also includes Disability Reinsurance Management Services, Inc., which provides turnkey disability risk management products and services to other insurance companies. International serves high net worth Clients in international markets, offering individual life insurance products, and manages a closed block of wealth products. In-force Management includes certain closed individual life insurance products, primarily universal life and participating whole life insurance.

Q2 2017 vs. Q2 2016
SLF U.S.'s reported net income was C$101 million in the second quarter of 2017, compared to C$54 million in the second quarter of 2016. Underlying net income was C$143 million, compared to C$114 million in the second quarter of 2016. The impact from the movement of the Canadian dollar in the second quarter of 2017 relative to average exchange rates in the second quarter of 2016 increased reported net income and underlying net income by C$4 million and C$6 million, respectively.

In U.S. dollars, SLF U.S.'s reported net income was US$74 million in the second quarter of 2017, compared to US$42 million in the second quarter of 2016. Reported net income in the second quarter of 2017 reflected the impact of acquisition, integration and restructuring amounts and the favourable market related impacts primarily driven by equity market and real estate gains. Reported net income also included the unfavourable impact of assumption changes and management actions of US$(178) million (C$(239) million) in In-force Management driven by the expected impact of recapturing certain reinsurance treaties, the expected cost of reinsurance in certain other treaties, and increases in general provisions for the risk related to changes in reinsurance market conditions, partially offset by the favourable impact on actuarial liabilities from the resolution of tax uncertainties in a U.S. subsidiary. Reported net income also included a favourable impact of assumption changes and management actions of US$161 million (C$216 million) in International driven by changes in the expected cost of reinsurance in certain treaties. For additional information refer to the Assumption Changes and Management Actions section in this document. Reported net income also reflected the factors discussed in underlying net income below.

Underlying net income was US$106 million in the second quarter of 2017, compared to US$90 million in the second quarter of 2016. Underlying net income in the second quarter of 2017 reflected gains from investing activities on insurance contract liabilities, favourable credit experience, and favourable mortality experience in In-force Management and International. Underlying net income also reflected unfavourable morbidity experience in stop-loss related to business written in 2016, partially offset by favourable morbidity experience in disability.

Reported net income in the second quarter of 2016 reflected unfavourable market impacts primarily driven by interest rates, as well as acquisition, integration and restructuring amounts. Reported net income also reflected the factors discussed in underlying net income below.

Underlying net income in the second quarter of 2016 reflected the contribution of the U.S. employee benefits business acquired in 2016, gains from investing activities on insurance contract liabilities, gains on the sale of AFS assets, and favourable mortality experience in International, partially offset by unfavourable morbidity experience in Group Benefits, notably from stop-loss experience.

Group Benefits sales were consistent with the second quarter of 2016 reflecting a 7% increase in stop-loss sales partially offset by a 3% decrease in employee benefits sales. International sales were consistent with the second quarter of the prior year.

Q2 2017 vs. Q2 2016 (year-to-date)
SLF U.S.'s reported net income was C$138 million for the six months ended June 30, 2017, compared to reported net income of C$149 million for the same period last year. Underlying net income was C$220 million in the first six months of 2017, compared to C$225 million in the same period of 2016. The impact from the movement in the Canadian dollar in the first six months of 2017 relative to average exchange rates in the first six months of 2016 increased underlying net income by C$1 million.

In U.S. dollars, SLF U.S.'s reported net income was US$103 million for the six months ended June 30, 2017, compared to US$111 million for the six months ended June 30, 2016.  Reported net income in the first six months of 2017 reflected the unfavourable impact of acquisition, integration and restructuring amounts and assumption changes and management actions. Reported net income also reflected unfavourable market related impacts driven by credit spreads, swap spreads, and interest rates, mostly offset by equity markets and real estate. Reported net income also reflected the factors discussed in underlying net income below.

Underlying net income was US$164 million for the six months ended June 30, 2017, compared to US$171 million in the same period last year. Underlying net income reflected gains from investing activities on insurance contract liabilities and favourable credit experience, partially offset by unfavourable policyholder behaviour in In-force Management. Underlying net income also reflected unfavourable morbidity experience in stop-loss related to business written in 2016, partially offset by favourable morbidity experience in disability and dental. This period also included favourable tax items related to prior years and net realized gains on the sale of AFS assets.

Reported net income in the first six months of 2016 reflected unfavourable market impacts primarily driven by interest rates and also reflected acquisition, integration and restructuring amounts and the impact of assumption changes and management actions. Reported net income also reflected the factors discussed in underlying net income below.

Underlying net income in the first six months of 2016 reflected the contribution of the U.S. employee benefits business acquired in 2016 and favourable mortality experience in International, partially offset by unfavourable morbidity experience in Group Benefits.

SLF Asset Management
SLF Asset Management is our asset management segment composed of MFS and Sun Life Investment Management ("SLIM").

MFS is a premier global asset management firm which offers a comprehensive selection of products and services. Drawing on an investment heritage that emphasizes collaboration and integrity, MFS actively manages assets for retail and institutional investors around the world through mutual and commingled funds, separately managed accounts, institutional products and retirement strategies.

SLIM is an institutional investment management business which delivers customized fixed income solutions, including liability-driven investing and a suite of alternative, yield-oriented asset classes, including private fixed income, real estate and commercial mortgages. SLIM consists of the businesses of the Bentall Kennedy group of companies ("Bentall Kennedy"), Prime Advisors, Inc. ("Prime Advisors"), Ryan Labs Asset Management Inc. ("Ryan Labs") and Sun Life Institutional Investments (Canada) Inc. that offer a comprehensive set of capabilities to institutional investors.

Q2 2017 vs. Q2 2016
SLF Asset Management's reported net income was C$183 million in the second quarter of 2017, compared to C$173 million in the second quarter of 2016. SLF Asset Management had underlying net income of C$199 million in the second quarter of 2017, compared to C$153 million in the second quarter of 2016. The impact from the movement of the Canadian dollar in the second quarter of 2017 relative to average exchange rates in the second quarter of 2016 increased reported net income and underlying net income by C$7 million and C$8 million, respectively.

