Sun Life Financial Inc (SLF) 2007 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Life Financial fourth quarter2007 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 called is being recorded today, Thursday, February 14, 2008, at 11 a.m. Eastern time.

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

Thank you, Patrick, and 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; Rick McKenney, Executive Vice President and Chief Financial Officer; and Jim Anderson, Executive Vice President and Chief Investment Officer, who will provide an overview of our investment portfolio. Also available to answer questions are Dean Connor, President, Sun Life Financial Canada; Bob Salipante, President, Sun Life Financial U.S.; Kevin Dougherty, President, Sun Life Global Investments; Rob Manning, President and CEO of MFS; Paul Kirwan, Chief Financial Officer of MFS; Bob Wilson, Senior Vice President and Chief Actuary; and Colm Freyne, Senior Vice President and Controller.

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 question, 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 Web site.

Turning to slide two, I draw your attention to the cautionary language regarding the 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 will now turn things over to Don.

Thank you, Paul, and good morning, everyone. As Paul mentioned our Chief Investment Officer, Jim Anderson, is joining us on the call. Given the level of attention on investment portfolios and financial services companies, Jim will be providing you with information on our balance sheet invested assets.

While no one has escaped the impact of the volatile financial markets of the last several months, our investment portfolio has held up reasonably well.

We are pleased to be reporting solid results for the fourth quarter of last year, both financially and operationally. Fourth quarter completed a strong 2007, where we again achieved all of our key financial objectives, growing fully-diluted operating earnings per share by 11% and operating return on equity 50 basis points to 14.3%, on our way towards a target ROE of 15%.

Our operating earnings for the full year 2007 were C$2.3 billion, a Sun Life record. Fourth quarter operating earnings per share were up 4.3% and operating ROE was 14.3%, up 30 basis points over the same period in 2006. The moderate growth in the earnings per share for the quarter reflects the considerable headwind created by the strengthening of the Canadian dollar relative to the fourth quarter of 2006. In constant currency, fully-diluted operating earnings per share were up 12% over the fourth quarter of '06.

The Board of Directors of Sun Life Financial has approved an increase in our quarterly shareholder dividend to C$0.36 per common share. For the full year 2007, dividends paid to shareholders amounted to C$752 million, an increase of 13% over 2006.

Our fourth quarter press release outlines a number of businesses and financial highlights. I will speak to a select few before commenting on 2008. Given the importance of mortality-based products to our business, we are very much aware of ongoing improvement in longevity, which in turn, drives increasing demand for retirement products. Over the fourth quarter of 2007, sales growth for the U.S. and Canadian wealth accumulation products continued. In Canada sales in Group Retirement Services, the GRS, increased by 76% over the fourth quarter of 2006, with full year sales of C$3.3 billion, up 61% over 2006. In the annual defined contribution plan survey, the results of which were published in December 2007, Benefits Canada has ranked Sun Life GRS as number one for the sixth consecutive year. GRS has also been recognized as the fastest-growing defined contribution provider measured in dollars. GRS currently has a 32% market share.

Individual segregated fund sales in Canada, including deposits from the SunWise Elite Plus guaranteed minimum withdrawal benefit rider, grew by 37% to C$426 million over Q4 2006. Gross variable annuity sales for Q4 in the United States grew by 38%, or $780 million over the same period the previous year. Indeed 2007 gross domestic available annuity sales of C$2.8 billion exceeded sales for the full 2006 year by 65%.

Turning to other accomplishments, in the midst of challenging market conditions over the fourth-quarter, we were able to secure long-term financing to address U.S. statutory reserve requirements for certain universal life policies under Actuarial Guideline 38. During 2007, we continued building our brand strategy in Canada, introducing the "Life is brighter under the sun" advertising campaign. We continued with our strategy of growing those businesses where we can leverage our position to one of increasing strength, while implementing decisions on other businesses where a strategic exit would optimize value. We acquired Genworth's group insurance business, bolstering our Employee Benefits Group business in the U.S., and we sold Independent Financial Marketing Group.

I congratulate our employees and distribution partners on the excellent progress made in executing our integration plans for the EBG group business. The acquisition was completed at the end of May last year. Our focus in the first stage of integration was to establish a combined salesforce selling one the overall suite of products in time for the fourth-quarter, which is a period of high sales in U.S. group insurance. We have been very successful in achieving this important milestone and we remain at or ahead of target in achieving our integration costs, synergies and earnings objectives. I am confident the EBG team will sustain this excellent performance into 2008.

2007 also saw us move to more explicitly leverage our capabilities across the enterprise. We appointed a chief marketing officer to support our enterprise priority of intensifying customer focus. We launched an international variable annuity center to support the growth of variable annuities solutions across the enterprise, as international division for variable solutions is expanding. We established Sun Life Global Investments, where we intend to further leverage our world-class investment management platform.

In 2008, we see many opportunities to grow -- building on our brand; introducing innovative products to meet the growing needs of the retirement market; leveraging the skills and capabilities brought under the umbrellas of Sun Life Global Investments and the international variable annuity center; and expanding internationally. We will continue to enhance our comprehensive risk management capabilities in an ever-changing business environment.

In terms of future growth, Asia represents a huge opportunity and one in which we will continue to invest. India, in particular, is a country of tremendous potential. The growth in India in life insurance is nothing short of extraordinary. It 2006, the industry grew by 70% over 2005 in total premium. Individual live sales for the private companies for the nine-month period ending December 31, 2007, are up almost 100% over the corresponding 2006. Birla Sun Life Insurance, our joint venture with the Aditya Birla group, has grown considerably faster than the market, gaining share.

