Sun Life Financial Inc (SLF) 2008 Q3 法說會逐字稿

Welcome to the Sun Life Financial conference call on Tuesday, October 21, 2008. I would like to remind everyone that this conference call is being recorded, and I will now turn the conference over to Paul Petrelli, Vice President of investor relations. Please go ahead, Mr. Petrelli.

Thank you, operator 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 and Rick McKenney, Executive Vice President and Chief Financial Officer. Also available to answer questions are Jim Anderson, Executive Vice President and Chief Investment Officer; Mike Stramaglia, Executive Vice President and Chief Risk 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 all. For today's call we have provided you with the earnings news release issued this morning and the presentation slides. The remaining portions of our complete quarterly reporting package, including our third-quarter financial statements and notes, the formal management's discussion and analysis document and the supplementary financial information package, will be published and available on our website at the beginning of November.

The slides to which the speakers will be referring to are available on the Sun Life Financial website. Turning to slide two, 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; and with that I will now turn things over to Don.

Thank you, Paul and good morning, everyone. Early this morning Sun Life Financial reported a net loss of $396 million for the third quarter of 2008. The release of our third-quarter results today is two weeks ahead of our scheduled release date. Given the magnitude of disruption in global capital markets and its impact on our third-quarter results, we felt it was important to bring forward the release date of this information.

At the same time we want to reassure all of our stakeholders that our core businesses remain sound and that Sun Life is well-capitalized to steer through these challenging times. Turbulence in the capital markets which continues to dominate headlines and mainstream media has reached historic proportions. We've seen many of the most well-known and respected names on Wall Street fall victim to the ongoing credit crisis, while witnessing huge daily swings in market indices.

Actions of governments and central banks around the world are positive steps toward restoring capital markets, but it will take time before any meaningful confidence comes back. The possibility that economic difficulties will extend well into 2009 and beyond remains very real. While we are extremely disappointed in our results this quarter, we recognize that much of the impact on our reported results is related to extreme circumstances which occurred during the quarter.

Our results include over $962 million in charges relating to a decline in equity markets, as well as credit related charges including write-downs and impairments on our previously disclosed holdings of Lehman Brothers, Washington Mutual and AIG bonds. These charges are not reflective of the fundamental earnings power of our businesses.

Our capital position continues to be sound. Our overall business generates significant capital that we use to organically grow our business, take advantage of market opportunities and pay dividends to our shareholders. Our third-quarter results do not affect our plans to invest in our business or pay and maintain our quarterly dividend of $0.36 per share. We are looking beyond current marketed disruptions and positioning ourselves for growth once markets recover.

We've added to existing talent in our US businesses with three new executives, Jon Boscia, Wes Thompson and Terry Mullen. We've also been expanding distribution with third-quarter growth and our advisors in SLF Canada; growth in ABG and SLF US, and in a number of regions across Asia, including India where our joint venture now has over 130,000 advisers.

Sun Life remains a well-capitalized financial institution with a continuing sustained focus on our customers. Now more than ever Sun Life's mission to help customers achieve lifetime financial security is critical as individuals seek our products, subsidies and advice to help protect them and their families.

Before handing the call over to Rick McKenney, our chief financial officer, I would like to reiterate that the earnings power of our core businesses remain strong and that Sun Life continues to be well-capitalized. The current disruptions in the global markets may impede our growth in the near term, but we are well positioned to take advantage of opportunities created by this volatility, as well as for a rebound in financial markets. With that, I will now pass the call over to Rick.

Thank you, Don and good morning. Earlier today we reported a net operating loss for the quarter of $396 million or $0.71 per share. This quarter's results were dominated by a number of factors related to the unprecedented economic conditions faced during the quarter. This does not reflect the underlying earnings potential of our core businesses.

Slide six highlights the credit and equity market impacts on the overall results of the Company. Charges related to asset impairments and other credit losses totaled $636 million. This includes previously disclosed exposures to Lehman Brothers, Washington Mutual and AIG. The impact of the decline of equity markets was an additional $326 million. It is important to note that under Canadian accounting rules for our insurance lines, changes in equity markets are fully reflected in earnings in the quarter. Excluding these impacts, earnings would have been in a more normalized range of about $1.00 per share.

Slide seven details the significant credit impacts on earnings in the quarter. This includes the impact of previously disclosed exposures to Lehman, Washington Mutual, as well as other write-downs taken in the quarter. Total write-downs amounted to $576 million for the quarter. Downgrades resulted in an additional $60 million in reserve strengthening. The downgrade figure also includes the increased default risk reserves on our AIG holdings.

The net impact of losses experienced on the Lehman and Washington Mutual bonds are higher than one might expect for two reasons.

