UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT 0F 1934

For the quarterly period ended

June 30, 2011

Commission File Numbers: 2-99959, 33-29851, 33-31711, 33-41858, 33-43008, 33-58853, 333-11699, 333-77041, 333-62837, 333-45923, 333-88069, 333-39306, 333-46566, 333-82816, 333-82824, 333-111636, 333-130699, 333-130703, 333-130704, 333-133684, 333-133685, 333-133686, 333-39034, 333-144903-01, 333-144908-01, 333-144911-01, 333-144912-01, 333-155716, 333-155726, 333-155791, 333-155792, 333-155793, 333-155797, 333-156303, 333-156304, 333-156308, 333-160605, 333-160606, 333-160607, 333-169558-01, 333-169559-01, 333-169560-01, and 333-169561-01

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

(Exact name of registrant as specified in its charter)

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

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

(781) 237-6030

(Registrant’s telephone number, including area code)

NONE

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.

Registrant has 6,437 shares of common stock outstanding on August 12, 2011, all of which are owned by Sun Life of Canada (U.S.) Holdings, Inc.

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

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

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

QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2011

TABLE OF CONTENTS

Page

PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Condensed Consolidated Statements of Operations for the six-month periods ended June 30, 2011 and 2010 (Unaudited)	3

	Condensed Consolidated Statements of Operations for the three-month periods ended June 30, 2011 and 2010 (Unaudited)	4

	Condensed Consolidated Balance Sheets as of June 30, 2011 and December 31, 2010 (Unaudited)	5

	Condensed Consolidated Statements of Comprehensive Income for the six and three-month periods ended June 30, 2011 and 2010 (Unaudited)	6

	Condensed Consolidated Statements of Changes in Stockholder’s Equity for the six-month periods ended June 30, 2011 and 2010 (Unaudited)	7

	Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2011 and 2010 (Unaudited)	8

	Notes to Condensed Consolidated Financial Statements	10

Item 2.	Management's Discussion and Analysis of Financial Position and Results of Operations	73

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	84

Item 4.	Controls and Procedures	84

PART II – OTHER INFORMATION

Item 1 .	Legal Proceedings	84

Item 1A.	Risk Factors	84

Item 2 .	Unregistered Sales of Equity Securities and Use of Proceeds	84

Item 3.	Defaults Upon Senior Securities	84

Item 4 .	(Removed and Reserved)	84

Item 5 .	Other Information	84

Item 6 .	Exhibits	85

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

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

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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

For the six-month periods ended June 30,

	Unaudited
	2011		2010

Revenues

Premiums and annuity considerations	$	70,547	$	68,242
Net investment income (1)		536,730		851,447
Net derivative loss (Note 5)		(107,999)		(567,165)
Net realized investment gains, excluding impairment losses on available-for-sale securities		23, 074		16,339
Other-than-temporary impairment losses (2) (Note 5)		(71)		(885)
Fee and other income		305,173		236,228

Total revenues		827,454		604,206

Benefits and Expenses

Interest credited		184,155		176,811
Interest expense		22,601		26,452
Policyowner benefits		79,491		116,577
Amortization of deferred policy acquisition costs and value of business and customer renewals acquired		237,465		(253,232)
Other operating expenses		176,194		159,793

Total benefits and expenses		699,906		226,401

Income before income tax expense		127,548		377,805

Income tax expense		35,749		121,354

Net income	$	91,799	$	256,451

(1)	Net investment income includes an increase in market value of trading fixed maturity securities of $210.6 million and $449.9 million for the six-month periods ended June 30, 2011 and 2010, respectively.

(2)

The other-than-temporary impairment (“OTTI”) losses for the six-month periods ended June 30, 2011 and 2010 represent solely credit losses. The Company incurred no non-credit OTTI losses during the six-month periods ended June 30, 2011 and 2010, and as such, no non-credit OTTI losses were recognized in other comprehensive income for the periods.

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

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

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

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands)

For the three-month periods ended June 30,

	Unaudited
	2011		2010

Revenues

Premiums and annuity considerations	$	36,270	$	33,178
Net investment income (1)		244,732		407,618
Net derivative loss (Note 5)		(135,769)		(525,715)
Net realized investment gains, excluding impairment losses on available-for-sale securities		18,991		11,174
Other-than-temporary impairment losses (2)		-		-
Fee and other income		157,152		120,475

Total revenues		321,376		46,730

Benefits and Expenses

Interest credited		96,279		87,428
Interest expense		11,509		9,355
Policyowner benefits		34,524		81,974
Amortization of deferred policy acquisition costs and value of business and customer renewals acquired		(10,649)		(424,941)
Other operating expenses		86,709		78,883

Total benefits and expenses		218,372		(167,301)

Income before income tax expense		103,004		214,031

Income tax expense		31,590		69,231

Net income	$	71,414	$	144,800

(1)	Net investment income includes an increase in market value of trading fixed maturity securities of $89.2 million and $179.5 million for the three-month periods ended June 30, 2011 and 2010, respectively.

(2)	No OTTI losses, credit or non-credit, were recorded for the three-month periods ended June 30, 2011 and 2010.

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

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

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

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

	Unaudited
ASSETS	June 30, 2011		December 31, 2010
Investments
Available-for-sale fixed maturity securities at fair value (amortized cost of $1,585,903 and $1,422,951 in 2011 and 2010, respectively) (Note 5)	$	1,642,931	$	1,495,923
Trading fixed maturity securities at fair value (amortized cost of $10,766,411 and $11,710,416 in 2011 and 2010, respectively) (Note 5)		10,728,334		11,467,118
Mortgage loans (Note 5)		1,605,920		1,737,528
Derivative instruments – receivable (Note 5)		220,844		198,064
Limited partnerships		39,286		41,622
Real estate		222,763		214,665
Policy loans		607,346		717,408
Other invested assets		41, 669		27,456
Short-term investments		12,997		832,739
Cash and cash equivalents		1,978,125		736,323
Total investments and cash		17,100,215		17,468,846

Accrued investment income		182,963		188,786
Deferred policy acquisition costs and sales inducement asset		1,595,829		1,682,559
Value of business and customer renewals acquired		102,954		134,985
Net deferred tax asset (Note 9)		328,837		394,297
Goodwill (Note 11)		7,299		7,299
Receivable for investments sold		7,687		5,328
Reinsurance receivable		2,235,769		2,347,086
Other assets		142,438		125,529
Separate account assets		28,301,272		26,880,421

Total assets	$	50,005,263	$	49,235,136

LIABILITIES

Contractholder deposit funds and other policy liabilities	$	14,027,877	$	14,593,228
Future contract and policy benefits		831,897		849,514
Payable for investments purchased		43,404		44,827
Accrued expenses and taxes		46,023		52,628
Debt payable to affiliates		783,000		783,000
Reinsurance payable		2,131,514		2,231,835
Derivative instruments – payable (Note 5)		335,495		362,023
Other liabilities		269,726		285,056
Separate account liabilities		28,301,272		26,880,421

Total liabilities		46,770,208		46,082,532

Commitments and contingencies (Note 7)

STOCKHOLDER’S EQUITY

Common stock, $1,000 par value – 10,000 shares authorized; 6,437 shares issued and outstanding in 2011 and 2010	$	6,437	$	6,437
Additional paid-in capital		3,929,192		3,928,246
Accumulated other comprehensive income		36,259		46,553
Accumulated deficit		(736,833)		(828,632)

Total stockholder’s equity		3,235,055		3,152,604

Total liabilities and stockholder’s equity	$	50,005,263	$	49,235,136

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

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

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

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

For the six-month periods ended June 30,

	Unaudited
		2011		2010

Net income	$	91,799	$	256,451

Other comprehensive (loss) income:

Change in unrealized holding gains on available-for-sale fixed maturity securities, net of tax (1)		6,757		26,986
Reclassification adjustment for OTTI losses, net of tax (2)		1,111		363
Reclassification adjustments of net realized investment gains into net income, net of tax (3)		(18,162)		(10,118)

Other comprehensive (loss) income		(10,294)		17,231

Comprehensive income	$	81,505	$	273,682

(1)

Net of tax expense of $(3.6) million and $(14.5) million for the six-month periods ended June 30, 2011 and 2010, respectively.

(2)

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

(3)

Net of tax benefit of $9.8 million and $5.4 million for the six-month periods ended June 30, 2011 and 2010, respectively.

For the three-month periods ended June 30,

	Unaudited
		2011		2010

Net income	$	71,414	$	144,800

Other comprehensive (loss) income:

Change in unrealized holding losses on available-for-sale fixed maturity securities, net of tax (4)		11,462		18,818
Reclassification adjustment for OTTI losses, net of tax (2)		1,111		259
Reclassification adjustments of net realized investment gains into net income, net of tax (5)		(14,245)		(7,735)

Other comprehensive (loss) income		(1,672)		11,342

Comprehensive income	$	69,742	$	156,142

(4)

Net of tax expense of $6.2 million and $10.1 million for the three-month periods ended June 30, 2011 and 2010, respectively.