SLF Asset Management's reported net income and underlying net income increased compared to the same quarter in 2016 due to MFS's results as described below. SLIM's net income was C$6 million compared to C$7 million in the second quarter of 2016.

In U.S. dollars, MFS's reported net income was US$132 million in the second quarter of 2017, compared to US$129 million in the second quarter of 2016. MFS's underlying net income was US$144 million in the second quarter of 2017, compared to US$114 million in the second quarter of 2016. MFS's underlying net income increased in the second quarter of 2017 compared to the same period in 2016, primarily due to higher average net assets and lower taxes. MFS's pre-tax operating profit margin ratio was 36% in the second quarter of 2017, up from 35% in the second quarter of 2016 due primarily to higher average net assets.

SLF Asset Management's AUM was C$655.3 billion as at June 30, 2017, compared to C$624.8 billion as at December 31, 2016. The increase in AUM was primarily due to asset appreciation, partially offset by unfavourable currency impact and net outflows. MFS's AUM was US$462.1 billion (C$599.0 billion) as at June 30, 2017, compared to US$425.6 billion (C$571.6 billion) as at December 31, 2016. The increase of US$36.5 billion was primarily driven by gross sales of US$40.9 billion and asset appreciation of US$51.6 billion, partially offset by redemptions of US$56.0 billion. Net outflows at MFS were primarily driven by institutional Client portfolio re-balancing and the trend to passive investing. 82%, 84% and 92% of MFS's retail fund assets ranked in the top half of their Lipper categories based on three-, five-, and ten-year performance, respectively, as of June 30, 2017.

SLIM's AUM was C$56.3 billion as at June 30, 2017, compared to C$53.2 billion as at December 31, 2016. This increase was primarily due to net sales of C$3.1 billion.

Q2 2017 vs. Q2 2016 (year-to-date)
SLF Asset Management's reported net income for the first six months ended June 30, 2017 was C$354 million, compared to C$350 million for the same period last year. Underlying net income was C$382 million for the first six months of 2017, compared to C$323 million for the six months ended June 30, 2016. Underlying net income in SLF Asset Management excludes the impact of fair value adjustments on MFS's share-based payment awards, which is set out in the table above. The impact from the movement of the Canadian dollar in the first six months of 2017 relative to average exchange rates in the first six months of 2016 increased reported net income and underlying net income by C$1 million.

MFS's reported net income for the six months ended June 30, 2017 was US$256 million, compared to US$253 million for the same period last year. MFS's underlying net income was US$277 million for the first six months of 2017, compared to US$233 million for the six months ended June 30, 2017. MFS's underlying net income in U.S. dollars for the first six months of 2017 increased compared to the same period last year driven primarily by higher average net assets and lower taxes.

SLIM's reported net income for the six months ended June 30, 2017 was C$13 million consistent with C$13 million for the same period last year.

SLF Asia
SLF Asia operates through subsidiaries in the Philippines, Hong Kong, Indonesia, and Vietnam, as well as through joint ventures and associates with local partners in the Philippines, India, China, and Malaysia. We offer individual life insurance products in all seven markets, and group benefits and/or pension and retirement products in the Philippines, China, Hong Kong, India, Malaysia, and Vietnam. We have also established asset management companies either directly or through joint ventures and associates in the Philippines, Hong Kong, China, and India. We distribute these insurance and wealth products to middle- and upper-income individuals, groups and affinity Clients through multiple distribution channels.

Q2 2017 vs. Q2 2016
SLF Asia's reported net income was $77 million in the second quarter of 2017, compared to reported net income of $68 million in the second quarter of 2016. Underlying net income was $81 million, compared to $85 million in the second quarter of 2016. The impact from the movement of the Canadian dollar in the second quarter of 2017 relative to average exchange rates in the second quarter of 2016 increased reported net income and underlying net income by C$1 million.

Reported net income in the second quarter of 2017 reflected unfavourable market related impacts, primarily driven by interest rates and equity market changes compared to the second quarter of 2016. Reported net income in the second quarter of 2017 reflected favourable impact from assumption changes and management, compared to unfavourable impact in the second quarter of 2016. Reported net income also reflected the factors discussed in underlying net income below.

Underlying net income in the second quarter of 2017, compared to the second quarter of 2016, reflected business growth offset by higher new business strain. Net income in both periods reflected the favourable effect of net realized gains on the sale of AFS assets.

Total individual insurance sales of $142 million increased 2% compared to the second quarter of 2016. On a constant currency basis, individual insurance sales were at the same level as 2016. Sales increases in India, Indonesia, and Vietnam driven by organic growth as well as our increase in ownership in Indonesia and Vietnam, were partially offset by decreases in Hong Kong.

Strong wealth sales in Asia of $2.9 billion were led by growth in India, at our joint venture mutual fund company, Aditya Birla Sun Life AMC Limited (previously called Birla Sun Life Asset Management), which manages over $44 billion in AUM and is the fourth largest mutual fund operation in India⁽¹⁾.

Q2 2017 vs. Q2 2016 (year-to-date)
Reported net income was $150 million for the first six months of 2017, compared to $159 million for the same period last year. Underlying net income for the first six months of 2017 was $160 million, compared to $153 million in the same period last year. The unfavourable impact of the change in the Canadian dollar in the first six months of 2017 relative to average exchange rates in the same period last year decreased reported net income and underlying net income by C$5 million and C$6 million, respectively.

Reported net income in the first six months of 2017 reflected less unfavourable market related impacts primarily driven by interest rates and equity market changes, compared to the first six months of 2016. Reported net income in the first six months of 2017 reflected favourable impact from assumption changes and management actions, compared to unfavourable impact in the first six months of 2016. The first six months of 2016 also reflected the favourable impact of acquisition, integration and restructuring amounts related to remeasuring our existing investment to fair value upon acquiring control over the operations of Sun Life Vietnam. Reported net income also reflected the factors discussed in underlying net income below.

Underlying net income for the first six months of 2017 reflected business growth relative to the first six months of 2016. Net income in both periods reflected the favourable effect of net realized gains on the sale of AFS assets.

Total individual life sales in the first six months of 2017 increased 16% from the first six months of 2016. On a constant currency basis, individual insurance sales increased 18%. Sales increased in all markets with the exception of Hong Kong driven by organic growth as well as our increase in ownership in Indonesia, Vietnam and India.

