SUN LIFE HONG KONG LIMITED

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Reports and Consolidated Financial Information For the year ended December 31,2018

SUN LIFE HONG KONG LIMITED

wm 1-x ;lj ~i¥h~1f ~~ 0 i§J REPORTS AND CONSOLIDATED FINANCIAL INFORMATION FOR THE YEAR ENDED DECEMBER31, 2018

CONTENTS

REPORT OF THE DIRECTORS

INDEPENDENT AUDITOR'S REPORT

CONSOLIDATED STATEMENT OF PROFIT OR LOSS

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

STATEMENT OF FINANCIAL POSITION

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

STATEMENT OF CHANGES IN EQUITY

CONSOLIDATED STATEMENT OF CASH FLOWS

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION

SUPPLEMENTARY SCHEDULE- LONG TERM BUSINESS STATEMENT OF FINANCIAL POSITION

I

PAGE(S)

1-6

7- 10

11

12

13 & 14

15 & 16

17

18

19 &20

21 - 103

104 & 105

SUN LIFE HONG KONG LIMITED

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REPORT OF THE DIRECTORS

The directors present their annual report and the audited consolidated fmancial information for the year ended December 31, 2018.

PRINCIPAL ACTIVITIES

The principal activities of the Company are to undetwrite long-term insurance business and retirement business. Details of the principal activities of the Company's subsidiaries are set out in note 11 to the consolidated fmancial information.

The Company did not carry on any insurance business during the year relating to liabilities or risks in respect of which persons are required by law to be insured.

RESULTS AND APPROPRIATIONS

The profit of the Group and the Company for the year ended December 31, 2018 and the financial position of the Group as at that date are set out in the consolidated fmancial statements on pages 11 to 16.

The directors do not recommend the payment of a dividend.

PLANT AND EQUIPMENT

Details of movements during the year in plant and equipment are set out in note 13 to the consolidated financial information.

SHARE CAPITAL

Details of the Company's share capital during the year are set out in note 22 to the consolidated financial information.

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SUN LIFE HONG KONG LIMITED wm 11< ~ 1!£;:tr:ff ~~ 0 i§J REPORT OF THE DIRECTORS -continued

REINSURANCE ARRANGEMENTS

As at December 31, 2018, the following arrangements were in effect:

Individual business

The Company has several treaties with Reinsurance Group of America, Inc. (RGA) and its subsidiaries as follows:

(a) The treaty arrangement with RGA Reinsurance Company, signed in September 2000, covers non-participating business and simplified underwritten participating business issued on or after April 1, 2000 including death benefits, accidental death/dismemberment benefits, accelerated and stand-alone critical illness benefits and waiver of premium. The treaty is a 50% quota share of the net amount at risk (that is the excess of the death benefit over the cash value accumulated on the policy) with the Company retaining up to US$250,000 per life insured except for Lady Plans (covering female illness and new born baby benefits) and Child Accident and Illness Benefit where the treaty arrangement operates with a maximum ceded amount ofUS$150,000 per life insured. For business written on or after July 1, 2010, the retention limit was increased to US$1 ,000,000 per life insured. The new business covered by this treaty was switched to RGA International Reinsurance (see below (c) viii)). Accordingly, this treaty with RGA Reinsurance Company was closed to new business from March 5, 2016.

(b) Two treaties with RGA Reinsurance Cmnpany effective since March 22, 2002 and May 5, 2003 cover plans with substandard lives frmn fon11er CMG Asia Limited. The treaties are on a quota share basis varied by mortality rating with the Company retaining up to US$125,000 per life insured. No new business is covered by this treaty.

(c) The treaty with RGA Global Reinsurance has been in effect since October 1, 2011 with guaranteed mortality reinsurance rates. The treaty with RGA Global Reinsurance has been novated to RGA International Reinsurance effective from June 30, 2012. The treaty covers i) fully underwritten whole life participating policies issued before the treaty effective date (50% of net amount at risk with the Company retaining up to US$250,000), ii) fully underwritten whole life participating policies issued after the treaty effective date, iii) Reversionary Bonus Par Post-Demutualization Blocks, iv) fully underwritten whole life participating policies issued by former CMG Asia Limited that are recaptured from Swiss Re, v) non-participating life policies recaptured from Swiss Re effective from March 15, 2013, vi) non-participating life policies issued after November 1, 2013, vii) participating critical illness product SunHealth UltraCare and SunHealth MaxiCare effective fron1 March 15, 2016 (75% quota share reinsured for SunHealth Maxi Care with the Company retaining up to US$1 ,000,000), and viii) new business originally ceded to RGA Reinsurance was switched to RGA International Reinsurance effective from March 5, 2016. The treaty is 50% quota share with the Company retaining up to US$1,000,000 if not otherwise specified.

(d) A 50% quota share reinsurance treaty with both RGA International Reinsurance Company dac and RGA Reinsurance Company, effective from September 15, 2017, covers the mortality risk of non-participating universal life product Bright UL Eternal Builder with the Company retaining up to USD 5,000,000. The ceded portion is split between RGA International Reinsurance Company dac and RGA Reinsurance Company at 90% and 10% respectively.

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' SUN LIFE HONG KONG LIMITED i!f~1J< ~ ~~~~ ~~ 0 -§J

REPORT OF THE DIRECTORS- continued

REINSURANCE ARRANGEMENTS - continued

Individual business- continued

The Company has several treaties with Munich Reinsurance Company as follows:

(a) Effective on August 12,2016, the Company entered into a modified coinsurance arrangement with Munich Reinsurance Company ("Munich Re"), Singapore Branch which reinsures 50% of inforce policies as of December 31, 2015 under individual participating whole life and endowment product lines. At the inception of this arrangement there was no premium due to Munich Re and the Company received an up front commission from Munich Re. The Company would settle to Munich Re the net result arising on a quarterly basis from the reinsured business. Net settlements commenced fron1 the third quarter of2016. The treaty includes a provision for automatic tetmination in the event that the net settlements paid to Munich Re result in an accumulated positive net transfer to Munich Re of the initial cormnission. The Company and Munich Re intend and have a legally enforceable right to settle assets and liabilities arising from this treaty arrangetnent on a net basis. The accounting for assets and liabilities frmn the treaty reflects this intention accordingly.

(b) The Company entered into another reinsurance treaty with Munich Re, Singapore Branch, which was effective frmn March 23, 2018. It is on a 50% quota share basis that covers the participating whole life products Generations and Prosperity on mortality risk with guaranteed reinsurance rates. The Cmnpany's retention for each policy is 50% of net amount at risk on a first dollar quota share basis, with retention up to USD 5,000,000. The ceded potiion is split between Munich Re, Hannover Reinsurance Cmnpany (Hannover Re) and SCOR Global Life SE (SCOR Global) at 60%, 20% and 20% respectively.

(c) The Company has a reinsurance treaty with Munich Re, Hong Kong Branch covering both SunHealth Critical Illness Care plan I & II, Critical Medical Care II and Multi Protection Benefits attached, which provides death, accelerating critical illness, additional recurring and additional life stage benefits. The treaty is on quota share of 50% of net amount at risk with the Cotnpany retaining up to US$250,000 for business written prior to July 1, 2010 and US$1,000,000 for business written on or after July 1, 2010.

The Company has several treaties with SCOR SE and its subsidiaries as follows:

(a) The Company has three 50% quota share reinsurance treaties with SCOR Global Life SE Singapore Branch. The first treaty covers the medical benefit of SunHealth Medical Premier and SunHealth Medical Essential effective since June 1, 2017. The second treaty covers the morbidity benefits of SunHealth Cancer Shield effective since August 1, 2017 with the Company retaining up to US$2,500,000 per life insured. An addendum was added to the treaty for SunHealth Cancer Shield effective from March 23, 2018 to cover Generations and Prosperity. This addendum is on 50% quota share basis with SCOR Global covering 20% of the ceded portion and Munich Re and Hannover Re covering the rest, see details under Munich Reinsurance Company.

(b) A novation agreement was signed among the Company, Transamerica Life (Bermuda) and SCOR Reinsurance Company (Asia) Ltd. effective since March 1, 2017 to transfer the treaty that covers mainly old term business to SCOR Reinsurance Company (Asia) Ltd.