In 2008 we will continue to invest in India. Our plan is to expand the number of branches and agents, increase IT investment and launch innovative products. Our ultimate goal in India is to become a top three player among private insurers, measured by new business premium. In pursuing this goal, we will continue to focus on growing profitable new sales, augmenting an increasingly valuable book of in-force business.

Also in 2008, we will continue to invest organically, both in the organization and in the businesses. We will also assess acquisitions in a financially-disciplined way. We'll continue to leverage a balanced business model that provides diversity in terms of geography, product and customer and generates profitable sales growth, translating into increased shareholder value.

Let me conclude by reiterating that Sun Life has again delivered solid results, as we executed on our business plans to fulfill our mission of helping customers achieve lifetime financial security. With that, it is a pleasure to handover 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 side six, we had a solid fourth quarter with good results. Fully-diluted earnings per share of C$0.98, which were on a constant currency basis, grew 12% versus fourth quarter 2007. Our operating return on equity also increased by 30 basis points to 14.3%. The rapid appreciation of the Canadian dollar in the second half of 2007 created a significant headwind in the fourth quarter on both our top and bottom line. Currency reduced net income by C$41 million, or C$0.07 per share, and reduced revenue by C$400 million in the quarter. This is the largest currency impact we have experienced in any quarter since we became a public company in 2000.

This quarter was also mark by a significant market turbulence and we weathered it quite well. Turbulence has continued since year-end, but looking back, the equity markets ended 2007 up single digits, while the fourth quarter was down slightly from September numbers. Interest rates have also been coming down, which impacts our fourth quarter results in line with our sensitivities. And finally, we saw a benefit from the implementation of our AXXX funding structure, which was offset by assumption changes with our annual review of assumptions, which to place in the fourth quarter.

On slide seven, we highlight our sources of earnings. In the fourth quarter, we saw expected profit on our in-force business grew by 7%. This growth was also tempered by currency. Without which, expected profit was up 15%. This growth was driven by good performance in our wealth management operations as well as the solid integration of our Employee Benefits Group acquisition.

We have significantly reduced new business strain primarily as a result of the implementation of our financing structures for our U.S. life insurance business. The implementation of this structure in the fourth quarter allowed us to recapture some of our previously-recorded new business strain. The portion of this strain related to 2007 was put through the impact of new business line in the fourth quarter to normalize it for the full year. Our quarterly run rate of strain will be higher than the eight million shown here and is more similar to the second and third quarter.

Skipping down to management actions and changes in assumptions, it is here that you will see the most significant piece of the benefit of the implementation of our AXXX structure. The benefit is derived from a combination of the recapture of excess strain booked prior to second quarter 2007 and the ongoing profitability of the structure employed. As we have mentioned on previous calls, the fourth quarter is normally characterized by a greater number of assumption changes than other quarters and this quarter was no exception. In addition to the favorable impacts under the AXXX structure, we saw a number of other changes in assumptions across all of our other businesses this quarter. This ranges from reserve releases for mortality and expense improvements, to reserve strengthening for longevity lapse and updated interest rates and equity market assumptions. This all netted to a pretax C$111 million gain in the fourth-quarter. Absent the favorable impact of the AXXX recapture, we would have seen overall reserve strengthening in the quarter.

In the other direction, experienced losses of C$36 million were down from the 116 million of gains from last year, as market volatility in the fourth quarter of 2007 was markedly different from the favorable experience gains we saw last year from investment and market gains across the Company.

Our effective tax rate for the quarter was 17%. Excluding the PAR adjustment for Canadian tax rate changes, which did not affect shareholder net income, the rate was 22%. The impact of the Canadian tax rate changes had little impact year-over-year, as earnings of the fourth quarter 2006 benefited from change of the investment tax credit.

Moving to premiums and deposits on slide eight, we saw a sizable decline in the fourth quarter of 2007. With the appreciation of the Canadian dollar and as an organization with operations around the world, currency translation has a significant impact on premiums and deposits as well. In fact, C$1.8 billion, or almost 80% of the reductions in premium deposits this quarter, can be attributed to the strengthening of the Canadian dollar. The impact was most significant in our U.S. asset manager MFS.

Normalizing for the impact of currency, life and health premiums and deposits were up 13% on strong sales in our Employee Benefits Group in the U.S. and sales of other (inaudible) wealth products are up 3%, as strong growth in seg fund deposits in Canada were offset by lower mutual fund sales at MFS and fixed annuity premiums in the US. Finally, managed funds sales, which represent sales of institutional funds at MFS and McLean Budden, were down 18%.

Looking at slide nine and the value generated by sales over the last 12 months, the value of new business grew by 24% to C$870 million. Driving this growth were strong sales in our wealth management businesses, our EBG acquisition in 2007 and impressive growth in Asia sales. Heading into 2008, the value of new business continues to be a focus of the management of Sun Life, as we build long-term shareholder value. Total company assets under management, which are depicted on slide 10, are down slightly from last quarter on a year-over-year basis. At C$492 billion, assets under management are down C$13 billion, or 3% from last year. Strong market performance and sales of mutual fund and segregated funds were more than offset by nearly C$50 billion in currency movement.

