Sun Life Financial Inc (SLF) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Life Financial second quarter 2007 results conference call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference call is being recorded on Tuesday, July 31, 2007 at 11:00am EST. I'll now turn the conference over to Paul Petrelli, AVP Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. I'd like to start by introducing the members of the management team present for todays call. Hosting the call we have Don Stewart, Chief Executive Officer of Sun Life Financial, Rick McKenney, Executive Vice President and Chief Financial Officer, and Bob Salipante, President Sun Life Financial US, who will provide an update on US insurance operations. Also available to answer questions are Kevin Dougherty, President Sun Life Financial Canada, Rob Manning, President and CEO of MFS, Jim Anderson, Executive Vice President and Chief Investment Officer, Bob Wilson, Senior Vice President and Chief Actuary, and Nigel Hodges, Senior Vice President Finance.. As many of you know, while the primary purpose of our call today is to update equity analysts and investors on our results and answer their questions, our audience also includes, media, industry peers, rating agencies, our regulators, our employees, and our distributors, and we welcome them. The slides to which the speakers will be referring are available on the Sun Life financial website. Turning to slide two, I draw your attention to the cautionary language regarding forward-looking statements, which form part of this mornings remarks. This slide reviews the reasons why forward-looking statements could be rendered inaccurate by subsequent events. And with that, I will turn things over to Don.

Thank you Paul. We are pleased to report a very solid second quarter delivering record earnings and increased ROE. Fully diluted operating earnings per share of a $1.03, were up an impressive 17%. And operating return on equity was up 100 basis points compared to one year ago, reaching 14.6%. We have consistently delivered strong earnings growth which, when combined with effective capital management, has grown our ROE over 400 basis points since 2003 just as we've laid out in our plans. The Sun Life board has approved a dividend increase to $0.34 per share. This will bring our overall 2007 dividend per share to a level which represents an average increase of 19% per annum over the past five years, underpinning our ability to deliver sustainable earnings growth. In additional to robust earnings growth for the quarter, we also continued to deliver on other key elements of our enterprise strategy, that is to diversify our earnings platform and expand our global distribution.

Before turning to the specific highlights of the quarter, I'll make some contextual observations. First it's relevant to recall that the underwriting of lifetime financial security products is a business with intrinsic fluctuations. Several of the experience components follow well known statistical distribution patterns with quantifiable standard deviations which fluctuate around the mean in both directions. I'm delighted to report a preponderance of positive experiences for Q2, 2007. The results of this positive experience were entirely consistent with out disclosure on interest and market sensitivities in our MD&A. In addition to fundamental variation and experience, some accounting measurement systems result in increased reported volatility. Following the move to new Canadian accounting standards, effective January 1, 2007, we are reporting higher swings in several of the overall metrics for Q2 and for Q1. This aspect of the quarter merely reflects the impact of the new rules under more volatile economic conditions. My final contextual observation is on the future outlook for economic conditions. Sun Life's sophisticated enterprise risk management capabilities position us well with respect to potential future adverse experience. However, future economic events seldom arrive in predictable fashion, as we regularly note in our forward-looking statement observations.

I'll now return to our business performance over the second quarter. I will not be referring to any of our websites. I begin with highlighting our year to date sales growth for the United States and Canadian wealth accumulation products. Our success has been drive by Sun Life's growing variable (inaudible) wholesaling force in the United States and the powerful partnership between Sun Life and CI Financial in Canada. Our distribution strength is complemented by a customer focused lineup of wealth accumulation products, led in the United States by income on demand, the industry's first ever income storage benefit. Income on demand provides retirees with more flexibility in their annuity income. In Canada, the SunWise Elite Plus guaranteed minimum withdrawl benefit rider, also expands the ability of retirees to safeguard income. As a result of our variable annuity enhanced distribution capabilities and product innovation we saw an increase in gross sales of 96% in the quarter over second quarter 2006, to exceed $800 million. This drove our overall US variability annuity business into positive flows for the second quarter of 2007 and total variable annuity account values to a record $22 billion US dollars. At the same time, our Canadian individual segregated fund sales, including deposits under the SunWise Elite Plus guaranteed minimum withdrawl rider, grew 16% to $879 million in the first six months of 2007. To sustain the earnings from a variable annuity products and manage the inherent (inaudible) risk, we apply industry leading risk management practices, underpinned by both static and dynamic hedging programs. We share best practices in risk management across our US and Canadian business. We closed the acquisition of Genworth's US employee benefits [group] business during quarter. Sun Life's US group insurance operation has organically grown sales at an average rate in excess of 20% over the past eight years. The new combined Sun Life group business is a solid top ten US group insurance player with $2 billion business in force foundation to build upon. Our US group business is an excellent example of how we've been able to take a business from a distant ranking into a top 10 position by combining consistent organic growth with a focused acquisition. Integration efforts continue to progress well and Bob Salipante will provide specific commentary later in the call.