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SUN LIFE HONG KONG LIMITED W~1j( l3)j ~~~if~& 0 PJ

REPORT OF THE DIRECTORS - continued

REINSURANCE ARRANGEMENTS - continued

Individual business - continued

The Company has several treaties with Hannover RE and its subsidiaries as follows:

(a) A 100% quota share reinsurance treaty with Hannover Re on the basic death and attached accelerating critical illness benefit on Super Protector policies of the former CMG Asia Limited.

(b) A reinsurance treaty was effective from March 23, 2018 to cover Generations and Prosperity. The treaty is on 50% quota share basis with Hannover Re covering 20% of the ceded portion and Munch Re and SCOR Global covering the rest, see details under Munich Reinsurance Company.

The Company has a 99% coinsurance treaty with China Life Re to cover Sun Dragon II and Sun Phoenix, the RMB and USD Endowment Plan.

The Company also has several treaties with other reinsurers to cover the products described below, all of which are closed to new business. They are:

(a) A 95% quota share reinsurance agree1nent with Cigna for the medical claims of Bright Superb Health and the riders attached. This treaty was recaptured as ofDecen1ber 31, 2018, and the recaptured business is ceded to SCOR Global as of January 1, 2019.

(b) A 80% quota share agree1nent with General Reinsurance Company for fen1ale critical illness benefits provided by the former CMG Asia Limited.

(c) Several treaties with Swiss Reinsurance Company covering life, accidental death, accidental dismemberment, and critical illness benefits from former CMG Asia Limited that had been in force for less than 10 years and written before December 31, 2010 as well as closed block of business written prior to demutualization of fo1mer Sun Life Financial.

(d) A 70% coinsurance treaty with Transamerica Life (Bermuda) Limited covers health products sold through the Direct Marketing channel.

Group Business

Since 201 0, all of the group life business is ceded to Munich Re. The retention limit of the treaty on any one and the same life is HK$3,000,000 or US$390,000 for all group business.

SUBORDINATED LOAN

On December 20, 2010, a subordinated loan of HK$31 0 million was granted by a fellow subsidiary to the Company. Details of the subordinated loan are set out in note 23 to the consolidated financial information.

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REPORT OF THE DIRECTORS- continued

DIRECTORS

The directors of the Company during the year and up to the date of this report were:

Claude Alan Accum Chou Chia Ling Fabien Gerald Jeudy Niall Mario 0 'Hare Jason Lee Clayton Came Stuart Edward Harrison Stuart John Valentine

(appointed with effect from April 1, 20 19) (resigned with effect from April1, 2019)

In accordance with the Company's Bye-laws, all existing directors shall serve until re-elected or their successors are appointed at the fmihcoming Annual General Meeting.

CONTROLLERS

The controllers of the Company, within the meaning of Section 9(1) of the Hong Kong Insurance Ordinance, during the year and up to the date of this report were:

Sun Life Financial Inc. ("SLF") Sun Life Assurance Company of Canada Fabien Gerald Jeudy Dean Arthur Connor

DIRECTORS' AND CONTROLLERS' INTERESTS IN CONTRACTS

No contracts of significance, to which the Company, its ultimate holding company or any subsidiaries of the Company's ultimate holding company was a party and in which a director or a controller of the Company had a material interest, whether directly or indirectly, subsisted at the end of the year or at any time during the year.

DIRECTORS' AND CONTROLLERS' RIGHTS TO ACQUIRE SHARES OR DEBENTURES

During the year, certain directors and controllers of the Company held options to subscribe for shares at fixed prices in SLF, the ultimate holding company of the Company, granted under the Sun Life Financial of Canada Executive Stock Option Plan. Mr. Fabien Gerald Jeudy and Mr. Claude Alan Accum partially exercised their options under the Executive Stock Option Plan to subscribe for SLF shares.

The following table discloses details of the relevant share options held by the directors and controllers and movements in such holdings during the year:

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SUN LIFE HONG KONG LIJ\1ITED

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REPORT OF THE DIRECTORS -continued

DIRECTORS' AND CONTROLLERS' RIGHTS TO ACQUIRE SHARES OR DEBENTURES - continued

Executive Stock Option Plan

Outstanding at January 1, 2018 Granted during the year Exercised during the year

Outstanding at December 31, 2018

Number of shares

143,660 31,411

(17,369)

157,702

Apart from the above, at no time during the year was the Company, its ultimate holding company or any subsidiaries of the Company's ultimate holding company a party to any arrangements to enable the directors and controllers of the Company to acquire benefits by means of the acquisition of shares in, or debentures of, the Company or any other body corporate.

AUDITOR

A resolution will be submitted to the annual general meeting to re-appoint Messrs. Deloitte Touche Tohmatsu as auditor of the Company.

On behalf of the Board

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INDEPENDENT AUDITOR'S REPORT

TO THE DIRECTORS OF SUN LIFE HONG KONG LIMITED :w m Ji< a)j ~~~ :tr ~~ 0 ifJ (Incorporated in Bermuda with limited liability)

Report on the Consolidated Financial Information

Opinion

We have audited the consolidated financial information of Sun Life Hong Kong Limited (the "Company") and its subsidiaries (collectively referred to as the "Group") set out on pages 11 to 105, which comprise the consolidated and Company's statements of financial position as at 31 December 2018, and the consolidated statement of profit or loss and other comprehensive income, consolidated and Company's statements of changes in equity, consolidated statement of cash flows and the Company's revenue account set out on pages 90 to 93 for the year then ended, and notes to the consolidated financial information, including a summary of significant accounting policies and the supplementary schedule on long term business statement of financial position set out on pages 104 and 105.

In our opinion, the consolidated financial information gives a true and fair view of the state of the Group and the Company's affairs as at 31 December 2018, and of the Group's profit and its cash flows for the year then ended in accordance with Hong Kong Financial Reporting Standards ("HKFRSs") and is prepared in all material respects, in accordance with the provisions of the Hong Kong Insurance Ordinance ("the Ordinance").

Basis for Opinion

We conducted our audit in accordance with Hong Kong Standards on Auditing ("HKSAs") and with reference to Practice Note 810.2 (Revised), "The Duties ofthe Auditor of an Insurer authorized under the Insurance Ordinance" issued by the Hong Kong Institute of Certified Public Accountants ("HKICP A"). Our responsibilities under those standards are further described in the "Auditor's Responsibilities for the Audit of the Consolidated Financial Information" section of our report. We are independent of the Group and the Company in accordance with the "HKICP A's Code of Ethics for Professional Accountants" ("the Code"), and we have fulfilled our other ethical responsibilities in accordance with the Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Emphasis of Matter- Basis of Accounting and Restriction on Use

We draw attention to note 3 to the consolidated financial information, which describes the basis of accounting. The consolidated financial information is prepared to assist the Company in complying with the provisions of the Ordinance. As a result, the consolidated financial information may not be suitable for another purpose. Our report is intended solely for the submissions by the Company to the Hong Kong Insurance Authority and the Registrar of Companies and is not intended to be, and should not be, distributed to or used by anyone for any other purpose. We do not assume responsibility towards or accept liability to any other person for the contents of our report. Our opinion is not modified in respect of this matter.

INDEPENDENT AUDITOR'S REPORT

TO THE DIRECTORS OF SUN LIFE HONG KONG LIMITED- continued ~i~11

INDEPENDENT AUDITOR'S REPORT

TO THE DIRECTORS OF SUN LIFE HONG KONG LIMITED - continued wm jJ

INDEPENDENT AUDITOR'S REPORT

TO THE DIRECTORS OF SUN LIFE HONG KONG LIMITED- continued W t~ 7X EJ3 ~ ~2 :ff ~~ 0 i§J (Incorporated in Bermuda with limited liability)

Report on the Consolidated Financial Information - continued

Auditor's Responsibilities for the Audit of the Consolidated Financial Information-continued

• Evaluate the overall presentation, structure and content of the consolidated financial information, including the disclosures, and whether the consolidated financial information represents the underlying transactions and events in a manner that achieves fair presentation.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit.

Report on matters under paragraphs 4(1) and (1AA) of Part 1 of Schedule 4 to the Hong Kong Insurance Ordinance

The required margin of solvency, as determined by the Company's appointed actuary in accordance with the Insurance (Margin of Solvency) Rules, being greater than the relevant amount applicable, as defined in section 10 of the Ordinance, arnounted to HK$1 ,985,036,000 as at 31 December 2018.

In our opinion:

(i) proper records have been maintained in accordance with section 16 of the Ordinance in respect of the year ended 31 December 2018; and

(ii) the value of the assets of the Company as stated in the consolidated financial information exceeds its liabilities by not less than HK$1,985,036,000 as at 31 December 2018.