In the last few quarters, I have stopped at this point and given you an update on our investment portfolio. This quarter, we will take time at the end of today's presentation to have our chief investment officer give you an overview of the portfolio. While no insurance company will be immune to a difficult market and economic conditions, we believe that our balance sheet and risk management capabilities have thus far and will continue to allow us to weather periods of difficulty comparatively well.

On an industry note, for those of you who follows the U.S. life insurance industry closely, you would have seen several companies incur significant investment losses in their portfolio. For the 56% of our total invested assets that are categorized as held for trading, changes in the market value of these assets are recorded immediately and are generally offset by changes in the value of our liabilities. We will take charges when we see the cash flows of a particular investment are impaired or when investments are downgraded, we will add to our existing reserves for credit within our actuarial reserves.

Turning to slide 11, we have had a busy year on the capital front. As you can see on slide 11, our MCCSR ratio for Sun Life Assurance Company of Canada, or SLA, remains strong at 213%. This is a slight increase from last quarter, with a number of small items that are largely offset and include continued phase-in of the investment accounting changes that became effective January 1 of 2007. Throughout the year in 2007 and going into 2008, we remain focused on effectively deploying capital to generate value for our shareholders. In 2007, a total of C$1.25 billion was returned to shareholders in the form of dividends and share repurchases. We spend C$700 million on our EBG acquisition and we optimized our capital structure by opportunistically issuing and redeeming debt. We ended 2007 with deployable excess capital of over C$1 billion and a leverage ratio of 22%.

We are already well on our way to maintaining this momentum in 2008 with the announcement today that our Board of Directors had approved a C$0.02 increase in common share dividends. This brings the quarterly dividend to C$0.36 per share, an annual increase of 13%. And in addition, our Board of Directors, once again, has approved our share repurchase program.

Moving to our business groups on slide 12, net income in our Canadian operations grew by 2% over the fourth quarter of 2006 to C$263 million. Return on equity was 15% for the quarter as well as for the full year. Earnings were driven by mortality and morbidity in group benefits, partially offset by lower investment gains in our individual and group wealth businesses. On the sales front in Canada, on slide 13, individual insurance sales in Canada were up 4%, with steady production from our career salesforce and continued growth in the wholesale channel. Individual wealth sales increased by 8%. Growth in our segregated funds was excellent again this quarter, with continued momentum in sales of our SunWise Elite Plus product, particularly in our wholesale channel.

Looking now to our Canadian group businesses, on slide 14, you will see both blocks of business continue to grow nicely. Our Group Retirement Services business grew 8% on record sales and equity market growth. As Don mentioned earlier, our GRS business has been recognized as the number one provide of DC plans by Benefits Canada magazine for the sixth consecutive year and with a market share of 32%. Our group benefits business ended 2007 with business in-force in excess of C$6 billion, a 7% increase over the fourth quarter of 2006.

Moving onto our U.S. operations on slide 15, earnings are up significantly to $165 million. The most dramatic increase was in our individual life business, where we benefited from the implementation of our AXXX structure that I've spoken to. The net earnings impact of AXXX of individual earnings, net of our other reserve adjustments, was approximately C$60 million in the fourth quarter. Our Employee Benefits Group earnings grew by 50%, primarily from our acquisition in the second quarter of 2007. Finally, annuity earnings were down 7% from the unfavorable impact of wider credit spreads and lower earnings on surplus.

Turning to annuity sales, on slide 16, we continue to experience good growth in our U.S. variable annuity sales, which increased 38% over the fourth quarter of 2006. Our Income ON Demand product continues to be well received in the market and the fourth quarter of 2007 marked the fifth consecutive quarter in which VA sales exceeded $500 million. After two quarters of positive flows, our U.S. VA sales did see net redemptions this quarter, as our strong sales did not offset an expected spike in surrenders of legacy products from the 2000 time period.

Moving on to slide 17, core sales of our individual life insurance have continued to trend down. You'll notice that we have added to the average level of individual life sales in 2005 as we feel that is a better comparative measure relative to the high sales volumes we saw in 2006. Going forward, we would expect to see core sales around current levels this quarter, with some margin for growth in 2008.

Looking at our Employee Benefits Group business, our business in force is up significantly over last year on the acquisition in the second quarter of 2007. As Don noted, the integration of the EBG business is progressing well. Sales and financial targets are in line with our expectations, service levels have been maintained and systems work is progressing according to plan.

Turning to our asset management business in the U.S., on slide 18, you can see we have had another excellent quarter at MFS. Amid turbulent market conditions, earnings are up 19% to $74 million and pretax operating margins grew to 40% with 30% -- 36% for the year. We would expense margins to moderate in 2006 as we continue to invest in our global distribution.

On the sales side, we experienced net outflows in both our retail and institutional funds. On the retail side, we saw increased redemptions as market conditions and general industry experience impacted consumer behavior. Flows of institutional funds were hampered by two large separate account withdrawals in the quarter. As we mentioned in our press release earlier today, MFS's long-term performance was recently recognized in the most recent Lipper/Barron's Fund Family Survey, where MFS ranked 14th out of 52 major fund families based on 10-year performance. MFS assets under management ended 2007 at $200 billion, up 7% from the fourth quarter of last year.