As expected our domestic individual life business in the United States returned to profitability. As announced at our investor day six weeks ago, we have identified our next generation financing structure to support our US universal life insurance products and consequently, we experience more of new business strain this quarter. As part of an integrated brand strategy in Canada our unique coast to coast career adviser network was officially re-named Sun Life financial advisers last month. Although the Sun Life brand is widely recognized both in Canada and internationally, there will be a significant increase in our brand visibility in Canada over the autumn months. The 3500 Sun Life financial advisers are excited about the new brand and the advertising support they'll be receiving beginning in September. Our Canadian operations bring together under one brand three very strong business units which coordinate closely with each other. Each of these has a leadership position in their respective markets and I'm proud that Sun Life [key] number one rankings here in our home base, which we continued to grow during the quarter. In addition to our strong individual wealth sales in Canada, individual life insurance sales had a solid quarter with 15% growth coming from increases in both our Sun Life financial adviser channel and our third party channel. Group Retirement Services had a very strong quarter, with gross sales of $470 million up 95% over Q2 2006. Rollover sales reached $175 million representing a 27% retention rate up from 21% one year ago. Group benefits in Canada was recently noted as the fastest growing Canadian group business in 2006, with a 22% market share and $6 billion of business in force.

MFS continues to deliver. Assets under management at the quarter end were $202 billion. This growth was driven by market performance and net positive sales from managed funds. Investment performance continues to be excellent, with 95% of domestic equity assets in the top half of (inaudible) data for three year performance. MFS also delivered a 34% profit margin this quarter while continuing to invest in global distribution and US brand initiatives. MFS is growing global distributions strengths, is a clear competitive advantage. An equally important competitive advantage is MFS's enviable US distribution presence where MFS ranked number five in nonproprietary fund sales.

We're laying a strong foundation for the future with our ongoing investment and growth in Asia. As Stephen Rajotte noted at our recent investor day, in the next dozen or so years, Asia, ex-Japan, is expected to equal North America in terms of share of the world [life] insurance market. India and China are projected to be the fastest growing markets in Asia with the Indian life insurance market expected to triple by 2013 and China expected to become the world's fourth largest life insurance market. In India, our direct sales force grew to over 60,000 advisors in this quarter. In China, we have received proprietary approval for Shanghai, mainland China's financial center and a strong operating base for our Chinese joint venture partner. Sales in Shanghai are expected to begin in the fourth quarter of this year. In addition, two new sales offices were opened in Jiangsu province's quarter, bringing Sun Life's Everbright's operations in China to 14 cities. With that it's now a pleasure to hand over to our Chief Financial Officer, Rick McKenney who will walk you through the quarter results in more detail.

Thank you, Don, and good morning. Turning to slide four, we had an excellent quarter for earnings per share in ROE. Fully diluted operating earnings per share were up 17% to a $1.03 on the strength of our diverse operating platforms. This was particularly true of our US business which benefited from higher interest rates, strong equity market performance, good experience and reduced strain in our US individual life operations.

Operating ROE for the second quarter is 14.6%, an increase of 100 basis points over the same period last year. The strong growth in ROE was driven by solid earnings and our steady return of capital through dividends and share repurchases. For comparability, we have depicted here, the impact of the changes in Canadian investment accounting rules on ROE. On a similar basis, our ROE grew 150 basis points from Q2 2006.

Our sources of earnings this quarter which are set out on slide five show that expected profit continues to grow nicely at 20%. Fueled by the strong performance in our asset management businesses. Importantly, this quarter we saw a decrease in new business strain versus last year and an even more dramatic decrease since first quarter. This is primarily due to improvements in our US life insurance business. As we outlined for you at investor day in June, we are proceeding with the implementation of a structure for our US universal life business by the end of 2007. And we will see the impact of this come through our financial results in two phases. In phase one, we saw reduced strain on new business issued during the second quarter, as we have determined out new structure. In phase two we'll extend the benefits to out [in-force] business once fully implemented, which we still expect to execute before year end. We also saw significant favorable experience gains this quarter. These were broad based across the company resulting from strong equity markets, increased interest rates and favorable mortality and morbidity experience. This positive experience was dampened slightly by credit related allowances on certain a Canadian held bonds. Management actions and assumption changes were slightly positive as gains on reserve releases in the Canadian individual business related to an internal reassurance transaction, were offset by reserved strengthening in a number of other businesses. And finally, the effective tax rate for the quarter on an operating basis was 20%, and right in line with our stated objective of 18% to 22%. Overall our sources of earnings demonstrate our strong performance this quarter.

Moving on to slide six, we continue to see good growth in our sales. Life and health premiums grew by 6% quarter over quarter with increases in Canada, the US, and Asia. We also experienced excellent growth in our wealth deposits. Which when adjusted for a median term note issuance Q2 2006, increased by 19%. As Don mentioned earlier, we saw significant growth in our annuity sales in the US and Canada. We also saw good growth in wealth sales in Asia, where strong demand for wealth products in the Philippines and Hong Kong drove sales up by 40% and 36% respectively.