Deloitte Touche Tohmatsu Certified Public Accountants Hong Kong 23 April 20 19

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SUN LIFE HONG KONG LIMITED w~~ 1X ~ ~M2:ff ~~ 0 i§J

CONSOLIDATED STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED DECEMBER 31,2018

NOTES

Revenue

Gross written premiums Reinsurance premiums ceded

Net written premiums Other revenue

6

Investment return 7 Modified coinsurance adjustment 8

Claims, surrenders and maturities 15(a) Reinsurance claims recoverable Interest on claims and deposits Policyholders' dividends Commission expenses Reinsurance commission recoverable Deferred origination costs capitalised 14 Change in insurance funds (net of reinsurance) 15(a) Agency allowances and bonus Other agency and staff costs Investment expenses Other operating expenses 1 0 Transfer from accumulated surplus

attributable to ring-fenced policyholders

Profit before taxation Income tax credit (expense)

Profit for the year

9

10

2018 2017 HK$'000 HK$'000

8,204,208 6,937,112

7,729,196 6,425,967 (1,087,704) (1,131,523)

6,641,492 5,294,444 465,420 516,949

(1 ,624,057) 6,581,766 (20,586) 139,512

5,462,269 12,532,671

2,985,084 2,749,511 (730,454) (719,042) 269,155 249,174 493,528 481,073 729,375 613,982

(151,437) (188,225) (187,502) (129,771) (376,912) 6,944,829 675,898 608,184 131,338 75,700 68,162 55,100

1,249,471 1,115,518

(2,125) 151,703

5,153,581 12,007,736

308,688 524,935 21,417 (30,995)

330,105 493,940

Adjustments that are required to be made to the above consolidated statement of profit or loss in order to comply with the Hong Kong Insurance Ordinance ("the Ordinance") are set out in note 38.

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SUN LIFE HONG KONG LIMITED

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CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED DECEMBER 31,2018

2018 2017 NOTE HK$'000 HK$'000

Profit for the year 330,105 493,940

Other comprehensive income (expense):

Items that may be reclassified subsequently to profit or loss: Change in fair value of available-for-sale investments (160,335) 77,321 Reclassification adjustment on disposal of available-for-sale

investments 17,731 (3,069) Deferred tax arising from movement of investment revaluation

reserve 28 23,532 (11 ,777)

Other comprehensive (expense) income for the year (119,072) 62,475

Total comprehensive income for the year 211,033 556,415

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SUN LIFE HONG KONG LIMITED wi~ 1i< 13)§ ~;:a1r ~[{ 0 EJ

CONSOLIDATED STATEMENT OF FINANCIAL POSITION ATDECEMBER31 2018

ASSETS

Interest in an associate Plant and equipment Intangible assets Reinsurance assets Investments in securities Derivative fmancial instruments Loans receivable Direct premiums receivable Tax recoverable Amounts due from reinsurers under reinsurance

contracts held Amount due from ultimate holding company Amounts due from fellow subsidiaries Other debtors, deposits and prepayments, unsecured

Bank balances and cash

TOTAL ASSETS

NOTES

12 13 14 15 16 17 18

19 20 20

21

2018 2017 HK$'000 HK$'000

240,826 72,987 97,788

1,833,720 1,775,836 1,598,215 2,383,172

63,630,094 64,748,766 146,103 62,895 748,779 765,745 196,263 178,147

3,338

149,331 151,022 238 462 305

269,184 296,618 1,420,243 1,269,215

70,309,783 71,729,509

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SUN LIFE HONG KONG LIMITED W1:ljk~~~~:fi~~0~

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AT DECEIVIBER 31, 2018 - continued

NOTES 2018 2017 HK$'000 HK$'000

EQUITY AND LIABILITIES

CAPITAL AND RESERVES Share capital 22 3,527,525 3,527,525 Reserves 2,486,852 2,275,819

6,014,377 5,803,344

SUBORDINATED LOAN 23 310,000 310,000

OTHER LIABILITIES Insurance funds 15 49,085,782 50,247,651 Accumulated surplus attributable to ring-fenced

policyholders 24 322,809 324,934 Financial liabilities from investment contracts 15(c) 4,684,155 5,786,649 Provision for policyholders' dividend 168,316 163,672 Policyholders' funds on deposit 25 7,572,015 7,088,028 Claims payable 26 80,004 57,440 Commission payable 279,126 237,305 Premiums received in advance 27 477,174 472,772 Amounts due to reinsurers under reinsurance

contracts held 257,019 237,316 Other creditors and accrued charges 784,868 674,507 Amount due to immediate holding company 20 22,091 20,331 Amounts due to fellow subsidiaries 20 66,401 47,620 Deferred tax liabilities 28 118,417 121,701 Derivative fmancial instruments 17 63,272 85,997 Tax payable 3,957 50,242

63,985,406 65,616,165

TOTAL EQUITY AND LIABILITIES 70,309,783 71,729,509

Adjustments that are required to be made to the assets and liabilities reported above in order to comply with the Ordinance are set out in note 3 8.

The consolidated financial information on pages 11 to 103 and the supplementary schedule on pages 104 and 105 were approved and authorised for issue by the Board ofDirectors on April23, 2019 and are signed on its behalf by:

DIRECTOR

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SUN LIFE HONG KONG LIMITED ~1-llj( ~~~~if~~ 0 P]

STATEMENT OF FINANCIAL POSITION ATDECEMBER31 2018

NOTES 2018 2017 HK$'000 HK$'000

ASSETS

Interest in subsidiaries 11 319,261 322,085 Investment in an associate 12 240,826 Plant and equipment 13 72,987 97,788 Intangible assets 14 1,833,720 1,775,836 Reinsurance assets 15 1,598,215 2,383,172 Investments in securities 16 63,630,094 64,748,766 Derivative financial inst1uments 17 146,103 62,895 Loans receivable 18 748,779 765,745 Direct premiums receivable 196,263 178,147 Amounts due frmn reinsurers under reinsurance

contracts held 19 149,331 151,022 Amounts due from fellow subsidiaries 20 462 305 Other debtors, deposits and prepayments, unsecured 237,297 268,816

Bank balances and cash 21 969,824 889,604

TOTAL ASSETS 70,143,162 71,644,181

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SUN LIFE HONG KONG LIMITED ;gf1~ jj( ~ ~;:R1f ~~ 0 P]

STATEMENT OF FINANCIAL POSITION AT DECEMBER 31,2018- continued

NOTES 2018 2017 HK$'000 HK$'000

EQUITY AND LIABILITIES

CAPITAL AND RESERVES Share capital 22 3,527,525 3,527,525 Reserves 2,405,999 2,251,282

5,933,524 5,778,807

SUBORDlNATED LOAN 23 310,000 310,000

OTHER LIABILITIES Insurance funds 15 49,085,782 50,247,651 Accumulated surplus attributable to ring-fenced

policyholders 24 322,809 324,934 Financial liabilities from investment contracts 15(c) 4,684,155 5,786,649 Provision for policyholders' dividend 168,316 163,672 Policyholders' funds on deposit 25 7,572,015 7,088,028 Claims payable 26 80,004 57,440 Co1nmission payable 279,126 237,305 Pre1niums received in advance 27 477,174 472,772 Amounts due to reinsurers under reinsurance

contracts held 257,019 237,316 Other creditors and acc1ued charges 730,108 620,751 Alnount due to immediate holding company 20 22,091 20,331 Amounts due to fellow subsidiaries 20 39,272 42,719 Deferred tax liabilities 28 118,417 121,701 Derivative financial instiuments 17 63,272 85,997 Tax payable 78 48,108

63,899,638 65,555,374

TOTAL EQUITY AND LIABILITIES 70,143,162 71,644,181

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SUN LIFE HONG KONG LIM:ITED :Wi~ 7J( ~ ~~911f ~~ 0 P]

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER31, 2018

Investment Share Share revaluation Accumulated

NOTES capital premium reserve profits Total HK$•ooo HK$•ooo HK$•ooo HK$·ooo HK$•ooo

At January 1, 2017 3,077,623 841,838 (54,211) 931,777 4,797,027

Change in fair value of available-for-sale investments 77,321 77,321

Reclassification adjustment on disposal of available-for-sale investments (3,069) (3,069)

Deferred tax arising from movement of investment revaluation reserve 28 (11,777) (11,777)

Other comprehensive income for the year 62,475 62,475 Profit for the year 493,940 493,940