(5)

Net of tax benefit of $7.7 million and $4.2 million for the three-month periods ended June 30, 2011 and 2010, respectively.

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

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

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

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER’S EQUITY

(in thousands)

For the six-month periods ended June 30, 2011 and 2010

Unaudited

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

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

Net income		-		-		-		256,451		256,451
Tax benefit from stock options		-		198		-		-		198
Capital contribution from Parent (Note 2)		-		400,000		-		-		400,000
Other comprehensive income		-		-		17,231		-		17,231

Balance at June 30, 2010	$	6,437	$	3,927,875	$	52,475	$	(706,455)	$	3,280,332



Balance at December 31, 2010	$	6,437	$	3,928,246	$	46,553	$	(828,632)	$	3,152,604

Net income		-		-		-		91,799		91,799
Tax benefit from stock options		-		946		-		-		946
Other comprehensive loss		-		-		(10,294)		-		(10,294)

Balance at June 30, 2011	$	6,437	$	3,929,192	$	36,259	$	(736,833)	$	3,235,055

(1) As of June 30, 2011, the total amount of after tax non-credit OTTI losses recorded in the Company’s accumulated other comprehensive income was $6.9 million.

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

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

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

For the six-month periods ended June 30,

	Unaudited
	2011		2010

Cash Flows From Operating Activities:
Net income	$	91,799	$	256,451
Adjustments to reconcile net income to net cash provided by operating activities:
Net amortization of premiums on investments		22,129		10,365
Amortization of deferred policy acquisition costs and value of business and customer renewals acquired		237,465		(253,232)
Depreciation and amortization		6,641		2,430
Net losses on derivatives		82,082		509,669
Net realized gains and OTTI credit losses on available-for- sale investments		(23,003)		(15,454)
Net increase in fair value of trading investments		(210,600)		(449,854)
Net realized losses on trading investments		6,099		30,822
Undistributed (gain) loss on private equity limited partnerships		(3,994)		492
Interest credited to contractholder deposits		184,155		176,811
Deferred federal income taxes		71,003		143,756
Changes in assets and liabilities:
Additions to deferred policy acquisition costs, sales inducement asset, value of business and customer renewals acquired		(111,805)		(117,946)
Accrued investment income		5,823		4,723
Net change in reinsurance receivable/payable		60,487		36,789
Future contract and policy benefits		(17,617)		11,707
Other, net		(22,768)		138,028

Net cash provided by operating activities		377,896		485,557

Cash Flows From Investing Activities:
Sales, maturities and repayments of:
Available-for-sale fixed maturity securities		213,769		284,652
Trading fixed maturity securities		2,067,550		1,488,444
Mortgage loans		115,551		92,420
Other invested assets (1)		(71,630)		152,900
Purchase of:
Available-for-sale fixed maturity securities		(352,185)		(602,292)
Trading fixed maturity securities		(1,157,234)		(2,472,109)
Mortgage loans		(1,495)		(28,551)
Real estate		(8,056)		(1,974)
Other invested assets (2)		(44,271)		(28,255)
Net change in policy loans		(11,276)		8,756
Net change in short-term investments		819,742		1,192,225

Net cash provided by investing activities	$	1,570,465	$	86,216

Continued on next page

(1) Includes $(84.6) million and $100.5 million related to settlement of derivative instruments during the six-month periods ended June 30, 2011 and 2010, respectively.

(2) Includes $43.2 million and $27.4 million related to issuance of derivative instruments during the six-month periods ended June 30, 2011 and 2010, respectively.

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

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

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

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(in thousands)

For the six-month periods ended June 30,

	Unaudited
	2011		2010

Cash Flows From Financing Activities:
Additions to contractholder deposit funds	$	542,793	$	647,901
Withdrawals from contractholder deposit funds		(1,230,954)		(1,336,122)
Capital contribution from Parent		-		400,000
Other, net		(18,398)		(12,761)

Net cash used in financing activities		(706,559)		(300,982)

Net change in cash and cash equivalents		1,241,802		270,791

Cash and cash equivalents, beginning of period		736,323		1,804,208


Cash and cash equivalents, end of period	$	1,978,125	$	2,074,999

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

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS

GENERAL

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

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

BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for stock life insurance companies and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2010.

The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. As of June 30, 2011, the Company directly or indirectly owned all of the outstanding shares of SLNY, a New York life insurance company which issues individual fixed and variable annuity contracts, individual life insurance, group life, group disability, group dental and group stop loss insurance in New York; Independence Life and Annuity Company, a Rhode Island life insurance company that sold variable and whole life insurance products; Clarendon Insurance Agency, Inc., a registered broker-dealer; SLF Private Placement Investment Company I, LLC; 7101 France Avenue Manager, LLC; Sun MetroNorth, LLC; SLNY Private Placement Investment Company I, LLC; and SL Investment DELRE Holdings 2009-1, LLC.

All inter-company transactions and balances between the Company and its subsidiaries have been eliminated in consolidation.

On June 30, 2011, the Company dissolved Sun Parkaire Landing LLC which was one of the Company’s special purpose entities established for real estate investments purposes. As a result of this dissolution, Sun Parkaire Landing LLC’s assets of $19.9 million (including $18.6 million in real estate) and liabilities of $0.1 million at June 30, 2011, were transferred to the Company. This transfer did not have any impact on the Company’s condensed consolidated financial statements.

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. DESCRIPTION OF BUSINESS (CONTINUED)

BASIS OF PRESENTATION (CONTINUED)

Involvement with VIEs

The Company is involved with various special purpose entities and other entities that are deemed to be variable interest entities (“VIEs”) primarily as a collateral manager and as an investor through normal investment activities, or as a means of accessing capital. A VIE is an entity that either has investors that lack certain essential characteristics of a controlling financial interest or lacks sufficient funds to finance its own activities without financial support provided by other entities.

The Company performs ongoing qualitative assessments of its VIEs under Financial Accounting Standard Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 810, “Consolidation,” to determine whether it has a controlling financial interest in the VIE and, therefore, is the primary beneficiary. The Company is deemed to have a controlling financial interest when it has both the ability to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company consolidates the VIE in its condensed consolidated financial statements if it determines that it is the VIEs primary beneficiary.

Consolidated VIEs

At June 30, 2011, the Company had an interest in one significant VIE, Credit and Repackaged Securities Limited Series 2006-10 Trust (the “CARS Trust”), for which consolidation is required under FASB ASC Topic 810.

On September 6, 2006, the Company entered into an agreement with the CARS Trust. Pursuant to this agreement, the Company purchased a funded note from the CARS Trust which, through a credit default swap entered into by the CARS Trust, is exposed to the credit performance of a portfolio of corporate reference entities. The Company entered into this agreement for yield enhancement related to the fee earned on the credit default swap which adds to the return earned on the funded note.

The CARS Trust is a structured investment vehicle for which the Company provides investment management services and holds securities issued by the entity. Creditors have no recourse against the Company in the event of default by the CARS Trust, nor does the Company have any implied or unfunded commitments to the CARS Trust. The Company's financial, or other, support provided to the CARS Trust is limited to its investment management services and original investment. The following table presents the carrying value of assets and liabilities and the maximum exposure to loss relating to the CARS Trust.

	June 30, 2011			December 31, 2010

Assets	$	36,786	$	36,324
Liabilities		22,563		27,341
Maximum exposure to loss		37,400		37,400

As the sole beneficiary of the CARS Trust, while having a controlling financial interest in the investment vehicle, the Company is required to consolidate the entity under FASB ASC Topic 810. As a result of the consolidation, the Company has recorded in its unaudited condensed consolidated balance sheets, a credit default swap held by the CARS Trust. At issue, the swap had a seven-year term, maturing in 2013. Under the terms of the swap, the CARS Trust will be required to make payments to the swap counterparty upon the occurrence of a credit event, with respect to any reference entity, that is in excess of the threshold amount specified in the swap agreement. In the event that the trust is required to make any payments under the swap, the underlying assets held by the trust would be liquidated to fund the payment. If the disposition of these assets is insufficient to fund the payment calculated, then under the terms of the agreement, the cash settlement amount would be capped at the amount of the proceeds from the sale of the underlying assets. As of June 30, 2011, the maximum future payments that the CARS Trust could be required to make is $37.4 million. The CARS Trust made no payment during the year ended December 31, 2010. The carrying amount of the assets in this VIE is included in trading fixed maturity securities and the carrying amount of the liabilities in this VIE is included in the derivative liabilities in the Company’s unaudited condensed consolidated balance sheets.

