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

KEYPORT LIFE INSURANCE COMPANY

(Exact name of registrant as specified in its charter)

(781) 237-6030

(Registrant's telephone number, including area code)

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.

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [x]

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

Registrant has 2,411,986 shares of common stock, $1.25 par value, outstanding as of November 14, 2003, all of which are owned by Sun Life of Canada (U.S.) Holdings, Inc.

2

(in thousands)

3

(in thousands)

Unaudited

4

Unaudited

5

Unaudited

6

(in thousands)

Unaudited

7

The accompanying unaudited consolidated financial statements of Keyport Life Insurance Company ("the Company") includes all adjustments, consisting of normal recurring accruals that management considers necessary for a fair presentation of the Company's financial position as of September 30, 2003 and December 31, 2002 and the related consolidated statements of operations, comprehensive income, stockholders' equity and cash flows for the three and nine months ended September 30, 2003 and 2002, respectively. Certain footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company's 2002 Form 10-K. Th e results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year.

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. Actual results could differ from those estimates. The most significant estimates are those used in determining deferred policy acquisition costs ("DAC"), value of business acquired ("VOBA"), investment valuations and the liabilities for future policyholder benefits.

Certain amounts in the prior years' financial statements have been reclassified to conform to the 2003 presentation. The net expense on interest rate swap agreements has been recorded as a component of derivative income (previously reported as a component of net investment income). The amortization expense of DAC and VOBA pertaining to realized investment gains (loss), derivative losses, and unrealized and undistributed gains (losses) in private equity limited partnerships has been recorded as a component of amortization of DAC and VOBA, respectively (previously the amortization was reported net with the respective income statement caption).

On December 31, 2002, the Company exchanged its 100% ownership interest in Keyport Benefit Life Insurance Company ("KBL") for a 67% interest in Sun Life Insurance and Annuity Company of New York ("SLNY"), when KBL merged with and into SLNY. SLNY and the Company are under common control. GAAP requires that the financial statements reflect such transaction to the earliest year presented or to the date the entities came under common control (November 1, 2001). Accordingly, the accompanying financial statements of the Company reflect the inclusion of SLNY in a manner similar to a pooling of interest. Minority interest has been established for a portion of the earnings not attributable to Keyport's 67% ownership. Prior year's financial statements have been restated to reflect this transaction. The inclusion of SLNY resulted in additional losses of $(2.2) million and $(1.2) million for the three and nine months ended September 30, 2002, respectively.

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In May 2003, the FASB issued SFAS No.150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 requires certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity to be classified as liabilities. SFAS No. 150 is effective July 1, 2003 for the Company. The adoption of SFAS No. 150 did not have a material effect on the Company's financial position or results of operations.

On March 14, 2003, the American Institute of Certified Public Accountants ("AICPA") issued a proposed Statement of Position ("SOP"), "Accounting by Insurance Enterprises for Deferred Acquisition Costs on Internal Replacements Other Than Those Specifically Described in FASB Statement No. 97." This proposed SOP provides guidance on accounting by insurance companies for DAC on internal replacements other than those specifically described in SFAS No. 97. This proposed SOP is expected to be effective for fiscal years beginning after December 15, 2004. The Company is in the process of evaluating the provisions of this proposed SOP and its impact on the Company's financial position and results of operations.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No. 46"), to improve financial reporting by enterprises involved with variable interest entities. FIN No. 46 states that if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities, and results of the activities of the variable interest entity should be included in consolidated financial statements with those of the business enterprise. In October of 2003, the FASB postponed the implementation of FIN No. 46 until the fourth quarter of 2003. The Company will adopt FIN. No. 46 as required during the fourth quarter of 2003. Although the Company is still evaluating the effect of FIN No. 46, it is reasonably possible that FIN No. 46 may require consolidation of the entities described below.

The Company may be required to consolidate Structured Enhanced Return Vehicle Trust Series ("SERVES") 1999-1 and

2000-2 based on its investments in certain floating rate notes and certificates of the SERVES. As of September 30, 2003, the assets and liabilities of these two entities were approximately $94.0 million and $101.1 million, respectively. The Company's maximum exposure to loss as a result of these investments is the carrying value of such investments, approximately $54.6 million at September 30, 2003.

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All derivatives are recognized on the balance sheet at fair value. Net interest received or paid on swap agreements and changes in the fair value of derivatives are reported in current period operations as a component of derivative 1osses. The Company believes that these derivatives provide economic hedges but the cost of formally documenting the effectiveness of the fair value of the hedged assets in accordance with the provisions of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is not justified.

The Company issues equity-indexed annuity contracts that contain a derivative instrument that is "embedded" in the contract. Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract) and is carried at fair value. The embedded derivative is included as a component of policy liabilities in the accompanying balance sheet.

The Company purchases call options and futures on the S&P 500 Index to economically hedge its obligation under the annuity contracts to provide returns based upon this index. The call options are carried at fair value and included in other invested assets in the accompanying balance sheet. In addition, the Company utilizes total return swap agreements to hedge certain other contract obligations.