Total comprehensive income for the year 62,475 493,940 556,415

Issue of ordinary shares 22 449,902 449,902

At December 3 1, 201 7 3,527,525 841,838 8,264 1,425,717 5,803,344

Change in fair value of available-for-sale investments (160,335) (160,335)

Reclassification adjustment on disposal of available-for-sale investments 17,731 17,731

Deferred tax arising from movement of investment revaluation reserve 28 23,532 23,532

Other comprehensive expense for the year (119,072) (119,072) Profit for the year 330,105 330,105

Total comprehensive (expense) income for the year (119,072) 330,105 211,033

At December 3 1, 2018 3,527,525 841,838 (110,808) 1,755,822 6,014,377

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SUN LIFE HONG KONG LIMITED wiJ§;x ~ ~;~:ff~f{ 0 PJ

STATEI\1ENT OF CHANGES IN EQUITY FOR THE YEAR ENDED DECEMBER31, 2018

Investment Share Share revaluation Accumulated

NOTES capital premium reserve profits Total HK$'000 HK$'000 HK$'000 HK$'000 HK$'000

At January 1, 2017 3,077,623 841,838 (54,211) 924,581 4,789,831

Change in fair value of available-for-sale investments 77,321 77,321

Reclassification adjustment on disposal of available-for-sale investments (3,069) (3,069)

Deferred tax arising from movement of investment revaluation reserve 28 (11,777) (11,777)

Other comprehensive income for the year 62,475 62,475 Profit for the year 476,599 476,599

Total comprehensive income for the year 62,475 476,599 539,074

Issue of ordinary shares 22 449,902 449,902

At December 31, 2017 3,527,525 841,838 8,264 1,401,180 5,778,807

Change in fair value of available-for-sale Investments (160,335) (160,335)

Reclassification adjustment on disposal of available-for-sale investments 17,731 17,731

Deferred tax arising from movement of investment revaluation reserve 28 23,532 23,532

Other comprehensive expense for the year (119,072) (119,072) Profit for the year 273,789 273,789

Total comprehensive (expense) income for the year (119,072) 273,789 154,717

At December 31, 2018 3,527,525 841,838 (110,808) 1,674,969 5,933,524

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SUN LIFE HONG KONG LIMITED

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CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER31, 2018

OPERATING ACTIVITIES Profit before taxation Adjustments for:

Dividend income Interest income on debt securities Other interest income Depreciation Deferred origination costs capitalised Amortisation of intangible assets Interest expense on subordinated loan Net realised and unrealised loss (gain) on

investments Decrease (increase) in prepayments (Decrease) increase in accumulated surplus

attributable to ring-fenced policyholders

Operating cash flow before movements in working capital

Increase in direct pre1niu1ns receivable (Decrease) increase in insurance funds

NOTES

7 7 7 13 14 14 10

(Decrease) increase in financial liabilities from investment contracts

Increase in provision for policyholders' dividend Increase in policyholders' funds on deposit Increase (decrease) in claims payable Increase (decrease) in commission payable Increase in premiums received in advance Decrease (increase) in reinsurance assets Decrease (increase) in amounts due from

reinsurers under reinsurance contracts held Increase in amounts due to reinsurers

under reinsurance contracts held Increase in amount due from ultimate holding company Increase in amount due to immediate holding company (Increase) decrease in amounts due from fellow subsidiaries Increase in amounts due to fellow subsidiaries Decrease (increase) in other debtors and deposits Increase (decrease) in other creditors and accrued charges Decrease in derivative financial liabilities (Increase) decrease in derivative financial assets

Cash generated from operations Income tax paid

NET CASH FROM OPERATING ACTIVITIES

2018 HK$'000

308,688

(73,808) (2,061,071)

(65,465) 28,789

(187,502) 154,590

7,037

3,783,147 12,664

(2,125)

1,904,944 (18,116)

(1,161,869)

(1,102,494) 4,644

483,987 22,564 41,821

4,402 784,957

1,691

19,703 (238)

1,760 (157)

18,781 22,548 87,967

(22,725) (83,208)

1,010,962 (7,959)

1,003,003

2017 HK$'000

524,935

(107,256) (1,857,327)

(57,992) 34,289

(129,771) 123,984

6,200

( 4,526,321) (69,328)

151,703

(5,906,884) (31,338)

7,339,667

1,133,151 8,003

548,681 (1,740) (8,931)

115,634 (394,838)

(51,676)

128,394

6,102 10

13,475 (33,723)

(8,173) (141,142)

4,651

2,719,323 (70,619)

2,648,704

- 19-

SUN LIFE HONG KONG LIMITED w1t 1-x s)j ~;~1r ~~ 0 PJ

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31,2018- continued

NOTES

INVESTING ACTIVITIES Dividend and interest received on investments

in securities 7 Other interest received Decrease in loans receivable Purchase of investments in securities Proceeds on disposal of investments in securities Purchase of plant and equipment Net payment for acquisition of interest in an associate/business Increase in fixed time deposits with original

maturity over three months

NET CASH USED IN INVESTING ACTIVITIES

FINANCING ACTIVITIES Proceeds from issue of shares Interest paid on subordinated loan

NET CASH (USED IN) FROM FINANCING ACTIVITIES

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

CASH AND CASH EQUIVALENTS AT JANUARY 1

CASH AND CASH EQUIVALENTS AT DECEMBER31BANKBALANCES AND CASH

Comprising: Cash at bank and in hand Fixed time deposits with original maturity within

three months when acquired

21

22 23

21

21

2018 HK$'000

2,106,351 65,465 16,966

(10,061,086) 7,282,536

(14,344) (240,826)

(844,938)

(7,037)

(7,037)

151,028

1,029,215

1,180,243

1,134,830

45,413

1,180,243

2017 HK$'000

1,959,767 57,992 64,596

(11,699,708) 7,039,134

(53,673) (336,737)

(200,000)

(3, 168,629)

449,902 (6,200)

443,702

(76,223)

1,105,438

1,029,215

784,253

244,962

1,029,215

-20-

SUN LIFE HONG KONG LIMITED w¥~jx~~~9!~~~0PJ

NOTES TO THE CONSOLIDATED FINANCIAL INFORMATION FOR THE YEAR ENDED DECEMBER31, 2018

1. GENERAL

The Company is an exempted company incorporated under the laws of the Islands of Bermuda with limited liability. Its immediate holding company is Sun Life Assurance Company of Canada ("Sun Life Assurance"), incorporated in Canada, and its ultimate holding company is Sun Life Financial Inc., incorporated and listed in Canada. The addresses of the registered office and principal place ofbusiness of the Company are Canon's Court, 22 Victoria Street, Hamilton, Bermuda and 10/F, Sun Life Tower, The Gateway, 15 Canton Road, Kowloon, Hong Kong respectively.

The Company continues to be engaged in underwriting long te1m insurance business and retirement business in Hong Kong. Details of the principal activities of the Company's subsidiaries are set out in note 11 to the consolidated financial information.

The consolidated financial information is presented in Hong Kong dollars ("HK$ "), which is also the functional currency of the Company and all of its subsidiaries.

2. APPLICATION OF NEW AND AMENDMENTS TO HONG KONG FINANCIAL REPORTING STANDARDS ("HKFRSs")

New and amendments to HKFRSs that are mandatorily effective for the current year

The Group and the Company have applied the following new and amendments to HKFRSs issued by the Hong Kong Institute of Certified Public Accountants ("HKICPA") for the first time in the current year.

HKFRS15

HK(IFRIC)- Int 22

Amend1nents to HKFRS 2

Amendments to HKFRS 4

Amendments to HKAS 28

Amendments to HKAS 40

Revenue fron1 contracts with customers and the related amendments

Foreign currency transactions and advance consideration

Classification and measurement of share-based payment transactions

Applying HKFRS 9 financial instluments with HKFRS 4 insurance contracts

As part of the annual improvements to HKFRSs 2014-2016 cycle

Transfers of investment property

Except for the application of HKFRS 15 and amendments to HKFRS 4 as described below, the application of the new and amendments to HKFRSs in the current year has had no material impact on the Group's financial performance and positions for the current and prior years and/or on the disclosures set out in this consolidated fmancial information.

- 21-

SUN LIFE HONG KONG LIMITED wi~1X ~ ~;~:ff ~~ 0 PJ

2. APPLICATION OF NEW AND AMENDMENTS TO HONG KONG FINANCIAL REPORTING STANDARDS ("HKFRSs")- continued

HKFRS 15 Revenue from Contracts with Customers

The Group and the Company have applied HKFRS 15 for the first time in the current year. HKFRS 15 superseded HKAS 18 revenue, HKAS 11 construction contracts and the related interpretations.