Turning to our Asian operations, on slide 20, earnings were up 15% to C$38 million on reserve releases related to expense management and interest rate movements. Some of this earnings growth was tempered by our continued investment in the rapidly developing markets of India and China. Looking at the chart on the right-hand side of this slide, you can see how some of this increased investment has materialized in the form of increased sales. With the opening of our Shanghai office, we are now operating in 16 cities in China. In India, we now have 339 branches in over 200 cities, with aggressive growth plans for 2008 as Don alluded to earlier.

Having reviewed the quarterly results, I would like to quickly turn to side 21 to reflect on how we have again delivered on our financial objectives in 2007. Our EPS grew by 11% to C$3.98 and our ROE increased by 50 basis points to 14.3%. The growth in ROE is even more impressive considering the 50 basis point headwind created by changes to investment accounting rules that came into effect on January 1, 2007. Our dividend payout ratio at 33% fell within the range of our stated target and our share repurchases ended at C$502 million for the year, meeting our target.

It is nice to come off a good year and now the question is how do we think about 2008 and beyond? Turning to slide 22, we continue to be committed to achieving the previously-established medium-term objectives going forward, namely a 10% average EPS growth per annum and a ROE goal of 15%. While we have overachieved with an average EPS growth of 11.4% over the past three years, we are well aware of the current environment and the challenges this brings in 2008.

First is credit. While we are confident about the quality of our asset portfolio, the current level of market deterioration is striking and could result in a need to strengthen asset default reserves, even as our portfolio performs. Jim will give you a deeper dive in a moment. Like all life co's, we have sensitivity to changes in interest rates and equity markets. As interest rates have come down and the size of our long duration business has grown, our sensitivity to changes in interest rates has consequently increased for 2008. Equity market sensitivity has remained fairly constant and finally, currency headwind is well-trodden ground. On average, our rate for 2007 was C$1.07, so if things continue to remain at parity, we will feel a roughly 4% growth headwind.

With all of the near-term headwinds, we take a longer view and remain on course. We will continue to serve our customers, innovate with products and we will continue to deploy capital in an effective manner to drive value for our shareholders. We achieve this by deploying capital to fund organic growth, making selective acquisitions and returning capital to shareholders through dividends and share repurchases.

In conclusion, we had a very solid year in 2007 delivering on our commitments to shareholders. We remain cautious about the broader environment in 2008, but at the same time, we are confident that our balanced business model, strong risk management capabilities and growth strategies will continue to deliver growth in shareholder value in 2008.

With that, I would like to now turn it over to Jim Anderson, Executive Vice President and Chief Investment Officer, to provide an overview of our investment portfolio. Jim?

Thanks, Rick, and good morning, everyone. I am pleased to be able to speak to you today about Sun Life's well-diversified and high-quality asset portfolio. I hope that by the end of my comments, you will share our view that while no insurance company can be immune to difficult market and economic conditions, we believe that our conservative balance sheet and strong investment and risk management capabilities will hold us in good stead on the comparative basis.

Here on slide 24, you can see that we have over C$100 billion of general fund assets of the insurance companies in the Sun Life Financial group of companies invested across all of the major asset categories. Our approach to managing the investment portfolios in all asset class is similar. Our time frame is generally focused on a longer-term than many investors and we invest to hold through the cycle. We have a team of over 200 experienced professionals and we deploy that team in a team approach across all asset classes. We have a strict adherence to a research-based process, which means we only buy what we understand. We believe in wide diversification and in looking at investments, we are trying for singles and doubles, not swinging for the fences. We have a very disciplined risk management process, which we follow in investment that we and all throughout our process.

I'll provide some more detail on our bonds, mortgages and real estate portfolios in the following slide, but would like to comment briefly on some of the other asset categories in the portfolio. The other category depicted on the pie chart is comprised mostly of policyholder's loans as well as our equity investments in CI Financial and MFS. 5%, or a little over five billion, is invested in equities, about two-thirds of the equity portfolio is invested in North American Exchange-traded funds, with the remainder invested in common stock in the U.S., UK, Canada and Asia, primarily in Hong Kong.

Within the mortgages and corporate loans category, we have a little over C$5 billion invested in corporate loans. These are primarily private placement loans in categories such as lease finance and project finance, sourced by our private fixed income group. The private fixed income group is something of a hidden gem here at Sun Life. They have sourced about C$17 billion of our overall portfolio, some of which gets categorized into bonds, and have delivered impressive returns for us. A small measure of this group's success is their repeated placement near the top of the rankings of North American life companies in private placement annual volume.

Slide 25 shows some of the things we do not own -- no subprime mortgage pools without subordination; no structured investment vehicles; and no non-bank-sponsored asset backed commercial paper.

Turning to side 26, we provide you with some more detail about our C$60 billion bond portfolio. We have a high-quality bond portfolio, with 98% rated investment grade. By policy, we do not buy below-investment-grade bonds, but neither will we necessarily sell bonds that have fallen below investment-grade, where we believe they continue to have good value as evidenced by the to% of the portfolio below investment-grade.

We are well diversified with approximately 1400 names in our bond portfolio. It is our policy to manage our credit exposure in a risk-adjusted way, which means that the absolute exposure to any name is related to its credit quality. That is the higher the credit rating, the larger the permitted exposure and the lower the credit rating, the smaller the permitted exposure.

Turning to slide 27, we have broken out some of the components of our asset-backed bonds portfolio. Nearly 100% of the portfolio continues to be investment-grade, with each of the separate categories noted here having a high percentage in AAA rating category for more mature vintages.