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. DESCRIPTION OF BUSINESS (CONTINUED)

BASIS OF PRESENTATION (CONTINUED)

Non-Consolidated VIEs

At June 30, 2011, other than the CARS Trust, the Company had no interest in significant VIEs for which consolidation is required under FASB ASC Topic 810.

In addition, through normal investment activities, the Company makes passive investments in various issues by VIEs. These investments are included in trading and available-for-sale fixed maturity securities, limited partnerships and other invested assets in the Company's condensed consolidated financial statements. The Company has not provided financial or other support with respect to these investments other than its original investments. For these investments, the Company has determined it is not the primary beneficiary due to the size of its investment relative to other issues, the level of credit subordination which reduces its obligation to absorb losses or right to receive benefits, and/or its inability to direct the activities that most significantly impact the economic performance of the VIEs. The Company's maximum exposure to loss on these investments is limited to the amount of its investment.

USE OF ESTIMATES

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

SIGNIFICANT ACCOUNTING POLICIES

For a description of the Company’s significant accounting policies, refer to Note 1 to the consolidated financial statements included in Part II, Item 8 of the Company’s annual report on Form 10-K for the year ended December 31, 2010, which should be read in conjunction with the accompanying condensed consolidated financial statements.

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. DESCRIPTION OF BUSINESS (CONTINUED)

ACCOUNTING PRONOUNCEMENTS

New and Adopted Accounting Pronouncements

In December 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-28, “Intangibles–Goodwill and Other (Topic 350): When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts (a consensus of the FASB Emerging Issues Task Force).” The amendments of ASU 2010-28 require reporting units with zero or negative carrying amounts to perform Step 2 of goodwill impairment test if it is more likely than not that a goodwill impairment exists and to consider adverse qualitative factors when performing the impairment test. The amendments in ASU 2010-28 are effective for interim periods and fiscal years beginning after December 15, 2010. Early adoption is not permitted. The Company adopted ASU 2010-28 on January 1, 2011 and the adoption did not have a significant impact on the Company’s condensed consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations (a consensus of the FASB Emerging Issues Task Force).” The amendments in ASU 2010-29 provide guidance to clarify the acquisition date that should be used for reporting the pro forma financial information disclosures when comparative financial statements are presented. ASU 2010-29 requires a public entity that presents comparative financial statements to disclose revenue and earnings of the combined entity as if the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The amendments also require the supplemental pro forma disclosure to include a description of the nature and amount of material, nonrecurring pro forma adjustments that are directly related to the business combination. The amendments in ASU 2010-29 are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company adopted ASU 2010-29 on January 1, 2011 and will apply this guidance to future business combinations.

In April 2010, the FASB issued ASU 2010-15, “Financial Services–Insurance (Topic 944): How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments–a consensus of the FASB Emerging Issues Task Force,” to provide guidance regarding accounting for investment funds determined to be VIE’s. Under this guidance, an insurance entity would not be required to consolidate a voting-interest investment fund when it holds the majority of the voting interests of the fund through its separate accounts. In addition, an insurance entity would not consider the interests held through separate accounts for the benefit of policyholders in the insurer’s evaluation of its controlling interest in a VIE, unless the separate account contract holder is a related party. The guidance is effective, on a retrospective basis, for fiscal years and interim periods within those fiscal years, beginning after December 15, 2010. The Company adopted ASU 2010-15 on January 1, 2011 and the adoption did not have a significant impact on the Company’s condensed consolidated financial statements.

Refer to Note 1 of the consolidated financial statements included in Part II, Item 8 of the Company’s annual report on Form 10-K for the year ended December 31, 2010 for other accounting pronouncements that the Company adopted during the year ended December 31, 2010.

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

1. DESCRIPTION OF BUSINESS (CONTINUED)

ACCOUNTING PRONOUNCEMENTS (CONTINUED)

Accounting Standards Not Yet Adopted

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income,” which revises the manner in which entities present comprehensive income in their financial statements. The amendments in ASU 2011-05 require entities to present components of comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. Under the two-statement approach, the first statement or statement of net income must present total net income and its components followed consecutively by the statement of comprehensive income which should include total other comprehensive income and its components. Under either method, entities must display adjustments for items that are classified from other comprehensive income to net income in both statements of net income and comprehensive income.

ASU 2011-05 does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The amendments in ASU 2011-05 are effective, on a retrospective basis, for fiscal years and interim periods within those fiscal years beginning after December 15, 2011. The Company will adopt ASU 2011-05 on March 31, 2012 and does not expect the requirements in this ASU to significantly impact the Company’s condensed consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,” which clarifies when a loan modification or restructuring is considered a troubled debt restructuring (“TDR”). In evaluating whether a restructuring constitutes a TDR a creditor must use judgment to determine whether the following exist:

The borrower is experiencing financial difficulties, and

The lender has granted a concession to the borrower.

ASU 2011-02 amends ASC Topic 310 to include financial difficulty indicators (such as debtor default, debtor bankruptcy or concerns about the future as a going concern) that the lender should consider in determining whether a borrower is experiencing financial difficulties. The amendments also clarify that a borrower could be experiencing financial difficulties even though the borrower is not currently in payment default but default is probable in the foreseeable future.

ASU 2011-02 provides guidance on whether the lender has granted a concession to the borrower and notes that:

A borrower’s inability to access funds at a market rate for a new loan with similar risk characteristics as the modified loan indicates that the modification was executed at a below-market rate and therefore may indicate that a concession was granted.

A temporary or permanent increase in the contractual interest rate as a result of restructuring does not preclude the restructuring from being considered a concession because the rate may still be below market.

A restructuring that results in an insignificant delay in contractual cash flow is not considered to be a concession.

The amendments in ASU 2011-02 are effective for the first interim or annual period beginning on or after June 15, 2011. These amendments are to be applied retrospectively to modifications occurring on or after the beginning of the annual period of adoption. The Company will adopt ASU 2011-2 on July 1, 2011.

In October 2010, the FASB issued ASU 2010-26, “Financial Services–Insurance (Topic 944): Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts (a consensus of the FASB Emerging Issues Task Force),” which amends FASB ASC Topic 944 to modify the definition of the types of costs incurred by insurance entities that can be capitalized in the acquisition of new and renewal contracts. The amendments specify that only incremental costs of successful contract acquisition that result directly from and are essential to the contract transactions can be capitalized as deferred acquisition costs. The incremental direct costs are those costs that would not have been incurred by the insurance entity if the contract transactions did not occur. The amendments in ASU 2010-26 are effective for interim periods and fiscal years beginning after December 15, 2011. The Company will adopt ASU 2010-26 on January 1, 2012 and is assessing the impact of this adoption.

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES

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

Related Party Reinsurance Transactions

As more fully described in Note 6 to the Company’s unaudited condensed consolidated financial statement, the Company and its subsidiary, SLNY, are party to several reinsurance transactions with Sun Life Assurance Company of Canada (“SLOC”) and other affiliates. Reinsurance premiums with related parties are based on market rates.

Capital Transactions

The Company did not receive any capital contribution from the Parent during the six-month period ended June 30, 2011. During the year ended December 31, 2010, the Company received capital contribution totaling $400.0 million from the Parent. The cash contributions were recorded as additional paid-in capital and were made to ensure the Company continues to exceed certain capital requirements prescribed by the National Association of Insurance Commissioners (the “NAIC”). The NAIC has established regulations that provide minimum capitalization requirements based on risk-based capital formulas for life insurance companies. The risk-based capital formulas for life insurance companies establishes capital requirements relating to insurance, business, asset and interest rate risks, including equity, interest rate and expense recovery risks associated with variable annuities that contain death benefits or certain living benefits.

The Company did not declare or pay any dividends during the six-month period ended June 30, 2011 or the year ended December 31, 2010.

Debt Transactions

At June 30, 2011 and December 31, 2010, the Company had $18.0 million in promissory notes issued to Sun Life (Hungary) Group Financing Limited Company (“Sun Life (Hungary) LLC”), an affiliate. The Company pays interest semi-annually to Sun Life (Hungary) LLC. Related to these promissory notes, the Company incurred interest expense of $0.3 million and $0.5 million for each of the three and six-month periods ended June 30, 2011 and 2010, respectively.

At June 30, 2011 and 2010, the Company had $565.0 million of surplus notes issued to Sun Life Financial (U.S.) Finance, Inc., an affiliate. The Company expensed $10.6 million and $21.3 million for interest on these surplus notes for each of the three and six-month periods ended June 30, 2011 and 2010, respectively.

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Institutional Investments Contracts

On September 12, 2006, the Company issued two floating rate funding agreements totaling $900.0 million to Sun Life Financial Global Funding III, L.L.C. (“LLC III”), an affiliate, which will mature on October 6, 2013. On April 7, 2008, the Company issued an additional floating rate funding agreement totaling $5.8 million to LLC III. Total interest credited for the funding agreements was $1.4 million and $2.9 million for the three and six-month periods ended June 30, 2011, respectively, and $1.4 million and $2.8 million for the three and six-month periods ended June 30, 2010, respectively. The Company also issued a $100.0 million floating rate demand note payable to LLC III on September 19, 2006. The Company expensed $ 0.2 million and $0.3 million for the three and six-month periods ended June 30, 2011 and 2010, respectively, for interest on this demand note.