Corporate
Corporate includes the results of our United Kingdom business unit ("SLF U.K.") and Corporate Support. Corporate Support includes our Run-off reinsurance business as well as investment income, expenses, capital, and other items that have not been allocated to our other business segments. SLF U.K. has a run-off block of business which has been closed to new business and focuses on supporting existing Clients.

Q2 2017 vs. Q2 2016
Corporate had reported net income of $28 million in the second quarter of 2017, compared to $nil in the second quarter of 2016. Reported net income in Corporate in the second quarter of 2017 reflected the favourable impact of assumption changes and management actions. Reported net income also included the impact of acquisition, integration and restructuring amounts.

Underlying net income was $nil, compared to underlying net income of $2 million in the second quarter of 2016. The impact from the movement of the Canadian dollar relative to the U.K. pound in the second quarter of 2017 relative to average exchange rates in the second quarter of 2016 decreased reported net income by C$4 million and underlying net income by C$2 million.

SLF U.K.'s reported net income in the second quarter of 2017 reflected the favourable impact of assumption changes and management actions, and gains from investing activity on insurance contract liabilities. Reported net income in the second quarter of 2016 reflected unfavourable market impacts, partially offset by gains from investment activities on insurance contract liabilities and favourable policyholder behaviour.

Corporate Support had a reported net loss of $30 million in the second quarter of 2017, compared to a reported net loss of $32 million in the second quarter of 2016.

Q2 2017 vs. Q2 2016 (year-to-date)
The reported net income was $32 million in the Corporate segment for the six months ended June 30, 2017, compared to a reported net income of $8 million for the same period last year. Reported net income in Corporate in the first six months of 2017 reflected favourable impact of assumption changes and management actions. Reported net income also included market related impacts and the impact of acquisition, integration and restructuring amounts.

Underlying net income was $5 million in the six months ended June 30, 2017, compared to an underlying net income of $17 million in the six months ended June 30, 2016. The impact from the movement of the Canadian dollar relative to the U.K. pound in the first six months of 2017 relative to average exchange rates in the same period last year decreased reported net income by C$14 million and underlying net income by C$10 million.

SLF U.K.'s reported net income in the six months ended June 30, 2017 reflected the favourable impact of assumption changes and management actions, gains from investing activity on insurance contract liabilities, and favourable credit and mortality experience. Reported net income in the first six months of 2016 reflected gains from investment activities on insurance contract liabilities, favourable policyholder behaviour and credit experience, partially offset by unfavourable impact of equity markets and interest rates.

In Corporate Support, the reported net loss for the six months ended June 30, 2017 was $71 million compared to a reported net loss of $64 million for the same period last year. The first six months of 2016 reflected favourable experience in our Run-off reinsurance business.

Additional Financial Disclosure

Revenue

Revenue in the second quarter of 2017 was $8.1 billion, compared to $9.5 billion in the second quarter of 2016. The decrease was mainly attributable to lower net gains in the fair value of FVTPL assets largely due to relatively larger decreases in interest rates and credit spreads in the second quarter in 2016, partially offset by higher net premium revenue in SLF Canada. The currency impact from the change in the Canadian dollar relative to average exchange rates in the second quarter of 2016 increased revenue by $159 million. Adjusted revenue was $7.4 billion in the second quarter of 2017, $0.4 billion higher compared to the second quarter of 2016. The increase was primarily driven by higher net premium revenue in SLF Canada, increased fee income from SLF Canada, SLF Asset Management and SLF Asia, partially offset by lower net premium revenue in SLF Asia and SLF U.S.

Revenue was $15.1 billion for the six months ended June 30, 2017, down $3.2 billion from the comparable period last year. The decrease was mainly attributable to lower net gains in the fair value of FVTPL assets largely due to relatively larger decreases in interest rates and credit spreads in the first six months of 2016 and impacts from currency and interest rates derivatives, partially offset by higher net premium revenue in SLF Canada and SLF U.S. The currency impact from the change in the Canadian dollar relative to average exchange rates in the first six months of 2016 decreased revenue by $38 million. Adjusted revenue of $14.7 billion for the six months ended June 30, 2017 was $1.0 billion higher compared to the same period last year, primarily due to higher net premium revenue in SLF Canada, SLF U.S. and increased fee income from SLF Asset Management, SLF Canada and SLF Asia, partially offset by lower net premium revenue in SLF Asia.

Premiums and Deposits

Premiums and deposits were $41.3 billion in the second quarter of 2017, compared to $38.0 billion in the second quarter of 2016. Adjusted premiums and deposits of $40.6 billion in the second quarter of 2017 increased $1.9 billion from the second quarter of 2016. In both cases, the increase was mainly the result of increased managed and mutual fund sales, higher net premium revenue, partially offset by lower segregated fund deposits and ASO premium and deposit equivalents. The currency impact from the change in the Canadian dollar relative to average exchange rates in the second quarter of 2016 increased total premiums and deposits by approximately $1.5 billion.

Premiums and deposits were $83.6 billion for the six months ended June 30, 2017, compared to $75.9 billion for the six months ended June 30, 2016. Adjusted premiums and deposits of $84.9 billion for the six months ended June 30, 2017 increased $7.7 billion over the same period last year. In both cases, the increase was mainly the result of increased mutual and managed fund sales, higher net premium revenue and segregated fund deposits, partially offset by lower ASO premium and deposit equivalents. The currency impact from the change in the Canadian dollar relative to average exchange rates in the first six months of 2016 increased total premiums and deposits by approximately $167 million.

Net premium revenue was $3.9 billion in the second quarter of 2017, compared to $3.6 billion in the second quarter of 2016. The increase was primarily driven by higher premiums in all business units in SLF Canada and the currency impact from the change in the Canadian dollar, partially offset by decreases in Hong Kong in SLF Asia, GB and International in SLF U.S. Net premium revenue was $7.5 billion in the first six months of 2017, compared to $6.7 billion in the same period of 2016. The increase was primarily driven by higher premiums in all business units in SLF Canada, GB and International in SLF U.S., partially offset by decreases in Hong Kong in SLF Asia.

