Sun Life Financial Inc (SLF) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Life Financial Q1 2008 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, May 6, 2008, at 10:00 AM Eastern time, and would now like to turn the conference over to Mr. Paul Petrelli, Vice President Investor Relations. Mr. Petrelli, please go ahead.

Thank you, operator, and good morning, everyone. I'd like to start by introducing the members of the management team present for 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 Dean Conner, President Sun Life Financial Canada; Bob Salipante, President Sun Life Financial US; Kevin Dougherty, President Sun Life Global Investments; Rob Manning, President and CEO of MFS; Jim Anderson, Executive Vice President and Chief Investment Officer; Bob Wilson, Senior Vice President and Chief Actuary; and 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 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 now turn things over to Don.

Thank you, Paul, and good morning, everyone. As reported earlier today, first-quarter 2008 fully diluted operating earnings per share were C$0.93, down 3% from the first quarter of 2007. But for the impact of the stronger Canadian dollar, fully diluted operating earnings would have risen 5% from one year ago. Return on equity for the first quarter was 13.4%, down marginally from a year ago.

The Board of Directors of Sun Life Financial has approved a dividend of C$0.36 per common share payable in early July to shareholders of record on May 21. This represents an increase of 12.5% over the corresponding second-quarter dividend in 2007.

Over the mid term, we continue to aim for an average of 10% annual growth in operating earnings per share and for a 15% ROE. Both of these objectives are subject to the assumptions and conditions we regularly specify in our annual management's discussion and analysis. These assumptions and conditions may be summarized as requiring an annual increase in equity markets approaching 8%, stability and interest and exchange rates, and a normal credit environment.

Obviously, first-quarter economic conditions have been very different from these foundation assumptions and will continue to hinder growth over the balance of 2008. Nonetheless, we believe our financial objectives remain achievable over the three- to five-year horizon through ongoing focus on the execution of our business plans.

As indicated, the first quarter of 2008 was a challenging one with much market volatility and economic uncertainty. The market turmoil that began in the second half of 2007 intensified during the first three months of 2008. Credit issues remained top of mind for investors, and questions around capital strength and solvency surfaced as many financial institutions looked to raise fresh capital.

Economic conditions deteriorated in North America. While the Canadian dollar has remained around parity for the last six months, it has strengthened considerably when compared to the first quarter of 2007. Weaker capital markets and global credit pressures also had a dampening effect on Sun Life's earnings. The impact was both direct and indirect. The direct impact was seen on the market value of our investment portfolios and in the valuation of our liabilities as we strengthened credit reserves.

The indirect impact was seen in the slowdown in the economy and the effect of that on our operations. This was most noticeable in the United States where we experienced lower than expected sales in our variable annuity line and in MFS (inaudible). At this point, we expect the balance of 2008 to remain challenging. However, despite uncertain economic conditions, our balance sheet and capital position remain strong. Our capital as measured by the minimum continuing capital and [surface] requirement ratio stands at 209%.

While our investment portfolio has not been immune to overall credit pressures, the economic impact has been moderate as evidenced by relatively small provisions and write-downs. We continued to grow in measures of value creation. Expected profit grew by 16% year-over-year in constant currency. Growth and value of new business continues to be strong, up more than 20% year-over-year to the end of March on a rolling four-quarter basis.

We believe that our business strategy and the underlying fundamentals of our business remains sound. It's a time of opportunity and challenge. As we began 2008, we had many top-line and bottom-line initiatives in the pipeline to increase productivity and efficiencies. Recent changes to our U.S. retail organization are an example. During the quarter, we reprioritized our strategic initiatives while continuing to invest in high-growth and high-margin opportunities. (technical difficulty) provide more information in his comments.

We continue to move forward with several steps aimed at improving sales through product launches and distribution (technical difficulty). Some of these will have a more (technical difficulty) impact than others. An example, SLF U.S. has made changes to its distribution system and has introduced new products, enhanced investment options and annuities.

MFS has invested in new funds and its institutional product mix. Once they have an established performance record, these new funds will support sales growth. Those funds with a three-year record are already achieving sales results. I was very pleased to see MFS and positive net flows for the month of April 2008. MFS continues to invest in advertising and improving brand position to support retail and institutional sales.

In this year, we remain committed to future growth as we along with our joint venture partner continue to invest in our life insurance operations in that country. We will shortly expand the number of life company branch offices from 339 to 600.

Before I hand over to Rick, let me reiterate that at Sun Life we continue to leverage our balanced business model that provides diversity in terms of geography, product and customer with a focus of increasing shareholder value.

It's now a pleasure to hand over to our Chief Financial Officer, Rick McKenney, who will walk you through the quarter results in more detail.

Thank you, Don, and good morning. Turning to slide 6, we had disappointing results this quarter but within our expectations given the challenging market conditions experienced in the first quarter of 2008. Fully diluted operating earnings were C$0.93 per share and our return on equity is down slightly from 13.5% to 13.4%, reflective of those earnings. Once again, currency was a significant factor in our year-over-year comparative results.

Our results this quarter reflect a reduction of C$43 million or C$0.08 per share from the appreciation of the Canadian dollar relative to foreign currency since one year ago. This is the second consecutive quarter where our earnings have been adversely impacted by more than C$40 million due to the appreciation of the Canadian dollar. Over the past 12 months, the impact has been greater than C$100 million or 5%.

Earnings were also adversely impacted by declining equity markets and a deteriorating credit environment with equity costing us C$0.07 per share and credit C$0.12 per share in the first quarter. Offsetting some of the effects of the macroenvironment were positive hedge experience, lower new business strain and individual insurance and growth in Employee Benefits Group in SLF U.S.