Transition approach

The Group and the Company have applied HKFRS 15 retrospectively with the cumulative effect of initially applying this Standard recognised at the date of initial application, January 1, 2018. Any difference at the date of initial application is recognised in the opening retained profits (or other components of equity, as appropriate) and comparative information has not been restated. Furthermore, in accordance with the transition provisions in HKFRS 15, the Group and the Company have elected to apply the Standard retrospectively only to contracts that are not completed at 1 January, 2018. Accordingly, certain comparative information may not be comparable as comparative information was prepared under HKAS 18 Revenue and HKAS 11 Construction Contracts and the related interpretations.

HKFRS 15 establishes principles about the nature, amount, timing, and uncetiainty of revenue arising from contracts with customers. HKFRS 15 requires entities to recognise revenue to reflect the transfer of goods or services to custmners n1easured at the amounts an entity expects to be entitled to in exchange for those goods or services. Insurance contracts and revenues arising from those contracts, primarily premium revenue, are not within the scope of this standard. Revenues from service contracts and service components of investment contracts (which are treated as service contracts) that are repmied in fee income and primarily arise from our asset management businesses are within the scope of HKFRS 15. HKFRS 15 also provides guidance related to the costs to obtain and to fulfill a contract.

The Group and the Company recognises revenue from the following major sources which arise from contracts with customers:

• Investment contract fees charged for managing investments; • Assets management fee income charged under the asset management agreement; • Trustee service income received for the provision of trustee services related to the

Mandatory Provident Fund ("MPF") schemes and occupational retirement schemes.

There was no material impact of transition to HKFRS 15 on retained earnings at January 1, 2018.

Information about the Group's and the Company's performance obligations and the accounting policies resulting from application ofHKFRS 15 are disclosed in note 3.

-22-

SUN LIFE HONG KONG LIMITED ~~~jj( ~~~:tiff~~ 0 i§j

2. APPLICATION OF NEW AND AMENDMENTS TO HONG KONG FINANCIAL REPORTING STANDARDS ("HKFRSs")- continued

Amendments to HKFRS 4 Applying HKFRS 9 Financial Instruments with HKFRS 4 Insurance Contracts

The amendment provides entities meeting the criteria for engaging in predominantly insurance activities with the option to continue current HKFRS accounting and to defer the application of HKFRS 9 until the earlier of the application of the new insurance standard or periods beginning on or after 1 January 2021. The assessment of predominance had to be made at the reporting entity level and at the annual reporting date immediately preceding April 1, 2016. Thereafter it should not be reassessed, unless there is a significant change in the entity's activities that would trigger a mandatory reassessment.

Separately, the amendment provides all entities with contracts within the scope of HKFRS 4 with an option to apply HKFRS 9 in full but to make adjustments to profit or loss to remove the impact of HKFRS 9, compared with HKAS 3 9, for designated qualifying financial assets. This is referred to as the 'overlay approach' and is available on an asset- by asset basis with specific requirements around designations and de-designations.

The Group and the Company qualified and elected to defer the adoption of HKFRS 9 under the amendments to HKFRS 4 as their activities are predominantly connected with insurance. Consequently, the Group and the Company will continue to apply HKAS 39, the existing financial instrument standard.

To enable a cotnparison to entities applying HKFRS 9, entities that apply the deferral approach are required to disclose fair value and changes in fair value separately for (i) those financial assets that pass the Solely Payment of Principal and Interest ("SPPI") test, excluding any financial asset that is managed and whose performance is evaluated on a fair value basis; and (ii) all other financial assets, including financial assets that are managed and their perfotmance is evaluated on a fair value basis. Financial assets which pass the SPPI test are assets with contractual terms that give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.

A high level review has been performed which indicates that majority of debt securities designated as available-for-sale investments, held-to-maturity investments, loans and receivables and bank balances and cash will meet SPPI criteria, detailed assessment is ongoing as part of the HKFRS 9 and HKFRS 17 implementation work. When making accounting policy choices for implementing HKFRS 17, management will also review which parts of the related asset potifolio will be carried at fair value under HKFRS 9 so as to align the accounting between assets and liabilities. See notes 16 and 30 for disclosures of the carrying value and fair value of financial assets as at December 31,2018 and 2017. Except for debt securities designated as available-for-sale which are measured at fair value, the remaining financial assets are measured at amortised cost.

-23-

SUN LIFE HONG KONG LIMITED :Wi~ 7"k fljj ~;:Rif ~~ 0 P]

2. APPLICATION OF NEW AND AMENDMENTS TO HONG KONG FINANCIAL REPORTING STANDARDS ("HKFRSs")- continued

New or revised standards and interpretations that have been issued but not yet effective

The Group and the Company have not early applied the following new or revised standards and interpretations that have been issued but are not yet effective:

HKFRS 16 HKFRS17 HK(IFRIC) - Int 23 Amendments to HKFRS 3 Amendments to HKFRS 9 Amendments to HKFRS 10

andHKAS 28 Amendments to HKAS 1 and

HKAS8 Amendments to HKAS 19 Amendments to HKAS 28 Amendments to HKFRSs

Leases1

Insurance contracts3

Uncertainty over income tax treatments 1

Definition of a Business4

Prepayment features with negative compensation1

Sale or contribution of assets between an investor and its associate or joint venture2

Definition of material5

Plan amendment, curtailment or settlement1

Long-term interests in associates and joint ventures1

Annual improvements to HKFRSs 2015-2017 cycle1

Effective for annual periods beginning on or after January 1, 2019 Effective for annual periods beginning on or after a date to be determined Effective for annual periods beginning on or after January 1, 2021 Effective for business combinations and asset acquisitions for which the acquisition date is on or after the beginning of the first annual period beginning on or after January 1, 2020 Effective for annual periods beginning on or after January 1, 2020

Other than the application ofHKFRS 16 and HKFRS 17 as described below, the directors anticipate that the application of these new and amendments to HKFRSs will have no material impact on this consolidated financial information.

HKFRS 16 Leases

HKFRS 16 introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees. HKFRS 16 will supersede HKAS 17 Leases and the related interpretations when it becomes effective.

HKFRS 16 distinguishes lease and service contracts on the basis of whether an identified asset is controlled by a customer.

Distinctions of operating leases and finance leases are removed for lessee accounting, and is replaced by a model where a right-of-use asset and a corresponding liability have to be recognised for all leases by lessees, except for short-term leases and leases of low value assets.

The right-of-use asset is initially measured at cost and subsequently measured at cost (subject to certain exceptions) less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications, amongst others.

-24-

SUN LIFE HONG KONG LIMITED w1~71

SUN LIFE HONG KONG LIMITED wmjkEA~;~1f~~0EJ

2. APPLICATION OF NEW AND AMENDMENTS TO HONG KONG FINANCIAL REPORTING STANDARDS ("HKFRSs") -continued

HKFRS 17 Insurance Contracts - continued

An entity is not permitted to include contracts issued more than one year apati in the same group. If contracts within a portfolio would fall into different groups only because law or regulation specifically constrains the entity's practical ability to set a different price or level of benefits for policyholders with different characteristics, the entity may include those contracts in the same group. HKFRS 17 requires entities to establish the groups at initial recognition and prohibits subsequent reassessment of the composition of the groups.

An entity shall recognise a group of insurance contracts it issues from the earliest of the following: (a) the beginning of the coverage period of the group of contracts; (b) the date when the first payment from a policyholder in the group becomes due; and (c) for a group of onerous contracts, when the group becomes onerous.

On initial recognition, an entity measures a group of insurance contracts at the total of the fulfilment cash flows ("FCFs") and the contractual service margin ("CSM"). This may be referred to as the General Measurement Model ("GMM") or the Building Block Approach ("BBA"). The FCFs comprise of:

• Estimates of future cash flows - Only future cash flows within the boundary of each contract in the group are allowed to be included. Cash flows are within the boundary of an insurance contract if they arise frmn substantive rights and obligations that exist during the reporting period in which the entity can cmnpel the policyholder to pay the premiums or in which the entity has a substantive obligation to provide the policyholder with services.

• An adjustment to reflect the time value of money and the financial risks associated with the future cash flows; and

• A risk adjustment for bearing the uncertainty about the amount and timing of the cash flows that arises from non-financial risk.