The Company has an interest rate swap agreement with LLC III with an aggregate notional amount of $900.0 million that effectively converts the floating rate payment obligations under the funding agreements to fixed rate obligations.

On May 17, 2006, the Company issued a floating rate funding agreement of $900.0 million to Sun Life Financial Global Funding II, L.L.C. (“LLC II”), an affiliate, which will mature on July 6, 2011. On April 7, 2008, the Company issued an additional floating rate funding agreement totaling $7.5 million to LLC II. Total interest credited for these funding agreements was $1.2 million and $2.5 million for the three and six-month periods ended June 30, 2011, respectively, and $1.2 million and $2.4 million for the three and six-month periods ended June 30, 2010, respectively. The Company also issued a $100.0 million floating rate demand note payable to LLC II on May 24, 2006. The Company expensed $0.1 million and $0.3 million for the three and six-month periods ended June 30, 2011 and 2010, respectively, for interest on this demand note.

The Company also had an interest rate swap agreement with LLC II with an aggregate notional amount of $900.0 million that effectively converts the floating rate payment obligations under the funding agreements to fixed rate obligations. Refer to Note 12 for additional information regarding the maturity of the funding agreement issued to LLC II.

On July 1 and July 8, 2010, the Company paid $900.0 million and $10.0 million, respectively, to Sun Life Financial Global Funding, LLC (“LLC”) due to the maturity of funding agreements. Total interest credited for these funding agreements was $1.4 million and $2.8 million for the three and six-month periods ended June 30, 2010, respectively. On August 6, 2010, the Company also paid $100.1 million to LLC including $0.1 million in interest due to the maturity of a $100.0 million floating rate demand note. The Company expensed $0.2 million and $0.4 million for the three and six-month periods ended June 30, 2010, respectively, for interest on this demand note. The related $900.0 million interest rate swap agreement expired on July 6, 2010 due to the maturity of the underlying floating rate funding agreements with LLC.

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

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Administrative service agreements, rent and other

Effective December 31, 2009, the Company transferred all of its employees to an affiliate, Sun Life Financial (U.S.) Services Company, Inc. (“Sun Life Services”), with the exception of 28 employees who were transferred to Sun Life Financial Distributors, Inc. (“SLFD”), another affiliate. The tax benefits associated with SLF stock options that had been granted to employees of the Company prior to the employee transfer, is recognized by the Company in stockholder’s equity when these benefits vest. Neither Sun Life Services nor SLFD are included in the accompanying condensed consolidated financial statements. Concurrent with this transaction, Sun Life Services assumed the sponsorship of the Company’s retirement plans. As a result of this transaction, the Company transferred to Sun Life Services all employee-benefits related assets and liabilities, the associated deferred tax asset, and certain property, equipment and software. For more details on these transactions, refer to Note 3 of the consolidated financial statements included in Part II, Item 8 of the Company’s annual report on Form 10-K for the year ended December 31, 2010.

The transfer of fixed assets from the Company to Sun Life Services discussed above, along with the administrative service agreement, resulted in a sale-leaseback transaction. The Company recorded a deposit liability for $17.1 million which represents the cost of certain of the assets transferred. The Company will amortize the liability over the remaining useful life of the assets that have been sold, which is estimated to be seven years. As of June 30, 2011, the remaining deposit liability was $12.8 million.

Pursuant to an administrative services agreement between the Company and Sun Life Services, Sun Life Services provides human resources services (e.g., recruiting and maintaining appropriately trained and qualified personnel and equipment necessary for the performance of actuarial, financial, legal, administrative and other operational support functions) to the Company. The Company reimburses Sun Life Services for the cost of such services, plus, with respect to certain of those services, pays an arms-length based profit margin agreed upon by the parties. Total payments under this agreement were $25.6 million and $60.4 million for the three and six-month periods ending June 30, 2011, respectively, and $28.1 million and $56.8 million for the three and six-month periods ending June 30, 2010, respectively.

The Company also participated in pension and other retirement plans sponsored by Sun Life Services. The cost of these benefits to the Company were allocated and charged to the Company in a manner consistent with the allocation of employee compensation expenses and the number of participants. For the three and six-month periods ended June 30, 2011, expenses of $1.4 million and $2.8 million, respectively, were allocated to the Company by Sun Life Services for the pension and other benefits plans. For the three and six-month periods ended June 30, 2010, expenses of $1.9 million and $3.8 million, respectively, were allocated for the pension and other benefits plans.

The Company has an administrative services agreement with Sun Life Assurance Company of Canada - U.S. Operations Holdings, Inc., under which the Company provides administrative and investor services with respect to certain open-end management investment companies for which an affiliate, Massachusetts Financial Services Company (“MFS”), serves as the investment adviser, and which are offered to certain of the Company’s separate accounts established in connection with the variable annuity contracts issued by the Company. Amounts received under this agreement were approximately $3.3 million and $6.6 million for the three and six-month periods ended June 30, 2011, respectively, and $3.2 million and $6.5 million for the three and six-month periods ended June 30, 2010, respectively.

The Company has an administrative services agreement with Sun Capital Advisers LLC (“SCA”), an affiliate and registered investment adviser, under which the Company provides administrative services with respect to certain open-end management investment companies for which SCA serves as the investment adviser and which are offered to certain of the Company’s separate accounts established in connection with the variable contracts issued by the Company. Amounts received under this agreement amounted to approximately $4.2 million and $8.2 million for the three and six-month periods ended June 30, 2011, respectively, and $3.2 million and $5.9 million for the three and six-month periods ended June 30, 2010, respectively. The Company, also paid $5.0 million and $10.6 million during the three and six-month periods ended June 30, 2011, respectively, and $5.2 million and $10.5 million during the three and six-month periods ended June 30, 2010, respectively, in investment management service fees to SCA.

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

2. SIGNIFICANT TRANSACTIONS WITH AFFILIATES (CONTINUED)

Administrative service agreements, rent and other (continued)

The Company paid distribution fees to SLFD of $10.7 million and $20.6 million during the three and six-month periods ended June 30, 2011, respectively, and $11.2 million and $21.7 million during the three and six-month periods ended June 30, 2010, respectively.

The Company has an administrative services agreement with Sun Life Information Services Canada, Inc. (“SLISC”), an affiliate, under which SLISC provides administrative and support services to the Company in connection with the Company’s insurance and annuity business. Expenses under this agreement were $5.2 million and $9.7 million for the three and six-month periods ended June 30, 2011, respectively, and $4.9 million and $9.1 million for the three and six-month periods ended June 30, 2010, respectively.

The Company has a service agreement with Sun Life Information Services Ireland Limited (“SLISIL”), under which SLISIL provides various insurance related and information systems services to the Company. Expenses under this agreement amounted to approximately $5.5 million and $11.6 million for the three and six-month periods ended June 30, 2011, respectively, and $6.0 million and $12.3 million for the three and six-month periods ended June 30, 2010, respectively.

The Company leases office space to SLOC under lease agreements with terms expiring on December 31, 2014 and options to extend the terms for each of twelve successive five-year terms at fair market rental value, not to exceed 125% of the fixed rent for the term which is then ending. Rent received by the Company under the leases amounted to approximately $3.0 million and $6.1 million for the three and six-month periods ended June 30, 2011 and 2010, respectively. Rental income is reported as a component of net investment income in the Company’s unaudited condensed consolidated statements of operations.

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. SEGMENT INFORMATION

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

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

Wealth Management

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

Individual Protection

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

Group Protection

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

Corporate

The Corporate segment includes the unallocated capital of the Company, its debt financing, and items not otherwise attributable to the other segments.