Our portfolio has also withstood many of the challenges we have seen. All of this points to actions taken by our management team to provide a balanced business model and mitigating risks in a challenging environment.

On slide 7 we highlight our sources of earnings. Our expected profit is up 5% over the first quarter of 2007 and up 16% on a constant currency basis. This growth was driven by a number of our wealth management operations in North America as well as the favorable impact of growth in the Employee Benefits Group business in SLF U.S.

Looking at the impact of new business on earnings, we saw a significant decrease in strain primarily in our individual insurance operations in the U.S. as a result of the implementation of our AXXX structure in the fourth quarter and lower sales of Universal Life. As far as experience gains and losses, you can see this here, the impact of the difficult markets including the equity markets and a widening of credit spreads. We did see the benefit of widening credit spreads come through earnings in Canada but these are more than offset by the adverse impact of the widening spreads in our U.S. fixed annuities business.

While interest rates did move lower in the quarter, favorable hedge experience and changes in fixed annuity lapse assumptions to reflect lower interest rates offset any adverse impact in other parts of business. And finally, the decline in equity markets resulted in reserve strengthening in various businesses which was somewhat mitigated by favorable hedge experience.

Turning now to management actions and changes in assumption, they are consistent with last year adjusting for non-recurring items that went through this line in the first quarter of 2007, namely the C$82 million for retirement of the Clarica brand and redemption of our partnership capital securities which you see in the line labeled other. In the management actions and assumption changes line we saw impacts from multiple areas in the business including the gain on sale of our U.S. plan administration business.

And finally before leaving the sources of our earnings, I would just quickly highlight our tax rate during the quarter, at just over 25% this is higher than what we would normally expect. A portion of the higher tax rate relates to tax laws in Canada that have not yet been substantially enacted and are balanced by an equal and offsetting amount in the experience gains line. Adjusting for this, our tax rate is within our expectations.

Moving to premiums in deposits on slide 8, we saw a sizable decline in the first quarter of 2008 half of which is explained by currency. The appreciation of the Canadian dollar reduced premiums in deposits this quarter by C$2.1 billion with the most significant impact coming from MFS. Analyzing premiums in deposits on a currency adjusted basis, Life and Health premiums in deposits are down 6% as higher premiums in the Employee Benefits Group were more than offset by lower Life insurance premiums including large case COLI and BOLI placed in SLF U.S. in the first quarter of 2007.

Our wealth deposits are down as you would expect in light of the vastly economic conditions which prevailed in the first quarter of 2008 compared to one year ago. However, we continue to see strong wealth segregated fund sales during the quarter which were offset by lower Mutual Funds sales at MFS and fixed annuity premiums in the U.S. And finally, managed fund sales which represent institutional sales at MFS and [McLain Baden] were down 21%.

Looking at slide 9 and the value generated by sales over the past 12 months, the value of new business grew by 21% to C$885 million. Driving this growth was our EBG acquisition in 2007, and impressive growth in Asia sales as well as the growth in our wealth businesses over the past 12 months. Building our VNB is important to driving the overall enterprise and is a good lead into our overall embedded value growth for the full year 2007.

So turning to slide 10, you will see that we delivered significant growth in embedded value and value of new business in 2007. As some of you will know, embedded value and the value of new business measures to seek to illustrate the present value of a stream of income over time. Growth in embedded value and the value of new business are, therefore, important measures of whether a Company is growing profitably. Embedded value from operations, that is to say before changes to the discount rate and effective currency in capital transactions, increased to C$20.2 billion, up C$1.8 billion or 10% from the beginning of 2007.

As of December 31, 2007, Sun Life Financial's embedded value was C$17 billion or C$30.14 per share. We've included a more detailed view of our embedded value disclosure in the appendix to today's presentation for those that are interested.

Total company assets under management of C$481 billion which are depicted on slide 11 are down from the first quarter of 2007, as well as year-end levels. Currency movement reduced assets under management by C$37 billion over the past 12 months while net sales of managed, mutual and segregated funds have generally offset adverse market performance over the same period.

Turning to slide 12, you can see that we maintain a solid MCCSR ratio for Sun Life Assurance Company of Canada at 209%. This is down slightly from last quarter due to market movements and the continued phase-in impact of investment accounting rules that became effective at this time last year. You will also notice from this slide that our debt to capital ratio is up slightly from the issuance of C$400 million of subordinated debentures that we issued in January of this year.

Despite challenging market conditions, our capital plans for 2008 remained unchanged. We've grown our quarterly dividend by 12.5% since the first quarter of 2007 and we continue to maintain excess deployable couple of over C$1 billion and we will focus on deploying our capital in a meaningful way that generate value for shareholders via organic growth, dividends, share repurchases and selective acquisitions.

Turning next to slide 13, I would like to give you a quick update on our investment portfolio. We spent some time on this at the end of fourth quarter earnings call where Jim Anderson, our Chief Investment Officer, went through the portfolio in detail. We continue to maintain a well diversified balanced portfolio but are not immune to the trends in the market around us. We've also included updated information about our asset-backed securities in the appendix. Asset-backed securities continue to make up about 6% of our total investment portfolio of C$104 billion.

At C$6.3 billion, the market value of our asset-backed securities has dropped slightly from C$6.6 billion at the end of fourth quarter reflecting the mark-to-market on these assets. The overall quality of the portfolio remains high with 99.5% rated investment grade.