The CSM represents the unearned profit of the group of insurance contracts that the entity will recognise as it provides services in the future, and is measured on initial recognition of a group of insurance contracts at an amount that, unless the group of contracts is onerous, results in no income or expenses arising at that date.

The Variable Fee Approach ("VF A") is the mandatory measurement model for insurance contracts with direct patiicipating features. They are defined out of three criteria, all of which must be met at initial recognition date: (i) The contractual terms specify that the policyholder participates in a share of a clearly

identified pool of underlying items; (ii) The entity expects to pay to the policyholder an amount equal to a substantial share of the

fair value returns on the underlying items; and (iii) The entity expects a substantial proportion of any change in the amounts to be paid to the

policyholder to vary with the change in fair value of the underlying items.

-26-

SUN LIFE HONG KONG LIMITED ;gf11§ jj( ~ ~PliS! if~[ 0 :p_]

2. APPLICATION OF NEW AND AMENDMENTS TO HONG KONG FINANCIAL REPORTING STANDARDS ("HKFRSs")- continued

HKFRS 17 Insurance Contracts - continued

Under GMM, the net gains and losses that the entity retains from invested premiums are treated as if they were a share of economic returns from the investment portfolio. Under the VFA, however, the returns to the entity arising from participating contracts are viewed as part of the compensation that the entity charges the policyholder for services provided in relation to the insurance contract, rather than as a share of returns from investments held. With the VF A the entity's interest in the investments held is equivalent to a variable fee that the entity charges the policyholder, expressed as a share of returns.

For contracts measured under the VFA, the CSM is adjusted for the following items at the end of each repmiing period: (i) changes in variable fee, (ii) the time value of money, and (iii) the effect of changes in financial risks not arising from underlying items.

For groups of contracts with a coverage period less than one year, or where it is reasonably expected to produce a liability measurement that would not differ tnaterially from the GMM, a simplified Premiutn Allocation Approach (PAA) can be applied. Using the P AA, the liability for remaining coverage shall be initially recognised as the premiums, if any, received at initial recognition, tninus any insurance acquisition cash flows paid.

Presentation and disclosures requirements introduce new insurance income and expense definitions that move away from a premium-based presentation approach and are instead a direct result of the movements in the items from the statement of financial position. For the presentation of finance income or expenses (e.g. the effect of discounting), insurers have an accounting policy choice at portfolio level to disaggregate insurance finance income or expenses for the period between profit or loss and other comprehensive income.

An entity shall disclose qualitative and quantitative information about: (a) the amounts recognised in its financial statements that arise from insurance contracts; (b) the significant judgements, and changes in those judgements, made when applying

HKFRS 17; and (c) the nature and extent of the risks that arise from insurance contracts.

HKFRS 17 is effective for annual periods beginning on or after January 1, 2021, with earlier application permitted if both HKFRS 9 Financial Instruments and HKFRS 15 Revenue from Contracts with Customers have also been applied. An entity shall apply HKFRS 17 retrospectively unless impracticable, in which case entities have the option of using either a modified retrospective approach or the fair value approach.

The directors of the Company anticipate that the new standard will result in an important change to the accounting policies for insurance contracts and is likely to have a material impact on the Group's and the Company's profit and financial position, together with significant changes in presentation and disclosure. The Group has initiated the journey to adopt the new standard and it would be premature to disclose the impact of the new requirements at this stage when the assessment is still in progress.

- 27-

SUN LIFE HONG KONG LIMITED w1l jj( !ljj ~;:t1f ~~ 0 PJ

3. SIGNIFICANT ACCOUNTING POLICIES

Basis of preparation

The consolidated financial information has been prepared in accordance with Hong Kong Financial Reporting Standards issued by the HKICP A. In addition, the consolidated financial information includes the applicable disclosures required by the Ordinance.

The consolidated financial information has been prepared on the historical cost basis, except for certain financial instruments that are measured at fair value and for insurance and reinsurance contracts that are measured using estimates of future cash flows, as explained in the accounting policies set out below.

Historical cost is generally based on the fair value of the consideration given in exchange for goods and services when they are purchased.

Fair value

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market pmiicipants at the measurement date, regardless of whether that price is directly observable or estin1ated using another valuation technique. In estimating the fair value of an asset or a liability, the Group and the Company take into account the characteristics of the asset or liability if 1narket participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial info1mation is dete1mined on such a basis, except for share-based paYJnent transactions that are within the scope of HKFRS 2, leasing transactions that are within the scope of HKAS 1 7, and measurements that have some similarities to fair value but are not fair value, such as value in use in HKAS 36.

A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows:

• Levell inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

• Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and

• Level 3 inputs are unobservable inputs for the asset or liability.

The principal accounting policies are set out below.

-28-

•

SUN LIFE HONG KONG LIMITED ~i~JJ( ~ ~ii9l1=f ~~ 0 i§j

3. SIGNIFICANT ACCOUNTING POLICIES - continued

Basis of consolidation

The consolidated fmancial information incorporates the financial infmmation of the Company and entities (including sttuctured entities) controlled by the Company and its subsidiaries. Control is achieved when the Company:

• has power over the investee; • is exposed, or has rights, to variable returns from its involvement with the investee; and • has the ability to use its power to affect its return.

The Group reassesses whether or not it controls an in vestee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above.

When the Group has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct unilaterally the relevant activities of the in vestee. The Group considers all relevant facts and circumstances in assessing whether or not the Group's voting rights in an investee are sufficient to give it power, including:

• the size of the Group's holding of voting rights relative to the size and dispersion of holdings of the other vote holders;

• potential voting rights held by the Group, other vote holders or other parties; • rights arising from other contractual anangements; and • any additional facts and circumstances that indicate that the Group has, or does not have,

the cunent ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders' meetings.

Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss and other comprehensive income from the date the Group gains control until the date when the Group ceases to control the subsidiary.

Profit or loss and each component of other comprehensive income are attributed to the owners of the Company and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Company and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance.

Where necessary, adjustments are made to the financial information of subsidiaries to bring their accounting policies into line with those used by other members of the Group.

All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation.

-29-

SUN LIFE HONG KONG LIMITED ;gf ~{t jj( lljj ~ ;9! 1f ~~ 0 i§J

3. SIGNIFICANT ACCOUNTING POLICIES -continued

Interest in subsidiaries

Interest in subsidiaries is included in the Company's statement of fmancial position at cost less any identified impairment loss. The results of subsidiaries are accounted for by the Company on the basis of dividends received or receivable.

Investment in an associate

An associate is an entity over which the Group and the Company have significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The results and assets and liabilities of the associate are incorporated in these consolidated financial statements using the equity method of accounting. Under the equity method, an investment in an associate is initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group's and the Company's share of the profit or loss and other comprehensive income of the associate. Changes in net assets of the associate other than profit or loss and other comprehensive income are not accounted for unless such changes result in changes in ownership interest held by the Group and the Company. When the Group's and the Company's share of losses of an associate exceeds the Group's and the Company's interest in that associate, the Group and the Cotnpany discontinues recognising the Group's and the Cmnpany's share of further losses. Additional losses are recognised only to the extent that the Group and the Company have incurred legal or constiuctive obligations or n1ade paytnents on behalf of the associate.

Goodwill

Goodwill arising on an acquisition of a subsidiary is carried at cost less accumulated impairment losses, if any, and is presented separately in the consolidated statement of financial position.

For the purposes of impaiiment testing, goodwill arising from an acquisition is allocated to each of the relevant cash-generating units, or groups of cash-generating units, that are expected to benefit from the synergies of the acquisition, which represent the lowest level at which the goodwill is monitored for internal management purposes and not larger than an operating segment. A cash-generating unit, or groups of cash-generating units, to which goodwill has been allocated is tested for impairment annually or more frequently when there is an indication that the unit may be impaired. For goodwill arising on an acquisition in a reporting period, the cash-generating unit, or groups of cash-generating units, to which goodwill has been allocated is tested for impairment before the end of that reporting period. When the recoverable amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated to reduce the carrying amount of any goodwill allocated to the unit first, and then to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in the consolidated statement of profit or loss. An impairment loss for goodwill is not reversed in subsequent periods.

On disposal of a subsidiary, the attributable amount of goodwill capitalised is included in the determination of the amount of profit or loss on disposal.