As we look to our future earnings streams on slide seven, our value of new business growth grew 10% to 749 million. This growth was fueled by the strong growth in sales at our wealth businesses. We saw a particularly good results at our asset management companies. We saw a particularly good results at our asset management companies.

Total company assets and their management continue to build year over year but are down slightly from last quarter as shown in slide eight. We saw increases from positive equity market movement, net sales and the acquisition of six closed end funds at MFS. This was offset by significant strengthening of the Canadian dollar, which resulted in a reduction of $24 billion, as well as changes in value on our health re-trading assets of $1.4 billion, as a result of interest rate increases.

Moving now to capital management on slide nine, we continue to maintain a strong capital position with and MCCSR ratio of 217%. As a reference, this number would have been 230% prior to the closing of our US group acquisition. We were very active on the capital management front this quarter. In addition to the purchase of the employee benefits group, we acquired 2.3 million trust units of CI Financial to maintain our ownership at 36.5%, and we then returned a significant amount of capital to shareholders by increasing dividends by 13% year over year and we repurchased 3 million common shares. We also looked at the structure of our balance sheet by redeeming 600 million US of accumulated capital securities and completed a 400 million subordinated debt offering. Our plans of capital generation and deployment are tracking to our expectations going into the year.

Before moving on to discuss the results in our business groups, I would like to take a moment to talk briefly about our asset portfolio on slide ten. We continue to maintain a well diversified and conservative investment portfolio that is duration matched. 98% of our bonds are rated investment grade and we run a diversified commercial mortgage portfolio for which there are currently no mortgages in arrears. And finally we have minimal exposure to sub prime mortgages. To break it down for you, our total US residential mortgage exposure is less than 4% of invested assets and of that residential mortgage backed and asset backed securities where sub prime exposure represents less than half of 1% of total invested assets. And finally breaking that down further, 96% of these sub prime holdings were either issued before 2006 or have a AAA rating. And 85% of the underlying mortgages are fixed rate.

Let's look more closely at the business group results for the quarter beginning on slide 11. Earnings in Canada grew 6% and ROE grew to an impressive 16.1%. Earnings were driven by overall business growth and good experience in our lines. We did benefit from an internal reassurance transaction which offset credit allowances on investments and less favorable taxes from a tax change in CI the previous year. Netting these, the underlying results were consistent with the reported growth. On the sales front, individual insurance sales were up 14% with increases from both Sun Life financial advisors and the wholesale channel. Growth in sales from our Sun Life Financial advisors was driven by continued productivity improvement. We are starting our branding efforts through the summer as we look to make good investments in this channel. In the whole sale channel, our efforts to grow sales continued to materialize particularly in the MGA channel as we focus on strengthening relationships with our wholesale advisers. Individual wealth sales were up 19% on higher mutual fund, segregated fund and payout annuity sales. Our SunWise Elite Plus guaranteed minimum withdrawal benefit rider, launched in mid-April is showing early signs of success with increasing awareness among advisers many of whom have either sold the product or added the rider to existing policies. On the wealth front our Sun Life advisers continue to be an important partner for CI, delivering 33% of their net sales and 35% of their net sales for the first half of the year.

On slide 13, group retirement services plan assets under management grew 20%. We continue to win accounts in the large and mid-size case market and retain individuals assets when the plan members terminate. In addition to our recognition as the leader in the DC market in Canada, we have also been recognized for the efficiency of our operations with GRS leading the industry in terms of number of accounts per full-time employee and assets per full-time employee according to the 2006 Phraser expense benchmark. Group benefits business in force also grew a solid 8% over 2006. In the most recently release Phraser group universe report Sun Life's group benefits were cited as having a 22% market share and had the highest year over year growth in the industry in 2006.

Turning to the US on slide 14, earnings were up substantially quarter over quarter with increases in each of our businesses. Annuity earnings were up on improved equity markets and higher fixed annuity spreads, which were 230 basis points in the quarter. Individual life earnings benefited from higher interest rates, favorable mortality, and reduced new business strain on business issued during the quarter. As I mentioned to you a few moments ago, the implementation are AXXX funding solution is a two phased approach. (Inaudible) this quarter's results in individual life do not include a recapture of any of the excess strain incurred on sales of our universal life, no lapse guarantee product, prior to the second quarter of 2007. Concurrent with the closing of our group acquisitions during the quarter, we've renamed our group life and health line of business to Employee Benefits Group. Results in this business unit were higher on improved claims experience as well as the [acreed] of impact of Genworth's employee benefits group business.