First, the unprecedented manner in which the US regulators dealt with Washington Mutual was extremely detrimental to bondholders resulting in our having to assume zero recovery on the value of these bonds. Second, the overall tax recovery on credit related charges was about 10%. This seems low but reflects the fact that some of the losses are capital losses and to the extent that this results in loss carry forwards we have not booked a tax benefit on these items. If you factor in the potential future tax recovery the overall rate would be in the 25% range. We will actively pursue recover of these tax losses going forward.

Slide eight highlights the steep decline in equity markets in the third quarter, as well as on a year-to-date basis. As part of our annual disclosure we provided you a sensitivity to our earnings of equity markets. Between December 31 and September 30 the S&P 500 declined by 21%, and the TSX60 declined by 13%. The reason the year to date is important is there is convexity in our equity market sensitivity. That is to say the second 10% decline is more impactful than the first 10%. We have updated our sensitivities in the appendix to allow you to roll forward from September 30 for earnings and capital.

Specific to the third quarter slide nine provides more detail on the impacts of the drop in equity markets and consequent reduction in segregated fund and variable annuity account values on earnings this quarter. The first row highlights the impact of these severe declines on our current and future fee income. For our insurance products the change in the present value of the fees comes into earnings in the current quarter. We do not hedge these fees as they are fundamental to the profitability of the product.

On the next line is the impact of equity markets on reserves for the guaranteed benefits and other reserve changes. You can see that the increase in reserves net of hedging was $134 million. This line includes both the increased value of the guaranteed benefits, which are partially offset by our hedging program and other reserve increases such as increased provisions for adverse deviation. We also do not hedge these latter described reserve increases as they effectively represent the future profitability of these products.

Lastly, equity market related reserves for Canadian Universal life benefits resulted in reserve strengthening of $61 million. Our universal life product includes a level cost of insurance guarantee that extends beyond 30 years in duration. These very long liabilities are backed by a combination of real estate and equities. The change in market value on those equities relative to the return assumed in the reserves immediately impacts net income.

Also in these products customers can make additional premium payments above those required to pay the cost of insurance. One of the alternatives available to customers is to invest these additional premiums in equity length investments. When the policyholder balance is reduced, the future fee revenue stream is also reduced.

Focusing for a moment on how the hedges performed in the third quarter versus expectations, recall that our purpose in hedging is to protect shareholders from the downside risk that living and death benefit guarantees will be in the money at the time that policyholders access their benefits in these products. Accordingly, our hedges are designed to match the best estimate assumption of the value of the guaranteed benefit over the life of the product and thereby insulate shareholders from this risk.

In the quarter the hedges provided us with approximately $100 million of benefit to offset the increased reserves required by falling markets on the value of the guaranteed benefits. To summarize the purpose of our equity hedging program is to insulate shareholders from the risk associated with the guarantees. This in effect give shareholders a mutual fund like return on these products over the longer term. However, since these are insurance contracts in volatile markets there will be volatility in returns as we are required to hold additional capital and reserves subject to present value construct under Canadian accounting.

The profitability of these products over their lifetime remains sound. Depending on market returns over the longer term, today's increased reserves for the present value of future fees and strengthened provisions for adverse deviation will emerge as expected profit over the life of the product.

And while we may continue to see the effect of lower markets in the fourth quarter, the underlying earnings power of the segregated fund and variable annuity businesses should return in better markets.

Moving on to our business groups on slide 10, we have provided greater detail of the market impacts on our business group earnings. The challenges from the credit and equity markets were shared throughout. Income in our Canadian operations decreased by $100 million or 39% compared to third quarter of 2007. Earnings were unfavorably impacted by charges of $126 million related to the decline in equity markets and credit losses of $59 million. The bulk of this decline came from individual insurance and investments where earnings were down 82% from the third quarter of 2007.

Earnings from group benefits increased by 37% from the third quarter of 2007 primarily due to favorable morbidity experience. And group wealth earnings were relatively unchanged compared to the third quarter of last year. Turning to sales in Canada, individual life and health sales were flat compared to the third quarter in 2007 and down slightly from last quarter. Individual wealth and GRS sales continue to be strong with individual sales up 10% from a year ago on good sales from our career sales force and group wealth was up over 100% as that division continues its record-setting pace of sales in 2008.

The majority of our credit and equity challenges were in our US operations. Earnings decreased by $664 million US dollars compared to the third-quarter of one year ago. Annuities contributed $555 million of this decline as the bulk of our Lehman Brothers, Washington Mutual and other equity market impacts in the US came through this line.