In terms of geographic exposure, about two-thirds of the commercial mortgage-backed securities portfolio is in the U.S., the remaining part in Canada and the UK. The non-agency residential mortgage-backed securities, subprime and Alt-A portfolios are in the U.S. market. About two-thirds of the collateralized debt obligation portfolio is similarly in the U.S. market.

Two other important features to note are the high levels of underlying fixed-rate mortgages supporting these securities. As most of you know, fixed-rate mortgages, particularly in the residential market, are much less susceptible to reset default. In our subprime and Alt-A holdings, in addition to vintage, fixed-rate and high-quality, we are also diversified across 148 separate pools of assets. And while any deterioration in credit quality will require us to put up additional asset default reserves, it is important to note that we have seen credit upgrades in addition to some downgrades during this period. For example, within the subprime and Alt-A portfolios for the period from January 1, 2007, to now, we have had C$20 million PAR amount in downgrades and C$53 million PAR amount in upgrades.

On slide 28, we have provided some additional information about some of the asset types that have been in the news of late. As you can see, our exposure to the monoline insurers is about C$1 billion in total. 92% of our exposure to monoline insurers is indirect. This indirect exposure represents the total value of bonds for which monoline insurers have provided credit insurance. Credit insurance, generally, has provided the underlying bonds with a AAA credit rating. If a monoline insurers is downgraded or becomes unable to honor its commitment to insure the bond, than the rating of the underlying bond would apply. The holder of a wrapped bond, therefore, only suffers a loss if both the monoline insurer and the underlying bond deteriorates in quality or becomes impaired. When we purchased wrapped bonds, we assess the underlying credit first, independently of the credit insurance wrapper. Absent the credit insurance, our underlying bonds have an average credit quality of between A and BBB. Our direct exposure to the monolines is with two insurers that are AAA rated, with a stable outlook by all agencies. All of our indirect exposure is to insurers to have current ratings that our investment-grade. Most of our exposure is in the UK and is to water companies, electrical distribution companies and other exposures backed by businesses. We do not have any Montreal Accord asset-backed commercial paper.

We have a small amount of credit derivatives used within a yield enhancement program. These positions are all CDX index positions, which are diversified across a basket of 125 North American investment-grade names. The tranches we traded have an average credit rating of AA.

Finally, turning to slide 29, our mortgages and real estate portfolios are also well diversified by type and geography. We have a C$15 billion mortgage portfolio with approximately 4500 commercial mortgages, nine billion in Canada, six billion in the U.S. By policy, we require a loan-to-value ratio of no more than 75% at time of origination. The current average loan-to-value ratio of the portfolio is approximately 65%. As at December 31, 2007, and also as of today, we have only two mortgages in arrears, one in Canada that is insured by CMHC and one in the U.S. that has been fully provided for.

Our C$4 billion direct real estate portfolio is split two-thirds in Canada and one-third in the U.S. and is comprised of 383 separate properties. Again, we have wide diversification in both property type and geography.

So in conclusion, while the present financial markets offer challenges for all investors, with our growing businesses and strong cash flows, we are a net investor and the current conditions have provided us with opportunities. One example is in our commercial mortgage lending activities. We've been able to place loans at attractive spreads and on attractive terms as the availability of funds from the conduits has dried up and borrowers have increasingly turned to traditional lenders, such as ourselves.

And with that, I will turn things back to Paul.

Thanks, Jim. I know today is actually a very busy day for many of you on the call. We will ask the operator to poll for questions in a moment and we will ask each participant to limit himself or herself to one or two concise questions and then re-queue with additional follow-up questions. We will of course make every effort to take all your questions during the allotted of time, but we would like to stick to the allotted time, again, appreciating that many of you have a busy day today. So with that, Patrick, will you please poll the participants for questions?

(OPERATOR INSTRUCTIONS) Michael Goldberg, Desjardins Securities.

I think from what you said, Rick, if -- impact of the AXXX funding solution, net of other reserve adjustments, was about $60 million in the quarter?

That is correct.

That is about $0.10 a share. Can you talk about some of the items, other than the stronger Canadian dollar, that offset this, in particular your equity market sensitivity, perhaps using the scenario that Industrial Alliance described yesterday? And what portion of that equity markets sensitivity would be [MUR] related?

Maybe the best way to do that is to take you through some of the differences relative to the AXXX. It did provide benefit. There are other areas in the portfolio, quite a number that actually we strengthened reserve. A couple of them were updates to model assumptions going through. We did feel some impacts from movements in the interest rate environment, particularly equity markets were basically very little impact to us.

But I would probably highlight currency, the changes to our assumptions set, being offset with the favorable AXXX level. You could throw some other things in there as well. We did see some positive mortality offset by some negative impact from lapses, but I'm taking you down -- probably too far down the chain to give you the overall story.

I have one other number question. Can you split the 870 million of valued new business, as you have in the past, between MFS and the rest of the Company?

I can, but it will take me a moment to get that. Maybe I should give that to you after the call or Paul can get it and we'll give it to you at the very end.

Okay, thank you.

John Reucassel, BMO Capital Markets.

Just a question on Canada and I guess for Rick or Don. I guess if I step back and my numbers are right, it looks like earnings growth in Canada in '07 was 5.5% and in '06, it was three to 4%. And I guess '05 was seven, 8%. What should we expect out of Canada going forward? You have talked about high single digits, but we have been below that trend. Could you talk about maybe what has been happening there and what we can expect going forward?