Segregated fund deposits were $2.5 billion in the second quarter of 2017, compared to $2.8 billion in the second quarter of 2016. Segregated fund deposits were $5.9 billion in the first six months of 2017, compared to $5.6 billion for the same period last year. In both cases, the change was primarily due to changes in GRS in SLF Canada.

Sales of mutual funds were $21.3 billion in the second quarter of 2017, an increase of $1.3 billion over the second quarter of 2016. The higher mutual fund sales largely reflected increased sales from India and the Philippines in SLF Asia, and the currency impact from the change in the Canadian dollar, partially offset by a decrease in MFS. Sales of managed funds were $11.9 billion in the second quarter of 2017, compared to $9.9 billion in the second quarter of 2016. The increased managed fund sales were primarily due to higher sales in SLIM, the currency impact from the change in the Canadian dollar, and increased sales in Hong Kong in SLF Asia and MFS.

Sales of mutual funds were $45.5 billion for the first six months of 2017, compared to $39.3 billion in the same period in 2016. The higher mutual fund sales largely reflected increased sales from MFS and growth in India and the Philippines in SLF Asia. Sales of managed funds were $21.2 billion for the first six months of 2017, compared to $20.8 billion in the same period in 2016. The increased managed fund sales were primarily due to increases from SLIM as well as Hong Kong in SLF Asia, partially offset by lower sales in MFS.

ASO premium and deposit equivalents in the second quarter of 2017 and for the first six months of 2017 were both down slightly compared to the same periods last year. In both cases, the decrease was attributable to decreases in Hong Kong in SLF Asia.

Sales
In SLF Canada, life and health 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 SLF U.S., life and health sales consist of sales by Group Benefits and individual life sales by International. In SLF Asia, life and health sales consist of the individual and group life and health sales by our subsidiaries and joint ventures and associates, based on our proportionate equity interest, in the Philippines, Hong Kong, Indonesia, India, China, Malaysia, and Vietnam; 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. SLF Asset Management sales consist of gross sales (inflows) for retail and institutional Clients; unfunded commitments are not included in sales.

Total Company life and health sales were $565 million in the second quarter of 2017, compared to $538 million in the same period last year.

• SLF Canada life and health sales were $230 million in the second quarter of 2017, compared to $213 million in the second quarter of 2016 mainly due to higher sales in GB
• SLF U.S. life and health sales were $186 million in the second quarter of 2017, compared to $179 million in the second quarter of 2016, mainly reflecting the currency impact from the change in the Canadian dollar
• SLF Asia life and health sales were $149 million in the second quarter of 2017, compared to $146 million in the second quarter of 2016, mainly attributable to growth in India, currency impact from the change in the Canadian dollar, and a balance of organic growth and increase in ownership in our Indonesia business, and the increase in our ownership in Vietnam, partially offset by lower sales in Hong Kong

Total Company wealth sales were $36.6 billion in the second quarter of 2017, compared to $32.7 billion in the second quarter of 2016.

• SLF Canada wealth sales were $3.8 billion in the second quarter of 2017, compared to $2.7 billion in the second quarter of 2016, reflecting higher sales in GRS and individual wealth business
• SLF Asia wealth sales were $2.9 billion in the second quarter of 2017, compared to $1.8 billion in the second quarter of 2016, primarily led by growth in India, as well as higher sales in the Philippines and Hong Kong. The increase also reflected the currency impact from the change in the Canadian dollar
• SLF Asset Management gross sales were $29.9 billion in the second quarter of 2017, compared to $28.2 billion in the second quarter of 2016, largely attributable to the currency impact from the change in the Canadian dollar and higher fund sales from SLIM, partially offset by lower mutual fund sales in MFS

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

AUM were $943.8 billion as at June 30, 2017, compared to AUM of $903.3 billion as at December 31, 2016. The increase in AUM of $40.5 billion between December 31, 2016 and June 30, 2017 resulted primarily from:

Changes in the Statements of Financial Position and in Shareholders' Equity
Total general fund assets were $161.8 billion as at June 30, 2017, compared to $161.1 billion as at December 31, 2016, primarily a result of an increase of $2.0 billion from the change in value of FVTPL assets and liabilities and an increase of $0.9 billion from business activities, partially offset by $2.2 billion from the strengthening of the Canadian dollar relative to exchange rates at the end of the fourth quarter of 2016.

Insurance contract liabilities (excluding other policy liabilities and assets) of $109.9 billion as at June 30, 2017 increased by $1.5 billion compared to December 31, 2016, mainly due to balances arising from new policies, changes in balances on in-force policies (which include fair value changes on FVTPL assets supporting insurance contract liabilities), partially offset by the currency impact from the change in the Canadian dollar relative to exchange rates at the end of the fourth quarter of 2016.

Shareholders' equity, including preferred share capital, was $22.3 billion as at June 30, 2017, compared to $22.0 billion as at December 31, 2016. The increase in shareholders' equity was primarily due to:

As at July 28, 2017, SLF Inc. had 613,694,016 common shares, 3,335,297 options to acquire SLF Inc. common shares, and 92,200,000 Class A Shares outstanding.

Cash Flows

The operating activities of the Company 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 in 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 lower cash flows used in investing activities in the second quarter of 2017 compared to the same period last year were primarily due to the ownership increase in our India joint venture in the second quarter of 2016. The lower cash flows used in financing activities in the second quarter of 2017 compared to the same period last year were largely attributable to the redemption of senior debentures in the second quarter of 2016.

Income Taxes
In the second quarter of 2017, our effective tax rates on reported net income and underlying net income⁽¹⁾ were (3.7)% and 18.9%, respectively. For the first six months of 2017, our effective tax rates on reported and underlying net income⁽¹⁾ were 10.3% and 18.3%, respectively. Our statutory tax rate is normally reduced by various tax benefits, such as lower taxes on income subject to tax in foreign jurisdictions, a range of tax exempt investment income and other sustainable tax benefits that are expected to decrease our effective tax rate to a range of 18% to 22%.

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

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&As for the relevant periods.