Turning to sales, we saw significant improvements in our variable annuity sales. Domestic variable annuity sales in the first quarter of 2007, increased almost 100% over the second quarter of 2006. On the success of improved whole seller productivity and income on demand. Importantly, we experienced positive net flows of $82 million marking the first time net flows of domestic VA's have been in positive territory in some time. And during the past week we have launched a new fixed indexed bonus product. SunDex Bonus Fixed index annuity, which amongst other features, offers an income storage benefit similar to income on demand allowing boomers to defer and store annuity withdrawals for future use. Individual life sales were down year over year on lower sales of core products as well as a reduction in COLI BOLI sales. Pricing actions taken over the last 12 months are reflected in this. Employee benefits group in-force business was up significantly over last year, primarily on the addition of 744 million of in-force on the group acquisition. But also on growth and net sales and good retention in the pre-acquisition business.

Turning to slide 17, you'll see that MFS had another excellent quarter with earnings up solidly 32% to $62 million. Driven by strong growth in AUM. Pretax margins for the second quarter improved to 34% from 27% one year ago. Fund performance also continues to improve with 87% of its US mutual fund assets ranked in the top half of their [lipor] three year category average as of June 30, 2007. On the sales side we recorded our second best quarter ever for combined retail mutual fund and managed fund sales. Year to date gross sales at MFS of $24 billion are 28% above sales levels for the same time last year. We had small net outflows in the quarter mostly in the result of rebalancing of funds we manage as separate accounts.

With strong equity markets, our assets remained above the $200 billion mark. And finally on slide 19 we turn to Asia. Earnings in Asia were down over the second quarter of 2006 as favorable investment experience from last year do not reoccur and we continue to investment in expansion in the region. Our expansion efforts in Asia are increasing and we are beginning to see the positive impact of distribution initiatives over the last few years. Sales were up 36% with growth in every branch in China and agency sales in India increasing 62%

We can (inaudible) to deliver on our strategy to develop Asia into a significant long term revenue and earnings growth operation. In summary, Sun Life had an excellent quarter in Q2. Looking at our medium term objectives, our fully diluted operating earnings per share of $1.03 for the quarter are up 17%, well ahead of our 10% objective. We are pleased with these results as we continue to be focused on long term profitable growth and making the necessary investments for Sun Life's position in the future. Our operating return on equity at 14.6% for the quarter and 14.3% over the last 12 months. The goal is 15% and we are driving growth and capital efficiency to get there. On the capital front, you saw in our press release today our board of directors has approved a dividend increase to $0.34 per share, representing an increase of 13% over the past 12 months. We will continue to look at dividends as a way to return a percentage of our free flow of capital and evaluate future increases with that in mind. We also bought back 3 million common shares for an out lay of $152 million and a total buy back of $275 million in the first half of the year. We are well on our way towards our objective of purchases 500 million of common shares for the year. And as I wrap up my section, I would note the great results coming from our US operations and I would like to turn it over to Bob Salipante for some specific color. Bob?

Thanks, Rick. Good morning, everyone. I'll make a few opening comments before turning to the slides. As Don and Rick mentioned, the US had a good quarter with strong results across all our product lines. In particular, earnings were strong in our employee benefits as we experience favorable claims and began to realize benefits of our acquisition of Genworth's group business. The annuities division not only generated solid earnings but also achieved excellent sales results with gross variable annuity sales reaching $805 million, nearly double the second quarter of last year. Earnings also improved in the individual life division, reflecting a new funding structure we were putting in place to support our universal life business as well as good interest rate and mortality experience in the second quarter. As I mentioned on investor day, we have completed our research and have determined the next generation funding structure to support the reserve requirements on our [no-laps] guarantee universal life products. Efforts are solidly underway to implement the US domestic [captive] structure by the end of 2007. The initial impact of this decision was to reduce new business strain on UL business issued this quarter and in the future. Later this year when the structure is fully implemented we expect to realize additional earnings benefits when we recover some of the excess strain incurred on LP3 business issued prior to the second quarter. We began to see the LP3 impact on new business strain in the fourth quarter of 2006 continuing into the -- this year. This quarter the strain on new business has improved significantly.

On investor day I defined our expectation for more normalized strain as a range of 10% to 25% of total premium. I gave a range because the level of strain in any one quarter can vary depending on mix of the business or actual reserve assumptions such as interest rate, mortally, or lapse. This quarter we were on the lower end of that range due to favorable business mix and the favorable interest rate environment. Our retail core sales of $108 million on a total premium basis down were down 11% from the first quarter. We expect sales to continue to trend down next quarter as sales of the older generation products tail off. However, we have established and maintained good positions with our distribution partners, continue to see strong sales momentum through both M&NFP and continue to enhance our core universal life and variable universal life product lines.

Turning to slide 22, with respect to our employee benefits division the acquisition of Genworth financial's employee benefits group closed on May 31. And as of June 30, our group insurance in-force grew to nearly $2 billion versus $1.1 billion a year ago. As you can see in the buyer chart, the Genworth acquisition added roughly $740 million to our in-force as of June 30 for a combined total of $1.974 billion. I am pleased to report that we have retained a significant share of Genworth's sales representatives and as a result we are well positioned to deliver future growth in this business. As of June 30, we have a sales force of 187 people and as of July 1, they are selling one product suite which combines the best of both company's products. Integration is proceeding on target. The acquisition had a positive impact on earnings in this quarter and we expect to achieve earnings targets consistent will previous indications. Integration costs are also within target. Once integration is complete and synergies have been achieved, the earnings run rate for the US group division is expected to roughly double to about $25 million per quarter.