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

3. SEGMENT INFORMATION (CONTINUED)

The following amounts pertain to the Company’s four segments (in 000’s):

	Six-month period ended June 30, 2011

	Wealth	Individual	Group
	Management	Protection	Protection	Corporate	Totals
Total revenues	$ 714,899	$ 36,976	$ 62,876	$ 12,703	$ 827,454
Total benefits and expenses	589,961	44,696	58,425	6,824	699,906
Income (loss) before income tax expense (benefit)	124,938	(7,720)	4,451	5,879	127,548
Net income (loss)	$ 90,677	$ (4,901)	$ 2,909	$ 3,114	$ 91,799

	Six-month period ended June 30, 2010

	Wealth	Individual	Group
	Management	Protection	Protection	Corporate	Totals
Total revenues	$ 545,477	$ 27,671	$ 64,576	$ (33,518)	$ 604,206
Total benefits and expenses	126,187	26,308	61,992	11,914	226,401
Income (loss) before income tax expense (benefit)	419,290	1,363	2,584	(45,432)	377,805
Net income (loss)	$ 282,658	$ 971	$ 1,682	$ (28,860)	$ 256,451

	Three-month period ended June 30, 2011

	Wealth	Individual	Group
	Management	Protection	Protection	Corporate	Totals
Total revenues	$ 255,011	$ 17,470	$ 31,569	$ 17,326	$ 321,376
Total benefits and expenses	165,433	22,803	28,007	2,129	218,372
Income (loss) before income tax expense (benefit)	89,578	(5,333)	3,562	15,197	103,004
Net income (loss)	$ 62,714	$ (3,412)	$ 2,326	$ 9,786	$ 71,414

	Three-month period ended June 30, 2010

	Wealth	Individual	Group
	Management	Protection	Protection	Corporate	Totals
Total revenues	$ 3,352	$ 12,445	$ 32,315	$ (1,382)	$ 46,730
Total benefits and expenses	(211,278)	12,093	30,844	1,040	(167,301)
Income (loss) before income tax expense (benefit)	214,630	352	1,471	(2,422)	214,031
Net income (loss)	$ 144,523	$ 260	$ 959	$ (942)	$ 144,800

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods including market, income and cost approaches. The Company utilizes valuation techniques that maximize the use of observable inputs and minimizes the use of unobservable inputs.

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

On April 1, 2009, the FASB issued additional guidance on estimating fair value when the volume and level of activity for the asset or liability have significantly decreased, as well as guidance on identifying circumstances which indicate that a transaction is not orderly. The Company reviewed its pricing sources and methodologies and has concluded that its various pricing sources and methodologies are in compliance with this guidance. During the six-month period ended June 30, 2011, there were no changes to these valuation techniques and the related inputs.

Fair Value Hierarchy

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

Level 1

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

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

Level 2

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

Level 2 inputs include the following:

Quoted prices for similar assets or liabilities in active markets,

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

Inputs other than quoted market prices that are observable, and

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

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

Level 3

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

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

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table presents the Company's categories for its assets measured at fair value on a recurring basis as of June 30, 2011 (in 000’s):

	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale fixed maturity securities:
Asset-backed securities	$	-	$	205	$	3	$	208
Residential mortgage-backed securities		-		30,658		-		30,658
Commercial mortgage-backed securities		-		12,542		2,137		14,679
Foreign government & agency securities		-		-		-		-
U.S. states and political subdivisions securities		-		220		-		220
U.S. treasury and agency securities		488,949		-		-		488,949
Corporate securities		-		1,100,755		7,462		1,108,217
Total available-for-sale fixed maturity securities		488,949		1,144,380		9,602		1,642,931

Trading fixed maturity securities:
Asset-backed securities		-		302,947		75,535		378,482
Residential mortgage-backed securities		-		666,785		157,814		824,599
Commercial mortgage-backed securities		-		726,745		67,031		793,776
Foreign government & agency securities		-		109,482		13,003		122,485
U.S. states and political subdivisions securities		-		627		-		627
U.S. treasury and agency securities		320,658		1,631		963		323,252
Corporate securities		-		8,178,459		106,654		8,285,113
Total trading fixed maturity securities		320,658		9,986,676		421,000		10,728,334

Derivative instruments - receivable:
Interest rate contracts		-		100,122		-		100,122
Foreign currency contracts		-		36,988		-		36,988
Equity contracts		28,751		35,811		18,035		82,597
Futures contracts		1,137		-		-		1,137
Total derivative instruments - receivable		29,888		172,921		18,035		220,844

Other invested assets		3,276		28,236		2,133		33,645
Short-term investments		12,997		-		-		12,997
Cash and cash equivalents		1,978,125		-		-		1,978,125
Total investments and cash		2,833,893		11,332,213		450,770		14,616,876

Separate account assets:
Mutual fund investments		23,506,664		-		-		23,506,664
Equity investments		187,826		26,925		59		214,810
Fixed income investments		290,954		6,008,621		97,452		6,397,027
Alternative investments		9,754		75,916		366,109		451,779
Other investments		1,894		-		-		1,894
Total separate account assets (1) (2)		23,997,092		6,111,462		463,620		30,572,174

Total assets measured at fair value on a recurring basis	$	26,830,985	$	17,443,675	$	914,390	$	45,189,050

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

(2)	Excludes $2,270.9 million primarily related to investment purchases payable, net of investment sales receivable, that are not subject to FASB ASC Topic 820, “Fair Value Measurement.”

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table presents the Company's categories for its liabilities measured at fair value on a recurring basis as of June 30, 2011 (in 000’s):

	Level 1		Level 2		Level 3		Total
Liabilities
Other policy liabilities:
Guaranteed minimum withdrawal benefit liability (1)	$	-	$	-	$	(7,645)	$	(7,645)
Guaranteed minimum accumulation benefit liability (1)		-		-		(2,554)		(2,554)
Derivatives embedded in reinsurance contracts (1)		-		78,075		18,035		96,110
Fixed index annuities (1)		-		-		132,804		132,804
Total other policy liabilities		-		78,075		140,640		218,715

Derivative instruments – payable:
Interest rate contracts		-		282,615		-		282,615
Foreign currency contracts		-		6,767		-		6,767
Credit contracts		-		-		22,563		22,563
Futures contracts		23,550		-		-		23,550
Total derivative instruments – payable		23,550		289,382		22,563		335,495

Other liabilities:
Bank overdrafts		41,883		-		-		41,883

Total liabilities measured at fair value on a recurring basis	$	65,433	$	367,457	$	163,203	$	596,093

(1)	The balances are included within the contractholder deposits funds and other policy liabilities in the Company’s unaudited condensed consolidated balance sheet. At June 30, 2011, the net balances of guaranteed minimum withdrawal and accumulated benefits were in an asset position.

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

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

	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale fixed maturity securities:
Asset-backed securities	$	-	$	704	$	11	$	715
Residential mortgage-backed securities		-		34,614		-		34,614
Commercial mortgage-backed securities		-		13,003		2,047		15,050
Foreign government & agency securities		-		563		-		563
U.S. states and political subdivisions securities		-		214		-		214
U.S. treasury and agency securities		375,233		-		-		375,233
Corporate securities		-		1,068,399		1,135		1,069,534
Total available-for-sale fixed maturity securities		375,233		1,117,497		3,193		1,495,923

Trading fixed maturity securities:
Asset-backed securities		-		321,129		90,851		411,980
Residential mortgage-backed securities		-		834,074		88,719		922,793
Commercial mortgage-backed securities		-		737,024		82,171		819,195
Foreign government & agency securities		-		116,986		13,790		130,776
U.S. states and political subdivisions securities		-		613		-		613
U.S. treasury and agency securities		737,936		8,582		1,101		747,619
Corporate securities		-		8,301,586		132,556		8,434,142
Total trading fixed maturity securities		737,936		10,319,994		409,188		11,467,118

Derivative instruments - receivable:
Interest rate contracts		-		97,060		-		97,060
Foreign currency contracts		-		32,504		-		32,504
Equity contracts		14,873		30,739		13,785		59,397
Futures contracts		9,103		-		-		9,103
Total derivative instruments - receivable		23,976		160,303		13,785		198,064

Other invested assets		2,890		11,120		8,343		22,353
Short-term investments		832,739		-		-		832,739
Cash and cash equivalents		736,323		-		-		736,323
Total investments and cash		2,709,097		11,608,914		434,509		14,752,520

Separate account assets:
Mutual fund investments		21,892,209		30,517		-		21,922,726
Equity investments		188,216		277		-		188,493
Fixed income investments		317,713		5,812,900		56,323		6,186,936
Alternative investments		24,094		78,164		293,254		395,512
Other investments		900		-		-		900
Total separate account assets (1) (2)		22,423,132		5,921,858		349,577		28,694,567

Total assets measured at fair value on a recurring basis	$	25,132,229	$	17,530,772	$	784,086	$	43,447,087

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

(2)Excludes $1,814.1 million, primarily related to investment purchases payable, net of investment sales receivable, that are not subject to FASB ASC Topic 820.

