Sun Life Financial Inc (SLF) 2007 Q3 法說會逐字稿

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Sun Life Financial Third 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 today, Tuesday, October 30, 2007 at 11:00 a.m. Eastern time.

I would now like to turn the conference over to Mr. Paul Petrelli, Vice President, Investor Relations. Mr. Petrelli, please go ahead.

Thank you, Patrick. Good morning, everyone. I would like to start by introducing the members of the management team present for today's call. Hosting the call, we have Don Stewart, Chief Executive Officer of Sun Life Financial and Rick McKenney, Executive Vice President and Chief Financial Officer. Also available to answer questions are Kevin Dougherty, President Sun Life Finance Canada, Bob Salipante, President Sun Life Financial U.S., Paul Kerwin, Chief Financial Officer 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 2, I draw your attention to the cautionary language regarding use of non-GAAP financial measures and forward-looking statements which form part of this morning's remarks. This slide reviews the reasons why forward-looking statements could be rendered inaccurate by subsequent events. With that, I'll turn things over to Don.

Thank you, Paul. We're pleased to report a robust third quarter. For the three months ending September 30, 2007 fully diluted operating earnings per share were $1.01, up 9% compared to a year ago. And over the same time frame operating return on equity was up 40 basis points, reaching 14.8%. Both results are in line with our medium-term objectives of 10% annual growth in operating earnings per share, and 15% ROE. Before I speak to specific business highlights, I will comment on Sun Life's branding initiatives. In Canada, we continued implementing our integrated brand strategy, launching a national advertising campaign on September the 17.

Slide 4 displays the campaign's theme, "life is brighter under the sun." We've had very positive reactions to our commercials, and we will be tracking the campaign's impact as we continue to profile our brand. Today, Canadian and international businesses are characterized by strong global brands. As an international player, we aim to leverage our brand strength in Canada to bolster our international competitive position. The scope of our international operations provides diversification in terms of customers, products and marketplaces with associated diversity in currency. While the value of the Canadian dollar is important, as it is the basis for our financial reporting, we review and monitor the underlying business of each of our units within their own geographies and without the impact of foreign exchange adjustments.

Our asset liability risk management policy addresses foreign exchange risk and specifies that assets be currency-matched to the liabilities they support. Under the terms of our operating policy on cooperate asset liability management, the company does not customarily hedge its income in foreign currencies. We believe our investors recognize that a portion of our earnings is generated in currencies other than the Canadian dollar, and are buying diversification on an informed basis when they invest. I'll now return to our business performance over the third quarter.

At Sun Life we continuously assess the impact of the shift in demographics, increases in longevity and the continuing transfer of responsibility to individuals for their retirement benefits. These are global trends. The strong sales growth shown across Sun Life's business units reflect individual customer response to innovative products that meet the rising from those trends.

Over the third quarter of 2007, sales growth of the U.S. and Canadian wealth-accumulation products continued. Individual segregated fund sales in Canada, including deposits from the SunWise Elite Plus guaranteed minimum withdrawal benefit rider grew to to $446 million, up 75% over Q3, 2006. Gross U.S. variable annuity sales of $771 million U.S. grew by 91% over the same period for the previous year. Sales were, again, fueled across our broad distribution channels by a customer-focused lineup of wealth-accumulation products which provide retirees with flexibility in their options.

Income on demand in the United States provides retirees with greater flexibility in their annuity income while, in Canada, the SunWise Elite Plus guaranteed minimum withdrawal benefit rider expands the ability of retirees to safeguard income. In Canada, sales in group retirement services increased 22% over the third quarter of 2006, as we further strengthened our leadership position in this key marketplace. The rollover program in Group Retirement Services was, again, very successful, 192 million of assets remained with Sun Life as members left employer-sponsored plans during the quarter. This represents an increase of 39% over the third quarter of 2006 and a retention ratio of 34% for the first nine months of 2007. This program is being extended to group benefits plan members. Now individuals transitioning from group benefit plans will be offered continued protection under Sun Life products to provide themselves and their families with health benefits over and above what is available from government plans.

Despite financial market volatility in the summer relating to credit concerns in the U.S., MFS continues to deliver with assets under management of $204 billion U.S. at quarter end and a pretax operating margin of 36%. Investment performance in retail retail mutual fund operations continues to be excellent with 80% of U. S. Mutual Fund assets ranked in the top half of their LIBOR category average over three years as of September 30, 2007. In line with our enterprise objective of intensifying customer focus, MFS has established a new venture under the banner Four Pillars. This initiative will meet customer demands for alternative investments such as hedge fund products by providing key operations, marketing and distribution support to select hedge fund operations.

Last quarter we closed our acquisition in the U.S. Group Benefits business. The integration is proceeding according to plan and meeting expectations with respect to net income, integration costs and synergies. Business retention is also in line with expectations. And we are pleased with the retention rate of the fuel force. Creating our new products and processes has been completed, positioning our sales force well for the key fourth quarter selling season. Although, I have highlight sales in only two of the countries in which we operate in Asia, sales growth across the Asian business group was excellent. In local currency, sales in India were up $177% in the third quarter of 2007 relative to the third quarter of '06. Sales in China were also up strongly. Sales in third quarter of '07 were 162% higher than in the comparable period the year before. Investment in these fast-growing markets continued.