Moving onto our business groups on slide 14, net income in our Canadian operations is consistent with the first quarter of 2007 at C$247 million. Asset reinvestment gains from wider credit spreads in Group Wealth and individual insurance and investments as well as a favorable mortality and morbidity in Group Benefits were offset by the impact of declining interest rates in equity markets.

On the sales front, individual insurance sales in Canada were virtually flat as higher sales from new advisors were offset by lower sales from our wealth focused advisers who are active supporting clients during these difficult markets.

Segregated fund sales including our SunWise Elite product were up 29% but were offset by a decrease in sales of our other wealth management products. This is particularly true of mutual funds which saw lower sales as a result of these difficult equity markets.

Looking now at our Canadian Group businesses on slide 16, you will see both blocks of business continue to grow nicely. Our Group Retirement Services business grew by C$1 billion to C$32.2 billion. This industry leading asset base enables us to retain significant assets for members leaving plans and we retained C$181 million of these assets in the first quarter of 2008 alone. This represented a 10% increase over last year and achieved our target of a 40% retention rate for the quarter.

Our Group Benefits business in-force increased 9% over the first quarter of 2007. The continuous growth of our in-force block in Group Benefits was recently recognized by Benefits Canada where we achieved the highest year-over-year increase in in-force business in the industry in 2007 moving us to the number two spot in the market.

Moving to our U.S. operations on slide 17, earnings are up 35% to US$113 million. Driving this improvement is the individual insurance line which benefited from lower new business strain as well as the Employee Benefits Group which had improved claims experience and business growth, primarily from our acquisition in the second quarter of last year. Earnings and annuities were lower by C$5 million from the first quarter of 2007. Our variable annuity hedging program mitigated much of the impact of lower interest rates and volatile equity markets in this business.

We also benefited from a small gain on the sale of our retirement services businesses. Offsetting these items were credit allowances and wider credit spreads in our fixed annuity block. With the widening of credit spreads, the current market value of our assets backing the fixed annuity block has fallen. Canadian reserving methods require us to take a more conservative view of policyholder behavior on this block of business and consequently assumed that we would sell some of these assets at depressed levels. However, we believe the underlying assets to remain creditworthy but they have been subject to severe spread widening due to the unprecedented market conditions experienced in the first quarter.

Turning to annuity sales on slide 18, our U.S. variable annuity sales are up slightly increasing 3% year-over-year. Income on-demand sales continue to dominate the sales mix and the product continues to be well received in the market. Equity market performance has impacted our sales particularly through the wirehouse channels. However, our distribution model remains strong and we continue to innovate and update our own product offering. Yesterday we announced the addition of new living benefit rider on our Masters VA series and we will be launching the next generation of our income on-demand product later this year.

Moving now to the graph on the right-hand side of slide 18, our annuity block was in net redemptions this quarter as unfavorable market conditions impacted customer behavior and many of our legacy products reached the end of their surrender charge period.

Moving onto slide 19, core sales of individual life insurance have continued to trend down as we gradually shift our product mix away from no-lapse guarantee products to our expanded distribution network. First quarter 2008 sales have benefited by some large case COLI and BOLI sales. In May, we will be launching a repriced version of our core Universal Life products and we expect this will significantly improve the competitiveness of our offerings while maintaining our profit targets. And 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.

Turning to our asset management businesses in the U.S. on slide 20, you can see that our earnings fell by 3% in the quarter to US$59 million from US$61 million a year ago on lower net average assets. Pretax operating margins were up slightly to 35% and in line with where they were for the full year 2007. On the sales side, we experienced net outflows in both our retail and institutional funds. Plan movements which are often typical early in the year adversely affected our retail flows while in the institutional side we lost a large separate account mandate.

Despite the outflows, we continue to improve our performance and position ourselves for future growth. Our MFS value fund was one of the 20 funds recognized by USA Today as a Mutual Fund All-Star. In the 2008 edition of its annual Mutual Fund All-Star's feature, we also ceded four new funds during the quarter including three Japanese Toshin funds.

MFS assets under management were down by 4% from last year to end the quarter at US$184 billion dollars on market depreciation in net outflows of retail and institutional funds.

Turning to our Asian operations on slide 22, earnings were lower by C$25 million on wider credit spreads and increased investment in our operations in India. Moving to the chart on the right hand side of the slide, you can see how some of this increased investment has materialized in the form of increased sales. Sales in Asia are up 92% by strong growth in almost all geographies. As Don mentioned earlier, we have aggressive plans for our expansion in India in 2008 which will require accelerated investments.

New business premiums grew by 123% to C$220 million during Birla Sun Life's most recent fiscal year which ended March 31, 2008. The value of new business generated by our sales in Asia has increased at a compound annual growth rate of 44% over the past five years with much of the growth coming from our operations in India. This positions us well in India where VNB is cited as one of the key if not the key metric used in valuing the fast-growing and early stage insurance operations in this market.

Turning to slide 23, I would like to conclude by reiterating that 2008 will be a challenging year. An economic slowdown in North America, uncertainty in the capital markets and the strength of the Canadian dollar may limit short-term earnings growth much like they did this quarter. However, we have not been passive in the face of uncertain economic times. Many top-line and bottom-line initiatives are already in place. We are reprioritizing initiatives and continue to focus on efficiencies to reduce costs while funding future growth.

Specifically, we will reduce both our project costs and discretionary, general and administrative costs this year. This process was intensified in the first quarter and we will continue to build on our efforts throughout the year. Nevertheless, from where we stand today we face an environment where a scenario of little to no growth could be a reality for 2008.