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

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

	Level 1		Level 2		Level 3		Total
Liabilities
Other policy liabilities:
Guaranteed minimum withdrawal benefit liability	$	-	$	-	$	2,245	$	2,245
Guaranteed minimum accumulation benefit liability		-		-		49		49
Derivatives embedded in reinsurance contracts		-		41,272		-		41,272
Fixed index annuities		-		-		131,608		131,608
Total other policy liabilities		-		41,272		133,902		175,174

Derivative instruments – payable:
Interest rate contracts		-		329,214		-		329,214
Foreign currency contracts		-		3,878		-		3,878
Credit contracts		-		-		27,341		27,341
Futures contracts		1,590		-		-		1,590
Total derivative instruments – payable		1,590		333,092		27,341		362,023

Other liabilities:
Bank overdrafts		61,227		-		-		61,227

Total liabilities measured at fair value on a recurring basis	$	62,817	$	374,364	$	161,243	$	598,424

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The methods and assumptions that the Company uses in determining the estimated fair value of its financial instruments that are measured at fair value on a recurring basis are summarized below:

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

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

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

Derivative instruments - receivables and payables: The fair values of swaps are based on current settlement values, dealer quotes and market prices. Fair values for options and futures are also based on dealer quotes and market prices. The Company uses credit valuation adjustments (“CVAs”) to properly reflect the component of fair value of certain derivative instruments that arise from default risk. CVAs are based on a methodology that primarily uses published credit default swap spreads as a key input in determining an implied level of expected loss over the total life of the derivative contract. When this information is not available, the Company also may utilize credit spreads implied from published bond yields, or published cumulative default experience data adjusted for current trends. CVAs may be calculated based on the credit risk of counterparties for asset positions or the Company's own credit risk for liability positions. The CVAs also take into account contractual factors designed to reduce the Company’s credit exposure to each counterparty, such as collateral and legal rights of offset.

Other invested assets: This financial instrument primarily consists of equity securities. The fair value of the Company’s equity securities is first based on quoted market prices. Similar to fixed maturity securities, the Company uses pricing services and broker quotes to price the equity securities for which the quoted market price is not available.

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

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

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

Other policy liabilities: The fair values of S&P 500 Index and other equity-linked embedded derivatives are produced using standard derivative valuation techniques. Guaranteed minimum accumulation benefit (“GMAB”) or guaranteed minimum withdrawal benefit (“GMWB”) are considered to be derivatives under FASB ASC Topic 815, “Derivatives and Hedging,” and are included in contractholder deposit funds and other policy liabilities in the Company’s unaudited condensed consolidated balance sheets. Consistent with the provisions of FASB ASC Topic 820, the Company incorporates risk margins and the Company’s own credit standing, as well as changes in assumptions regarding policyholder behavior, in the calculation of the fair value of embedded derivatives.

Other liabilities: This financial instrument consists of issued checks and transmitted wires that have not been cashed and processed in the Company’s bank accounts as of the end of the reporting period. Similar to cash, the carrying value for other liabilities approximates fair value due to the liquidity of the balance.

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table shows a reconciliation of the beginning and ending balances for assets which are categorized as Level 3 for the six-month period ended June 30, 2011 (in 000’s):

Assets	Beginning balance	Total realized and unrealized gains (losses)		Purchases	Sales	Issuances	Settlements	Transfers into level 3	Transfers out of level 3	Ending balance	Change in total gains (losses) included in earnings relating to instruments still held at the reporting date
Assets	Beginning balance	Included in earnings	Included in OCI	Purchases	Sales	Issuances	Settlements	Transfers into level 3	Transfers out of level 3	Ending balance

Available-for-sale fixed maturity securities:
Asset-backed	$ 11	$ (12)	$ 4	$ -	$ -	$ -	$ -	$ -	$ -	$ 3	$ -
Residential mortgage-backed	-										-
Commercial mortgage-backed	2,047	(199)	289							2,137	-
Foreign government & agency	-	-	-	-	-	-	-	-	-	-	-
U.S. states & political subdivisions	-	-	-	-	-	-	-	-	-	-	-
U.S. treasury and agency	-	-	-	-	-	-	-	-	-	-	-
Corporate	1,135	11	248	6,102	-	-	(34)	-	-	7,462	-
Total available-for-sale fixed maturity securities	3,193	(200)	541	6,102	-	-	(34)	-	-	9,602	-

Trading fixed maturity securities:
Asset-backed	90,851	9,464	-	-	-	-	(3,198)	5,192	(26,774)	75,535	9,072
Residential mortgage-backed	88,719	12,472	-	-	-	-	(20,315)	133,509	(56,571)	157,814	14,918
Commercial mortgage-backed	82,171	(967)	-	-	-	-	(19,127)	4,954	-	67,031	(7)
Foreign government & agency	13,790	(787)	-	-	-	-	-	-	-	13,003	45
U.S. states & political subdivisions	-	-	-	-	-	-	-	-	-	-	-
U.S. treasury and agency	1,101	(22)	-	-	-	-	(116)	-	-	963	(7)
Corporate	132,556	7,567	-	6,932	(3,404)	-	(4,578)	3,202	(35,621)	106,654	7,019
Total trading fixed maturity securities	409,188	27,727	-	6,932	(3,404)	-	(47,334)	146,857	(118,966)	421,000	31,040

Derivative instruments – receivable:
Interest rate contracts	-	-	-	-	-	-	-	-	-	-	-
Foreign currency contracts	-	-	-	-	-	-	-	-	-	-	-
Equity contracts	13,785	5,330	-	3,124	-	-	(4,204)	-	-	18,035	5,330
Futures contracts	-	-	-	-	-	-	-	-	-	-	-
Total derivative instruments – receivable	13,785	5,330	-	3,124	-	-	(4,204)	-	-	18,035	5,330

Other invested assets	8,343	440	-	1,000	-	-	-	-	(7,650)	2,133	440
Short-term investments	-	-	-	-	-	-	-	-	-	-	-
Cash and cash equivalents	-	-	-	-	-	-	-	-	-	-	-
Total investments and cash	434,509	33,297	541	17,158	(3,404)	-	(51,572)	146,857	(126,616)	450,770	36,810

Separate account assets:
Mutual fund investments	-	-	-	-	-	-	-	-	-	-	-
Equity investments	-	-	-	-	-	-	-	59	-	59	-
Fixed income investments	56,323	(393)	-	142,395	(91,583)	-	(10,216)	32,618	(31,692)	97,452	(762)
Alternative investments	293,254	18,067	-	148,821	(92,047)	-	(5,186)	3,200	-	366,109	16,706
Other investments	-	-	-	-	-	-	-	-	-	-	-
Total separate account assets (1)	349,577	17,674	-	291,216	(183,630)	-	(15,402)	35,877	(31,692)	463,620	15,944

Total assets measured at fair value on a recurring basis	$784,086	$ 50,971	$ 541	$ 308,374	$ (187,034)	$ -	$(66,974)	$182, 734	$ (158,308)	$914,390	$ 52,754

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

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table shows a reconciliation of the beginning and ending balances for liabilities which are categorized as Level 3 for the six-month period ended June 30, 2011 (in 000’s):

Liabilities	Beginning balance	Total realized and unrealized (gains) losses		Purchases	Sales	Issuances	Settlements	Transfers into level 3	Transfers out of level 3	Ending balance	Change in total (gains) losses included in earnings relating to instruments still held at the reporting date
Liabilities	Beginning balance	Included in earnings	Included in OCI	Purchases	Sales	Issuances	Settlements	Transfers into level 3	Transfers out of level 3	Ending balance

Other policy liabilities:
Guaranteed minimum withdrawal benefit liability (1)	$ 2,245	$ (115,180)	$ -	$ -	$ -	$105,290	$ -	$ -	$ -	$(7,645)	$(118,199)
Guaranteed minimum accumulation benefit liability (1)	49	(14,131)	-			11,528	-	-	-	(2,554)	(14,893)
Derivatives embedded in reinsurance contracts	-	(1,344)	-	3,124		20,459	(4,204)	-	-	18,035	(1,344)
Fixed index annuities	131,608	(19,438)	-			20,634	-	-	-	132,804	16,427
Total other policy liabilities	133,902	(150,093)	-	3,124		157,911	(4,204)	-	-	140,640	(118,009)
Derivative instruments – payable:
Interest rate contracts	-	-	-	-	-	-	-	-	-	-	-
Foreign currency contracts	-	-	-	-	-	-	-	-	-	-	-
Credit contracts	27,341	(4,778)	-	-	-	-	-	-	-	22,563	(4,778)
Futures contracts	-	-	-	-	-	-	-	-	-	-	-
Total derivative instruments – payable	27,341	(4,778)	-	-	-	-	-	-	-	22,563	(4,778)


Other liabilities:
Bank overdrafts	-	-	-	-	-	-	-	-	-	-	-
Total liabilities measured at fair value on a recurring basis	$161,243	$ (154,871)	$ -	$ 3,124	$ -	$157,911	$ (4,204)	$ -	$ -	$ 163,203	$ (122,787)

(1)	The balances are included within the contractholder deposits funds and other policy liabilities in the Company’s unaudited condensed consolidated balance sheet. At June 30, 2011, the net balances of guaranteed minimum withdrawal and accumulated benefits were in an asset position.