I think we would stick to the point that we would look to high single digits in that line. I think your numbers are correct. There's obviously a lot of different elements that have been taken into account there over the last couple of years. As you mentioned, for the full year, 5.5% this year, but it is still a single digit -- high single digit type growth pattern that we would expect.

So this looks GRS have been, but it has been group benefits and individual. So is this just you have been spending a little more here to get this -- reach these growth targets or what has been dragging you down this quarter and over the last year or so?

This quarter, you'll probably have to look more -- if you get specific to this quarter, you would have to look more some of the changes relative to what we saw last year -- lower investment gains that we saw, interest rates were a factor coming in there. You take a couple of those things in the quarter, I think the way you are looking at it is not a bad way to look at it, though, which is over a longer-term trend, 5.5% growth level and we would like to see it a little bit north of that.

And I guess my last question in two parts, a clarification. You use to disclose your reserves for credit losses in your actuarial liabilities. Did I just miss that or have you stopped disclosing that? The billion in monoline wrapped, is that all municipals? Is that what you said that was in the UK?

On the monolines, it basically is municipal wraps everywhere. We are not wrapping structures so that's --

We have about 60 underlying credits. About 98% of the credits are real companies, most of them in the UK. There are water boards, electrical transmission, gas transmission, things like that. In the structured finance type underlying, there is about 2.5% of the total portfolio is in that sector.

Then on the credit reserves, it should be out there. If not, it will be in our financial statements. I believe it is in the supplement, Paul --

John, I think it is on page 25 of the sup pack.

Okay, thank you.

Tom MacKinnon, Scotia Capital.

Just a question with respect to the AXXX and then a follow-up with respect to the corporate segment. Just trying to get the net impact on a quarterly basis with respect to the AXXX, because this is the first time you are able to recoup any of the strain from previous quarters, is that correct? I think you had said that if we looked at the impact new business, Rick, that negative eight that we see in the quarter here would have probably been closer to the run rate in the prior two quarters, which was somewhere around a negative 48. So are we to then assume that ability to recoup prior strain was about 40 pretax, is that the way to best look at that?

I think the best way to look at it, Tom, is really to go back into the second and third quarter where we had reflected most of the benefit of the structure ongoing and seeing that from a run rate. What we saw this quarter in the recapture was a recapturing of strain as well as the higher profitability of that business that we recaptured. Taking back to previous quarters is probably a better way --

Yes, you don't go back to '06 -- you don't go back to fourth quarter'06, you just look at it was in the second and third quarter of this year.

That is the best way to do it. When you start getting into 4Q '06, the recaps becomes a little bit difficult.

With respect to the corporate segment, where you have got a hodgepodge of items here, the UK seemed to be a lot lower than the annual run rate we've seen in the past year, at least for the quarter, and some other strengthenings in runoff. How are we supposed to look at these? I know you do all of your annual review of assumptions and you do the true-up then, but just help us understand this segment.

The corporate support is down significantly if you look off of previous quarters. I would do you that the corporate support really has a couple of big elements in it. One of them is going to be our overall corporate expenses, onetime type items that come through. Those were higher on the quarter. The other piece that we have in there is a runoff reinsurance business that we do and that accounts for some of it. That piece particularly came from some of our assumption changes going into that block of business.

So it's hard to look at it on a periodic basis. If you go back over eight quarters or further, corporate support can be a little bit lumpier, but this quarter was a lot -- or at least was certainly lower than we expect.

On a go-forward basis you will still see some expense noise coming through there, particularly to the runoff reinsurance business. You won't see the same assumption changes, but there will be some sensitivity there to moves in equity markets and interest rates.

And then with respect to the UK part, does that --?

Yes, the UK part is lower than we anticipate on the quarter and that would be due to different assumption changes or reserve strengthening.

Okay, thanks.

Mario Mendonca, Genuity Capital Markets.

Good morning. I'll take a step back and maybe not look at as much detail, because there is a lot going on this quarter. You strengthened a lot of economic assumptions this quarter, interest rates, equity markets, certainly. What I'm trying to wrap my mind around is having strengthened all of these assumptions this time or this quarter, does that mean, at least philosophically, that on a go-forward basis the Company's reserves are, say, more conservative, so the Company's capacity to deliver earnings has improved. And again just philosophically, am I reading that right?

I'll turn it over to Bob.

Clearly, if we strengthen reserves by 100 million, then earnings will be, over time, 100 million higher than they would be if we haven't strengthened reserves, because reserves just dictate the timing of when money comes out, as opposed to whether the business is profitable in the first place. The primary changes that we made this quarter were with regard to the economic scenario generator, we using stochastic reserving and for capital purposes with OSFI, use of own approval from OSFI requires that you at least annually update the generator that you use for economic assumptions. We made significant changes to the conservative end on our interest rate generator, not so much -- a little bit more conservative on the equity generator, but it is primarily interest rate-driven thing, which, getting to Tom's question, is one of the reasons why runoff reinsurance was hit quite severely, because it is basically an equity and interest rate play and more interest than equity.

As a sort of follow-up, then, would it be fair to say if -- you made the point that earnings, almost by definition, are higher when you strengthen reserves now, because we're really just talking about the timing. Is it fair to say, then, if the only way earnings would not be higher in the future from this reserve strengthen is if the assumptions that the Company is implying turn out not to be sufficiently conservatives and they become, rather than just provisions for adverse deviations, become real requirements?