Even in these challenging times, we are focused on the medium-term objectives set out over the last several years and believe that our strategy is on track that the fundamentals of the business remain strong.

This concludes my formal remarks and with that, I'd like to turn the call back over to Paul so that we can begin Q&A.

Thanks, Rick. Before we open the call to questions, I would ask each of our participants to limit him or herself to one or two concise questions and then to requeue with any additional or follow-up questions. We will make every effort as always to take all your questions during the allotted time this morning.

With that, I will ask the operator to please poll the participants for questions.

Jim Bantis, Credit Suisse.

Good morning. Rick, just a quick question. In your opening comments you had highlighted the effects of the equity and credit markets and I think the numbers were C$0.07 and C$0.12 respectively. Can you confirm that, those numbers, and just maybe provide a little bit of guidance on how we are getting to those numbers?

Certainly. The C$0.07 -- I will start with the equity. The C$0.07 basically takes the impacts around the enterprise from our asset management businesses to our variable annuity focused businesses and even including some of our investments. So that C$0.07 is from around the horn.

If you look at the credit ratings of C$0.12 we have there, it's a couple of categories you'd have to break it down into. The first are actual write-offs that we saw in the quarter in both bonds and equity. And then the second piece of that would be the credit impacts of downgrades in the portfolio where we have increased our actuarial reserves for default.

The third piece of that is the impact from credit spreads specifically in our fixed annuity line. Bob would have mentioned that in the fourth quarter as well. But that was about C$0.05 coming from the widening credit spreads and the fact that now we have to assume because of the shorter nature of the liabilities that we have to sell some of those assets at a loss which will play out over time. So those would be your C$0.12 in aggregate.

All right, thanks. Rick, and just a follow-up question. When I look at slide 7, it highlights in the [sub-pack] a number of weaker sales trends. Partly Q1 is a seasonally tough quarter. But when we look at what came out of Canada and as well as we look at what came out of Group Life out of the U.S., some pretty low numbers going back to Q1 '06. And I'm just wondering, can we get the sales momentum rebounding in the second half of 2008 against your comments about reprioritizing initiatives? Can you talk about that?

I certainly can and it's not something you can talk about in aggregate. I will tell you from an overall comment talk about our sales growth, we are continuing to invest in distribution, product innovation, what we're doing around the board. But I can turn that over to two of our sales leaders or business leaders that are responsible for that and I will start with Bob in the U.S.

In terms of variable annuity, we've just come forward with a new rider and we think it's very competitive. It really expands the competitiveness of our product lineup across several age groups. So our sales force is very focused on that and the launch yesterday. On the Group side, we have a very large record of fourth quarter and a lot of our sales force in January and February was involved in tying that business down. So we really got back to business in March and we expect to pick it up from there.

And then on the Life side we've expended a tremendous amount of effort expanding our product lineup, creating a focus away from no lapse guarantee products and so we've launched a tremendous amount of product the last couple of quarters and today we are relaunching our no lapse guarantee Universal Life product as well. So I think we will build the momentum from here across all of the lines.

Let me turn it over to Dean Connor for our Canadian business.

In Canada starting with the Life insurance business, you think about our wholesale market and the repricing of our level COI UL in February that has positioned us in a much better place at the age 50 and above affluent market. We're seeing positive results from that change. We've also just announced the extension of our long-term care specialists -- we have about 100 of them in Canada -- to make those available to the wholesale channel. That has been very well received and so we are expecting to see lift from that.

Rick referred to our seg fund sales. We are quite pleased with 29% growth in the first quarter. And we expect with the launch -- recent launch of our lifetime income guarantee to see that growth extended. And then finally thinking about our Group Benefits and GRS businesses. Group Benefits, a lot of focus here has been on selling in the small and midsize market. We've had good success there.

That is inherently more profitable business. The challenge is it takes several years. There is strain involved as you know, and it takes several years for those profits to emerge. And GRS is the same. We had really a banner sales year last year, and this year is shaping up to be the same. Again, there is big setup costs when we write this business and set it up and it takes several years for those earnings to emerge.

Thank you, I will requeue.

Andre Hardy, RBC Capital Markets.

Thanks, just a clarification from Rick and a question for Jim Anderson. The C$0.07 from equities, is that before the positive impact of hedges or net of the positive impact of hedges?

That is going to be net, so that actually includes positive hedge benefits of roughly the same amount. Without giving too much detail, that does include a significant amount of hedge benefits.

Okay, perfect. Jim, credit spreads are obviously a lot of wider. Can you talk about how fast you can take advantage of that, whether it is the natural role of the investment portfolio or new cash flows coming in? So as we try to look at the spreads that you -- on your bond portfolio, how fast can that go up?

You've identified a couple of factors, Andre, that are important. The new money coming in and, therefore, the previous question about sales momentum is important. Also, the liquidity in the bond market which is something that has been an usual occurrence, the lack of liquidity in the last nine months or so. We are generally longer term investors.

We don't look to flip the portfolios on a daily basis or weekly basis. But we are very, very active in monitoring the portfolios. And any chance that we can to add value by shifting parts of a portfolio into different sectors or different credits, we readily take advantage of that and quickly take advantage of that.

Again, the portfolios are generally positioned for a longer-term investing but we do actively monitor them and actively create the portfolios.

Can you remind us how big you are in the private bond business? And do you have enough capacity to take advantage of -- I mean intellectual capacity to take advantage of banks perhaps withdrawing from corporate lending?