Our joint venture operations in India had expanded into over 200 cities by the end of September '07. To provide a flavor of the size of the Chinese market, I highlight two group benefit cases awarded to Sun Life Everbright. Sun Life Everbright will provide group life and health benefits to 13,000 employees of China Everbright Group and Everbright Bank, it will also provide claims administration for three million members of the [Taiga] Bureau of Labor and Social Security.

Let me conclude by reiterating that we have once again delivered strong sales and solid results this quarter, as we executed on our business plans to fulfill our mission of helping customers achieve lifetime financial security. With that, it is now a pleasure to hand over to our Chief Financial Officer, Rick McKenney, who will walk you through the quarter results in greater detail.

Thank you, Don. And good morning. Turning to Slide 6, we had another excellent quarter for earnings per share and ROE. Fully diluted operating earnings per share were up 9% to $1.01. As Don alluded to in his remarks, the strengthening of the Canadian dollar continued to be a headwind this quarter reducing our operating EPS by $0.04 over the same period last year. In constant currency operating EPS saw a 13% increase over Q3, 2006. The underlying results in our North American operations were very good. We weathered well some of the turbulence seen in the quarter. The impact of wider credit spreads and volatile equity markets and interest rates came through favorably for the company, in part due to some of our economic hedging programs. In the quarter, we also saw improved earnings from our employee benefits group acquisition in the U.S. and higher earnings from our Asian operations. Our results were slightly lower than second quarter which can simply be explained by $0.02 of currency impact and the fact that the second quarter also saw very good performance.

Operating ROE for the third quarter was 14.8%, an increase of 40 basis points over the same period last year. The growth in ROE was driven by good earnings and continued effective capital management. On a trailing 12-month basis our operating return on equity stands at 14.4%, progressing measurably towards our medium-term objective of 15%. Our sources of earnings, which I've set out on Slide 7, highlight the high quality of our earnings this quarter. Expected profit on our Enforce business increased by 14% over last year, or 18% on a constant currency basis, driven by excellent performance in our wealth management operations, as well as the benefits of our group acquisition which closed in May of this year. We continue to see lower levels of new business strain, particularly in the U.S., where we are progressing with the implementation of a structure for our U.S. Life Insurance business. We expect we will fund this structure in the near-term and will communicate once it has been implemented.

Similar to last quarter, this quarter's results reflect reduced strain only on new business issued in the third quarter of 2007. We saw positive experience gains again this quarter, driven by increases from equity markets and credit spread movements which were offset by less favorable mortality experience primarily in our reinsurance business. Management actions and changes in the assumptions were slightly positive this quarter, coming in at $14 million pretax. And lastly our effective tax rate was 20% for the quarter, in line with recent results.

Moving on to Slide 8, we continue to see good growth in our sales. Life and health premiums grew by 46% over last year, with significant growth in the U.S., as a result of a large bank-owned life insurance deposit, as well as strong sales in Asia from the company's expansion efforts in that region. Adjusting for the Boli sales in each period, life and health sales increased 12% compared to one year ago. We also experienced broad-based growth in our wealth deposits this quarter. Wealth deposits are up 14% compared to last year after adjusting for a $1 billion Canadian issuance of a medium term note in Q3 of 2006. Sale of variable annuities in the U.S. and Seg funds in Canada drove much of the increase in our North American operations, as well as strong managed fund sales through MFS and McLean Budden.

Turning now to Slide 9, and the value generated by sales made over the last year, the value of new business grew 24% to $839 million. This impressive growth was fueled by excellent growth in sales at our wealth businesses. Also adding to the growth were increased sales throughout Asia. We are very pleased with the progress being made on this front and building value through profitable sales growth continues to be a top priority for the management of Sun Life. Total company assets under management continue to build year-over-year but are down slightly from last quarter as shown in Slide 10. This decrease is mostly from movement in the Canadian dollar, specifically versus the second quarter increases from positive equity market movements were offset by a $22 billion reduction from currency.

Moving now to capital management on Slide 11, we continue to maintain a strong capital position with a MCCSR ratio of 212% for Sun Life Assurance Company of Canada or SLA. This represents a slight decrease from last quarter due to a number of small items, including the phased in impact of investment accounting changes that became effective on January 1, of this year, as well as currency. We declared $193 million in common shareholder dividends and repurchased approximately 2 million common shares for for $98 million during the quarter. Year-to-date we have bought back a total of $373 million worth of shares, right in line with our stated objectives. Our run rate of capital generation and utilization remains on-track and we will continue to optimize our capital structure and deploy capital in an effective manner. We still expect to end 2007, with excess capital in the $1 billion to $1.5 billion range with which we are still looking for a variety of ways to put to work.