First Quarter 2017
Reported net income was $551 million in the first quarter of 2017, reflecting the favourable effect of market related impacts partially offset by the unfavourable impact of acquisition, integration and restructuring amounts and fair value adjustments on MFS's share-based payment awards. Reported net income also reflected the factors discussed in underlying net income. Underlying net income was $573 million, reflecting favourable mortality experience in SLF Canada and SLF U.K. and gains from investing activities on insurance contract liabilities, partially offset by lapse and other policyholder behaviour experience and unfavourable mortality experience in SLF U.S.

Fourth Quarter 2016
Reported net income was $728 million in the fourth quarter of 2016, reflecting favourable interest rate impacts. Reported net income also reflected factors discussed in underlying net income. Underlying net income was $560 million, reflecting positive credit experience and a lower level of gains from investing activity on insurance contract liabilities. This was partially offset by unfavourable expense experience, reflecting incentive compensation costs arising from overall strong business performance and investment in growing our businesses. We also experienced unfavourable morbidity results mainly in the U.S.

Third Quarter 2016
Reported net income was $737 million in the third quarter of 2016, reflecting favourable equity markets, interest rates, and assumption changes and management actions. Reported net income also reflected factors discussed in underlying net income. Underlying net income was $639 million, reflecting higher levels of gains from investment activities on insurance contract liabilities, positive credit experience, and other experience items. This was partially offset by mortality and expense experience, including investment in growing our businesses.

Second Quarter 2016
Reported net income was $480 million in the second quarter of 2016, reflecting unfavourable impact of interest rates. Reported net income also reflected factors discussed in underlying net income. Underlying net income was $554 million, reflecting unfavourable morbidity experience, mainly in SLF U.S. Group Benefits notably from the stop-loss insurance business, and expense experience including investment in growing our businesses. This was partially offset by gains from investment activity on insurance contract liabilities and positive credit experience.

First Quarter 2016
Reported net income was $540 million in the first quarter of 2016, reflecting unfavourable impacts from interest rates and equity markets. Reported net income also reflected factors discussed in underlying net income. Underlying net income was $582 million, reflecting favourable impact of strong investing activities and positive morbidity experience.

Fourth Quarter 2015
Reported net income was $536 million in the fourth quarter of 2015 reflecting costs related to acquisition, integration and restructuring and unfavourable interest rate impact. Reported net income also reflected factors discussed in underlying net income. Underlying net income was $646 million, reflecting favourable impact from investment activity on insurance contract liabilities largely in SLF Canada and SLF U.S., positive credit, morbidity and mortality experience, and other experience items including a change to post-retirement benefit liabilities in SLF U.S., partially offset by unfavourable expense experience including investment in growing our businesses.

Third Quarter 2015
Reported net income was $482 million in the third quarter of 2015, reflecting unfavourable equity market impact, partially offset by favourable impact from interest rates and assumption changes and management actions. Reported net income also reflected factors discussed in underlying net income. Underlying net income was $528 million, reflecting favourable impact from investment activity on insurance contract liabilities, positive credit experience and policyholder behaviour. These items were partially offset by unfavourable morbidity and mortality experience, expense experience, and other experience items.

Investments
We had total general fund invested assets of $143.6 billion as at June 30, 2017, compared to $142.4 billion as at December 31, 2016. The increase in general fund invested assets of $1.2 billion was primarily due to changes in net fair value growth and operating activity, partially offset by the currency impact of the strengthening Canadian dollar and the redemption of subordinated debt. Our general fund is primarily invested in fixed income instruments, including debt securities and mortgages and loans, with 84.9% of the general fund invested assets invested in cash and fixed income investments. Equity securities and investment properties represented 4.1% and 4.9% of the portfolio, respectively, and the remaining 6.1% of the portfolio consisted of policy loans, derivative assets, and other invested assets. Our general fund invested assets are well diversified across investment types, geographies, and sectors.

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

Energy
As a leading international financial services organization we have a highly diversified portfolio that includes a variety of investment types spread across a broad range of sectors and geographies. As at June 30, 2017, our direct exposure to energy through our debt securities and loan holdings was approximately $5.3 billion or 4% of total invested assets, and our indirect exposure through our mortgage and real estate holdings was approximately $2.9 billion⁽¹⁾ or 2% of total invested assets.

Debt Securities and Loans
As at June 30, 2017, our holdings in debt securities and loans in the energy sector were $5.3 billion (compared to $5.4 billion as at December 31, 2016). The credit quality of our portfolio is stable and remains strong at 94% investment grade⁽²⁾.

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

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

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, 2017, we held $73.4 billion of debt securities, representing 51.1% of our total invested assets compared to $71.9 billion representing 50.6% as at December 31, 2016. Debt securities with a credit rating of "A" or higher represented 70.3% of the total debt securities as at June 30, 2017, compared to 69.6% as at December 31, 2016. Debt securities with a credit rating of "BBB" or higher represented 98.2% of total debt securities as at June 30, 2017, compared to 97.6% as at December 31, 2016.

Corporate debt securities not issued or guaranteed by sovereign, regional, and municipal governments represented 64.0% of our total debt securities as at June 30, 2017, compared to 64.4% as at December 31, 2016. Total government issued or guaranteed debt securities as at June 30, 2017 were $26.4 billion, compared to $25.6 billion as at December 31, 2016. With the exception of certain countries where we have business operations, including Canada, the United States, the United Kingdom and the Philippines, our exposure to debt securities from any single country did not exceed 1% of total invested assets on our Consolidated Statements of Financial Position as at June 30, 2017.

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

Debt Securities of Governments and Financial Institutions by Geography

Our gross unrealized losses as at June 30, 2017 for FVTPL and AFS debt securities were $0.30 billion and $0.07 billion, respectively, compared with $0.72 billion and $0.14 billion, respectively, as at December 31, 2016.

Our debt securities as at June 30, 2017 included $9.6 billion invested in the financial sector, representing 13.1% of our total debt securities, or 6.7% of our total invested assets. This compares to $9.3 billion, representing 12.9% of the debt security portfolio, or 6.5% of our total invested assets as at December 31, 2016.

Our debt securities as at June 30, 2017 included $6.2 billion of asset-backed securities, representing 8.4% of our total debt securities, or 4.3% of our total invested assets. This compares to $5.9 billion representing 8.3% of total debt securities, or 4.2% of our total invested assets as at December 31, 2016.