Slide 23. As this slide shows, gross domestic variable annuity sales were very strong this quarter at $805 million. More importantly net sales were positive for the first time since the first quarter of 2002. This demonstrates that our strategy of innovative product and experienced wholesaling is starting to payoff. Sales have benefited from the March launch of our income on demand lifetime income rider in an (inaudible) productivity and increased tenure of our variable annuity wholesaling team. About 50% of the sales in the quarter included the income on demand rider and annualized year to date productivity [purse] wholesaler is up 44% over the same period last year. In the productivity of wholesalers who have been with us for more than two years is up 61%. Furthermore, average monthly sales have been trending up and have almost doubled from last year. We believe that the innovative nature of the income on demand benefit, coupled with a strong customer value proposition and an experienced wholesaling team will continue to give us a competitive advantage in the variable annuity market. And with that brief summary I will now turn the call back to Paul. Paul?

Thanks, Bob. Before we open the call to question, I would ask each of our participants to limit him or herself to one or two concise questions. And then to requeue with any additional or follow-up questions. We'll make every effort to take all your questions before ending the call.

Thank you, one moment please. Ladies and gentlemen, we will now conduct the question and answer session. (OPERATOR INSTRUCTIONS) First question comes from Jim Bantis from Credit Suisse Please go ahead.

Good afternoon -- or good morning. Just looking at the individual life segment in the US and the sharp increase in earnings. I wonder if you could characterize what was the largest influence in terms of the increase earnings. Was it the change in funding arrangement, was it the drop in individual sales this quarter resulting in lower (inaudible) strain, or was it the higher interest rates?

This is Bob Salipante, Jim. It would be the reduction in strain which would be a function of reflecting the new refunding structure. Also, some influence from the lower sales and then next would be the interest rate impact.

Great. Thank you. And I just wanted to follow up on the lower sales at $60 million this quarter. One of the lowest levels since middle of 2005. And you had mentioned something with respect to the pricing adjustments. But maybe you can elaborate a little bit more on the factors of the lowers sales and the trends for Q3 and Q4.

So we made pricing adjustments on our no-lapse guarantee universal life product line in the first quarter both to our survivorship products and our single life products. As we have explained, it takes some period of time after we've made a pricing change, for all the product from prior periods to move through and so that's part of the effect here. So, as each quarter goes by, we have a larger proportion of the sales be from the repriced product. I would add that we are also actively, as Michelle Van Leer indicated at investor day, launching new products just this past Monday, yesterday, we launched a new universal life product line -- product.

Thanks very much. I'll re-queue.

Your next question comes from Tom MacKinnon from Scotia Capital. Please go ahead.

Yes, thanks very much. Good morning. A couple questions here. One maybe you -- Rick, you can elaborate a little bit on the credit allowances in Canada? Is it certain Canadian he held bonds? Specifically, what did you do? And if the cash flows never became impaired, I assume we would get that $18 million back. But, if you can elaborate specifically what was done and what you see going forward with respect to that. And then I have a follow-up as well.

Certainly, and what was done there relative -- and it is the credit allowances, it's not [against] specific cash flows of those positions. We look at the overall credit portfolio and our internal ratings with regards to those and have those factored into our reserves. So, this really came through as a reserve adjustment in the quarter and as you say, it could come back, however, that's what our current view is of the overall book of credit for Sun Life.

So it's an increase in the default provision in the reserves? Is that what it would have been?

Yes.

Okay and the actuarial reserves, is that correct?

That's correct.

Okay, and the -- I guess the second one would be, Bob Salipante, you talked about roughly $25 million for the US employee benefits group going forward. I mean we were at $25 million. Maybe I just misunderstood. You expect that to double to $50 million going forward? Is that the way we read that?

No, Tom. I'm sorry. The -- on an annual basis, that business was doing about $50 million pre-acquisition and what I was telegraphing is that our anticipated run rate per quarter is $25 million. So there's the doubling.

Okay, I see. So this was just -- this was the Genworth business that you picked up was running at 50 before and you expect it to be hundred annually.

No.

I'm missing it again then, sorry.

The Sun Life business pre-acquisition was about $50 million, and --

Okay, I got you. So, we're at the annual quarterly run rate you anticipate from this thing, is that correct?

Well this quarter is a little stronger. We had favorable experience, you know. We have volatility and we've noted that quarter to quarter. So this -- we had experienced gains that I wouldn't expect to continue. We'll be at this run rate in the second half of 2008 on a sustainable basis as we get all of our integration done and our synergies achieved.

Okay, I was just going to squeeze one more in if I could on the GRS. The group wealth stuff in Canada here. This seems to be a weaker quarter than I have seen in a long time and yet you talk about how everything is going great in terms of growth sales up great and asset and retention going well. What happened here?