Before moving on to discuss each of our business groups, I thought I would take a moment to give you a similar review to last quarter's call and the quality of our asset portfolio. We maintain a well-diversified bond portfolio that is duration managed with 98% of the bonds being rated investment grade. The portfolio continues to perform well. Within the from the portfolio we continue to have low exposure to asset backed securities with residential subprime, being $366 million and Alt-A mortgage exposure of $191 million. Thisn represents approximately one half of 1% of the company's total invested assets and 96% of those investments were either issued before 2006 or have a Triple-A rating. These investments have been mark-to-market as of September 30, with nearly all using independent third-party pricing sources.

Let's look more closely to the business group results for the quarter beginning on Slide 12. Earnings in Canada grew 7% compared to a year ago, and ROE was a solid 14.7%. Earnings were driven by good investment experience in both individual and group wealth. Group benefit earnings were down from a high base last year that benefited from a reserve adjustment. This line of business continues to deliver a very strong return on equity. On the sales front, individual insurance sales were up 11% with solid growth in sales through the managing general agents and the national accounts channels, as we continued to execute on our wholesale distribution strategy. On the insurance side our Sun Life Financial Advisors sales force saw flat sales although they did see increased productivity. Individual wealth sales were up 34% as our segregated fund sales in Canada begin to reflect the benefit of our Q2 launch of SunWise Elite Plus. Mutual fund sales were also strong in the quarter.

Our Sun Life advisors continue to be an important distribution partner for CI delivering 78% of CI net sales during the volatile marketing conditions that prevailed in the third quarter. On Slide 14, we show the key indicators through the growth of our blocks of business, Group Retirement Services plan assets under management grew 15% on equity market growth sales and excellent retention rates. We continue to leverage our leadership position, winning accounts in the large and mid-size case market including this quarter's $110 million sale to Magellan Aerospace and on the Group Benefit's side business in force grew by 5% over the third quarter of 2006 to the the $6 billion mark demonstrating the strength of our service and technology leadership in this highly competitive market. Turning to the U.S. on Slide 15, earnings are up substantially to to $162 million, with increases in each of our businesses. Annuities earnings were up on increase fee income on higher assets as well as a number of factors contributing to net positive hedge experience. Individual life earnings were strong in the quarter, benefiting from the positive impact of interest rate hedges implemented during the third quarter, higher credit spreads and lower new business strain. And finally results in the Employee Benefits group doubled from the third quarter of 2006 as we saw our first full quarter impact following the acquisition of the EBG business.

On the sales front on Slide 16, we continue to experience good momentum in our variable annuity sales. U.S. variable annuity sales in the third quarter of 2007 increased 91% over the third quarter of 2006 on the success of an increased wholesale productivity and income on demand. This is the second successive quarter in which domestic variable annuity net sales were in positive territory as we execute on our growth strategy in this business. We continue to be focused on product innovation as look to further develop the next generation of products. On Slide 17, individual life sales increased significantly year-over-year as the large Boli case came through in the quarter as mentioned earlier. As Bob Salipante noted in remarks in previous calls core sales of life insurance have trended down as sales of our older generation products tail off.

Third quarter 2006 was also our highest level of sales for these products, we maintain good positions with 9 of the top 10 independent distributors in the U.S. including M and NFP and continue to see good sales through all of our major distributors and as the slide depicts Employee Benefits Group Enforce business was up significantly over last year primarily on the addition of the Enforce block of the EBG acquisition. Turning to Slide 18, you will see that MFS had another excellent quarter, with earnings up a solid 25% to $65 million U.S. and pretax margins growing to 36%. Margins may moderate somewhat next year -- next quarter and into 2008 as we continue to build our Global distribution, launch our Four Pillar offering and invest in brand initiatives in the U.S. On the sales side, we saw an increase in net outflows for the quarter. Gross sales remain strong, increasing 16% over the same period last year. However , volatility in the global equity markets resulted in higher than expected redemptions in certain asset classes during the quarter. Market appreciation during the third quarter more than offset net outflows to maintain assets under management above the $200 billion U.S. mark.

Turning to Asia on Slide 20, earnings in Asia were up 131% over the third quarter 2006 on business growth and the benefit of higher equity markets in Hong Kong, as well as improved earnings in Indonesia. Offsetting some of gains were increased expansion costs as we continue to invest heavily in Asia. Sales were up an impressive 121% over the third quarter of 2006, driven by triple-digit growth in India and China as well as strong demand for wealth products in Indonesia and Hong Kong. Our joint venture asset management company in India also delivered outstanding growth this quarter with assets under management growing 90% from a year ago to C$8 billion Canadian. We continued to deliver on our strategy to develop Asia into a significant, long-term revenue and earnings growth operation. To wrap this all up we are tracking well against our medium-term objectives. Our fully diluted operating earnings per share of a $1.01 for the quarter was up 9%. The impact of the strengthening Canadian dollar relative to foreign currencies reduced our earnings per share by $0.04 over the same period last year. We continue to expect that currency will be a headwind for the remainder of 2007 and into 2008 given the Canadian dollar's rapid appreciation.