Mortgages and Loans
Mortgages and loans disclosures in this section are presented at their carrying value on our Consolidated Statements of Financial Position. As at June 30, 2017, we had $40.7 billion in mortgages and loans, representing 28.4% of our total invested assets, compared to $40.8 billion representing 28.6% as at December 31, 2016. Our mortgage portfolio consisted almost entirely of first mortgages, and our loan portfolio consisted of private placement assets.

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

Mortgages and Loans by Geography

As at June 30, 2017, we held $15.2 billion of mortgages, compared to $15.4 billion as at December 31, 2016. Our mortgage portfolio consists entirely of commercial mortgages, including retail, office, multi-family, industrial, and land properties. As at June 30, 2017, 28.2% of our commercial mortgage portfolio consisted of multi-family residential mortgages; there are no single family mortgages. Our uninsured commercial portfolio had a weighted average loan-to-value ratio of 55% as at June 30, 2017, consistent with December 31, 2016. While we generally limit the maximum loan-to-value ratio to 75% at issuance, we may invest in mortgages with a higher loan-to-value ratio in Canada if the mortgage is insured by the Canada Mortgage and Housing Corporation ("CMHC"). The estimated weighted average debt service coverage for our uninsured commercial portfolio is 1.76 times. Of the $3.2 billion of multi-family residential loans in the Canadian commercial mortgage portfolio, 90.5% were insured by the CMHC.

As at June 30, 2017, we held $25.5 billion of loans, compared to $25.4 billion as at December 31, 2016. Private placement assets provide diversification by type of loan, industry segment, and borrower credit quality. The loan portfolio consists of senior secured and unsecured loans to large- and mid-market sized corporate borrowers, securitized lease/loan obligations secured by a variety of assets, and project finance loans in sectors such as power and infrastructure. Our strategy is to continue to focus our efforts on the origination of new private placement assets.

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

Mortgages and Loans Past Due or Impaired

Our impaired mortgages and loans, net of allowance for losses, were $77 million as at June 30, 2017, compared to $16 million as at December 31, 2016. The increase of $61 million in impaired loans was primarily due to the addition of two creditors in the first quarter of 2017.

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, 2017 was $2,312 million compared to $2,247 million as at December 31, 2016. The increase of $65 million was primarily due to increases in the provision for assets purchased, net of dispositions, partially offset by the release of provisions on fixed income assets supporting our insurance contract liabilities.

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

Derivative Instruments

The total notional amount of derivatives in our portfolio increased to $54.7 billion as at June 30, 2017, from $54.4 billion as at December 31, 2016.

The net fair value of derivatives was a net liability of $438 million as at June 30, 2017, compared to a net liability of $904 million as at December 31, 2016. The increase in net fair value was due primarily to increases in fair value of our foreign exchange portfolio, partially offset by a decrease in fair value of our interest rate portfolio.

Capital Management
Our total capital consists of subordinated debt and other capital instruments, participating policyholders' equity, and total shareholders' equity which includes common shareholders' equity and preferred shareholders' equity. As at June 30, 2017, our total capital was $26.7 billion, compared to $26.9 billion as at December 31, 2016. The decrease in total capital was primarily due to the redemption of $800 million of subordinated debt detailed below and the payment of $525 million of dividends on common shares, partially offset by the result of common shareholders' net income of $1,125 million.

The legal entity, SLF Inc. (the ultimate parent company), and its wholly-owned holding companies had $1,438 million in cash and other liquid assets as at June 30, 2017 ($1,616 million as at December 31, 2016). The decrease in liquid assets in these holding companies in the first six months of 2017 was primarily attributable to the redemption of $800 million subordinated debt detailed below, which was partially offset by cash generated from the businesses during the period. Liquid assets as noted above include cash and cash equivalents, short-term investments, and publicly traded securities.

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

As at June 30, 2017, Sun Life Assurance's MCCSR ratio was 229%, compared to 226% as at December 31, 2016. The increase in Sun Life Assurance's MCCSR ratio over the period primarily resulted from the contribution of earnings net of dividends.

As at June 30, 2017, SLF Inc.'s MCCSR ratio was 248%, compared to 253% as at December 31, 2016. The primary difference between the MCCSR ratio of SLF Inc. and Sun Life Assurance relates to cash and liquid assets held at the holding company level of $1,438 million as discussed above and capital related to certain insurance subsidiaries held directly by SLF Inc.

Effective January 1, 2018, the Office of the Superintendent of Financial Institutions ("OSFI") will implement a revised regulatory capital framework in Canada.  The Life Insurance Capital Adequacy Test ("LICAT") Guideline will replace the MCCSR Guideline. For additional information, see Risk Management - Recent Regulatory Developments.

Normal Course Issuer Bid

On August 9, 2017, SLF Inc. announced that the Board of Directors had authorized the purchase of up to 11.5 million common shares through a normal course issuer bid. The bid is expected to commence on August 14, 2017 and continue until August 13, 2018 or such earlier date as SLF Inc. completes its purchases. The purchases will be made through the facilities of the Toronto Stock Exchange, other Canadian stock exchanges and/or alternative Canadian trading platforms, at prevailing market rates. Purchases may also be made by way of private agreements or share repurchase programs under issuer bid exemption orders issued by securities regulatory authorities. Any purchases made under an exemption order issued by a securities regulatory authority will generally be at a discount to the prevailing market price. Any common shares purchased by SLF Inc. will be cancelled. The Company will utilize the normal course issuer bid program to acquire common shares in order to distribute funds to shareholders as part of the Company's overall capital management strategy.

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

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

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

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

The market value of our investments in fixed income and equity securities fluctuates based on movements in interest rates and equity markets. The market value of fixed income assets designated as AFS that are held primarily in our surplus segment increases with declining interest rates and decreases with rising interest rates. The market value of equities designated as AFS and held primarily in our surplus segment increases (decreases) with rising (declining) equity markets. Changes in the market value of AFS assets flow through OCI and are only recognized in net income when realized upon sale, or when considered impaired. The amount of realized gain (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 $58 million (pre-tax) in net gains on the sale of AFS assets during the second quarter of 2017 ($54 million pre-tax in the second quarter of 2016). The net unrealized gains or OCI position on AFS fixed income and equity assets were $195 million and $145 million, respectively, after-tax as at June 30, 2017 ($86 million and $125 million, respectively, after-tax as at December 31, 2016). 