Individual insurance earnings were lower by $117 million as another large portion of Lehman Brothers and Washington Mutual appeared in this line. And on the group side earnings from our employee benefits group improved by $8 million US over Q3 2007 due to favorable claims experience.

On the sales front Sun Life US total net annuity sales in the third quarter were slightly positive compared on higher fixed annuity sales and lower surrenders in all product lines. Individual sales were flat compared with the second quarter and down 50% from one year ago, which included a large bully sale. Employee benefits group sales were up 23% from a year ago mostly on growth and stop loss.

For MFS earnings fell 28% compared to third quarter of 2007 due to the decline in equity markets and resulting impact on fee income. Despite the much lower markets MFS margins remained at 29%. MFS experienced net outflows of $2 billion in the third quarter as retail fund sales were down 7% from a year ago and managed fund sales were down 6%. Retail and managed fund redemptions were flat compared to a year ago.

Turning to our Asian operations, earnings were lower by $38 million relative to the third quarter of 2007, primarily due to credit related losses of $18 million and increase in investment and growth in India. Sales in Asia were up 10% from a year ago and 14% from the second quarter, largely on the strength of growth in India.

In our corporate lines asset impairment charges as well as the impact of lower equity markets on our runoff reinsurance business reduced our corporate earnings. In addition, reinsurance earnings were hurt by the unfavorable impact of claims and the strengthening of future lapse assumptions.

So now we turn to slide 11 you can see that despite the tough economic conditions faced during the quarter we have maintained a solid MCCSR ratio for Sun Life Assurance Rick McKenney of Canada or SLA, at 202%. As we mentioned on our call announcing the sale of our CI stake, we continue to focus on deploying our capital to generate value for shareholders via organic growth, dividends, selective acquisitions and share repurchases. As Don said, we plan to maintain our quarterly dividend which represents a 36% payout ratio based on normalized earnings of the dollar per share on the quarter.

And turning to slide 12, I would like to conclude by reiterating that although results this quarter were disappointing, they are not reflective of the ongoing earnings potential of our core businesses. We continue to execute on our strategy and see positive momentum across the company. Sun Life remains well capitalized, and we are well positioned to take advantage for growth opportunities going forward. This concludes my formal remarks, and with that, I would like to now turn the call back over to Paul so we can begin with the 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 to take all your questions during the allotted time this morning. With that I will now ask the operator to please poll the participants for questions.

(Operator Instructions) Andre Hardy, RBC Capital Markets.

A few questions on capital probably for Rick. Rick, how much of your equity exposures reside in Sun Life Assurance Rick McKenney of Canada versus other parts? Secondly, we see the ratio dropping seven basis points, the MCCSR ratio dropping seven points sequentially. Were there any transfers out of the holding company into SLAC or this is all organic?

Let me take the first question. If you look at our equity exposure across the company approximately 60% of the overall equity exposure sits in our Sun Life Assurance of Canada or SLA. In terms the MCCSR ratio being down, it reflects some of the impacts that we've talked about on the credit and the equity side. The net flows from SLA were actually zero. Usually we take, we actually take dividends out of SLA; in this last quarter our net flows were actually zero on the quarter.

So the capital that you have at the holding company you haven't disclosed. It would be great if you disclosed it, but has it changed sequentially?

I think if you look at the holding company -- I take you away from that because the holding company interfaces very closely with SLA. If you look at the multiple sides of our legal entity structure SLA being the major portion of it, and then Sun Life US, we have moved capital around but in a variety of ways. We still feel strong in the overall. SLA you can see the ratio and then Sun Life US we manage that differently on an RBC ratio basis, which still remains in a range we expected. In the second quarter we generally manage it between 300 and 350% RBC. Second-quarter is right there. And I think throughout the third quarter as we saw some of the credit impacts etc. we did move money into Sun Life US.

So is it fair to say you're $1 billion excess capital position would be down as a result? Excluding the CI gain?

I think a different way to look at that is you have to be reflective of the markets that we are in, and our 200% MCCSR threshold, we are still above that. So to say that we don't have the ability to deploy capital I think is an unfair characterization reflective of those markets and the challenge that we are in. So 200 is something we have used in the past. We can certainly flex down below that given what the opportunities might be.

I am just trying to reconcile the delta on your excess capital which in the past you have suggested was around $1 billion.

I think if you look at the excess capital and it is all in the definition of excess capital, we still have capital flexibility. Certainly the credit impacts that we have have eroded into that but as we've mentioned we continue to generate a fair amount of capital in both just organically and company and then through different moves in the portfolio.

Thanks.

Michael Goldberg, Desjardins Securities.