As a component of its investment strategy and to reduce its exposure to interest rate risk, the Company utilizes interest rate swap agreements. Interest rate swap agreements are agreements to exchange with a counterparty interest rate payments of differing character (e.g., fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The fair value of swap agreements are included with other invested assets (positive position) or other liabilities (negative position) in the accompanying balance sheet.

Net derivative gains (losses) consisted of the following (in 000's):

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Private limited partnerships ("partnerships"), which are included in other invested assets, are accounted for on either the cost method or equity method. The equity method of accounting is used for all partnerships in which the Company has an ownership interest in excess of 3%. Investments in partnerships amounted to $438.8 million and $461.3 million at September 30, 2003 and December 31, 2002, respectively.

The equity income of private limited partnerships is accounted for using the equity method and represents primarily increases or decreases in the fair value of the underlying investments of the private equity limited partnerships for which the Company had ownership interests in excess of 3%. For the three months ended September 30, 2003 and 2002, the equity income of partnerships was $0.3 million and $14.4 million, respectively. For the nine months ended September 30, 2003 and 2002, the (loss) income of partnerships was $(8.8) million and $2.7 million, respectively. The financial information for these investments is obtained directly from the partnerships on a periodic basis. There can be no assurance that any unrealized and undistributed gains will ultimately be realized or that the Company will not incur losses in the future on such investments.

On September 25, 2003, the Company sold commercial mortgage loans in a securitization transaction. The mortgages were sold to a Qualifed Special Purpose Entity ("SPE") which was established for the purpose of purchasing the assets and issuing trust certificates. The Company retained investment tranches in connection with this transaction. The investors in the securitization trust have no recourse to the Company's other assets in the event that the trust certificates are not paid when due. The value of the Company's retained interest is subject to credit and interest rate risks associated with the transferred financial assets. The Company recognized a pre tax gain of $2.0 million on this transaction.

Key economic assumptions used in measuring the retained interest resulting from the securitization on September 25, 2003 were as follows:

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Effective January 1, 2002, Sun Life Assurance Company of Canada (U.S.) ("SLUS"), an affiliate of the Company, became the employer of record for most United States affiliates of Sun Life Financial Inc. ("SLF") (formerly known as Sun Life Financial Services of Canada, Inc.). In accordance with an administrative services agreement between and among SLUS, Sun Life Assurance Company of Canada ("SLOC") and the Company, SLUS allocates operating expenses back to the Company. These expenses include general and administrative expenses, corporate overhead, such as executive and legal support, employee benefits, and investment management services.

For the three-month periods ended September 30, 2003 and 2002, the Company reimbursed SLUS for expenses incurred on its behalf in the amount of $8.9 million and $12.3 million, respectively. For the nine-month periods ended September 30, 2003 and 2002, the Company reimbursed SLUS for expenses incurred on its behalf in the amount of $27.0 million and $37.7 million, respectively. Management believes inter-company 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.

On May 29, 2002, the Company purchased from SLUS a $100 million note issued by Massachusetts Financial Services Company, an affiliate, for $107 million. In the first quarter of 2003, the note was sold to another affiliate, Sun Life (Hungary) Group Financing Limited Liability Company ("Sun Life (Hungary)"). The Company realized a gain of $3.3 million on the sale.

On July 25, 2002, the Company issued a $380 million promissory note at 5.76% to Sun Life (Hungary), which matures on June 30, 2012. The Company pays interest on this note semi-annually on December 31 and June 30. The proceeds of the note were used to purchase fixed rate corporate and government bonds. This note is included in other liabilities and the associated interest expense is included in other operating expenses. Interest expense amounted to $5.4 million and $4.1 million for the three months ended September 30, 2003 and 2002, respectively and $16.4 million and $4.1 million nine months ended September 30, 2003 and 2002, respectively.

On December 31, 2002, KBL, then a wholly owned subsidiary of the Company, merged with and into SLNY, an affiliate. Keyport and its subsidiaries, including KBL, were purchased on October 31, 2001 by Sun Life of Canada (U.S.) Holdings, Inc., an upstream parent of SLNY. On December 31, 2002, prior to the completion of the merger, the Company contributed capital in the amount of $30.15 million to KBL and SLUS, the parent of SLNY, contributed capital totaling $14.85 million to SLNY. These contributions were approved by the respective boards of directors in anticipation of the merger transaction. As a result of the merger, SLUS continued to hold 2,000 shares of SLNY's common stock; however, the par value of the common stock was converted to $350 per share. In exchange for its investment in KBL, SLNY issued the Company 4,001 shares of its $350 par value common stock. As a result of the share issuance and changes in par value, SLUS ownership percentage of SLNY became 33%, with the Company ho lding the remaining 67%.

At September 30, 2003, the Company has unfunded mortgage loan and private limited partnership commitments of $105.8 million and $118.3 million, respectively.

In the normal course of its business, the Company has entered into agreements that include indemnities in favor of the third parties, such as engagement letters with advisors and consultants, outsourcing agreements, underwriting and agency agreements, information technology agreements, distribution agreements and service agreements. The Company has also agreed to indemnify its directors and certain of its officers and employees in accordance with the Company's by-laws. Due to the nature of these indemnification agreements, it is not possible to estimate the Company's potential liability.

