Sun Life Financial Inc (SLF) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Life Financial fourth quarter 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 this conference call is being recorded, today, Thursday, February 12, 2009, at 9:00 a.m. Eastern Time.

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

Thank you, Patrick, and good morning, everyone. I would like to start by introducing the members of the management team present for today's call. Hosting the call we have Don Stewart, Chief Executive Officer of Sun Life Financial, and Rick McKenney, Executive Vice President and Chief Financial Officer.

Also available to answer questions are Jon Boscia, President Sun Life Financial, Dean Connor, President Sun Life Financial Canada, Kevin Dougherty, President Sun Life Global Investments, Bob Salipante, President Sun Life Financial International, 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, Colm Freyne, Senior Vice President and Controller and Dikran Ohannessian, Senior Vice President Finance. As many of you know, while the primary purpose of our call today is to update equity analysts and investors on our results and answer their questions, our audience also includes, media, industry peers, rating industries, our regulators, our employees, and our distributors, and we welcome all of 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. This morning, Sun Life Financial reported earnings for the final quarter of 2008. Our CFO, Rick McKenney, will provide detailed information on these results.

The dramatic decline in year-over-year earnings reflects the severe impact of falling equity markets and the deteriorating credit environment. Results for the quarter included over $1 billion in charges related to equity market declines and credit related impacts. As I indicated in our third quarter earnings call, these charges are not reflective of the quarter earnings power of our businesses.

Indeed, the Board of Directors of Sun Life Financial has approved a quarterly shareholder dividend of $0.36 per common share, continuing at the same level as the previous quarters. Sun Life Financial remains a strong and well capitalized company. As we progress flew 2009, it appears likely that the turbulence of 2008 will continue and may extend well into 2010.

In light of 2009's economic uncertainties, we have undertaken initiatives to further strengthen the organization and will undertake others to continue to build on our strong foundation. We are aligning priorities, reducing non-critical expenditures and scaling back on projects or other discretionary initiatives that do not sufficiently enhance our revenue over the near term. Examples our worldwide workforce has been reduced by approximately 4% and we are reviewing our entire product line, focusing on increasing our resilience while being guided by key principles of outstanding customer service, strong risk management, operational excellence, expense management, increased efficiency and productivity, and sustaining our brand.

At the same time, our business units continue to focus on strategic moves for the future. In Canada, we are broadening customer relationships and extending our strong market conditions through competitive investment, retirement and protection solutions. In the United States, after a strategic review undertaken by the new senior management team, we are taking major changes in the organization. MFS will continue to expand product offerings and increase sales, building upon excellent relative investment performance in 2008. In Asia, we will continue to concentrate on growth opportunities in advancing customer service while reducing expenses.

Unacceptable levels of loss in our reinsurance business unit over the final two quarters of 2008 have caused us to place the contributing lines of business into run-off and merge the reduced active business lines into our corporate reporting segment. We will continue to elaborate a balanced business model that provides diversity in term of geography, product and customer, and generates profitable sales growth translating into increased shareholder value. And underpinning our balance business model is our strong risk management culture exemplified by our comprehensive hedging program that significantly lessened the earnings impact of the severe market environment.

Another aspect of our risk program is our diversified balance sheet which should continue to hold in the face of ongoing crude credit conditions that will be a significant headwind in 2009. With that, it is a pleasure to hand over to our CFO, Rick McKenney, who will walk you through the quarter results in greater detail.

Thank you, Don and good morning. Earlier today we reported net income for the fourth quarter of $129 million or $0.23 per share. Excluding the after-tax gain of $825 million related to the sale of our $37.5 million stake in CI Financial, we reported an operating loss of $696 million or $1.25 per share.

On a full-year basis, we reported earnings of $785 million or 1.40 per share in 2008. These are clearly disappointing results, compared to previous periods of strong growth. However, they are in line with our sensitivities, given extreme economic conditions faced during the second of half 2008 and the fourth quarter in particular. The Company is successfully managing through this environment and has taken steps to reduce expenses, further strengthen risk reserves, and is positioned to take advantage of market opportunities.

Slide 7 highlights the credit and equity market impacts on the overall results of the Company. Charges related to asset impairments and other credit losses totalled $529 million for the quarter. The sharp drop in equity markets impacted the Company's earnings by $682 million in the fourth quarter as well. Although they cannot be ignored excluding these impacts, earnings would have been about $0.92 per share and reflective of the lower equity based asset levels and account values, creating essentially a smaller business than we had at the end of 2007.