I'll paraphrase Peter Rabinovich, who when the analyst asked him when they increased the reserves by, I think, 700 million on the acquisition of John Hancock if they could assume that that was just an increase in PFAD. I think his answer was I wouldn't assume that all of it will come back.

I remember that. I think I asked that question. Thank you.

Dark Mihelic, CIBC World Markets.

Actually I just wanted to circle back again on individual life in the U.S. I want to try and get to a run rate of earnings for that division. Given that you are guiding to, say, sales of around 30 million with similar strain levels, it still seems like the number came in light this quarter. Can you give me any help with that, Rick? Should I be looking at a $40 million run rate for this division, or should I now sort of perceive it -- perversely, I would think that with lower sales there would be lower strain and, therefore, higher earnings out of this division going forward.

I will take it at a very high-level and in the past I have encouraged you to look at our business over several quarters, in this case several years. What I would encourage you to do is look at '05, '06, '07 for this business, average that, because that takes into consideration, really, all of the change that we have been through and then add a bit for the growth that we have experienced.

Okay, I think I can work with that. Similarly for the annuities business, can you walk me through -- there's an awful lot of noise in this quarter and, again, just because it has dropped so significantly, I'm trying to weed through the noise on assumption changes and rather just get to what might be a more base run rate.

I won't indicate to a run rate, but we did have reserve strengthening in the quarter. I would highlight that under CGAAP, we have to assume adverse policyholder behavior, so in the reserve calculation, we assume policyholders will cash out earlier than we think they actually will. And with asset values down due to wider credit spreads, the reserve calculations assume capital losses -- that we will generate capital losses and then we present value that into the reserve. And so we had that affect in Q4, that was part of the reserve strengthening. Frankly if there's further spread widening, we will see that reserve effect again.

I think I understand. Okay.

Just to clarify, Bob is speaking to the fixed annuity block there.

Yes, I am sorry.

Just generally, maybe as another follow-up to the same question, just ask with respect to PFADs, I guess this is for Bob. I guess another way to think of this is you had been actually increasing reserves for the AXXX up until a couple of quarters ago and now you have had a big release, so net-net, should we think that you have actually increased reserves for obviously interest rate sounds like it's the biggest reserve increase. But I guess my concern is what if interest rates stay down and continue to go down? Basically, I think the way I think of this is you had an opportunity this order to increase interest rate reserves even further, but you to take advantage of that relative to your AXXX. I'm just wondering what was part of the thinking there?

We undergo a disciplined approach to establishing what we use in our economic scenario generator and we do the same thing, more or less, every year. It would be inappropriate, I believe, to have just sort of said, gee, we have got a big opportunity, let's hammer the hell out of this and have that flowing through to our capital requirement as well. So there was a change from that.

There were number of other changes in the individual life portfolio as we looked at our assumptions and studied them and had other people from outside study them and look at them. We have still taken the somewhat conservative view with regards to the effect of AXXX, so I wouldn't say that we have taken all of the benefit of AXXX solutions directly into income on all of the existing business.

I understand. Thank you very much.

Michael Goldberg, Desjardins Securities.

I have a question about the monoline. Could you give us some idea of how much markdown would be necessary if the monoline ratings fell below the (inaudible) exposure ratings given, as you said, that the underlying are typically a range of A to BBB?

I will give it a try. We actually have gone through that exercise just to see if we had to sort of forget about the monolines and just hold the assets without any wrap, they would be -- looking at it two ways, we would have to increase capital about 24 million and the effect on increasing reserves would be roughly in the same order.

But that would be in reserves importantly, Michael, it doesn't mean that we expect any actual provisions there, it would just be in our actual actuarial reserves for the lower credit rating.

But if it is a rating change, doesn't that actually go against capital, go against your shareholders equity?

No actually, it would go -- effectively, it wouldn't go to shareholders equity, but it would be through the actuarial reserves.

What would the -- to put it more simply, what would the earnings impact be?

It would be that same 24 million that Jim was talking about. I would highlight there, Michael, this is a -- on a C$1 billion portfolio, this is a very severe case, so I wouldn't spend a lot of time on the net income impact of this thing alone. The monolines would have to go away in that analysis as opposed to a small downgrade or anything else.

Okay, thank you, Rick.

Doug Young, TD Newcrest.

I guess this is a question for Bob Salipante. I guess I always think of widening credit spreads as potentially a positive for your fixed annuity business and I just want to clarify the impact that you're talking about, is that on just the book value part of your business versus the market-value-adjusted part of your business?

The book value is a large portion of what was sold over time, Doug. And again, there's artificial truncation required, so the liabilities behave shorter than we think they will. And that is what we have to reflect in the accounting reserves.

What is the size of that book value block of business versus the market value block of business, just so we can get an idea of significance?

You'll have to have Paul get you that after the call.

Great, thank you very much.

Jim Bantis, Credit Suisse.

I have got two quick questions. Just wanted to ask Bob in terms of gross sales on the U.S. variable annuities side. Obviously a good performance in 2007 and leveling off a little bit in the last quarter because of the tough market conditions, but maybe with the Income ON Demand product fully integrated in the change in the wholesale network, bulk of that is done, what do you see is the next couple of catalysts to get sales momentum continuing on the VA side. And I think Rick had mentioned that there were some redemptions that came off an older block and I'm wondering if you see further redemptions on that older block persisting in 2008?