Gains and losses related to Level 3 assets and liabilities, as included in the Company’s unaudited condensed consolidated statements of operations for the six-month period ended June 30, 2011, are reported as follows (in 000’s):

		Total gains (losses) included in earnings		Change in unrealized gains (losses) related to assets and liabilities still held at the reporting date
Net investment income	$	28,167	$	31,480
Net derivative income		160,201		128,117
Net realized investment losses, excluding impairment losses on available-for-sale securities		(200)		-
Net gains	$	188,168	$	159,597

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table shows a reconciliation of the beginning and ending balances for assets which are categorized as Level 3 for the six-month period ended June 30, 2010 (in 000’s):

Assets	Beginning balance	Total realized and unrealized gains (losses)		Purchases, issuances, and settlements (net)	Transfers in and/or (out) of level 3	Ending balance	Change in unrealized gains (losses) included in earnings relating to instruments still held at the reporting date
Assets	Beginning balance	Included in earnings	Included in other comprehensive income	Purchases, issuances, and settlements (net)	Transfers in and/or (out) of level 3	Ending balance
Available-for-sale fixed maturity securities:
Asset-backed securities	$ 37	$ (22)	$ 7	$ -	$ -	$ 22	$ -
Residential mortgage-backed securities	-	-	-	-	-	-	-
Commercial mortgage-backed securities	1,930	(307)	(252)	-	-	1,371	-
Foreign government & agency securities	-	-	-	-	-	-	-
U.S. states and political subdivisions securities	-	-	-	-	-	-	-
U.S. treasury and agency securities	-	-	-	-	-	-	-
Corporate securities	7,936	(12)	(5)	(57)	(7,184)	678	-
Total available-for-sale fixed maturity securities	9,903	(341)	(250)	(57)	(7,184)	2,071	-

Trading fixed maturity securities:
Asset-backed securities	111,650	(8,524)	-	(18,975)	(36,483)	47,668	7,159
Residential mortgage-backed securities	154,551	2,505	-	(6,416)	(52,317)	98,323	5,066
Commercial mortgage-backed securities	14,084	798	-	48,607	(696)	62,793	1,670
Foreign government & agency securities	15,323	(685)	-	-	-	14,638	103
U.S. states and political subdivisions securities	-	-	-	-	-	-	-
U.S. treasury and agency securities	-	-	-	-	-	-	-
Corporate securities	107,886	(6,196)	-	2,187	(55,326)	48,551	1,635
Total trading fixed maturity securities	403,494	(12,102)	-	25,403	(144,822)	271,973	15,633

Derivative instruments – receivable:
Interest rate contracts	-	-	-	-	-	-	-
Foreign currency contracts	-	-	-	-	-	-	-
Equity contracts	8,821	(3,894)	-	(3,204)	-	1,723	(3,894)
Futures contracts	-	-	-	-	-	-	-
Total derivative instruments– receivable	8,821	(3,894)	-	(3,204)	-	1,723	(3,894)

Other invested assets	-	128	-	1,486	-	1,614	127
Short-term investments	-	-	-	-	-	-	-
Cash and cash equivalents	-	-	-	-	-	-	-
Total investments and cash	422,218	(16,209)	(250)	23,628	(152,006)	277,381	11,866

Separate account assets:
Mutual fund investments	-	-	-	-	-	-	-
Equity investments	7	11	-	179	-	197	10
Fixed income investments	276,530	4,140	-	(78,387)	(109,320)	92,963	1,313
Alternative investments	267,196	(10,652)	-	16,182	(2,969)	269,757	(10,741)
Other investments	4,108	-	-	-	(4,108)	-	-
Total separate account assets (1)	547,841	(6,501)	-	(62,026)	(116,397)	362,917	(9,418)

Total assets measured at fair value on a recurring basis	$ 970,059	$(22,710)	$ (250)	$ (38,398)	$ (268,403)	$ 640,298	$ 2,448

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

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table shows a reconciliation of the beginning and ending balances for liabilities which are categorized as Level 3 for the six-month period ended June 30, 2010 (in 000’s):

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

Other policy liabilities:
Guaranteed minimum withdrawal benefit liability (1)	$168,786	$385,563	$ -	$ 63,680	$ -	$ 618,029	$ 387,678
Guaranteed minimum accumulation benefit liability (1)	81,669	138,727	-	11,515	-	231,911	139,536
Derivatives embedded in reinsurance contracts	-	-	-	-	-	-	-
Fixed index annuities	140,966	(27,126)	-	4,447	-	118,287	(7,166)
Total other policy liabilities	391,421	497,164	-	79,642	-	968,227	520,048

Derivative instruments – payable:
Interest rate contracts	-	-	-	-	-	-	-
Foreign currency contracts	-	-	-	-	-	-	-
Credit contracts	34,349	(623)	-	-	-	33,726	(623)
Futures contracts	-	-	-	-	-	-	-
Total derivative instruments – payable	34,349	(623)	-	-	-	33,726	(623)


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

Total liabilities measured at fair value on a recurring basis	$425,770	$496,541	$ -	$ 79,642	$ -	$ 1,001,953	$ 519,425

(1)	The balances are included within the contractholder deposits funds and other policy liabilities in the Company’s unaudited condensed consolidated balance sheet.

		Total losses included in earnings		Change in unrealized gains (losses) related to assets and liabilities still held at the reporting date
Net investment (loss) income	$	(11,974)	$	15,760
Net derivative loss		(500,435)		(523,319)
Net realized investment losses, excluding impairment losses on available-for-sale securities		(341)		-
Net losses	$	(512,750)	$	(507,559)

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table shows a reconciliation of the beginning and ending balances for assets which are categorized as Level 3 for the three-month period ended June 30, 2011 (in 000’s):

Assets	Beginning balance	Total realized and unrealized gains (losses)		Purchases	Sales	Issuances	Settlements	Transfers into level 3	Transfers out of level 3	Ending balance	Change in unrealized gains (losses) included in earnings relating to instruments still held at the reporting date
Assets	Beginning balance	Included in earnings	Included in OCI	Purchases	Sales	Issuances	Settlements	Transfers into level 3	Transfers out of level 3	Ending balance
Available-for-sale fixed maturity securities:
Asset-backed	$ 7	$ (5)	$ 1	$ -	$ -	$ -	$ -	$ -	$ -	$ 3	$ -
Residential mortgage-backed	-	-	-	-	-	-	-	-	-	-	-
Commercial mortgage-backed	2,089	(66)	114	-	-	-	-	-	-	2,137	-
Foreign government & agency	-	-	-	-	-	-	-	-	-	-	-
U.S. states & political subdivisions	-	-	-	-	-	-	-	-	-	-	-
U.S. treasury and agency	-	-	-	-	-	-	-	-	-	-	-
Corporate	7,386	6	70	-	-	-	-	-	-	7,462	-
Total available-for-sale fixed maturity securities	9,482	(65)	185	-	-	-	-	-	-	9,602	-

Trading fixed maturity securities:
Asset-backed	90,706	582	-	-	-	-	(1,272)	1,696	(16,177)	75,535	500
Residential mortgage-backed	145,035	3,223	-	-	-	-	(7,356)	78,250	(61,338)	157,814	3,778
Commercial mortgage-backed	81,994	(1,710)	-	-	-	-	(18,119)	4,866	-	67,031	(1,144)
Foreign government & agency	13,165	(162)	-	-	-	-	-	-	-	13,003	257
U.S. states & political subdivisions	-	-	-	-	-	-	-	-	-	-	-
U.S. treasury and agency	1,096	(17)	-	-	-	-	(116)	-	-	963	(10)
Corporate	106,537	568	-	-	-	-	(451)	-	-	106,654	588
Total trading fixed maturity securities	438,533	2,484	-	-	-	-	(27,314)	84,812	(77,515)	421,000	3,969

Derivative instruments – receivable:
Interest rate contracts	-	-	-	-	-	-	-	-	-	-	-
Foreign currency contracts	-	-	-	-	-	-	-	-	-	-	-
Equity contracts	20,459	350	-	1,586	-	-	(4,360)	-	-	18,035	350
Futures contracts	-	-	-	-	-	-	-	-	-	-	-
Total derivative instruments – receivable	20,459	350	-	1.586	-	-	(4,360)	-	-	18,035	350

Other invested assets	10,156	(193)	-	-	-	-	-	-	(7,830)	2,133	(193)
Short-term investments	-	-	-	-	-	-	-	-	-	-	-
Cash and cash equivalents	-	-	-	-	-	-	-	-	-	-	-
Total investments and cash	478,630	2,576	185	1,586	-	-	(31,674)	84,812	(85,345)	450,770	4,126

Separate account assets:
Mutual fund investments	-	-	-	-	-	-	-	-	-	-	-
Equity investments	64	-	-	-	-	-	-		(5)	59	-
Fixed income investments	66,935	(396)	-	78,155	(24,369)	-	(5,411)	7,188	(24,650)	97,452	(632)
Alternative investments	348,076	4,863	-	104,227	(88,337)	-	(2,720)	-	-	366,109	4,164
Other investments	-	-	-	-	-	-	-	-	-	-	-
Total separate account assets (1)	415,075	4,467	-	182,382	(112,706)	-	(8,131)	7,188	(24,655)	463,620	3,532