Slide 8 provides more detail on the significant capital market impacts on the earnings in the quarter. I'll take you first to the left-hand side of the slide. Write-downs and realized losses amounted to $155 million. Unlike Q3 where we experienced a smaller number of very large impairment events, impairments in Q4 were experienced across a variety of sectors primarily driven by corporate credit, equities, and US securitized assets.

The breakdown of the $155 million impairments on bonds amounted to $36 million, equities accounted for $55 million, write write downs on securitized assets totalled $64 million with about half of that amount attributable to our CMBS portfolio. No single issuer accounted for more than 10% of total impairments. We had downgrades in the portfolio, resulting in a need to book an additional $55 million of reserved strengthening.

Looking for a moment at our unrealized losses, gross unrealized losses at December 31, 2008 for available for-sale bonds are $1.9 billion, help for trading bonds which have been mark-to-market to fully reflect market pricing were $7.1 billion, lower than their cost. This is up actually $2.7 billion from the third quarter. The increase is largely due to the widening of credit spreads, primarily in the financial and securitization sectors.

Rounding out the earnings picture, we also took proactive steps this quarter in anticipation of continued credit headwinds in 2009 to double our asset default assumptions, resulting in additional reserve strengthening of $164 million. And although we expect credit conditions to continue to be a significant headwind in 2009, Sun Life's balance sheet remains well diversified with 97% investment grade and spread over 1200 names. In the second half of the year, we've also strengthened our liquidity position, holding just under $9 billion in cash and cash equivalence. This is a much higher level of liquidity than we traditionally held and although it will dampen our earnings -- more near term, we believe it is the right course of action given uncertain times. I would also add that the number of $15 billion of government bonds is also in our portfolio.

Our $16 billion mortgage portfolios is seasoned and well diversified, both geographically and by property type. It is comprised almost entirely of first mortgages. In North America, we are invested in over 4200 mortgages with an average loan size of $3.7 million, and an average maturity of just under eight years with an average loan devalue of 56%. Impaired mortgages remain less than half a percent of total invested assets.

Turning briefly to another asset class in the news of late, our total exposure to hybrid securities of UK banks, that is Tier 1 and upper Tier 2 bonds, amounts to less than half of 1% of invested assets or about $400 million. Then taking you to the right column of Slide 8, this details the significant impacts of the draw up in equity markets and consequent reduction in segregated funds and variable annuity account values on earnings this quarter. The first row of $249 million highlights the impact of the 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 our products.

On the second line, the impact of equity markets on reserves for the guarantee benefits and other reserve changes, was an increase in reserves net of hedging of $349 million. This line includes both the increased value of guaranteed benefits which are mitigated by our hedging program and other reserve increases, such as increase provisions for adverse deviations. We also do not hedge these pads which have been set up strictly for reserving purposes.

Our comprehensive hedging program for GMXB guarantees has significantly lessened the earnings impact of a severe market environment. We benefited from hedging gains of a little over $700 million in Q4, as our actual hedge experience generally outperformed our expected experience in the quarter largely due to the outperformance of our interest rate hedges. And finally, reserves for universal life benefits increased by $84 million this quarter from their equity market exposure. The total equity market impact was slightly higher than our Investor Day sensitivity guidance would have indicated. As the sensitivities assume an adjustment to [TTE] levels as markets declined, we elected not to lower the TTE levels from third quarter, thereby building additional reserves for our equity sensitive insurance businesses.

On Slide 9 we highlight our sources of earnings. First our expected profit on in force business is down $104 million over last year, primarily due to the decrease of fee income in asset based businesses related to the drop in equity markets. As for the impact of new business, results this quarter are in line with normal levels. The unusually low number in the year ago comparison is due to the effect of implementing our A triple X funding solution in the fourth quarter of 2007. Our experienced gains and losses show clearly the impact of the difficult market conditions experienced in the quarter which I took you through in more detail in the previous two slides. Management actions and changes in assumptions in the quarter reflect the impact of actions taken to further strengthen our credit risk reserve by changing the 2009 asset default assumptions in anticipation of higher future credit-related losses, as well as the increase in reserves in our life purchase session business to reflect more comprehensive information on potential future premiums and claims.

Moving to premiums and deposits on Slide 10. We saw sizeable decline of $2.5 billion from fourth quarter of 2007 on a constant currency basis primarily from our asset based lines. You'll note that life and health premiums in the funds were relatively stable, being down 2% mainly due to lower sales in our Asian operations excluding India. As could be expected by the market impacts, wealth deposits are down 11%, mainly on lower retail mutual fund sales. And correspondingly, managed fund sales which represent institutional sales at MFS and [Plain Vauden] were also down 24%.