Let me start with the latter point first, Jim. Bob Salipante here. With respect to net sales, in 2007 we were at about 70 million of net outflows. In 2006, it was over one billion, so we had a big improvement there. Seven-year product and the fourth quarter of 2000 was Sun Life's largest VA quarter ever in the state, so with the [shock lapses], that was expected surge in surrenders in that period. So going forward, we expect surrenders to normalize and that brings us gross sales.

As you said in the fourth quarter, we are off a little bit. Yet to see what the industry does, but again, I think industry is going to be perhaps not as strong as it was earlier in the year. IOD continues to gain traction. Our IOD sales were actually up a little bit in the quarter. Our non-IOD variable annuity product is a bit stale. The competitor product at this point has some stronger features and in the first half of the year, we will come forward with response to that.

With respect to the field force, really going strong. Strong team, sales desk in place, wholesaling team in place and the disciplined calling program continues and we tell our story and we are rolling out some new sales ideas around the use of the Income ON Demand storage.

And just maybe a quick question on MFS, obviously we saw some conflicting trends with the margin actually going up despite your guidance in the previous quarter in terms of investment spend. And then there seemed to be some issues on the managed funds side, which was actually a strength over the past few quarters.

This is Rob. On the operating margin, we had some onetime accrual reversals in the fourth quarter that boosted the margin up. What I would say to you is if we hadn't had those events occur, one of the most significant of which was a regulatory reserve that we adjusted, the margin for the year, which was about 36%, would have been consistent in the fourth quarter. I would caution you that we are very sensitive to market levels of assets and given the turmoil in the markets that we have today, that as we into the year, we would need to adjust expectations on that.

In terms of redemptions in what we -- we call it our institutional business, we had one significant account which was in a highly-concentrated deep value strategy that struggled and the portfolio manager running that decided to retire and the client withdrew their money. The bad news is we lost that account, which was about 1.5 billion. The good news is it was a performance-based fee, so the base fee was about 10 basis points. So financially, it didn't have a significant impact on us. We have seen our institutional business in terms of final [presentations] pick up as we move into this year and we are hopeful that the run rate that you've seen in that business will return.

Thanks, guys.

Mario Mendonca, Genuity Capital Markets.

Forgive me if you have already answered this, the earnings on capital and the sources of earnings, it looked soft relative to last year. I'm trying to figure out that was an issue of last year being strong or this year not being very strong?

It was actually last year being strong. We had some LP gains, namely in the U.S., which drove a lot of that.

So you would look at this quarter, Rick, and call that your normal?

Well, we would like to when we have got the LP gains, so I hope that to be normal. But that is the difference between the two.

Okay, thinks.

Darko Mihelic, CIBC World Markets.

Just one quick follow-up, as well, I thought I'd just ask a sort of general, bigger-picture question. This morning, Great-West announced an acquisition of a payout annuity block in the UK. I had thought that that would also be something that Sun Life would look at. Can you confirm whether or not that would be of interest to you, that kind of acquisition activity and if not, why not?

It is Don Stewart. In principle, we do purchase annuities in the United Kingdom, so I would like to answer the question against the base of we're in the annuity business on a relatively active basis and we keep current with trends. For example, there was a mortality study released in December relevant to the business and showed continuing improving trends in that particular sector of the marketplace. So in principle, yes, but obviously we look at each opportunity as it comes along and play on a case-by-case basis.

So in principle, then, you wouldn't be -- you would be adverse to selling, you would actually be a buyer?

We continue to look at annuity blocks. What we do with our total business is obviously something that we examine. I am speaking enterprisewide here. I noted in my introductory remarks that we had got out of one business and we continue to look at smaller pieces of the business to sharpen our focus. But in the annuity business in the United Kingdom, we are an active player and we would look at opportunities as they come along, yes.

Okay, great. Thank you very much.

Michael Goldberg, Desjardins Securities.

I would just like to follow-up again on the question of equity market, the sensitivity. I think the scenario that the Industrial Alliance presented yesterday, and that is a 10% drop in markets at the start of the year, followed by market appreciation at your assumed rates for the remainder of the year, what would be the impact of that on earnings and what portion of that impact would be fee income verses surplus related?

We don't necessarily use Industrial Alliance's sensitivity scenarios to run our business, but the plus or minus 10% in equity market sensitivities is going to be similar as we disclosed in the MD&A this year to last year. Down 10% is about $130 million to the negative; up would be $121 million. And we do split that pretty equally, probably more of a 60/40 between what would be reserve changes from that relative to direct income impact given the construct of the business.

I'm not sure I followed you last -- the 60/40.

Just basically to say that as those equity markets impact -- these are shock analyses -- so you would actually see the reserve impact being about half that number and then the other half would be, what I would say, in twelve-month earnings pattern. Clear?

Not totally.

Okay. Let me do it this way then, of the down 131 that I talked about, you would see roughly C$60 million coming through in the reserve changes immediately. What you would see in our 2000 and, let's say, eight earnings would actually be C$75 million over the course of the rest of the year.

Okay, thank you.

Thank you very much, everybody. I would like to thank all of you for participating in the call today. If there are any additional questions, we will be available after the call and should you wish to listen to our rebroadcast, it will be available from our Web site shortly after 1 p.m. this afternoon. Thanks very much and have a good day.

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