- 30-

•

SUN LIFE HONG KONG LIMITED ~1~jj( ~ ~~9!1r ~~ 0 PJ

3. SIGNIFICANT ACCOUNTING POLICIES -continued

Revenue recognition

Gross written premiums from insurance contracts and investment contracts with discretionary patticipating features ("DPF") are recognised in the consolidated statement of profit or loss when these contracts are written and the risk is accepted. Reinsurance premiums ceded from reinsurance contracts held are accounted for in the same accounting year as the written premiums for the insurance contracts to which they relate.

Interest income from a financial asset is recognised when it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably. Interest income is recognised using the effective interest method which is described in more detail below.

Dividend income from investments is recognised when the Group's and the Company's rights to receive payment have been established.

Realised gains or losses on disposal of investments in securities are recognised on a trade date basis.

Revenue from contracts with customers (upon application of HKFRS 15 in accordance with transitions in note 2, applicable from January 1, 2018)

Under HKFRS 15, the Group and the Company recognise revenue when (or as) a performance obligation is satisfied, i.e. when "control" of the goods or services underlying the particular performance obligation is transferred to the customer.

The core principle of HKFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Specifically, the Standard introduces a 5-step approach to revenue recognition:

• Step 1: Identify the contract( s) with a customer • Step 2: Identify the performance obligations in the contract • Step 3: Determine the transaction price • Step 4: Allocate the transaction price to the performance obligations in the contract • Step 5: Recognise revenue when (or as) the entity satisfies a performance obligation

A performance obligation represents a good or service (or a bundle of goods or services) that is distinct or a series of distinct goods or services that are substantially the same.

Control is transferred over time and revenue is recognised over time by reference to the progress towards complete satisfaction of the relevant performance obligation if one of the following criteria is met:

• the customer simultaneously receives and consumes the benefits provided by the Group's and the Company's performance as the Group and the Company perform;

• the Group's and the Company's performance create and enhances an asset that the customer controls as the Group and the Company perform; or

• the Group's and the Company's performance do not create an asset with an alternative use to the Group and the Company, and the Group and the Company have an enforceable right to payment for performance completed to date.

- 31 -

SUN LIFE HONG KONG LIMITED w~i1X ~ ~~~ff ~~ 0 PJ

3. SIGNIFICANT ACCOUNTING POLICIES- continued

Revenue recognition - continued

•

Revenue from contracts with customers (upon application of HKFRS 15 in accordance with transitions in note 2, applicable from January 1, 2018)- continued

Otherwise, revenue is recognised at a point in time when the customer obtains control of the distinct good or service.

A contract asset represents the Group's and the Company's right to consideration in exchange for goods or services that the Group and the Company have transferred to a customer that is not yet unconditional. It is assessed for impairment in accordance with HKFRS 15. In contrast, a receivable represents the Group's and the Company's unconditional right to consideration, i.e. only the passage of time is required before payment of that consideration is due.

A contract liability represents the Group's and the Company's obligation to transfer goods or services to a custmner for which the Group and the Company have received consideration (or an amount of consideration is due) from the customer.

A contract asset and a contract liability relating to the same contract are accounted for and presented on a net basis.

Investment contract fees charged for 1nanaging investn1ents are recognised as revenue as the services are provided. Given these services are rendered uniformly over tilne and are directly proportionate to the mnount of assets under managetnent the revenue is recognised as a stable percentage of assets under 1nanagen1ent over the period. The Group and the Company provide these services for investment contracts without DPF which combine a financial instrument and an investment management service obligation and for MPF contracts which are pure investment management service contracts.

Trustee fee income is recognised at a certain percentage of the daily net asset values of the funds for which the Group acts as a trustee.

Asset management fee income is generally recognised at a certain percentage of the adjusted daily net asset values of the funds under management.

Revenue recognition (prior to January 1, 2018)

Revenue is measured at the fair value of consideration received or receivable and represents amounts receivable for services provided in the normal course of business.

Revenue is recognised when the amount of revenue can be reliably measured, when it is probable that future economic benefits will flow to the Group and the Company and when specific criteria have been met for each of the Group's and the Company's activities, as described below.

- 32-

•

SUN LIFE HONG KONG LIMITED wil11< ~ ~;9!~ ~~ 0 :pj

3. SIGNIFICANT ACCOUNTING POLICIES -continued

Revenue recognition (prior to January 1, 2018) - continued

Investment contract fees charged for managing investments are recognised as revenue as the services are provided. Given these services are rendered uniformly over time and are directly proportionate to the amount of assets under management the revenue is recognised as a stable percentage of assets under management over the period. The Group and the Company provide these services for investment contracts without DPF which combine a fmancial instrument and an investment management service obligation and for Mandatory Provident Fund ("MPF") contracts which are pure investment management service contracts.

Plant and equipment

Plant and equipment are stated at cost less subsequent accumulated depreciation and accumulated impairment losses, if any.

Depreciation is provided to write off the cost of items of plant and equipment over their estimated useful lives and after taking into account their estimated residual value, using the straight-line method. The estimated useful lives, residual values and depreciation method are reviewed at the end of each reporting period, with the effect of any changes in estimate accounted for on a prospective basis.

An iten1 of plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the canying amount of the item) is included in the consolidated statement of profit or loss in the year in which the item is derecognised.

Intangible assets

Intangible assets acquired in a business combination

Intangible assets acquired in a business combination are identified and recognised separately from goodwill when they satisfy the definition of an intangible asset and their fair values can be measured reliably. The cost of such intangible assets is their fair value at the acquisition date. Subsequent to initial recognition, intangible assets with finite useful lives are canied at cost less accumulated amortisation and any accumulated impairment losses, if any.

- 33-

SUN LIFE HONG KONG LIMITED j:1~Uk~~~~1f~~0PJ

3. SIGNIFICANT ACCOUNTING POLICIES -continued

Intangible assets - continued

Internally-generated intangible assets - research and development expenditure

Expenditure on research activities is recognised as an expense in the period in which it is incurred.

An internally-generated intangible asset arising from development activities (or from the development phase of an internal project) is recognised if, and only if, all of the following have been demonstrated:

• the technical feasibility of completing the intangible asset so that it will be available for use or sale;

• the intention to complete the intangible asset and use or sell it; • the ability to use or sell the intangible asset; • how the intangible asset will generate probable future economic benefits; • the availability of adequate technical, fmancial and other resources to complete the

development and to use or sell the intangible asset; and • the ability to measure reliably the expenditure attributable to the intangible asset during its

development.

The amount initially recognised for internally-generated intangible asset is the sum of the expenditure incurred from the date when the intangible asset first meets the recognition criteria listed above. Where no inte1nally-generated intangible asset can be recognised, development expenditure is recognised in profit or loss in the period in which it is incurred.

Subsequent to initial recognition, inte1nally-generated intangible assets are repmied at cost less accumulated amortisation and accumulated imp ailment losses (if any), on the same basis as intangible assets that are acquired separately.

Value of Business Acquired ("VOBA ")

The fair value of acquired portfolios of insurance contracts in a business combination or in a portfolio transfer is determined by adjusting the acquired liabilities' carrying amount by what a market participant would expect to be the present value of the future profits after cost of the required capital that would derive from the acquired contracts. The accounting for the acquired portfolio of insurance contracts is split into a liability accounted for under the Group's and the Company's accounting policies for insurance contracts and an intangible asset called Value of Business Acquired ("VOBA") that represents the adjustment to take the carrying amount of the acquired contracts to their fair value at the acquisition date. Subsequently, VOBA is ammiised through profit or loss in line with the subsequent measurement of the related insurance liability. VOBA is tested for recoverability in the context of the liability adequacy test for insurance contracts where the VOBA intangible asset is deducted from the insurance contracts' liabilities to determine the net carrying amount which is then compared with the current estimates of future cash flows expected to be realised from the portfolio (see the accounting policy on insurance contracts).

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SUN LIFE HONG KONG LIJ\1ITED

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3. SIGNIFICANT ACCOUNTING POLICIES -continued

Intangible assets - continued

Deferred Origination Costs ("DOC") (upon application of HKFRS 15 in accordance with transition, applicable from January 1, 2018)

Incremental costs of obtaining a contract

Origination costs are the incremental costs which are directly attributable to securing an investn1ent management contract. The MPF contracts and the contracts that involve the provision of investment management services have DOC assets within the scope of HKFRS 15. The origination costs include commissions, and other incremental costs that are directly attributable to securing an investment management contract. An incremental cost is one that would not have been incurred if the entity had not secured the investment management contract. Origination costs on contracts with investment management services are deferred for two portfolios of contracts as set out in Note 14.