It's Kevin Dougherty peaking. Overall there were two things that happened in the GRS results. One was the fault provisions that Rick mentioned. Second, a slightly worse mortality experience compared to this time last year. I think the, excuse me -- The best way to look at the GRS numbers is to look at our rolling fourth quarter and overall the business is going very, very well.

Okay, thank you very much.

Your next question comes from Mario Mendonca from Genuity Capital Markets. Please go ahead.

Good afternoon. Rick, throughout the presentation, you referred to the benefits of positive equity markets and higher interest rates. And I want to ask just how important were these in the quarter end? It's not so much that I want to make any adjustment to the quarter. It's more -- I want to think about it in the context of how things have played out since the quarter. Because equity markets obviously haven't been that great and interest rates look like they are trending down a little bit. Is there anything you can give us, so we have a better flavor for of that $1.03, what portion of that might have benefited from -- how much of the benefit was from higher rates and better equity markets?

Hello Mario, the best thing I could do is probably point you back to our sensitivities as part of our overall disclosure that we have. We tracked our results and how our actuals came through relative to our expected in those sensitivities and it was basically in line.

Sense -- so the sensitivities -- so are far as equity markets are concerned you're referring to the -- used to be something like 50 basis points -- or 50 --

Yes, up 10% in the equity markets equates overall to roughly $140 million range.

Annually?

That's for a full year.

Okay and the interest rate sensitivity is the one that you put in your -- in the annual report?

100 -- yes, 100 basis points up is roughly $60 million once again annualized.

Okay, my second question, Rick again, it relates to capital structure. You've referred to things like dividends and buy backs. Is there any -- are you also contemplating changes in the capital structure, more fundamental changes in the capital structure, perhaps as it relates to your debt to capital ratio or coverage ratios or interest coverage ratios that is. Do you have room with the rating agencies? I know you do from regulatory capital perspective, but to you have the room from the rating agency perspective to make Sun Life's capital structure look a little bit more like some other companies?

It's a fair question. I think I would take that back, which is to say unless we see the impetus to do so, we wouldn't change course on that front As you mention, we do have flexible on that front. We'd like to use some of that ability to go out and acquire as we've talked about in the past as opposed to anything just to change our overall balance sheet view in the near term.

So if the company becomes slightly more leveraged in will happen in the form of a deal not so much just a trans -- something that the company does in and of itself on itself own?

I think in a (inaudible) that's a fair expectation.

Thanks very much.

Your next question comes from Tim Lazaris of GMP Securities. Please go ahead.

Thanks. I've got two questions, sort of in the similar vein with Marios. Could you comment at least if at all possible or direct us to how we could calculate what the negative impact in the quarter would have been from currency? Because that was a risk, I think, going into the quarter. Is there anyway to quantify that number?

Yes, from a variance perspective you'd have to look off previous quarters. It was about $0.01 relative to the most prior quarter. I'd probably send you back to our disclosure in the supplement and you can look at earnings coming out of the US as well as MFS to do your own calculations we've actually disclosed the average level there. But, it is a head wind we will see that over the course of the year. If the Canadian dollar sits at roughly $1.06 level where it is today.

Okay, and the other question I have really is just, I think you provided us with a whole bunch of numbers very quickly about your exposure to the sub prime market. Is that just a number that you could quantify as well in terms of what the absolute number of dollars are exposed to sub prime, albeit AA or better, just the total dollar amount.

I think if your took the calculation we said less than half of 1% you'd be roughly in the $400 million range.

400 million US or Canadian? Sorry.

Good question. That would be -- that would be actually Canadian. Thats reported basis.

Okay and is it fair to say that right now it's management's view that rated AA exposures to sub prime are not you know, an investment exposure that you're uncomfortable with? I think there's some thinking out there that the rating agencies have provided pretty healthy ratings on this type of paper in the past and there may be some re-rating what's your view on that?

Well, I think you'd have to look at our book as opposed to the whole industry. And we take it back to one, the duration and you have to look at the underlying collateral when it was put on the books, whether it's backed by fixed or floating and all those different factors. So, its hard to make a generalization about a certain rating level just look at our overall book and it was issued -- the majority of it was issued prior to '06 and its more the AAA level, so we feel fine about our position.

Okay, guys, thanks very much.

Your next question from Eric Berg from Lehman Brothers, please go ahead.

Thanks, very much. My question is to Bob regarding -- two questions really first to Bob regarding the US life insurance business. As we look forward, it seems there are many cross currents that will affect earnings. You've indicated you're gong to have lower sales in the next couple of quarters because of a product transition Interest rates are headed down. On the other hand, I think you've indicated that there's going to be a catchup adjustment in connection with the -- applying your secondary guarantee solution to on the books business and there will probably be more factors. Can you give us some help in thinking about sort of the current level of earnings therefore and whether it is indicative? Or whether the level of earnings perspectively, meaning in the next few quarters will be materially different (inaudible) the life business? Even if you don't give us an exact number, something that I would obviously not expect, can you help us think through the issue? How would you think about this if you were sitting in our shoes? Thank you.