Our return on equity was 14.4% over the last 12 months, the goal is 15% and we are driving a balance of growth and capital efficiency to get there. Specifically on the capital front we continue to deploy capital in an effective and an efficient manner. We have repurchased 373 million shares in the first nine months of 2007 and our payout ratio stands within our target range of 33%. To conclude, we are pleased with the results we are experiencing in the businesses, strong earnings from each of our business groups reenforce the investments we have made in global growth initiatives around the world. We will continue to execute on our strategies and deliver on our medium term financial objectives. I would like to turn the call back over to Paul to begin the question and answer portion of today's call. Paul? Before we open th call to questions, I would ask each of participants to limit him or herself to or two concise question and to then requeue with any additional or follow up questions. We will make every effort to take all your during the allotted time this morning. Now I'll Patrick our operator please pull the participants for questions.

(OPERATOR INSTRUCTIONS) Your first question from Michael Goldberg of Desjardins Securities.

Good morning. Thank you once again. Rick, I'm wondering if you could tell us the split in value of new business is for MFS and non-MFS for this year, and also last year and for trailing 12 month Q2 last year, where the MFS/non-MFS VNB excludes medium term notes as you've now started reporting it.

Okay. Let me take you through. Let me give you four data points and that should do most of what you are looking for. I think the split, we reported C $839 million, Canadian dollars, this quarter for the trailing 12 months. I would split that 839 to 237 million for MFS, 602 million for non-MFS. Looking back to Q3 of last year, also on a trailing 12 month basis MFS was $191 million, non-MFS as $483 million, both of them grew in roughly the 25% range and so there is no mix differential between the two.

Okay. And can -- what factors actually account for the year-over-year in sequential changes in VNB's split between MFS and the non-MFS?

Well, I can give you some rough -- if I'm answering your question correctly, the -- the biggest factors are really growth across the businesses and maintaining -- maintaining good margins throughout the lines. There's no one particular area. I think it is good, broad-based growth.

Okay. Thanks. I'll requeue.

Your next question comes from Dennis Westfall of Merrill lynch. Please go ahead.

Thank you. Question on new business strain, can you confirm that this third quarter did not include any recovery of prior new business strain and you were talking about by the end of the year recovering the prior elevated levels, is that safe to say that that might go into '08?

Well, what I said actually is that this quarter does not include the impact of finalization of implementation of the structure. If you looked at what we talked about last quarter, there are some benefits as we -- as we start to prepare that block effectively for going into the structure. But it is not go back to prior to 2 Q to recapture any of the previous strain that was noted. And we do expect still to complete that structure by the end of this year.

Thank you.

Your next question comes from Eric Berg of Lehman Brothers. Please go ahead.

Thanks very much. Rick, you mentioned as did the narrative of your news release that in the United States, both through individual life and annuities businesses, benefited from some favorable net hedge activity. Could you expand on that? What types of hedges are you talking about? And how exactly did this affect the reported results? Thank you.

Sure. Let me take it -- I'll take an initial crack at that and then Bob can add in as well. We do look at helping programs across a variety of areas. That the two areas that came into account this quarter, we do put some interest rate hedges relative to our life business as we look at the flow of -- cash flows there, and those can come through favorably in terms of our overall reserves, and then the second piece is a set of hedges which we've talked about in previous quarters as well, which are hedges against our GMBD block of business and as those hedges actually increased in value over the course of the quarter, those will come through into our overall earnings. So those are the -- those are the two sets in which I was most referring to. But I would tell you that that is a part of a comprehensive hedging program across many of our lines.

If I could just clarify, or sort of -- sort of follow-up on this, this will be my remaining my question, part of the same question, to the extent that the hedges of your interest rate exposure are meant to do precisely that, produce a hedge and not make money for you, and to the extent that the GMDB hedges basically are there to do the same thing and presumably the increase in the-- well, let me just pose the question this way: Shouldn't we think therefore that since these are, since you are calling them hedges as opposed to businesses per say, money-making ventures, would be it be analytically reasonable to exclude these benefits from your earnings in the quarter since if they are hedges definitionally they are in the there it make money as much as to protect you from -- sort of offset losses.

Yes. I think that have you to look at both sides of the equation, Eric, in terms of what happened in the quarter to those hedges. These are economic hedges that we look at. Two different things going on there in terms of how we reflect the cash flows that we expect come in. We call them hedges but it is really locking in our expected cash flows that we see in the business at a certain interest rate environment. That is real. That is real value that was creates through locking in those hedges, that is reflected in the quarter. The other piece, hedges that you see, economically they do offset but because our reserves are effective floored at this point in time we don't see the other side of that hedge coming through. To be fair, we've seen the reverse of that in other quarters as well and so you will see some volatility there. But I don't -- in terms of actually pulling them out of the run rate of earnings, I do not think that I would necessarily do that. There is a lot of movement around the entire book. And although we've isolated those two in this quarter there are certainly other things going in different directions.

I will definitely want to circle back with you or Paul so thank you very much for this explanation.

Your next question comes from Andre Hardy from RBC Capital markets.