Looking at Slide 11 and the value generated by sales over the past 12 months, the value of new business fell by 7% to $822 million, the main driver coming from lower sales. Although sales are down, we remain focused on our margins. B & B from individual and group life and health products remains strong and we're taking steps to ensure that our new (inaudible) products continue to generate value despite the volatile markets. Total Company assets under management are $381 billion depicted on slide 12 are relatively flat to Q3 '08, but down 10% from one year ago. The reverse of what we would have seen a year ago, currency movements of positive $50 billion were offset by the impact of declining equity markets which reduced assets under management in excess of $88 billion from 12 months ago.

Turning to Slide 13, you see that despite the very challenging economic conditions faced during the quarter, we remained a very -- we remained with a very strong MCCSR ratio for Sun Life Assurance of Canada at 232%. We end the year with $2.5 billion of excess capital to deploy. Our capital strength, strong liquidity and overall balance sheet position us well in the current environment.

Moving on to our business groups on Slide 14, SLF Canada reported a loss of $55 million, largely due to the equity market and credit impacts I mentioned earlier. I would note that group benefits business had very good results. Turning to sales in Canada, individual life and health sales were down slightly from Q4 '07, primarily due to a decrease in sales from our wholesale distribution channel consistent with our strategy of broadening relationships with key distribution partners. Individual wealth sales continued to be strong with sales of 16% from a year ago to the strong Sun Life Elite segregated fund sales. I'm happy to report that we've also made progress in growing our Sun Life financial advisor channel where we grew by 100 new recruits than last year, and now have over 3500 advisors serving Canadians across the country.

Looking now at our Canadian group business on Slide 16, assets under management and our group retirement services business were down slightly over Q4 2007. The impact of declining equity markets were partially offset by new business and positive cash flows. We continue to be the market leader in the defined contribution space with a mid-30s market share. Group benefits also continues to demonstrate solid momentum with business in force increasing 6%.

Turning to Slide 17, Sun Life US reported a loss of $576 million for the quarter. Annuity earnings dropped substantially over Q4 '07, driven by equity markets and credits. Individual insurance earnings increased by $11 million where we benefited from the sale from an end of money derivative position while we rebalanced the portfolio. On the group side, earnings from our employee benefit group declined by $23 million from an increase in reserves as a result of the rapid decline in interest rates. The underlying fundamentals of this business remain strong.

Turning to Slide 18, Sun Life US total annuity sales in the fourth quarter were down $343 million US. Sales declined in line with the market in our variable products. And this is also in line with what we were seeing in the industry as a whole. Moving on to Slide 19, core sales of individual life insurance grew by $32 million over Q4 '07 due to strong growth in the Sun executive UL products. The employee benefit group had outstanding results in Q4, registering a record high $323 million in sales across our lines. And as you can see on the right-hand side of the page, business in force and our employee benefits group remained at $2.1 billion US.

Turning next to our asset management business in the US at MFS, on Slide 20, earnings fell significantly compared to Q4 of last year. As we mentioned last year, Q4 was slightly higher than the run rate for one-time items and this year, slightly lower for more one-time items in the current quarter. The normalized decrease is consistent with the decline in equity markets, our asset levels and resulting impact on fee income. Even with the much lower markets, MFS margins held in at 21%.

MFS experienced net outflows of $2.1 billion in the fourth quarter. It is difficult to isolate these numbers in the current market where there has been so much disruption particularly versus a year ago. The real story for MFS is relative performance. Investment performance at MFS remains strong with over 80% of fund assets rank in the top half of the Lipper category average, over three, five and 10 years at the end of the year. In addition, MFS ranked fourth overall, out of 59 firms in the 2008 Lipper Baron's Best Fund Family Survey.

Turning to our Asian operations on Slide 22. Earnings lower by $22 million relative to the fourth quarter 2007, due to lower earnings in the Philippines. On the right hand of this slide, you can see that sales are down 7% over Q4 2007.

Continued growth in sales in India was offset by a slow-down in other markets. Full-year sales were up over 34% from last year driven by strong growth momentum in India, resulting from increased distribution reach. We continue to invest for growth in India in the fourth quarter were direct sales force now exceeds 160,000 advisors across 600 branches. As we look forward, Slide 23 reiterates the potential economic scenarios that could unfold in 2009 and their implications for our earnings first introduced at our 2008 Investor Day in November. I won't spend time reviewing with you in detail today, but it provides context for how different environments will impact our earnings in 2009.