Yes, Eric, it's Bob Salipante. Yes, with respect to the quarter, it's a stronger quarter as I think we all indicated due to favorable experience gains in terms of interest rates and mortality. And so that's one factor with respect to that run rate. And then with respect to the catchup adjustment we expect that to occur in the second half of the year as we lock down our funding structure. I think perhaps the best way to think about that is for those quarters where we exhibited high strain, I indicated that that strain level was around 40%. And we've indicated that we see a normalized strain as being in the 10 to 25% range going forward. So I think that gives you the dimensions of the possible adjustment.

Second question, also with you Bob, with respect to the annuity business and the introduction of the new product in March, as we sit here today in August we're now in the September quarter, can you give us a sense as to whether or not you believe the -- I mean whenever you launch a new product there's typically flurry of excitement and a burst of initial sales, but how do we sit today. Is this continuing or would you -- would you say that -- that the level of sales in the June quarter, is not -- is or is not representative of what we can expect based on what you know today for the next few quarters. Thank you.

Again, it's Bob. I think Kevin (inaudible) did a nice job of addressing this at investor day. You know we see this as early days with an attractive product. It certainly opens the doors with our key. Our focus brokers who have been telling our story too, on a repetitive basis over the last several quarters. The summer tends to be a little wider. I think that's just an industry seasonal pattern but we continue to see a very substantial interest in this product and expect to see that for the duration of the year.

Thank you very much.

Your next question coming from John Reucassel with BMO Capital Markets. Please go ahead.

Thank you. I don't know if it's for Rick or not the -- the -- in the non-MFS business the growth there, if I have it right -- 9% I think it was 18% in Q1. Could you maybe talk a bit what happened and the slow down you know, on the one hand --

John, you are breaking up a little bit. If you could -- if you could restate your question.

Can you hear me better now, Rick.

Yes.

So, the VNB growth non-MFS is 9% in the quarter and versus 18% in Q1. So, I'm just wondering and individual life sales were down in the US I know they're up in Canada. Why the slowdown? Was there something particular in the quarter? I just would have thought, you know, anyway, just, if you could talk a bit about that.

Yes, no, I think I'd you know -- and we look at VNB overall -- it can see intraquarter volatility and that's why we do look at it over a longer term basis. As you mentioned, we did is have a little bit less VNB as sales have come down in the US and the margins there. But I wouldn't highlight anything particularly that's -- that jumps off the page or the analysis. We are still right around the 10% level. We still feel pretty good. Last year was, was stronger at 18%. But 10% in a quarter is still good results.

Okay, and then I guess a question for Bob. Just trying to get a sense -- you said sales growth was still good at M&NFP. So, I'm trying to get a sense of the reduction in individual life sales. Did that come outside of the M&NFP and I guess what were sales growth in those two key channels on the life side?

Yes, I think that we're seeing a pretty much pro-rata sales level across our distribution organizations and 2006 we were seeing about a third of those sales from those two organizations and it continues to be in that range, John.

Okay, okay. And may I squeeze one more in? On MFS, and just wondering what the AUM level is as of yesterday or whenever the latest you had. And has the rebalancing in the portfolios you saw in the second quarter, has that mainly run its course?

We don't disclose our assets on a day-to-day period like that. We do it at quarter end. What I would day to you is that the firm has held up relatively well because we are so well diversified across fixed income as well as international and domestic equity. The rebalancing that happened in our sub-advise insurance business that really impacted the net flows for the quarter we believe are one-off events and not related to performance. And hopefully, as we move forward into the second half of the year, we'll have better traction on flows.

Great, thank you very much.

Your next question comes from Andre Hardy from RBC Capital Markets. Please go ahead.

I just had a quick question on Asia. You alluded to investments and distribution driving the income down. What was the particular step-up in investing and distribution, because you have been so for awhile, yet the impact seemed to be much more material this quarter on earning?

Andre, its Don Stewart. I'd like to address the question in a slightly wider context. Asia, for us, as you know, is made up in the insurance space of the results from five separate countries. And it would be perhaps incorrect to see the investment and distribution which is very significant in India and China as having the full impact that we saw from Q1 '07 to Q2 '07. Because Asia's got the results from five relatively small pieces from a net income perspective, it bounces around a great deal. We've been encouraging people to look at the first half results, which illustrate much more stability. If you actually look at Q1 and Q2 in '06 there was also substantial volatility. You look at Q1 and Q2 '07 the same volatility but not in the same direction. Where as if you aggregate for six months in both years, you get, essentially, a flat result and that would be more indicative of the additional investment and distribution than trying to walk it through quarter by quarter because we're not seeing that the investment and distribution was all of the difference between Q1 '07 and Q2 '07. So, I hope that gives you a better perspective. And the investment and distribution, you know, in China we're well over 3000 advisers. We are opening in new cities, and each time you open in a new province you have a certain amount of infrastructure. In India we're up to 60,000 advisers. So, these would be the principle places that theres investment and new distribution, but we're also expanding in the other places as well.