We have a portfolio of about C$11 billion in private placement bonds and about another C$6 billion in what are classified as corporate loans. So the portfolio would be in the C$17 billion range which puts us certainly in the top five on a North American basis of private placement lenders. We do have both the staff and the intellectual capacity to take on more and we are very active in that business. In Canada we consider ourselves a leader in that business and we are expanding to fill some of the voids as you quite correctly mentioned in positions vacated by banks in the United States.

It's a tremendous business for us, one that we think we can add a lot of value. We feel more comfortable holding an additional C$17 billion of corporate debt because of the covenants we can negotiate and the structures we can negotiate and the security we can negotiate in the private market. So it is a very important asset class for us, and we are certainly capitalizing on our abilities there.

Okay, thanks, Jim.

Michael Goldberg of Desjardins Securities.

Thanks. I have a few questions about page 26, (inaudible) appendix, the detail of the embedded value. Could you tell us what the impact to currency on VNB was in 2006 and 2007? Also what your equity experience gain or loss was for each of the two years, and your credit experience gain or loss?

Also, you mentioned that you've had 44% CAGR over the past five years out of VNB from Asia. How much of your VNB -- what is the amount of VNB that comes from Asia now versus what you had in 2002?

Michael, let me try and dissect that. In terms of your embedded value questions, we're going to have to take that off-line for the specific analyses around those different pieces, so I apologize for that. We will have to take that off-line. The Asia growth that we have seen has continued to come from our operations. We've seen India most recently in terms of what that has brought up. And we have not broken out the VNB at this point in time specific to any of our individual Asian operations and probably won't do so for some time, given the competitive nature of that business.

So how are we supposed to put 44% growth into context?

I think you'll have to look at it in terms of the overall sales that you've seen which we have disclosed for Asia over the last five years, and look at that relative to the fact that we are continuing to generate value there and that growth has continued to come from it. So in line with our sales, we maintain profitable books of business after we put them on in Asia, and we've seen that VNB growing.

Okay. Can you give us some idea of what the half-life of the Asian VNB is versus, let's say, Canada or the U.S. In other words, how many years does it take to get half of the VNB in each of these different markets?

I will have to give that to Bob Wilson to see if he can help me on that one.

It's not a piece of information that we have readily available, Michael, as to how it translates and how long it takes to flow into income. The business that we are writing in Asia varies considerably, depending upon which territory. It tends to be relatively long, so it will take a while for it to actually flow into income. There's quite a bit in India that is reasonably short in the 10 to 20 year range, but a lots of these contracts are permanent life insurance contracts or long-term 20-year endowments.

In India, the tax laws basically require a 10-year contract for the policyholder to get the benefit of the favorable tax treatment on the policy. So we won't be selling anything less than 10 years long in India.

Okay. I know that Q1 '08 VNB is an estimate. But given the declines in sales and the net flows that have taken place, can you give us some idea of what the change is just for Q1 on a year-over-year and on a quarter-over-quarter basis?

It's a question we will have to take off-line. I don't have that information with me right now.

Although, Michael, just to give you -- it's Paul Petrelli. Just to give you the overview, it is the growth in Asia sales, it is the growth from the Employee Benefits Group business in the U.S., and the wealth sales over the course of the year as we said in the opening remarks. But we will go through the detail with you off-line.

I'm just looking for the first quarter alone.

We will take that up with you off-line, okay?

Sure.

Thank you.

Doug Young of TD Newcrest.

Good morning. Just wanted to start on the credit side. Obviously, that was one area that you've mentioned accounted for some of the weakness. Can you elaborate which line item does that go through, because I know it went through on a change of actuarial reserve. Does that go through assumption changes or experience gains and losses on the SOE?

And maybe second, can you talk a little bit about your watchlist? Are you seeing significant deterioration year-over-year? And if you can quantify what your watchlist is this year versus last year? And is there anything specific that is really concerning you on the investment side?

So let me start on the credits or the impacts. You will actually see the majority of that -- the vast majority of that going through the experience gains line. Turn it over to Jim to talk a little bit about our watchlist and how that is trending over time.

The watchlist and it is something that we actively monitor, it is roughly the same size as it was a year ago. And it's actually not that big. We don't keep credits that we are really worried about. A lot of the movements in the lines that Rick has mentioned is basically just spread widening or in the case of Canada some spread contracting. If we're not happy with the credits, we will settle them and move on to something else. We are not just a deer in the headlights. We do actively monitor the portfolio, actively manage the portfolio and take action based on our analysis and beliefs.

And was the negative impact related to any one specific credit category?

Again, the negative impacts are generally -- or the largest percentage is just in the spread widening.

Okay.

And it depends whether you're talking U.S., UK or Canada, consumer discretionary widened in the U.S. but it actually narrowed in Canada. And it depends on where you have your portfolio and in what purpose and in what ways.

Okay, just a second question. Management action changed in assumptions at 174, I mean that is the biggest number that I can remember I think since you started disclosing SOE. I think you mentioned it, Rick, and I missed it, but can you -- what was that attributable to? And I think it was in the U.S., but if you can maybe elaborate a little bit on that.

It actually was coming from across the business so it wasn't in any one particular place in the portfolio. So it included -- also I would highlight it included our sale of our U.S. platform business in the first quarter so on a pretax basis, that adds to that as well. And then beyond that, it was actually across the board including in Asia.

Was there any one region that was more? And is it related to any particular mortality, morbidity?

It is really a lot of more detail behind that in terms of it's not any one particular -- I wouldn't highlight it as any one characteristic. It's going be a lot of -- I won't even say a lot of small things; it's a lot of medium size things that came through on the quarter.