Maybe I will just continue with the question about the US RBC ratio. (inaudible) your objective is 300 to 350. The second-quarter you were right there. You were right there at 300 or you were right there at 350? Which one? You also said that you injected capital into the US operating sub. How much did you inject, and where did it actually end the quarter with its RBC ratio? And then I have some other questions.

Certainly when you look at the -- to be more clear we were at the lower end of that ratio at the end of the second quarter, but also the RBC ratio is not something that is filed on a quarterly basis. It is more of an indicator as we go throughout the year. So as we see different elements in the market we will put money down. I don't want to give you the exacts of different cash flows that move between our different subs, and it is not just singular entities in that nature, but we still have the goal of maintaining 300 to 350.

So where did you actually end the quarter? Was it above, below or the same as where you started?

From a filing perspective we haven't really ended the quarter yet. These are calculations that are ongoing. As I mentioned, those quarter points are not actually filed numbers so we continue to look at our overall capital bases in the US and we are still quite fresh off the end of the third quarter. We are coming to you on a rapid basis on our overall results in the company, but there is still more work to do behind some of our detailed financials.

Of the $134 million in seg fund guarantee and other reserve changes this quarter, can you tell us how much came in three components? First of all, the impact of weak equities, holding the CTE level flat. Second the impact of changing the CTE level if you did change it and if you changed it from what level to what level? And third, the impact of the other reserve changes and if you could elaborate on what those other reserve changes in the 134 were.

I will take a first shot at that, Michael. To clarify, we did not move the CTE levels in the quarter, so I think that clears up a lot of that. In terms of the actual reserve changes you have two elements going on in there. One is the change in the reserves for the guarantee benefits. The other would be normal increases -- I say normal -- where you have increases in the reserves for [PFADs] and other things. So there is nothing special in there just reflective of the increase or I should say the decrease in the equity markets and our subsequent increase in reserves. I would also note in there we do have the $100 million of hedging benefits that we did receive in the quarter.

So how much was the actual impact of just the seg fund guarantee reserve?

I'm not sure I exactly understand the question on the seg fund guarantee reserve. The reserves moved -- there is multiple ways to look at it. One is the cash flows that we assume as a result of those benefits. So if you think of the pure benefit. The other is increased on margins on those benefits, so they are all fairly well wrapped together. We could take it off-line to get into more details around it. That's about as much as I want to give.

Second question, is the equity impact on the Universal Life benefits really the impact of what has been described by Manulife as weak equities backing liabilities, and how do you measure that impact? Is it variance from some assumed normal capital appreciation or through mean reversion where, perhaps, you changed the assumed mean this quarter?

I'll ask Bob to go through this.

If you look at the CI guidance, CI guidance suggests that one use if you were not doing stochastic, which we do not do for Universal Life in Canada, that you use a rate of return that is a long-term rate of return on the equities, not higher than what the equities have returned over the last 25 years. And then they require a bunch of shocks that you apply to the equity movements at the worst possible time. So if you look at the $61 million, and I may have the numbers wrong here, but roughly two-thirds of that is from the equities that are backing these long-tailed liabilities, basically funding the level cost of insurance reserve that goes out 40, 50, 60 years. The rest of it comes from the present value of fees.

Because people do have options in what they put their money into in the Universal Life plans they can put them into a variety of elements. An awful lot of them are invested in S&P 500 indexes or TSX300 or rather TSX60 indexes. The present value of those we do not use any mean reversion whatsoever in our equity performance. So if the market is down 30% or 10% or 20% the present value of all cash flows going forward, be it from the fees or be it from the real estate or the equities backing a long tail, go down by exactly the same amount.

Okay, and what is that return that you assume?

To be honest, Michael, I can't remember. It is somewhere in the 8% to 9% range; then you have to pad it to reduce it from that, and then you have to put in a 30% drop at the worst possible time, so it comes out to a pretty draconian rate overall. But it is exactly as specified by the standards of the CIA.

Okay, and just further in terms of reserves, in reserves can you tell us what investment returns you assume for long Canada's, long US treasuries and for non-fixed income investments?

I think for long Canada's we are assuming that they get whatever it is that the current rate of long Canada's is.

But I mean in your best estimate reserves; what is the assumption that you have for each of these three investment classes?

The CI defines the best estimate reserve as being continuation of the current yield curve environment into perpetuity. So it is whatever the governments may be and it depends on which term you are buying, obviously. So if you were looking at, say, in the US roughly speaking at the end of September 10-year treasuries were 375, 385. So we would have been assuming that. And then we would be assuming whatever the spreads were on the particular assets that we purchased at that point in time. The narrow definition that is actually spelled out in the standards, we don't really have much choice in them.