As we look to Slide 24 to our medium-term objectives, volatile economic conditions are expected to continue to unfold in 2009. At present, we would expect to see our earnings growth off of current base levels. We have updated 2009 earnings and capital sensitivities provided in the appendix and these will directionally give you a sense of how earnings may emerge during the year. Our ROE target range of 13% to 15% over the medium term, realistically combines the solid underlying earnings power of the Company, how we look to price our business and the fact that we will continue to face headwinds in 2009.

Importantly we will continue to manage the Company's capital effectively. First and foremost in this environment is about our capital strength. As I mentioned earlier, we are in a solid excess capital position where we are able to maintain the strengths, continue to invest in growth, both organically and through acquisitions while maintaining current level of dividend. I would now like to turn the call back over to Don for his concluding remarks.

Before we open the lines up for questions, I would like to reiterate that while 2009 will prove to be a challenging year, we remain well-positioned for the future and we continue to invest for growth in our businesses. Sun Life Financial has a solid capital position, a strong risk management culture and program, and a diversified balance sheet. And we continue to invest in the growth in all of our businesses, as well we remain financially disciplined, staying focused on improving results for shareholders, while maintaining a strong value proposition for our customers. Turn the call back over to Paul.

Thanks, Don. 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 of your questions during the allotted time this morning. With that, I will now ask Patrick to poll the participants for questions.

Your first question is from Tom MacKinnon at Scotia Capital.

Good morning. Two quick things, first of all, why not prerelease these results. They seem to be significantly below what anybody was expecting. And then I've got a follow-up with respect to the spread widening impact.

Certainly. When we talk about the process we go through in evaluating the disclosure of our results, it is important to note the year-end process is a process that takes some time as we produce more documents than just our quarterly reports. When you look at it, Tom, you need to look at the sensitivities that we put out as part of our Investor Day. They give good very guide posts as to what was going on in the market. And even from a credit perspective, as you look around the market, the credit impacts are quite well denoted out there. I think we're very comfortable with the process we've gone through in getting you full disclosure and taking you through that today.

Okay. Now, with respect to $155 million in what you call spread widening, and I think -- can you elaborate a little bit on that? How much of that is in the fixed annuity business in the United States? You talk about it being financial and securitization sector. If you could just little bit more color as to what this spread-widening is or how it's impacting your results.

Talk about the spread widening, Tom, it goes back to a conversation we've had in the past in terms of the widening in the portfolio and expectation of how those wider spreads will actually come through the results. And as a result booking higher reserves in the current period, is the impacts of those. You asked where that is. It is primarily in our US annuity lines and you would have seen that in previous quarters. And what happened in the fourth quarter was the extreme widening that was seen throughout the industry caused us to book increasing reserves in that line.

And this is a problem that seem to be in the first and second quarter. I don't know to what extent it was in the third. The spread was pretty wide then. Is this a catch-up play right now? And as a follow-up, are you able to hedge changes in the treasuries, but you're not able to hedge changes in the credit spreads? Is that correct, with respect to that fixed annuity business?

I'll turn that to Bob Olson.

Hi, Tom. The spreads did widen out quite considerably in the securitized asset portfolios in the financial portfolios in the fourth quarter. It was -- the $155 million is just the Q4. We did have effects in the other quarter s as well. And like most companies, we utilized swaps to rebalance portfolios on an ongoing basis. Part of this is the relation that swap spreads themselves did some rather strange things in the fourth quarter. It is a combination of the spread widening on the CMBS, RMBS portfolios primarily and the fact that swap spreads went negative at certain durations in the US.

When you talk about your securitized asset and financials portfolio, what businesses are these -- ?

This is primarily related to the fixed annuities in the United States operation.

And if we see spreads come in, what do we do -- if they come in to the same degree they went out -- ?

Then this will reverse.

It will reverse. And reversed immediately? Spreads wide 100 so take this, and if they come in 100, then you reverse whatever you did when they widened.

To the extent -- you also will have had time happen when we report now and whenever we are reporting with the spreads having come in.

Okay.

I do not expect spreads to be in to where they started in 2007 in the next quarter.

And maybe just one quick other one to squeeze in here. This business, Don, you mentioned reviewing your entire product lines, where does this fit in when you think about reviewing product lines?

This is optimizing (inaudible) business of pursuit, Tom.

Okay. We anticipate sales of the stuff -- or to decline going forward?

Yes. When you maximize the embedded value of the business, you can't purely focus on the in force because you also have to look at selling and complimenting from time to time by adding business. Business net overall, as you know, is ongoing.

Thanks.

Your next question is from Colin Devine from Citi. Please proceed.