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Goodwill represents the difference between the purchase price paid and the fair value of the net assets acquired in connection with the acquisition of the Company. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," goodwill is tested for impairment on an annual basis. The Company completed the required impairment tests of goodwill and indefinite-lived intangible assets during the second quarter of 2003 and concluded that these assets are not impaired. The Company used the actuarial appraisal method, with assumptions and discount rates reflective of current market conditions, and determined on that basis that the fair value of the Company was at least equal to the carrying value. The Company also compared the results of that valuation to a range of values based on historical multiples, and found them to be consistent with the results of the actuarial appraisal method.

On April 2, 2003, the Company and its affiliate, SLUS, filed a Form D (Prior Notice of a Transaction) with the Division of Insurance, Department of Business Regulation of Rhode Island. On April 3, 2003, the Company and SLUS filed similar documents with the Delaware Department of Insurance. Both filings seek regulatory approval for a contemplated merger of the Company with and into SLUS. The Company and SLUS are both direct wholly-owned subsidiaries of Sun Life of Canada (U.S.) Holdings, Inc. and indirect wholly-owned subsidiaries of SLF. The boards of directors of both the Company and SLUS voted to approve the merger at their meetings on April 24, 2003. Regulatory approval from the States of Rhode Island and Delaware was received on June 11, 2003 and July 21, 2003, respectively. The management of both companies currently anticipate completing the merger as planned on December 31, 2003.

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This discussion includes forward-looking statements by Keyport Life Insurance Company ("the Company") under the Private Securities Litigation Reform Act of 1995. These statements are not matters of historical fact; they relate to such topics as future product sales, volume growth, market share, market risk, interest rates and financial goals. It is important to understand that these forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those that the statements anticipate. These risks and uncertainties may concern, among other things:

On December 31, 2002, the Company exchanged its 100% ownership interest in Keyport Benefit Life Insurance Company ("KBL") for a 67% interest in Sun Life Insurance and Annuity Company of New York ("SLNY"), when KBL merged with and into SLNY. SLNY and the Company are under common control. Accounting principles generally accepted in the United States ("GAAP") require that the financial statements reflect such transaction to the earliest year presented or to the date the entities came under common control (November 1, 2001). Accordingly, the accompanying financial statements of the Company reflect the inclusion of SLNY in a manner similar to a pooling of interest. Minority interest has been established for a portion of the earnings (loss) not attributable to Keyport's 67% ownership. Prior year's financial statements have been restated to reflect this transaction. The inclusion of SLNY with the results of the Company resulted in additional losses of $(2.2) mil lion and $(1.2) million for the three and nine months ended September 30, 2002, respectively.

The Company's discussion and analysis of its financial position and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company believes that of its significant accounting policies, the following may involve a higher degree of judgment and complexity.

All derivatives are recognized on the balance sheet at fair value. Changes in the fair value of derivatives are reported in current period operations as a component of derivative losses. The Company believes that these derivatives provide economic hedges and the cost of formally documenting the effectiveness of the fair value of the hedged assets in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities," is not justified.

The Company issues equity-indexed annuity contracts that contain a derivative instrument that is "embedded" in the contract. Upon issuing the contract, the embedded derivative is separated from the host contract (annuity contract) and is carried at fair value.

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Fair values are based upon either dealer price quotations or are derived from pricing models that consider current market and contractual prices for the underlying financial instrument, as well as time value and yield curve or volatility factors underlying the positions. Pricing models and their underlying assumptions impact the amount and timing of unrealized gains and losses recognized. Changes in the fixed income and equity markets will affect the Company's estimate of fair value in the future, which will affect reported derivative income.

The value of business acquired ("VOBA") represents the actuarially-determined present value of projected future gross profits from policies in force at the date of their acquisition. This amount is amortized in proportion to the projected emergence of profits.

VOBA is also adjusted for amounts relating to the recognition of unrealized investment gains and losses. This adjustment, net of tax, is included with the change in net unrealized investment gains or losses that is credited or charged directly to accumulated other comprehensive income (loss).

During the third quarter of 2003, the Company revised its gross profit estimates resulting in reduced VOBA amortization of $3.1 million for the three-month and nine-month periods ended September 30, 2003.

DAC relates to the costs of acquiring new business, which varies with, and is primarily related to, the production of new annuity business. Such acquisition costs include commissions, costs of policy issuance, and underwriting and selling expenses. These costs are deferred and amortized with interest in relation to the present value of estimated gross profits from mortality, investment spread and expense margins. This amortization is reviewed periodically and adjusted retrospectively when the Company revises its estimate of current or future gross profits to be realized, including realized and unrealized gains and losses from investments.

DAC is adjusted for amounts relating to unrealized gains and losses on available for sale fixed-maturity securities. This adjustment, net of tax, is included with the change in net unrealized investment gains or losses that is credited or charged directly to accumulated other comprehensive income (loss).

Although realization of DAC is not assured, the Company believes it is more likely than not that all of these costs will be realized. The amount of DAC con