This is for Rob Manning, if he is there, two questions related to MFS, one, it looks like the revenue realization on assets was down, although some of that would definitely be currency driven but I'm wondering if there was an asset mix shift that was negative for your fee realization and secondly, your LIBOR numbers are strong but your sales were not as good. Can you talk about what your MorningStar results look like, and what needs to be done to translate that performance into higher sales?

Yes, let me turn it over to Paul Kerwin, CFO of MFS.

Good morning. On the revenue realization, I assume you mean just revenue.

Revenue as a percent of assets, we have Canadian dollar revenues but assets.

Yes. Actually our revenue run rate on advisory fees has been inching upwards over the last year because of a mixed shift, and that is less lower fee U.S. mutual funds and more higher fee your international. The actual revenue in total is going down for a couple of reasons, one of those is the distribution fee rates on Class B shares as B shares have become less popular. There are less fees on those. But at the same time we see less amortization coming through the P&L. And so that is one of the reasons why revenue goes down by margins are not going down. And on the other side we do get some revenue from the transfer agent. We have been reducing costs there and outsourcing that. The revenue is on a basically a cost reimbursement basis. So again revenue comes down but it does not affect P&L and the advisory fee line is the one that I focus on and that is still relatively healthy and, sorry, what was the second question again?

Performance. What -- what does it look like on a MorningStar basis as opposed to LIBOR and what needs to be done in order to translate that good LIBOR performance into better sales?

Yes, MorningStar as -- as probably most of you are aware, four and five star funds do drive the vast majority, probably actually over 100% of net sales in the U.S., we do not have an awful lot of those that are currently in the four or five star range in the large capitalization or large sales area. So core growth, core value, those types of -- of styles. Obviously we talked in the past about growth performance and domestic equity performance in general. As you can see from the results, they have increased significantly over the last year to the extent that some of our larger funds have very, very good performance, if you look at emerging growth, which was one of those that suffered during the downside, I think that fund on the one-year basis is -- is in the 11% percentile and I -- it is close to, I think, the 12th percentile on a three-year basis. The problem is -- on that fund, of course, is that the downside of the crash in 2001 has pulled the ten year much below that level and it is the -- the MorningStar ratings are a ten-year average rating basis. And I think realistically the only way they are going to continue to go up is continued good performance over the next few years so that we can improve the ten year. Having said that, we do have a number of funds that we are seeing traction on, utility is a five-star fund and that has been in net positive flows for a while, we have three international funds that are four-star load waved and they are in positive sales, our value fund, I think our biggest fund at $10 billion is now a four-star load-waved fund and that's gone positive this year. So there is some -- some positive points there. But I think on -- on the growth side, while very happy with the performance and you can see it in LIBOR, it will be a while, two -- two years, I I would think, of continued outperformance before we start seeing three, four star funds in the growth area.

Okay. I really appreciate the granularity and just to clarify when you say increase investments and distribution, I guess Rick said so, we're talking about adding wholesalers here?

Yes, primarily in international locations, so we're expanding into Germany and France. We'll probably add some people in Southeast Asia. That is on the -- on the distribution front. We -- we will add a small amount in the U.S. side as we focus more on the D.C. market going forward. And then there will be some increases in the investment team globally, again, Australia, probably South America and Europe.

Thank you very much.

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

Yes. Thanks very much. Good morning. Good quarter. A clarification and then a couple quick questions, with respect to the funding arrangement as I understand it it does not look like in the quarter it doesn't say that you have recouped any of the strain booked in prior quarters but at the same time I do not think that the funding of the structure is entirely in place. So does that mean going forward we might see a bit of a benefit from recovery of prior quarter strain but at the same time the costs of the structure would be -- would be taken into account as well? Is that correct?

That is correct. I mean, when -- when you look at it we have not taken the benefit. So there will be -- as we implement the structure in its final form in the fourth quarter, there will be multiple factors taken into account however your point is very very much true that prior to second second quarter where we were seeing outside levels of strain, we will be able to recoup some of that if you focus on that explicitly.

And the two quick follow-ups, in the Canadian group business, I notice the earnings were down quarter-over-quarter in the area of about $10 million. I know they were down year-over-year for maybe some reserve issue, in third quarter of '06 but what might be driving -- I mean, the business and forces up, what is driving the -- the -- is it just seasonality or just volatility within that business, or is there anything else that we should be concerned with here?

It's Kevin Dougherty speaking. So as you pointed out there was a big gain last year in Q3 around investment in income, which was non-recurring and the second piece would be slightly weaker mortality experience within Q3, still within the range of normal fluxation but lower than last year.

Okay, thanks. And then the final is just if we look at page 21 of the SUP it talks about other borrowing costs which were up considerably in the quarter at 43 million, I think they were running in the area of, 30ish million and this is like this quarter would then be almost after half of the level that we saw for last year. What's driving that? Is it anomaly in the quarter or maybe you can just refresh me as to what might be the -- the issue there.

Well, we have increased it, some of our -- as we talked about historical funding structures in place and as those have increased in size as would be expected as the historical blocks grow, the funding costs will go up. I know that will be a factor. I would have to give you more details explanation offline on that, Tom.