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

Interest Rate and Equity Market Sensitivities

Our net income and MCCSR sensitivities to interest rates have changed since December 31, 2016. The increase in sensitivity to interest rates is primarily from declines in interest rates in the first half of 2017.

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

Credit Spread Sensitivities ($ millions, after-tax)

Swap Spread Sensitivities ($ millions, after-tax)

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

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

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

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

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

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

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

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

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

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

The movement of the items in the table above from December 31, 2016 to June 30, 2017 primarily resulted from the following factors:

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, 2017, 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 and 100 basis point decrease in interest rates and a 10% and 25% decrease in equity markets for segregated fund contracts as at June 30, 2017 and December 31, 2016.

Impact of Segregated Fund Hedging

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, 2017 would decrease net income⁽¹⁾ by approximately $225 million ($200 million decrease as at December 31, 2016). Conversely, an instantaneous 10% increase in the value of our direct real estate investments as at June 30, 2017 would increase net income by approximately $225 million ($200 million increase as at December 31, 2016). 

Additional Cautionary Language and Key Assumptions Related to Sensitivities
Our market risk sensitivities are measures of our estimated change in net income and OCI for changes in interest rates and equity market price levels described above, based on interest rates, equity market prices, and business mix in place as at the respective calculation dates. These sensitivities are calculated independently for each risk factor, generally assuming that all other risk variables stay constant. The sensitivities do not take into account indirect effects such as potential impacts on goodwill impairment or valuation allowances on deferred tax assets. The sensitivities are provided for the consolidated entity and may not be proportional across all reporting segments. Actual results can differ materially from these estimates for a variety of reasons, including differences in the pattern or distribution of the market shocks, the interaction between these risk factors, model error, or changes in other assumptions such as business mix, effective tax rates, policyholder behaviour, currency exchange rates and other market variables relative to those underlying the calculation of these sensitivities. The extent to which actual results may differ from the indicative ranges will generally increase with larger capital market movements. Our sensitivities as at December 31, 2016 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 Use of Non-IFRS Financial Measures. The cautionary language which appears in this section is also applicable to the credit spread, swap spread, real estate, and MCCSR 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 MCCSR 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, 2017 and December 31, 2016, 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, 2017 and December 31, 2016, 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 International Swaps and Derivatives Association agreements that generally include applicable 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 sensitivities. Given the nature of these calculations, we cannot provide assurance that actual impact will be consistent with the estimates provided.

Information related to market risk sensitivities and guarantees related to segregated fund products should be read in conjunction with the information contained in the sections in the annual MD&A under the headings Outlook and Critical Accounting Policies and Estimates. Additional information on market risk can be found in Note 6 of our 2016 Annual Consolidated Financial Statements and the Risk Factors section in our AIF.

Recent Regulatory Developments

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

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

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

Department of Labor
In April 2016, the U.S. Department of Labor issued its final Conflict of Interest rule defining when a communication constitutes investment advice and results in fiduciary status. The new rule expands the definition of fiduciary investment advice applicable to employee benefit plans and participants under the Employee Retirement Income Security Act of 1974, as well as owners of Individual Retirement Accounts. The Company has investment management operations in the U.S., primarily MFS, which conduct business with distribution firms that may be impacted by the rule. These changes required modifications to how we interact with intermediaries, retirement Clients and prospects, and may cause us to revise compliance procedures, limit certain sales practices, or adjust our products. The requirement for brokers offering advice on retirement savings account to put Clients' interest first became effective as of June 9, 2017. However, the Department of Labor has said it will not enforce the rule until January 1, 2018. It should further be noted that the current administration is still reviewing the requirement and it could be amended further.

Legal and Regulatory Matters
Information concerning legal and regulatory matters is provided in our Annual Consolidated Financial Statements, annual MD&A, and AIF, for the year ended December 31, 2016.

Changes in Accounting Policies
We have adopted several amended IFRS standards in the current year. In addition, new IFRS standards were issued in the current year. For additional information, refer to Note 2 in our Interim Consolidated Financial Statements.

In May 2017, the IASB issued IFRS 17 Insurance Contracts ("IFRS 17"), which replaces IFRS 4 Insurance Contracts. IFRS 17 establishes the principles for the recognition, measurement, presentation and disclosure of insurance contracts. IFRS 17 requires entities to measure insurance contract liabilities at their current fulfillment values using one of three measurement models, depending on the nature of the contract. IFRS 17 is effective for annual periods beginning on or after January 1, 2021. IFRS 17 will affect how we account for our insurance contracts and how we report our financial performance in our consolidated statement of operations. The adoption of IFRS 17 will be a significant initiative for us and the industry. We are currently assessing the impact that IFRS 17 will have on our Consolidated Financial Statements.

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, 2017 and ended on June 30, 2017 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Reconciliation of Non-IFRS Financial Measures
Additional information on the use of non-IFRS measures, including the definition of underlying net income (loss), is available in this document under the heading Use of Non-IFRS Financial Measures.

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

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.

Adjusted revenue. This measure is an alternative measure of revenue that provides greater comparability across reporting periods, by excluding the impact of: (i) exchange rate fluctuations, from the translation of functional currencies to the Canadian dollar, for comparisons ("Constant Currency Adjustment"); (ii) Fair value and foreign currency changes on assets and liabilities ("FV Adjustment"); and (iii) reinsurance for the insured business in SLF Canada's GB operations ("Reinsurance in SLF Canada's GB Operations Adjustment").

Adjusted premiums and deposits. This measure is an alternative measure of premiums and deposits that provides greater comparability across reporting periods by excluding the impact of: (i) the Constant Currency Adjustment and (ii) the Reinsurance in SLF Canada's GB Operations Adjustment.

Pre-tax 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 amounts are excluded in order to neutralize the impact these items have on the pre-tax operating profit margin ratio and have no impact on the profitability of MFS. There is no directly comparable IFRS measure.