The Group and the Company recognise such costs (sales commissions and other distribution costs) as an asset if the Group and the Company expect to recover these costs and those costs are essential to incur in order to obtain a contract with customer. The recognised asset is subsequently amotiised to profit or loss in line with the revenue recognition from the provision of investment tnanagement services over time.

DOC (prior to January 1, 2018)

Origination costs are the incremental costs which are directly attributable to securing an investment management contract. The contracts that involve the provision of investment management services are the investment contracts within the scope ofHKAS 39 and MPF contracts. The origination costs include commissions, and other incremental costs that are directly attributable to securing an investment managen1ent contract. An incremental cost is one that would not have been incurred if the entity had not secured the investment management contract. Origination costs on contracts with investment management services are deferred for two portfolios of contracts. The first portfolio relates to the investment management service component from the issue of investment contracts under HKAS 39 for which a DOC has been recognised under the requirement ofHKAS 18 to account for DOC. A second portfolio is related to the MPF contracts. Origination costs are recognised as an asset if they can be identified separately and measured reliably and if it is probable that they will be recovered from the revenue expected by the relevant potifolio of contracts. This asset is called DOC and it represents the contractual right the Group and the Company have acquired to benefit from providing investment services, and is amortised through profit or loss as the services are provided. At each reporting date the Group and the Company assess the recoverability of DOC at the level of the portfolios of investment management contracts by testing that the net present value of expected future investment management service revenues less associated future senrice costs are higher tha..ll the canying amount ofunamortised DOC. The accounting for any impairment losses detetmined from this test and their possible subsequent reversal follows the same accounting policy on impairment of the Group's and the Company's other intangible assets which is described below.

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3. SIGNIFICANT ACCOUNTING POLICIES - continued

Impairment of non-financial assets other than goodwill (see the accounting policy in respect of goodwill above)

At the end of the reporting period, the Group and the Company review the carrying amounts of non-financial assets with finite useful lives to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss, if any. If the recoverable amount of an asset is estimated to be less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. An impairment loss is recognised immediately in profit or loss.

Where an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, such that the increased carrying amount does not exceed the canying amount that would have been determined had no impairment loss been recognised for the asset in prior years. A reversal of an impairment loss is recognised as income immediately.

Financial instruments

Financial assets and financial liabilities are recognised in the consolidated and Company's statements of financial position when a group entity becomes a patiy to the contractual provisions of the instrument.

Financial assets and financial liabilities are initially 1neasured at fair value. Transaction costs that are directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets or financial liabilities at fair value tlu-ough profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognised immediately in profit or loss.

Financial assets

The Group's and the Company's financial assets are classified into one of four categories including financial assets at fair value through profit or loss ("FVTPL"), loans and receivables, held-to-maturity investments and AFS financial assets. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. All regular way purchases or sales of financial assets are recognised and derecognised on a trade date basis. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace.

Effective interest method

The effective interest method is a method of calculating the ammiised cost of a debt instrument and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees and points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or where appropriate, a shorter period to the net carrying amount on initial recognition.

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SUN LIFE HONG KONG LIMITED ~1{t 1X ~Jl~~:Rir ~~ 0 i5J

3. SIGNIFICANT ACCOUNTING POLICIES -continued

Financial instruments- continued

Financial assets - continued

Financial assets at FVTPL

Financial assets are classified as FVTPL when the fmancial asset is either held for trading or it is designated at FVTPL.

A financial asset is classified as held for trading if:

• it has been acquired principally for the purpose of selling it in the near term; or • on initial recognition it is a part of a pmifolio of identified financial instruments that the

Group and the Company manage together and has a recent actual pattern of short-te1m profit-taking; or

• it is a derivative that is not designated and effective as a hedging instrument.

A financial asset other than a financial asset held for trading may be designated as FVTPL upon initial recognition if:

• such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or

• the financial asset fmms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group's and the Cmnpany's documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or

• it forms part of a contract containing one or more embedded derivatives, and HKAS 3 9 "Financial instluments: Recognition and measurement" permits the entire combined contract (asset or liability) to be designated as FVTPL.

Financial assets at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss excludes any dividend or interest earned on the financial assets.

Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Subsequent to initial recognition, loans and receivables (including investments in debt securities, loans receivable, amounts due from fellow subsidiaries, other debtors, deposits, amount due from a subsidiary, and bank balances and cash) are measured at ammiised cost using the effective interest method, less any impairment losses (see accounting policy on impairment of financial assets below).

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3. SIGNIFICANT ACCOUNTING POLICIES - continued

Financial instruments - continued

Financial assets - continued

Held-to-maturity investnzents

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity dates that the Group's and the Company's management has the positive intention and ability to hold to maturity. Subsequent to initial recognition, held-to-maturity investments are measured at amortised cost using the effective interest method, less any identified impairment losses (see accounting policy on impairment of financial assets below).

AFS financial assets

AFS financial assets are non-derivative, financial assets that are either designated as AFS or are not classified as any of the other categories. Equity and debt securities held by the Group and the Company that are classified as AFS financial assets and are traded in an active market are measured at fair value at the end of each reporting period. Changes in the carrying amount of AFS financial assets relating to interest income calculated using the effective interest method and dividends on AFS equity investments are recognised in profit or loss. Dividends on AFS equity instruments are recognised in profit or loss when the Group's and the Company's rights to receive the dividends is established. Other changes in the carrying atnount of AFS financial assets are recognised in other comprehensive incon1e and accumulated in investn1ent revaluation reserve. When the investment is disposed of or is detennined to be impaired, the cu1nulative gain or loss previously accumulated in the investment revaluation reserve is reclassified to profit or loss (see the accounting policy in respect of impainnent of financial assets below). Dividends on AFS equity instruments are recognised in profit or loss when the Group's and the Company's rights to receive the dividends are established.

Impairment of financial assets

Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial assets, the estimated future cash flows of the fmancial assets have been affected.

For an AFS equity investment, a significant or prolonged decline in the fair value of that investment below its cost is considered to be objective evidence of in1pairment.

For all other financial assets, objective evidence of impairment could include:

• significant financial difficulty of the issuer or counterparty; or • breach of contract, such as default or delinquency in interest or principal payments; or • it becoming probable that the borrower will enter bankruptcy or financial re-organisation;

or • disappearance of an active market for that financial asset because of financial difficulties.

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3. SIGNIFICANT ACCOUNTING POLICIES - continued

Financial instruments - continued

Financial assets- continued

Impairment of financial assets - continued

For financial assets canied at amortised cost, the amount of the impailment loss recognised is the difference between the asset's canying amount and the present value of the estimated future cash flows discounted at the financial asset's original effective interest rate.

The canying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of loans receivable, where the canying amounts are reduced through the use of an allowance account. Changes in the canying amount of the allowance account are recognised in profit or loss. When a loan receivable is considered uncollectible, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited to profit or loss.

When an AFS financial asset is considered to be ilnpaired, cumulative gains or losses previously recognised in other comprehensive income are reclassified to profit or loss in the period in which the ilnpairment takes place.

For financial assets measured at amortised cost, if, in a subsequent period, the amount of impairment loss decreases and the decrease can be related objectively to an event occuning after the impairment loss was recognised, the previously recognised impairment loss is reversed through profit or loss to the extent that the carrying amount of the asset at the date the impainnent is reversed does not exceed what the amortised cost would have been had the impairment not been recognised.

In respect of AFS equity investments, impairment losses previously recognised in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impailment loss is recognised in other comprehensive income and accumulated in the investment revaluation reserve. In respect of AFS debt investments, impairment losses are subsequently reversed through profit or loss if an increase in the fair value of the investment can be objectively related to an event occuning after the recognition of the impairment loss.

Financial liabilities and equity instruments

Debt and equity instruments issued by the Group and the Company are classified as either financial liabilities or as equity in accordance with the substance of the contractual anangements and the definitions of a financial liability and an equity instrument.

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Company are recognised at the proceeds received, net of direct issue costs.

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SUN LIFE HONG KONG LIMITED w~l 1X ~ ~;911r ~~ 0 i1J

3. SIGNIFICANT ACCOUNTING POLICIES - continued

Financial instruments- continued

Financial liabilities and equity instruments - continued

Other financial liabilities

Other financial liabilities, including amounts due to immediate holding company/fellow subsidiaries, other creditors and subordinated loan are subsequently measured at amortised cost, using