Okay, and what about non-fixed income investments on average?

Aside from the Universal Life in Canada we do not back fix liabilities with real estate or equity.

Thank you.

Colin Devine, Citigroup.

That was the longest one question I've ever heard. I've got a couple. If you can discuss what happened with annuity sales in the US first. Second, it is all well and good to have the MCCSRs at the end of the quarter, but Don, as I indicated earlier this morning I think the key is where is it now. We saw Manulife's basically collapse in the first two weeks of this month. And so if you give us an update on really where you sit today and if that was the reason why you had to perhaps sell the CI stakes. And then lastly, the reinsurance business. Why are you still in this, and what strategic value does it add?

Okay, I'll take these in reverse order, Colin. The reinsurance business obviously had significant negative impact this quarter and you think you note in the previous interchange that we have been in and out of this business. Our primary historical focus on the business is not to be in the health side, but the life side over about the last 15 years has overall delivered a profitability on a reasonable basis. The volatility in the last quarter was extreme. And in fact, as the primary reinsurers are raising their retention limits, it may be that the residual that we retain or we get as business from the primary reinsurers in retrocession mode is becoming a more volatile aspect of the business and we will look at that going forward.

But I would emphasize that like reinsurance over an extended period has been a positively contributing business. From the strategic aspect of this business, particularly today as the industry and ourselves are increasingly entering into longevity guarantees does have some residual strategic value because it is a partial hedge against a longevity, particularly at older hedges, longevity increases in the various guarantees we provided under variable annuities, living benefits and immediate annuities and pensions. So that is roughly the story on the reinsurance business.

To reply then to that Don, I would disagree. You can simply adjust your retention limits to manage your mortality position. That is not any justification for staying in it, and it is unclear to me and perhaps you are going to have to take this up with John Boscia; Lincoln got out of it, ING got out of it, it just seems this is a hobby business for you that in no way is core and I think you just acknowledged that just on the strategy.

If we are only in the retrocession business say, Colin, I think your attribution about the [ranks] was in the broader business. This is a narrow business retrocession from reinsurers. We are not in the reinsurance business overall. If we come back to your second point about the MCCSR, we think we've given the sensitivities in the appendix in slide 14 and subject to the artificiality of any flat movement of 10% in markets, that would give you a decent approximation to the MCCSR of Sun Life Assurance Company of Canada on any given quarter to date equity movement. As, again, subject to the assumptions in that immediate, a sudden shift of 10% either way.

So I should interpret it to be below 200 today, absent what you do with the gain from CI?

That is correct. That would be a logical conjecture from the sensitivities given, yes.

Thank you.

And coming back to sales in annuities in the third quarter, that was an amalgam of fixed and variable. Variable were down. We did sell some fixed annuities as I expressed at the last quarter. Our goal in fixed annuity is to optimize the embedded value of the business, and that means some modest level of sales from quarter to quarter depending on the spreads in force.

John Reucassel, BMO Capital Markets.

I just want to clarify a couple things Rick, you said your pretax loss estimate on Washington Mutual is 100%. Is that and what was it for Lehman and AIG?

For Washington Mutual it was 100%. For Lehman, depending on the bond could be anywhere from $0.10 to $0.30 on the dollar. AIG was in a different construct because it still is actually in our reserves for default because there has not done anything there. So we actually set up more C1 reserves on that bond and we continue to watch it.

Okay and how much went to par? Did any of the credit losses go to par?

We actually have excluded that from much of the analysis.

Okay, okay. And just on your hedging program, I don't know if this is for Bob or not, but does your hedge qualify for capital relief at [OS-V] or is it just on the earnings side?

John, [OS-V] will not allow any capital relief for hedges.

Okay, so you have a 202 even without the hedge? Is that right?

Yes.

Just so I understand. Okay, great. And then I guess for Don Stewart, given the results in the quarter has your appetite for acquisitions changed, or have you become -- has your stance become more conservative or how would you characterize your appetite for acquisitions today?

Clearly, John, we are looking at opportunities. There are a lot of businesses for sale around the world right now, and we are being very disciplined in our assessment. So I would say that current economic conditions raise the bar on any given acquisition opportunity, and we have to be most certain that it will generate the benefits that justify the acquisition. But I would equally emphasize that we are seeing a lot of opportunities in almost all geographies. But these are in the inventory and will come out when we come out; but we are being very disciplined and I think it's fair to say the bar is higher.

Sorry, last question I guess just for Rick. How much of the seg fund or variable annuity guarantees are in SLA? Was it 60%? Is that the number?

That's correct. That is the exposure.

Thank you.

Tom MacKinnon, Scotia Capital.