So the funding structure -- the cost of that is slightly responsible for the increase? Did I hear that correctly?

That is correct. Previous funding structures though.

Oh, okay.

We -- we've issued more senior notes earlier in the year as a result of that, which you would have seen.

All right. Okay. Thank you.

Your next question comes from Darko Mihelic of CIBC world markets. Please go ahead.

Hi, thank you. Our first question for Bob Salipante just with respect to sales in the U.S. for individual light past three quarters ranging between 37 and $41 million doesn't seem to be any momentum gathering, I wonder if you can talk to, what might -- what might your expectations be for sales and maybe perhaps the pricing environment, and if that is causing, sort of a -- a stagnant level of sales.

Thanks, Darko. Bob Salipante here. As you recall, we introduced competitive product in 2005 and then brought in distribution in 2006 with the addition of M Financial and National Financial partners. And in the past I've characterized the -- the sales increase in 2006 as being beyond expectations. We also experienced an increase in reinsurance rates and -- and you're familiar with the strain story. So as a result in the first quarter of this year we repriced the product to a lessen strain a, improved profitability and implement our funding solution as Rick has mentioned. And the intent, and I think I've telegraphed it on these calls, is that no lapse guarantee sales would -- would tail down to some degree. And -- and they have. And this reduces the balance sheet strain that that product drives. But if you look in a broader context, our sales this year are up 72% over 2005 when this whole initiative began. Our relationships with M and NFP are strong. They've picked up our full product set including Group insurance and Annuities and we're introducing proprietary products with them and introducing a full suite of non-no-lapse guarantee products. And so our focus is to increase the sales in those areas. I'm not going to make a projection on future sales but our focus is to grow the non-no-lapse guarantee business through the strong distribution relationships that we have.

Okay. Thank you. And I'm wondering -- just one final question for Rick and maybe Bob Wilson as well with this last question, I'm not sure if you guys are ready to quantify what the recapture would be of excessive strain in Q4. But how should we look at Q4? Should we prepare ourselves for a lot of moving parts with respect to perhaps reserve increases as an offset, given the volatility that we've seen in the markets? Wonder if you can just comment on that. Should -- should -- should investors think about sort of a noisy Q4?

Well, I'll -- I'll take a shot at that Darko, and Bob can add on. When you look at -- we've identified one item here, which is the recapture that we expect to happen as -- as part of the structure, to protect forward in terms of what we think the other pieces of Q4 would be. We would not do so necessarily obviously at this point. This is obviously only a month into it. It is a question I really would stay away from at this point relative to what were seeing today and how the quarter will end up.

I would just add Darko that Q4 for most companies in Canada is the quarter when more of the assumptions are looked at, and so there will be a greater number of assumption changes that will happen in Q4 than would happen in Q3 or Q2. If we had been able to quantify them, we would have put them into the income in, Q3 or Q2. Suffice it to say we're looking at a whole bunch of assumptions and there will be a lot of assumption changes. The extent to which they will affect income we will find out between now and the end of the year.

Okay. Fair enough. Thank you.

Your next question comes from Jim Bantis of Credit Suisse. Please go ahead.

Good morning. Just a couple of questions, one on the individual sales in the U.S. Did you -- can you quantify the side of that Boli bock please.

Yes, this is Bob Salipante. The absolute amount of that Boli sale was $1.5 billion.

Got it, thank you. And then the next question is for Don it is a little bit more broader. I think when you look at what investors you've been winning their favor with smaller, creative tucking deals as you did with Hong Kong in '05 and the U.S. Group operations in -- earlier this year. If you look at what the Canadian banks have been recently doing, they've been taking advantage of their currency, both on the Canadian dollar and as well as Stock Valuations and excess capital to advance their U.S. platforms to make more sizable, strategic transactions. I guess, Don, seeing that there might be this window of opportunity where things are in favor of Canadian financials, what do you think of doing a larger deal in terms of deviating from this smaller tucking strategy in the context of really advancing your platform in the U.S.?

We looked very carefully at deals pretty much on a continuous basis at any point in time. We would have a number of deals in the assessment process. We're very driven by the fit of a deal rather than any particular size and range. The deals that we happen to do in the last 24 months have, as you pointed out, been relatively small deals. And have been good fits for existing business. And so I -- I would see us much more focused on the fit of a deal rather than a particular size of the deal at this juncture.

John, could you just remind us, or perhaps Rick, in terms of the typical deal economics, what you are looking for in terms of when you want the transaction to be accretive and things of that nature?

Well, we're looking at no EPS dilution in the first year, is the aim of the deal and EPS accretion from year to onwards inevitable a deal of any size that's not funded by cash will have some downward pressure on ROE and therefore we'd seek to make that bank over a reasonable period of time but really primary first screen would be an EPS screen.

Great. Thanks very much. I'll requeue

Your next question tomorrow from Timothy Lazaris of GMP something court. Please go ahead.