Maybe I'll ask it a different way. Is this -- do you see this as being abnormally large?

Well, I can use first quarter last year as a comparator, where it's actually quite similar to that and if you take out the effect of the sale which we classify as a management action, the selling of that business, it gets down to a range which is something you would have seen before.

Thank you.

Mario Mendonca, Genuity Capital Market.

Good morning, a couple of questions about the wider credit spreads. In the fixed annuity business, I understand credit spreads would retire. Are you referring to any asset-backed securities here? That was the understanding I got from some of the earlier comments. And specifically, are we looking at the CMBS exposure the Company has, the 2 -- it might be 2.7 billion or so. Are those the credit spreads you are referring to?

They would certainly be included in that loss but it's going to be a widening credit spreads in general across the board which could include some of the bonds that we have -- backing at that line of business. It is certainly in there in terms of the widening of credit spreads that we've seen.

To the extent that CMBS played a role there, credit spreads extends to about the middle of March and moving down aggressively and if we look at where CMBS spreads are now, there are actually lower now than they were at the end of March. What I am getting at here is, is there any -- maybe this is a question for Bob Wilson. Is there any room for this to come back into earnings as CMBS spreads recover?

I think that is a safe assumption, but I wouldn't want to try and predict a number because there has been all sorts of other changes in the interest rate market since the end of March as well. Bond rates have come up, spreads have narrowed in; bonds have been downgraded, bonds have been upgraded. By the end of June, we will find out where we are and we will do the valuations.

But we believe that some of the spreads on these type of assets are pretty hard to justify in a real world terms. And we are making the assumption that we have to sell these in the actuarial liabilities, but don't really have any intent of doing so.

You are making the assumption that you have to sell all the assets and my understanding of the comments is -- the only reason why you would assume you'd have to sell the assets is if you assume that the policyholders -- sorry, the policyholders actually lapsed the product.

Well, if you look at the standards, there is a specification on the term of the liability. And the term of the liability tells you when you have to make the assumption if the policyholders leave.

Sorry. So do I understand it correctly then, because of the level of interest rates specifically low interest rates, you assume that the policyholder terminates the policy and that is what you sell the CMBS or other asset?

It's not because of the low interest rates per se although that is part of it, if you look for example, one of the areas where we were hit was dividends on deposits in Hong Kong where we have to basically assume that the liability is the deposit amount. The reality is that nobody ever surrenders those particular assets or those particular liabilities. And we have invested longer which gives the policyholders the benefits of higher interest rates or higher interest over time. And if we were to hold all of the assets in 90-day treasury bills, the way that the accounting works particularly under the 3855 section of CICA, we take losses as the bonds go down. And when the bonds come back up, we will reverse those, assuming that they do.

Just to wrap up, because we are -- things are so volatile these days in terms of where rates are going, how spreads are behaving, what I'm trying to appreciate here is the -- what caused these -- this need to assume that you sold the assets. What is happening now with government bond yields moving a little bit higher, do you then start to change some of those assumptions? What I'm trying to get at, Bob, ultimately is how are things changing that would cause the Company to reverse some of these charges and could it happen in the near-term?

The reality is the policyholders will do what policyholders will do. The assumptions that we have in on interest rate -- a lot of the fixed annuities for example will be five-year interest rates and it would roll over at the end of five years into a different bucket. To a certain degree under the CIA standards, we have to be conservative on the assumption as to how many people will roll over in comparison to the actual historical experience.

So as a result, it's the fact that the value of the bonds is lower the value of the amount you would have to pay out to the policyholders that results in us taking a loss on the books.

So it's a combination of policyholder behavior and the value of the assets that drives this -- those are the two things we have to be careful with going forward.

One final thing, you referred, Rick, to write-offs in the quarter. If you -- your supplement suggests that there were actually recoveries in the quarter of about C$2 million. Where were these write-offs recorded?

The write-offs actually would have come down through -- one of them, so half of them, C$0.01 would have come through the reserves. One of them actually would have been recorded through charge-offs through gain loss.

Mario, it's Paul speaking. We did have some mortgage recoveries in the U.S. and that is probably what you are seeing in the supplement.

Okay, sorry I didn't follow Rick's answer though. So one, it goes through reserves and the other kind of goes through where?

It would be in gain and loss, and would be included in that overall (inaudible). There's other things going in the other direction. I was highlighting the write-down, but we didn't [net] that of the recoveries we saw.

Sorry, gain/loss, what gain/loss? What are you referring to?

That is through the gain/loss on sale of securities.

I was talking about the income statement line unless you are referring to somewhere else, Mario.

I think I am with you know. I will requeue.

Tom MacKinnon, Scotia Capital.

Thanks very much. A couple of question. One, just with respect to the Group Benefits business, both in Canada and the United States. Canada is the lowest we've seen in five quarters and the business in-force is about 9%. I'm wondering what the reason is for the lower earnings there. And also the U.S. Group seems to be about the lowest level we've seen since you picked up the Genworth block. So any commentary around out? And then I've got a follow-up.

Tom, it's Dean Connor here. In terms of the Canadian Group benefits business, we had good underlying growth in operating income in Group Benefits in the first quarter. It was offset as described in our MD&A by the nonrecurrence of an actuarial reserve adjustment around asset liability matching that occurred in Q1 of last year.