Just to follow up on that, how much of the US equity exposure is in SLA?

I actually don't have that split, but it is probably -- go ahead, Don.

If you look at the US exposure, the US has, their domestic variable annuity business, which is all in SLF and not SLA. They also have the international variable annuities that are written out of Bermuda. Offhand, Tom, I do not have the split right now, but the 60% -- and that 60% is the split based upon the required capital for seg funds. The Bermuda part is in the 60% as part of the SLA piece.

So all that domestic variable annuity business you have written in the US is not this MCCSR slide you've shown on page 11 or slide 11 here has nothing to do with the US variable annuity seg fund guarantees?

No, it's not.

Okay, so we are not dealing with the whole picture here; the biggest impact is with respect to the US. We are not getting the whole picture here in terms of the capital as a result of just looking at SLA?

Tom, if 60% is in SLA the biggest part isn't in the US. That is pretty obvious.

Yes, okay. And secondly, with respect to -- pardon me here -- on slide nine you talk about the first box says the impact on current period fees, and then it says and the PV of something, can you split the current period fees with the present value impact?

I just say the current period fees are actually quite small.

Okay.

Most of it is present value and going through the reserves.

Okay, and then finally the 113 million hit on SLF reinsurance, you've got it categorized things as either credit or equity markets in terms of the hits in the quarter. How are we to look at this $0.20 hit or was it offset somewhere else by some other things?

I think we've talked about after the credit and equity hits what the overall company did, and the reinsurance business, the impacts that you see there are increases in reserves primarily for experience, some of which we saw in the quarter as well as our assumption around future [lapsesation] in that business.

So it hasn't really been what any one of the credit or equity market impacts that you've done in terms of working back to your adjusted earnings; is that correct?

No, that's correct. It is not in any of those numbers.

And were there any other kind of reserves moving the other way at all in the quarter that may have contributed to some extent in the results? Other than the ones we talked about, credit or equity market related?

I would take out the credit and the equity market, and we talked about a normalized of a dollar so within that dollar you will have the negative impacts you saw in the reinsurance offset by other impacts and just the core earnings of the business.

Okay, so we can assume that there is probably $0.20 in positive impact somewhere around there if we want to go back to say that the adjusted earnings were $1?

When we actually release our source of earnings, which will be later on, the source of earnings for the quarter will show very negative assumption changes.

Okay, and is there going to be a call when the actual numbers come out, as well?

Let me just say these are the actual numbers.

I mean, sorry, when the rest of the details come out?

I don't expect there will be more to disclose at that point in time.

Okay, so we will just have to wait and find out or assume whatever. This other $0.20 in positive stuff in the quarter, just we will gauge that from the source of earnings when it is released two weeks from now. Is that correct?

Yes.

Okay. All right. Thanks very much.

Mario Mendonca, Genuity Capital Markets.

I have a few questions, but they should be fairly quick. Bob, when you said you don't get any credit in your capital for hedging, did you mean the dynamic hedging? Do the static hedging that those S&P puts that you put on the 7.5 year S&P puts, do you get some credit for that?

We are not taking any credit for that. [OS-V] has left it open that one can make application with all sorts of provisos and conditions for those. We are not at this point taking any credit for them whatsoever.

If it is available to you what do you think it could do to your MCCSR if you took advantage of it?

Haven't even calculated it.

Okay. Why do you figure you haven't looked at this? Does it not worth it to you?

We may change from having static puts in this environment to switching them over to a futures program. The way that we hedge is dictated by what is available and what looks good in the market. So the static hedge might not be here in the next quarter, it might be converted from puts into something else. And the number of hoops to go through is efficiently large that it might take us a year to get approval.

The other thing I might add is that it is true we are not taking credit for on the required capital side; but in terms of available capital because the hedges do provide income mitigation, and Rick talked about the $100 million number that flows through to available capital. So it does impact positively over time on the overall MCCSR position.

I understand that. Question on SLA required capital. Is it higher, lower or the same as last quarter?

It has to be higher purely because of the segregated funds. The segregated fund capital required, if you had to go up between Q2 and Q3 because as the market goes down the capital required goes up. I don't have with me the actual numbers for that. But it would have to have gone up, everything else -- assuming everything else is equal obviously bond downgrades you will move to a different MCCSR factor if a bond moves from a AA to an A. So that would have gone up, as well.

What I am getting at is was there any transfer reinsurance or something to reduce required capital in SLA?

There were no reinsurance transactions that moved any liabilities out of SLA.