Total assets measured at fair value on a recurring basis	$893,705	$ 7,043	$ 185	$183,968	$(112,706)	$ -	$ (39,805)	$ 92,000	$ (110,000)	$914,390	$ 7,658

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

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table shows a reconciliation of the beginning and ending balances for liabilities which are categorized as Level 3 for the three-month period ended June 30, 2011 (in 000’s):

Liabilities	Beginning balance	Total realized and unrealized (gains) losses		Purchases	Sales	Issuances	Settlements	Transfer s into level 3	Transfers out of level 3	Ending balance	Change in unrealized (gains) losses included in earnings relating to instruments still held at the reporting date
Liabilities	Beginning balance	Included in earnings	Included in OCI	Purchases	Sales	Issuances	Settlements	Transfer s into level 3	Transfers out of level 3	Ending balance

Other policy liabilities:
Guaranteed minimum withdrawal benefit liability (1)	$(122,682)	$ 60,797	$ -	$ -	$ - -	$ 54,240	$ -	$ -	$ -	$ (7,645)	$ 59,234
Guaranteed minimum accumulation benefit liability (1)	(34,560)	26,377	-	-	-	5,629	-	-	-	(2,554)	26,010
Derivatives embedded in reinsurance contracts	20,459	350	-	1,587	-	-	(4,361)	-	-	18,035	350
Fixed index annuities	139,577	(24,962)	-	-	-	-	18,189	-	-	132,804	593
Total other policy liabilities	2,794	62,562	-	1,587	-	59,869	13,828	-	-	140,640	86,187

Derivative instruments – payable:
Interest rate contracts	-	-	-	-	-	-	-	-	-	-	-
Foreign currency contracts	-	-	-	-	-	-	-	-	-	-	-
Credit contracts	23,846	(1,283)	-	-	-	-	-	-	-	22,563	(1,283)
Futures contracts	-	-	-	-	-	-	-	-	-	-	-
Total derivative instruments – payable	23,846	(1,283)	-	-	-	-	-	-	-	22,563	(1,283)


Other liabilities:
Bank overdrafts	-	-	-	-	-	-	-	-	-	-	-
Total liabilities measured at fair value on a recurring basis	$ 26,640	$ 61,279	$ -	$ 1,587	$ -	$59,869	$ 13,828	$ -	$ -	$163,203	$ 84,904

(1)	The balances are included within the contractholder deposits funds and other policy liabilities in the Company’s unaudited condensed consolidated balance sheets. At June 30, 2011, the net balances of guaranteed minimum withdrawal and accumulation benefits were in an asset position.

Gains and losses, related to Level 3 assets and liabilities, included in the Company’s unaudited condensed consolidated statements of operations for the three-month period ended June 30, 2011, are reported as follows (in 000’s):

		Total gains (losses) included in earnings		Change in unrealized gains (losses) related to assets and liabilities still held at the reporting date
Net investment income	$	2,291	$	3,776
Net derivative loss		(60,929)		(84,554)
Net realized investment losses, excluding impairment losses on available-for-sale securities		(65)		-
Net losses	$	(58,703)	$	(80,778)

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table shows a reconciliation of the beginning and ending balances for assets which are categorized as Level 3 for the three-month period ended June 30, 2010 (in 000’s):

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

Available-for-sale fixed maturity securities:
Asset-backed securities	$ 29	$ (10)	$ 3	$ -	$ -	$ 22	$ -
Residential mortgage-backed securities	-	-	-	-	-	-	-
Commercial mortgage-backed securities	1,135	(64)	300	-	-	1,371	-
Foreign government & agency securities	-	-	-	-	-	-	-
U.S. states and political subdivisions securities	-	-	-	-	-	-	-
U.S. treasury and agency securities	-	-	-	-	-	-	-
Corporate securities	939	(6)	(1)	-	(254)	678	-
Total available-for-sale fixed maturity securities	2,103	(80)	302	-	(254)	2,071	-

Trading fixed maturity securities:
Asset-backed securities	48,924	769	-	(261)	(1,764)	47,668	921
Residential mortgage-backed securities	105,554	473	-	(3,268)	(4,436)	98,323	1,388
Commercial mortgage-backed securities	12,892	1,294	-	48,607	-	62,793	2,439
Foreign government & agency securities	15,093	(455)	-	-	-	14,638	(58)
U.S. states and political subdivisions securities	-	-	-	-	-	-	-
U.S. treasury and agency securities	-	-	-	-	-	-	-
Corporate securities	96,653	(6,863)	-	4,416	(45,655)	48,551	979
Total trading fixed maturity securities	279,116	(4,782)	-	49,494	(51,855)	271,973	5,669

Derivative instruments – receivable:
Interest rate contracts	-	-	-	-	-	-	-
Foreign currency contracts	-	-	-	-	-	-	-
Equity contracts	11,956	(7,048)	-	(3,185)	-	1,723	(7,049)
Futures contracts	-	-	-	-	-	-	-
Total derivative instruments– receivable	11,956	(7,048)	-	(3,185)	-	1,723	(7,049)

Other invested assets	-	128	-	1,486	-	1,614	128
Short-term investments	-	-	-	-	-	-	-
Cash and cash equivalents	-	-	-	-	-	-	-
Total investments and cash	293,175	(11,782)	302	47,795	(52,109)	277,381	(1,252)

Separate account assets:
Mutual fund investments	-	-	-	-	-	-	-
Equity investments	7	11	-	179	-	197	10
Fixed income investments	313,747	(78)	-	(88,136)	(132,570)	92,963	(2,723)
Alternative investments	259,762	(10,187)	-	20,182	-	269,757	(9,519)
Other investments	725	-	-	-	(725)	-	-
Total separate account assets (1)	$ 574,241	$(10,254)	-	(67,775)	(133,295)	362,917	(12,232)

Total assets measured at fair value on a recurring basis	$ 867,416	$ (22,036)	$ 302	$ (19,980)	$ (185,404)	$ 640,298	$ (13,484)

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

The following table shows a reconciliation of the beginning and ending balances for liabilities which are categorized as Level 3 for the three-month period ended June 30, 2010 (in 000’s):

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

Other policy liabilities:
Guaranteed minimum withdrawal benefit liability	$ 168,786	$ 385,563	$ -	$ 63,680	$ -	$ 618,029	$ 480,587
Guaranteed minimum accumulation benefit liability	46,030	180,406	-	5,475	-	231,911	181,178
Derivatives embedded in reinsurance contracts	-	-	-	-	-	-	-
Fixed index annuities	139,012	(21,771)	-	1,046	-	118,287	(11,167)
Total other policy liabilities	353,828	544,198	-	70,201	-	968,227	650,598

Derivative instruments – payable:
Interest rate contracts	-	-	-	-	-	-	-
Foreign currency contracts	-	-	-	-	-	-	-
Credit contracts	34,612	(886)	-	-	-	33,726	(886)
Futures contracts	-	-	-	-	-	-	-
Total derivative instruments – payable	34,612	(886)	-	-	-	33,726	(886)


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

Total liabilities measured at fair value on a recurring basis	$ 388,440	$ 543,312	$ -	$ 70,201	$ -	$ 1,001,953	$ 649,712

Total realized and unrealized gains (losses), related to Level 3 assets and liabilities, included in the Company’s unaudited condensed consolidated statements of operations for the three-month period ended June 30, 2010, are reported as follows (in 000’s):

		Total realized losses included in earnings		Change in unrealized gains (losses) related to assets and liabilities still held at the reporting date
Net investment (loss) income	$	(4,654)	$	5,797
Net derivative loss		(550,360)		(656,761)
Net realized investment losses, excluding impairment losses on available-for-sale securities		(80)		-
Net loss	$	(555,094)	$	(650,964)

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

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)

4. FAIR VALUE MEASUREMENT (CONTINUED)

Fair Value Hierarchy (continued)

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

During the six-month period ended June 30, 2011, the Company transferred the following assets into (out of) Levels 1, 2 and 3:

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

Trading fixed maturity securities:
Asset-backed securities	-	-	26,774	(5,192)	5,192	(26,774)
Collateralized mortgage obligations	-	-	-	(4,954)	4,954	-
Residential mortgage-backed securities	-	-	56,571	(133,509)	133,509	(56,571)
Commercial mortgage-backed securities	-	-	-	-	-	-
U.S. states and political subdivisions securities	-	-	-	-	-	-
U.S. treasury and agency securities	-	-	-	-	-	-
Corporate securities	-	-	35,621	(3,202)	3,202	(35,621)
Total trading fixed maturity securities			118,966	(146,857)	146,857	(118,966)

Derivative instr

Sun Life Assurance Co of Canada (U.S.) 10-Q