Assumption changes and management actions. In this document the impact of assumption changes and management actions on shareholders' net income (after-tax) is included in reported net income and is excluded in calculating underlying net income, as described in this document under the heading Financial Summary.

Note 6.A of our Interim Consolidated Financial Statements shows the pre-tax impact of method and assumption changes on shareholder and participating policyholder Insurance Contract Liabilities net of reinsurance assets, excluding changes in other policy liabilities and assets.

The view in this document of assumption changes and management actions is the impact on shareholders' net income (after tax). The Interim Consolidated Financial Statement view is a component of the change in total company liabilities. The following table provides a reconciliation of the differences between the two measures.

In the second quarter of 2017, method and assumption changes were mainly in SLF U.S, primarily comprised of the favourable impact on actuarial liabilities from the resolution of tax uncertainties in a U.S. subsidiary, partially offset by increases in general provisions for the risk related to changes in reinsurance market conditions. Management actions in the second quarter of 2017 were also mainly in SLF U.S., primarily comprised of the expected impact of recapturing certain reinsurance treaties and the expected cost of reinsurance in certain other treaties.

Impact of foreign exchange. Several IFRS financial measures are presented on a constant currency adjusted basis to exclude the impact of foreign exchange rate fluctuations. These measures are calculated using the average or period end foreign exchange rates, as appropriate, in effect at the date of the comparative period.

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, life and health sales, and total premiums and deposits; (ii) AUM, mutual fund assets, managed fund assets, other AUM, and assets under administration; (iii) the value of new business, which is used to measure the estimated lifetime profitability of new sales and is based on actuarial calculations; and (iv) assumption changes and management actions, 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, the Office of the Superintendent of Financial Institutions.

Forward-looking Statements
From time to time, the Company makes written or oral forward-looking statements within the meaning of certain securities laws, including the "safe harbour" provisions of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities legislation. Forward-looking statements contained in this document include statements (i) relating to our strategies, (ii) relating to our growth initiatives and other business objectives, (iii) relating to our expected capital position under the new LICAT guideline, (iv) relating to our expected expense and tax run-rate synergies in connection with the integration of the U.S. employee benefits business acquired in 2016, (v) that are predictive in nature or that depend upon or refer to future events or conditions, (vi) set out in this document under the heading Financial Summary - Assumption Changes and Management Actions, and (vii) that include words such as "aim", "anticipate", "assumption", "believe", "could", "estimate", "expect", "goal", "initiatives", "intend", "may", "objective", "outlook", "plan", "project", "seek", "should", "strategy", "strive", "target", "will", and similar expressions. Forward-looking statements include the information concerning our possible or assumed future results of operations. These statements represent our current expectations, estimates, and projections regarding future events and are not historical facts. Forward-looking statements are not a guarantee of future performance and involve risks and uncertainties that are difficult to predict. Future results and shareholder value may differ materially from those expressed in these forward-looking statements due to, among other factors, the matters set out in this document under the headings Financial Summary - Assumption Changes and Management Actions, Capital Management and Risk Management and in SLF Inc.'s 2016 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, are set out below. The realization of our forward-looking statements, essentially depends on our business performance which, in turn, is subject to many risks. Factors that could cause actual results to differ materially from expectations include, but are not limited to: credit risks - related to issuers of securities held in our investment portfolio, debtors, structured securities, reinsurers, counterparties, other financial institutions and other entities; 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 mortality, morbidity, longevity and policyholder behaviour; product design and pricing; the impact of higher-than-expected future expenses; and the availability, cost and effectiveness of reinsurance; business and strategic risks - related to global economic and political conditions; changes in distribution channels or Client behaviour including risks relating to market conduct by intermediaries and agents; the impact of competition; the design and implementation of business strategies; changes in the legal or regulatory environment, including capital requirements and tax laws; tax matters, including estimates and judgments used in calculating taxes; the performance of our investments and investment portfolios managed for Clients such as segregated and mutual funds; our international operations, including our joint ventures; market conditions that affect our capital position or ability to raise capital; downgrades in financial strength or credit ratings; and the impact of mergers, acquisitions and divestitures; operational risks - related to breaches or failure of information system security and privacy, including cyber-attacks; our ability to attract and retain employees; the execution and integration of mergers, acquisitions and divestitures; 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; the environment, environmental laws and regulations and third-party policies; and liquidity risks - the possibility that we will not be able to fund all cash outflow commitments as they fall due.

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.

Earnings Conference Call
The Company's second quarter 2017 financial results will be reviewed at a conference call on Thursday, August 10, 2017, at 10:00 a.m. ET. To listen to the call via live audio webcast and to view the presentation slides, as well as related information, please visit www.sunlife.com and click on the link to Quarterly reports under Investors – Financial results & reports 10 minutes prior to the start of the call. Individuals participating in the call in a listen-only mode are encouraged to connect via our webcast. Following the call, the webcast and presentation will be archived and made available on the Company's website, www.sunlife.com, until the Q2 2019 period end. The conference call can also be accessed by phone by dialing 647-427-2311 (International) or 1-866-521-4909 (toll-free within North America). A replay of the conference call will be available from Thursday, August 10, 2017 at 1 p.m. ET until 11:59 p.m. ET on Thursday, August 24, 2017 by calling 416-621-4642 or 1-800-585-8367 (toll free within North America) using Conference ID: 50684972.

Consolidated Statements of Operations

Consolidated Statements of Financial Position

About Sun Life Financial
Sun Life Financial is a leading international financial services organization providing a diverse range of insurance, wealth and asset management solutions to individuals and corporate Clients. Sun Life Financial has operations in a number of markets worldwide, including Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China, Australia, Singapore, Vietnam, Malaysia and Bermuda. As of June 30, 2017, Sun Life Financial had total assets under management of $944 billion. For more information please visit www.sunlife.com.

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

Media Relations Contact:
Kim Armstrong
Corporate Communications
Tel: 416-979-6207
[email protected]

Investor Relations Contact:
Gregory Dilworth
Vice-President, Investor Relations
Tel: 416-979-6230
[email protected]

SOURCE Sun Life Financial Inc.

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