Okay. A couple of other very quick ones. You mentioned I think it was Bob, you suggested that you do not apply any mean reversion approach and so far as equities backing your (inaudible) liabilities are, and that is precisely the same thing that Manulife says. What I am trying to get a hold of and understand is if Manulife and Sun Life treat those changes as permanent, is there a requirement to treat them as permanent or is that a decision that Manulife and Sun Life have made?

If you look at the standards, the standards would allow a mean reverting model. The issue is one of we try and use the same sort of approach for doing all of our work, and it will be very difficult, nigh on impossible to come up with a stochastic model that would meet the CI's calibration criteria for the segregated funds that mean reverted. So since we are not using mean reversion there we are not using it anywhere else.

But there is room for that in the standards if the company chose to use it?

Yes, there is.

And the final question, I know there is no formal holding company MCCSR, and the reason why I am asking about the holding company now is you confirm that 40% of the equity market sensitivity is outside of SLA. And while that is less than 50% it is still a material number. What I am trying to understand is the holding company; is the MCCSR at the holding company if you were to calculate one informally greater than 200%?

I think when you look at the holding company, as I mentioned and reiterate that does not as a ratio, is really not a governing metric for our company and the capital flows around that. But it would probably be slightly below 200%.

So it is below the operating company's MCCSR?

At the current moment, yes.

Is it normally above?

It has been in the past but it fluctuates. Once again, I would reiterate, it is not a governing metric so it is more of an indicative. It doesn't change any of the capital flows in our company.

Thanks.

Jim Bantis, Credit Suisse.

Most of my questions have been asked and answered. Just looking at maybe stepping back looking at the size of the losses with respect to WaMu and Lehman, Rick, maybe you can give us a sense of what the single named limits are in terms of holdings in the corporate bond portfolio.

I will turn it over to Jim Anderson.

We do have both single name and group name limits. They are expressed in two ways. One as a percentage of the shareholder's equity, and it is a fraction of 1% and also as a percentage of capital required. The impetus for the second one is we can hold an awful lot less of a triple BBB than we can a AAA. The limits are in the range of 3/10 of 1% on an individual name, and up to about 6/10 of 1% on a group name. Those are limits that we have used for some time and actually we are reviewing the limits just as to try to get some learnings out of what is going on. I don't anticipate there will be any significant change, but we do have risk control around what we invest in.

Thank you. Were there any holdings that were above the limits that you suggested that had to go to the Board or reviewed by the risk committee?

There were no holdings that were above the limits at the time of purchase. As I mentioned again, some of the -- it is a two hurdle test, the second is on available capital where we have had some downgrades. They have put themselves over the limit, not by actions, but just by downgrades. And those aren't approved by the Board, but they are reported to the risk review committee of the Board.

Got it. Just the last question obviously some questions regarding the moving parts in terms of the total capital required for the MCCSR ratio, Rick. And I'm just wondering how much of an impact was currency this quarter to the positive side?

Currency on MCCSR is almost a nonfactor. It is one of the DCAT scenarios that we've run with major currency movements, and it is probably on the order of maybe 1% on the MCCSR factor.

You'll get it on both sides of the equation.

Yes, because you will end up -- you increase the required as well as the available if the currency goes up relative to Canadian.

Got it. And you haven't provided what the total capital required at the end of the quarter was. It was $4.7 billion the last two quarters?

We have not provided that yet.

Thanks very much.

Colin Devine, Citigroup.

One quick follow-up given the credit losses this quarter. What would be the value of your bonds that are down more than 20% for six months, please?

Colin, I would talk to you first about the split. So our held for trading assets are mark to market currently. So those will reflect that, and our available for sale bonds that are under that contract are less than $100 million.

Great. Thanks.

Michael Goldberg, Desjardins Securities.

Some additional follow-ups. Could you tell us how much potential tax recovery you have in the future with the lower tax that you were assuming? What -- talk about the potential for credit recovery. What is the CTE level that you have in your seg fund guarantee reserves? And you said that you didn't take any dividends from SLA and you injected cash into US operating subs, together how much did these actions reduce holdco cash flow during the third quarter?

Michael, thank you for your one question.

You are welcome.

Going through the different parts, the tax recovery that we have not taken credit for yet is close to $100 million when you look at that so we have the ability to recover that over time. In terms of our potential for credit returns in the portfolio, we are hopeful we have not sold out of our positions but certainly we think we have marked them to the appropriate level as of currently. And then in the CTE -- on the seg funds mid 70s type return on our variable annuity type blocks and we do maintain different levels of CTE across our different variable annuity seg funds and reinsurance businesses. But they did not move in the quarter.

And the impact on holdco cash flow of not taking dividend from SLA and injecting cash into the US operating subs?