Thanks. And maybe just a quick one for Bob Wilson. There was very good variable annuity sales in the US at the peak of the market. Does the sensitivity to equity markets change at all given the guarantees on those products or the sales aren't big enough as a percent of the book to matter?

The sensitivities will change, because of the sales. But for the overall organization, that's a fairly small proportion of the equity exposure that Sun Life has.

Fair enough. Thank you.

Your next question comes from Michael Goldberg for Desjardins Securities. Please go ahead.

Thank you. I have a couple of questions. First of all what's the total cumulative amount of LP3 sales prior to the latest quarter that would be subject to (inaudible) once the new funding solution is completely in place?

Yes, I'm going to have to -- we'll have to punt that one until after the call I think, Michael. I'm sorry.

Okay. And I also want to follow up. I think there was a question about the trend in trailing 12 month VNB. Looks like second quarter total VNB this year is $41 million. On a trailing 12 month basis, then last year and if you leave out MFS, it looks like the non-MFS VNB for Q2 is $55 million down from last year. Now, you my mentioned I think, lower US sales and margins. But this seems like a pretty big decrease from you know -- in one quarter year over year. Can you please explain what's going on?

Yes, I'm not sure exactly the numbers you're referring to Michael. I think they are probably calculations coming out of that. I would tell you the same thing I mentioned in the last piece, was that our overall in the quarter did slow a bit and we've talked about that on the sales front as well as the margin front. In the call we have, following with on the LP3 sales we can take this one up as well.

Okay. And if I could get one more in. In terms of the widening of credit margins -- credit spreads in the US, you know, the -- it's -- this seems to have happened in particular during the month of July. Do you think that this widening that's happened in July will hurt Sun? And what impact do you see it having on US life companies? Do you see it potentially improving relative valuations and maybe making them something more attractive as a potential acquisition down the road?

Yes, Michael, this is Rick. We will take your third question on this. Which is, we've talked about the credit spread environment and what that does. I would not speculate in terms of what that will do across the industry, et cetera What I can say relative -- relative to us, is we are continual investors in the markets and we choose where we want to invest in credit, and we will feel the benefits of the widening of the spread. But it's hard to extrapolate more off of what you've seen in recent (inaudible) than that (inaudible).

Okay. Thank you.

Your next question comes from Mario Mendonca of Geniuty Capital Markets. Please go ahead.

The questions were asked and answered. Thank you.

Your next question comes from Tom MacKinnon of Scotia Capital. Please go ahead.

Yes, thanks. One follow up here. Our maybe just a comment. This VNB discussion year over year and quarter to quarter, obviously currency has something to do with that. Everything you site is in that slide is in Canadian dollars, right?

Thats correct.

Okay and then, the question -- you mentioned a little bit in the call, Rick, about reserve strengthening in some of the other businesses and I think that was with respect to Canada. Is there anything material here to address? Or is this just sort of normal course?

I think it is normal course. It's the cross multiple lines that we saw and so I wouldn't spike anything out, its not necessarily in Canada. That really is across the business.

Okay. Thank you.

Your next question comes from [Darko Mihelic] of CIBC World Markets. Please go ahead.

Hello, good morning. Just a quick question. If you could just elaborate on the internal reassurance that impacted Canada. And how should we view that with respect to our expectations for earnings out of Canada? Is this a one time impact or is this actually have an impact on your expected profits in Canada going forward?

Let me take it in a broader context than -- in what the internal re-insurance transaction was. It's really part of an ongoing effort we have looking at the efficiency of our blocks. The objective of that transaction is to get us US exposure, investment exposure in our Canadian investment portfolios. And what you saw this quarter was more the result of timing of tax cash flows. So, it's more one time in nature, what you saw this quarter, Darko. I think when you look at the overall company, in terms of -- as we mentioned this was a one time favorable release. We had some other reserve stregthenings across the company. So, I wouldn't read too much into that in terms of what it forebodes going forward.

Okay. Thank you very much.

Okay, Operator, do we -- is there one more question?

We have a question from Jamie Keating from [McClain and Dudden]. Go ahead.

Hi guys, sorry to bother you. For and old analyst, would you just -- I'm looking for what the FX impact is year on year and I missed it if you mentioned it. Just, hoping, Rick, you might help me out?

I'd give you the same direction, Jamie, I gave to Timothy Lazaris. It's all disclosed, in the supplement and break that down. It's fairly small in this quarter but we'll be ahead when going forward.

Thanks, Rick.

Okay. Thank you very much operator. And I'd like to thank all our participants on the call today. If there are any additional questions, we'll be available after the call and should you listen to our rebroadcast it will be available from our website shortly after 1 p.m. this afternoon. With that, I will say thank you and good day.

Ladies and gentlemen this concludes the conference call for today. Thank you for participating and please disconnect your lines.