Thank you. I've got two questions, one possibly for Kevin. On the SunWise Elite Plus program or the new rider that you implemented can you comment, give us just a bit of a tracking point as to how that -- how sales of that product are going and perhaps even quantify the volumes? I'm not sure they are separated out in the package but if so direct me to that, I'm trying to get a gage as to whether sales came out of the chute strong and are tailing off or whether they are accelerating and what the magnitude of that number is and number two, I'm not sure who can answer this one, but maybe Don, how comfortable -- not how comfortable but are you comfortable with your 36.5% ownership in CI and do you intend to raise that ownership piece over time? Thank you.

Okay. It is Kevin Dougherty speaking. In terms of the product, I guess it was launched at the end of April, early May, I would say it is still gathering steam in the marketplace. There is a fairly steep learning curve for the advisers, for the roll-out and for people to get used to the product and to start to use it in their practices. And so we would expect continued continued growth in the sales of this product. I don't have the number right in front of me, I think it is in the range of about 225 million in Q4 of SunWise Elite Plus sales.

Okay. Commenting -- it is Don Steward here, on CI, we like our ownership position in CI, we think that Bill [Holland] and his team are doing a great job over at CI. As you will recall, our ownership in CI has fluctuated between late 20% to presently 36.5%. I would say this particular level works well for us and I wouldn't expect to see major shifts in the ownership position any time soon.

Don, just as a follow-up to that should CI have to issue equity for a strategic acquisition, would you then be more inclined to get back to the level of ownership that you have? Is this the optimal level then, I guess is my question.

I guess if you look at prior transactions we have in fact invested in the transaction backing the team's decision. If we look at each transaction on a case-by-case basis. But generally history has said that we have bought up to our previous ownership position in prior transactions. And I would expect that that would be a guideline going forward but we do look at each transaction as they come along.

Okay. Thank you both.

Your next question comes from John Reucassel at BMO Capital Markets. Please go ahead.

Thank you. Rick, just a couple of clarifications. Did you mention margins at MFS will moderate? Do you mean that we've peeked in the margins over the next 12 moments? Is that what you are trying to tell us?

Potentially. I think that we were very happy with 36% in the quarter. We do expect it will come back in a little bit next quarter. How it trends off of that over the next 12 months or so, you know, we'll have to see how the markets and many other factors go. But that is what I'm trying to atone. We are going to spend some money there.

And just to be clear it is on wholesalers and brandings, so advertising?

Correct.

Okay. And then Bob Salipante, you mentioned that the M and NFP are now selling -- are they selling variable annuities and group business out of Sun Life? Is that what they are doing?

Yes, this is Bob. Variable annuity piece would be modest but we've launched group relationships with both firms and on the individual side both firms have picked up our full product suite from the core universal life products that we've talked about to our coly products and our private placement products so it -- it has been quite good and we're getting the annuity piece of it starts so it is modest at this point.

Okay. So not material. And then I guess my -- my last question for Don, just is -- is the activity level picking up out there given the uncertain conditions in the U.S.? Have you seen the deal flow pick up? Or has there not been a lot of change? And, we've heard people comment that valuation expectations are still high out there. Is that something that you would continue to agree with, or not?

I think from our perspective, John, we see a relatively constant level of activity. It does inevitably fluctuate quarter-by-quarter. But I wouldn't say that we detect a trend upwards or downwards.

Okay. And the valuation, has that -- has that changed much, what people's expectations are?

Well, I think you've -- inevitably, any time valuation shifts you've got the-- looking at the more attractive deal from the purchaser's point of view versus the seller, it remorse as to times past so I think valuations possibly look a little more favorable to purchase, but that doesn't mean to say sellers are willing to accept that. So I see the valuation as also a noisy situation.

Okay. Great. Thank you.

Your next question comes from Mario Mendonca of Genuity Capital Markets.

Good morning. Want to drill down to some detail on the higher credit spreads you've referred that to being beneficial in the quarter, I think it was mostly in Canada and the others and the disclosure really does not allow us to calculate just how much that has changed because of the U.S. dollar co-mingled on the balance sheet. Rick, could you give us an understanding of what sort of changes, what the magnitude was and how that contributed to earnings.

Yes. What we've seen credit help on a couple of fronts, we saw it in the U.S. and really just a reflection of expectations of where credits will go and how it will impact and it is roughly -- I will give it to you, in the $10 million range, benefit there. We also see a little bit in Canada more as we get higher yields on some of assets, we've seen benefits to that as well and that is probably higher probable in the 15 to $20 million range.

Is that the expectation or has the company shifted from higher rated securities to lower rated securities?

In U.S. is probable more of an expectation, in Canada it is actually a shift of shift to actual better yielding assets but I should tell you that the credit spreads is more a reflection of in the reserves as opposed to the pure yield coming off of the portfolio.

And -- but we're talking modest shifts here, the company is not making a major shift into higher --

No, absolutely -- absolutely not. No.

Modest.

If you look across the common credit profile this quarter to last quarter is very consistent.

And then a question on the -- on the benefit of hedges, going back to Eric's question. I was a little confused when I was trying to understand the explanation for how the U.S. Annuity earnings improved. You stated that the fee income improved because markets were stronger and then the hedges had a positive impact.. The hedges would be -- really should go the other way if they are in fact hedges. You'd assume they are to cover you from -- for down equity markets. So the two explanations just did not chive with me, can you help me to understand that?