We had actually plenty of cash to do so on that basis, and it is all part of the overall equation; still very well capitalized at holding company our subs, etc. So cash flow is certainly not a problem.

But just those two items, how much did those two items impact the holdco cash flow together?

You are going after something which isn't attributable such as the holding company; cash flows is a lot of ins and outs, so we hold excess cash at our holding company as well as within the subs that we are able to move back and forth. So I wouldn't want to talk to you about the many different flows that happen on a quarterly basis there. Just suffice it to say we have plenty of cash at our holding company and within our operating subs.

Thanks.

Andre Hardy, RBC Capital Markets.

For Jim Anderson, how much exposure would you have to the auto industry, as well as in your UK portfolio; how much exposure would you have to housing related credits?

The auto industry we have relatively little exposure to the North American automakers, the big three in North America, the total direct exposure to them would be a very small number, less than $25 million. We do have some exposure to their finance subsidiaries. Again, a very modest number. We do have exposure to the auto industry broader than that in the Toyota, Honda, Miss and that type of thing. But if your question is directed towards North American automakers, it is a very small exposure.

And are you including parts manufacturers in your answer?

Yes.

Thank you. And UK housing?

We don't have much exposure to UK housing there. We do have exposure to financials in the UK which have exposure to housing. But we don't have a very large percentage of our direct holdings in the UK exposed to the housing.

And sorry, last question, how big would that exposure to financials be?

I would have to get back to you. I don't have that number in front of me.

Mario Mendonca, Genuity Capital Market.

Rick, the Lehman and Washington Mutual exposure, those were obviously in bonds supporting policyholder liabilities not of the surplus account; first just confirm that I got that right.

There is a portion of it that was in the AFS category, so not all of it was back in (multiple speakers) --

Most of it would be in policyholders, right, simply just because --.

Most of it, correct.

So obviously these impairment losses can come from these policyholder accounts, assets for the policyholder accounts, so we understand that. I guess part of the reason I asked that question, Rick, is in answer to Colm's question you said that there was about $100 million in fixed income security or call it bonds that are be below market -- sorry, below carrying value of what you purchase them for. It was about $100 million that have been below for, say, six months. Is that right?

Actually the number is much lower than that. It sits around $30 million.

I'm sorry, I heard $100 million.

I did say under $100 million, but it is actually $30 million.

That's what I'm getting at is you didn't provide us with the bonds or the fixed-income securities that are supporting policyholders because they are carried at market value. I think that was the logic you used in not giving us that disclosure.

Yes.

I guess I'm getting at is it doesn't really matter what they are carried at. The fact is they were purchased for something else, and if they were to stay there for a long period of time and ultimately not recovery, which is the whole point of the question, you would take a loss. So the question is, what is the unrealized loss on those bonds that are backing policyholder liabilities?

We actually did on the quarter in our press release disclose the unrealized loss relative to par because we don't have at the carrying value is the current value, we did disclose the unrealized loss or at least defined it as the difference that we have from par. And Paul, you have that number? It is in the press release I believe.

It is $4 billion on the HFT bonds unrealized loss. From par.

But you could have, because of where interest rates were you could have purchased them at well above par.

Yes.

I guess that's the part that matters because you don't take a charge off of par. You take a charge off of what you paid for them.

So we could have actually put that number as relative to carrying value as well. I don't think they were materially different.

Thanks very much.

Michael Goldberg, Desjardins Securities.

I asked initially about the assumptions that you have for investment returns and when I see a quarter like this with significant volatility and weak returns, I guess the longer-term question that I am getting at is some way to validate the assumptions that you have built into your best estimate assumptions; because I think that is really the key issue to look at. But in order to be able to validate those return assumptions, it would be helpful to know what they are. So could you give us some idea of what the long-term investment return assumptions that you have for different classes of investments are, so that we could then maybe make some judgment about their validity going forward?

As you know, we operate worldwide. So we have a different assumption for equity returns in the UK, the US, India, Hong Kong, Philippines and any other place where we happen to own equities. Same goes for real estate. And they are linked to what on average over a long period of time these have earned in the particular countries. I don't have all of that information here, and if I did it would delay the call too long to go through it all.

How about if you give us the three most important investment return assumptions that you have?

Don't have them with me.

Michael, it's Paul. We do provide that as part of our embedded value disclosure, so we will be following up with that information. Operator, are there any further calls?

No, Mr. Petrelli, there are no further questions at this time. Please continue.

Okay, thank you very much. And I would like to thank all of our participants on the call today. If there are any additional questions we will be able to, we will be available after the call and should you wish to listen to our rebroadcast, it will be available on our website later today. With that, I will say thank you, and good morning.

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