What about -- like this is lower than the fourth quarter of '07, third quarter '07, second quarter '07, so I mean you can --

Well. I guess I would just provide a point that this is a business, as you know, that has quite a bit of volatility in it. I don't think you can zero in on any one quarter. You have to look at it over longer periods of time. I think as I said earlier when you look at the growth in business in-force as you referenced, when you look at the focus on smaller and midsize cases which are inherently more profitable but do take time to emerge into earnings. I'm confident that the business we're putting on and growing is going to lead to growth in net income. But it is fair to say it's a choppy ride.

Has there a bit of seasonality in this business too, like in terms of the way the earnings would be booked?

Yes, there is a seasonality.

Okay. And then just over to the U.S. story then.

Yes, Tom, Bob Salipante. So on earnings in Group Benefits this quarter, we bucked the trend that we've had the last couple of years of significant claims in the first quarter and we had better claims experience than prior first quarters and also the benefit of the acquisition. On the sales side, as I explained earlier, we did almost C$300 million of business in the fourth quarter, a very large quarter for us. December was over C$200 million, I think. And you know this business is seasonal in the U.S. from a sales standpoint.

So we spent a lot of time tying down that fourth-quarter business in the first quarter, the sales force was focused on that. We got back to business in March and we have been picking it up from there. So I'm not too fussed by the first quarter; we will get on track. And the acquisition and the integration are meeting our expectations, and I'm quite pleased with how that Group business is going.

Okay and then one follow-up here with the fixed annuity block book value guarantees and the credit spread negative impact here. As I understand, you've been able to insulate some of the changes in U.S. Treasuries but you haven't been able to insulate any credit spread duration changes. So consequently the hits to this book I guess over the last couple of quarters, the spreads have widened.

Maybe you could talk about any development here to try to work some of your hedging onto credit spread duration, how has the block been moving? Are you expanding this block? Does it continue to decline? And if spreads are coming back in, should -- to what extent should we be able to get any of this back?

I think it's a fair question. I think hedging at deep levels and the widening which we don't think is going to be sustained would be the wrong time to do something like that. This has been a practice we've maintained for a very long time in terms of this investment behind the annuity line. We felt some of the volatility that the world saw in the quarter, and that is where you'd see it here. So we think it already has come back in as was referenced earlier, and we will maintain the course on that piece of the business.

And the size of the block and how it has been moving?

This is Bob Salipante. It is declining. We are still in the net runoffs in that business. From a sales standpoint, I look opportunistically in that market for new sales when we can make a profit for VNB. And those periods are opportunistic.

Okay, thank you very much.

John Reucassel, BMO Capital Markets.

Thank you. Just for Bob Salipante. Bob, can you tell us what the gross sales and the net sales were for the income on-demand product were in the quarter?

For -- well on the supplement you've got our domestic sales were about 61% of the U.S. domestic sales for income on-demand in the quarter.

61 was the gross -- and what -- so the net sales of the income on-demand was what?

I don't have net income on-demand specifically. We just started selling that product a year ago, so I've got to believe it is highly positive.

So I guess another way to think of that is could you tell us what the redemptions on the single manager product was?

Well, if you look at -- I don't know what page of the supplement, I think it is page eight of the supplement, you see that we show net sales. So you can back into it, because we show gross sales as well. Most of those redemptions are the old single manager product. That is the product we were selling principally seven years ago and it was a seven-year product.

Okay. And so when -- I know we've asked this before -- when does that run out, like when should this -- is '08 the last year we should see this?

Well, it will run beyond that. But the two biggest quarters of Sun Life VA sales were the fourth quarter of 2000 and the first quarter of 2001, so right at sort of at the peak, these last couple of quarters and then it should add from there, John.

Okay. Rick, just on the tax rate. It's still the 18% to 22% range, is that what you are thinking?

It is.

Thank you.

Darko Mihelic, of CIBC World Markets.

Hi. Just a couple of questions. One thing that I'm trying to size up for Sun Life is -- I mean the macro environment is pretty tough and one of the things you guys are suggesting now is efficiency improvements. When I look at banks, it's often a lot easier to figure out what cost savings could possibly come and from where. I was wondering if you can provide a little more color on your efficiency commentary and maybe point to specific areas or specific segments where we could see some improvement in results as a result of maybe cost-cutting?

Sure, Darko, I'll just give you a high-level view. What I was referring to is really a prioritization at a fairly high level. We didn't get into quantification. Our strategy is still intact, so we are still pushing on the same pieces of the business that we have. It has been more of a general recognition of the market that we are in and some rationalization of some things that we wanted to do. But it is not going to be a material driver in terms of our earnings overall end there won't be any material reductions that we would take out and make public.

Okay. So when you mention the 2008 possibility of little to zero growth, that is inclusive of rationalization? And you are not in process now of finding other areas where you could perhaps reduce costs. Would that be a fair summation?

Your first piece of that which said that my comments included that would be absolute -- would be true. The second piece of that, we are continually looking at cost efficiencies. I talked about intensifying our efforts in the first quarter, that is not a process that we will follow the budget season. It is something we're going to be diligent on throughout the year and more so this year probably than we've ever been.

Okay. I guess my other question is with respect to Asia. You mentioned that -- you made some -- part of the reason why earnings were weaker was increased investment. Where would I actually see that? Because when I look at -- and I realize this is in Canadian dollars and it's probably a currency impact here, but when I look at commissions and expenses, it doesn't really look like that's been a big driver of weakness in the results. Can you help me understand where -- what the degree is that actually be on the impact of the results?

Darko, are you talking specifically about credit? I'm sorry, you were talking about the investment performance.

Well, no, I -- it said increased investment in India was one of the reasons why you had weaker results in Asia.