Yes. Let me turn that over to Bob Wilson.

Thanks, Rick. If you at variable annuities the CIA standards on variable annuity reserving have a concept of term of the liability. And we actually purchase our hedges on an economic basis as opposed to an accounting basis and for many of our variable annuity policies in the U.S. the reserve that we established for the guarantee minium death benefits is actually zero because of the term of the liability concept because a lot of the policies were sold back when the markets were much lower than they are today. And so even at CPE 80 the reserve is zero. And when we hedge, we buy hedges that do not take into account the term of the liability concept. So during the quarter volatilities increased on our hedge portfolio, causing the actual hedges to go up in value because the reserves have a zero floor on them, we ended up making money and as Rick has pointed out in some prior quarters exactly the opposite would happen. The market would go up, the reserve wouldn't go down and the hedges would go down and that would go through income.

This is a case of the value of the options increasing because volatility went up?

Yes.

Got it. That totally makes sense now. And, I'm sorry, I just have to get one other quick one in, the hedge fund initiative, you are talking about helping these folks set up their fund for the distribution and everything else but are you lending any money to these guys and is there any co-branding of Sun Life and the hedge fund for the purpose of distribution that could create some deputational risk down the road?

This is Paul Kerwin on the Four Pillars, the entity itself is a a pseudo private entity venture whereby we will seed let's say a $500 million fund, invest that money with say ten hedge fund managers and the goal of -- or the selling point of the seeding will be that we will oversee the security selection underneath that and we'll put risk monitoring on top of it. And so one of the selling points is that this thing will not be, 100 times leveraged and cannot blow up and from that standpoint I think that reduces the risk of the headline risk to MFS and to Sun Life because that is part of the -- of the reason for selling this. On the -- the lending money front, we will have a small amount of money invested in the seed fund, probably in the 5 to 10% range, including some of the -- the individuals involved in the venture. But we will won't be lending money per say to any of the -- to the hedge funds. That will all be through a -- a seed fund which we will obviously sell to institutional investors.

Rick, how much money do you -- sorry for this question, how much do you think of -- of Sun Life's own capital do you think will be in this initiative.

We will have to see how the initiative goes but it will start with an initial seeding and we hope to grow it significantly but it will not be a large portion of a -- or relative, I should say, of MFS or -- certainly of sun life but we want it to be successful.

Thanks.

Operator, I think we have time for one more question.

Okay. And it is from Colin Devine of Citigroup. Please go ahead.

Okay. I was wondering if could you just come back to the V-A business again, with the sales down a little bit this quarter, Bob, do you really attribute that to the market or are you starting to see a bunch of competitors products sort of mimicking your income on demand. As you may recall, I think you went through this a few years ago with the enhanced death benefit and then sales ran up and then sales tailed down? And then for Don on the M&A front is it fair to say that you are looking at both, I guess, the tuck-in-type deals that you have done but it is our speculation that you have looked at, at least one major deal in the U.S. and that still remains something that you can -- you are very open to?

Colin, Bob Salipante, I'll sake the V-A stuff. I -- I think in the third quarter we saw both on gross and surrenders some impact. July was the strongest month of the quarter on the sales side. And then we also saw surrender activity drop from prior quarters in an absolute dollar and a percent basis and as the quarter progressed, so we did see some market impact there and it was the summer as well. We see IOD as being distinctive. It is a very competitive market, as you know. A lot of product, innovation continues to come from our competitors. We haven't seen really too much mimicking of IOD. I expect we'll see more of that come the May 1, release of product in 2008.

And, Colin, it is Don speaking to address the question on M&A. I'm not sure that I can add a great deal to my comments previously in that we are in the deal stream, perhaps important to point out we're in the deal stream internationally. It is not solely about the United States, that we do look outside the U.S. as witness our Hong Kong acquisition some time back. And so we're looking wherever we see opportunity and fit. I think in the United States, as you well know, transactions do not come along in neatly packaged sizes. And so we tend to look at whatever happens to come our way that we deemed a close fit with good prospects. And I'm not sure that I can say much more than that.

And then one follow-up Don for you, perhaps, or perhaps for Kevin. I agree with Don -- or with Bob's comment that IOD is quite distinctive. And I think it does tremendous value to the clients but if it is so distinctive, why haven't you rolled it out in Canada or have -- any of your other regions around the world?

It is Kevin speaking. So Canada is still a pretty early stage market. And I think you'll see quite a bit of product innovation happening, over the next 12, 24 months.

And Colin, just to talk about other parts of the world, we are 's continuing to look at product -- what you might call product extensions or product needs pretty much everywhere we do business so stay tuned on that front.

Okay. Thank you.

Okay, thanks, Colin. And I would 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 wish to listen to our rebroadcast it will be available on our website shortly after 1:00 p.m. this afternoon. With that I'll say thank you and have a good day.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating. You may now disconnect your lines.