It's Don Stewart. We, as you know, don't break out our specific Asian countries by detailed figures and particularly vis-a-vis bottom line. But I think it is fair to say that we operate in three emerging markets and two mature markets and the three emerging markets are the markets where we are seeing the increase in investments.

China is ongoing and although we've had very significant increase in Chinese sales, it is not a huge increase in investment. Most of this is focused in India where not only are we having 100% plus percent increase in sales that is off a very significant base.

So it would be fair to say that the focus and the quantification would be attributable to India but also partly to China and a little bit in Indonesia which has also had positive sales overall in the last year-over-year quarter. Mature markets like the Philippines and Hong Kong remain profitable, and we alluded earlier to the spread impact in Hong Kong.

But if you are looking at it from an investment point of view, which was your question, think of India as the primary contributor.

Okay, thank you.

Mario Mendonca, Genuity Capital Market.

Thank you. Is there any remaining exposure to those securities that resulted in the C$0.01 to C$0.02 credit hit in the quarter? Or are those essentially written to zero now?

One of them was pretty close, one of them was just a -- is a write-down on a position.

Can you tell us what the remaining exposure is?

I wouldn't want to get into a specific position.

I'm not asking for the name, though. I'm just asking for the size of the position.

Mario, it's Paul speaking. It is not material what is remaining.

Okay. The sale of the retirement business, did you quantify what that added to earnings in the quarter?

We haven't, but like I said, it was right around C$0.02.

Okay. And then the C$0.07 equity, the negative effect of equity is C$0.07. How did you calculate that? Are you looking at year over year and how markets performed this quarter relative to last quarter -- or sorry -- last year?

That was actually more relative to our expectations on the quarter that we built into our plan.

So performance versus what you actually got?

Exactly.

Sorry, what you expected versus what you actually got?

That is right. Think about it in more of a sources of earnings context.

Got it. And then MFS, Don, when you said positive flows in April. Were you referring to the complex as a whole or just institutional, or what were you referring to?

Complex as a whole (inaudible).

Okay, so outflows and retail offset by inflows and institutionals, I think is what you are getting at.

Just leave it as complex as a whole. We will give more -- as you know, we don't regularly break this out on a month-by-month basis. We give you the full story in the quarter. But I wanted to say that the signals across the complex were positive for April, and I think that is where I would stop for details.

Okay. And Don, while you are there maybe just a last sort of -- when you look at -- sort of broad question here -- when you look at the way things have gone in the U.S. variable annuities space, a little difficulty turning net flows positive, a short couple of quarters of positive and then sort of not looking as strong again now.

The departure of, I think it was Kevin Hart, and I understand that was for some personal reasons there as well. When you look at the U.S. individual Life business and how it really got started with a bang and then sort of tailed off from there, the funding solution issues in the U.S., what sort of grade would you give the U.S. operations from an execution perspective?

I think we'd have to answer that in the context of some of the facts. Mario, you talk about the U.S. VA turning negative, and Bob has explained -- several years ago we had very record-breaking sales. So I think what you are seeing here is some pretty good execution in some very tough markets.

So you are happy with the way the U.S. has gone from an execution perspective?

I'm never happy with any business that is not either growing sales strongly or making a lot of money, so I'm just not a happy guy, period. And I'm looking for us to do better on both top and bottom line going forward.

It sounds like your execution is what you would expect then?

Well, I think execution has faced some really tough markets and I think it has done pretty well in these tough markets. But we are always trying to do better.

I appreciate your comments.

Andre Hardy, RBC Capital Markets.

Thanks. Just a follow-up what Mario was asking in execution. Can you remind us from the U.S. variable annuities sales force, the maturity of your wholesalers, I presume you are not adding too many new wholesalers. But can you remind us how long you think it will take before that sales force has reached maturity?

Bob Salipante here. We at about 90 wholesalers, which is the level that we've held for some time and we are going to hold at that level. The experience builds, and the most successful sales forces in the U.S. are those with the longest tenured people. So it is key for us to continue to build that tenure.

We have a ways to go on the productivity target that we set for ourselves, and we lost a little bit in the first quarter. I don't think that is materially different than our competitors experienced in the first quarter.

We built a strong sales force, a strong inside desk. We have a disciplined calling approach and a strong team. So we will continue to hammer away at it and we're supplementing it with some very good product, with the new product that we released yesterday.

What kind of external validation do you have that sales force is strong? And secondly, out of those 90, how many would have two years of experience at Sun Life?

I can't give you a breakdown off the top of my head but I would suspect that at this point that maybe two-thirds have over a couple of years with us at this point. And now we made a big move and bringing people on in 2004, the external validation we actually do as a standard third party that does assessments of the variable annuity and the Mutual Fund business. And actually our sales force, our wholesale in-force in 2007 was rated as the most effective actually at the very top of the list.

So -- and I think for us it's just a matter -- and that is on the basis of a valuation by brokers. So the third party firm goes to brokers and interviews them about the variable annuity space and we rated at the top in terms of wholesaling effectiveness in 2007. So we've just got to expand the population of brokers that we call on and tell our story.

Thanks, that is helpful.

Operator, its Paul Petrelli speaking. It looks like we're at the end of queue and I believe we are a little over time. So I think Don would like to make a brief closing remark.

Just in closing, I'd like to recognize and congratulate Rick McKenney on being named to Canada's Top 40 Under 40 this morning trade. So congratulations to Rick. Thank you all for your time and attention on the call.

Thank you very much. If there are any additional questions, we will be as always available after the call and should you wish to listen to a rebroadcast, it will be available from our website shortly after 1 PM this afternoon.

With that, I'll say thank you 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.