Don, I appreciate your comments about Sun Life's strong risk management culture, but I have to be candid, I'm having trouble to reconcile that with the $1.2 billion of unusual items this quarter. In particular, over $3 billion of investment losses in the US for the full year. That's far and away the highest of any company that I've seen given the size of your portfolio. Perhaps you can comment on these risk management practices.

Second, excess capital, it seems the gain from CI is gone, so where does your excess capital stand today or is it basically spent? And then perhaps for John Boscia, I hope you can assure us this was a house cleaning, now that you're at the helm and we can finally start to see some progress on these operations going forward because this is just, frankly, a horrendous quarter.

Colin, you're acutely aware with equity markets down approximately 23%, 24% over the quarter, that in and alone generates some $600 million-plus of a negative net income for the quarter. I think that plus the credit is indicative of an extremely stressed environment.

You're giving those figures net of your hedges, Don?

As you're well aware, our accounting system is different from our colleagues in the United States and gives rise to different reflections at any point in time of economic events, although it will balance out over the longer haul. These conditions in the United States are in -- reflecting enormous stresses, as we've seen in the diminution of the value in the banking and reflect right through the financial sector. Our view is that we are managing well in an incredibly and difficult and challenging environment from a risk management perspective.

And as you point out, the dollar values that are lost, are very large, but so are the economic events driving them. And we feel that our hedging program, in particular, has served us reasonably well over the quarter. In fact, particularly well over Q4 and reasonably well over the second half of 2008.

On the second part of your question, again from CI, we see as alive and well in our excess capital. We think we have a very strong position at 232 MCCSR ratio at this juncture. We see ourselves in a strong capital position when, as Rick noted, it is all about capital.

Don, with all due respect, though, you avoided -- you overlooked one part of the question. $3 billion of investment losses plus in the US, on a general account investment portfolio that is not even $20 billion. I never seen anything like that in 20 years doing this.

Let me understand where you're $3 billion number is coming from.

Net investment income for the year of what, $3 billion of a loss?

No -- (multiple speakers)

Credit driven on the annuities business.

That is not correct, Colin. One of the things you would see there -- we talked about our un realized loss position. And actually what -- we mark to market our investment portfolios so that might be what you're seeing. These are not credit losses that have come through. It is nowhere near that in the US.

Colin, it's Paul. The Canadian accounting is slightly different on this, and how it flows through the income statement is a little different . We would be happy to go through that with you in some detail with you off-line, if you would

I look forward to it.

Third part of the --

Colin, with regard to the US, we have just completed a very comprehensive strategic review of the businesses that we are operating in and our ability to be successful in those businesses going forward. There are businesses that we will be focused on going forward, and there are some existing lines that we will have less focus on.

Less focus, I do want to emphasize doesn't mean necessarily that we will exit completely the businesses that operate on a more opportunistic basis. What we are trying to do this quarter, as well as every quarter, is to have our financial results accurately reflect our current position. I wouldn't want to characterize or lead you to think that what we did in 4Q was somehow some type of a housekeeping, because --

Housecleaning.

Because something was wrong previously, and that is not what we had done. But I will say that our business going forward will have different direction than would it otherwise might have had.

That's all we can hope for. Thanks, Jon.

Your next question comes from Michael Goldberg of Desjardins Securities. Please proceed.

Thanks. At the end of the third quarter, you had said that you had about $800 million of bonds that were more than 20% below cost for more than six months. Can you tell me what the comparable number at December 31st would be?

We can. That number would be roughly -- and these are -- remind you that these are held for trading so these are actually held at current market values. But if you use as reference original purchase that number would be similarly be about $1.8 billion.

Okay. Also just to re mind me, you now have $1.9 billion of unrealized loss on available for sale bonds and $7.1 billion on held for trading bonds. What would those numbers have been at September 30th?

The number on -- it's in our press release, Michael -- go ahead, Paul.

That would have been $1.1 billion on the AFS and $4.4 billion on the held for trading.

Okay. My other questions is about your MCCSR. Can you tell me what the impact of the changes mandated by [Austie] in the calculation of MCCSR? What it would have been excluding those changes, instead of the 232%.

If you, Michael, if you think about the change to the [seg] fund rules that would be about 13% impact at the SLA level. And then the other changes would have gotten washed in with the other movements within the quarter.

Okay. And what would the -- so that's 13%?

Yes, percentage points.

Right. And what was the impact of the CI gain?

Roughly -- it's not all in SLA, so I think that's important to note. But the overall impact on a relative basis, if all of those funds were in SLA, would still be about 40 points which is what I think we put out. It came in as expected.

Okay. I'll requeue.

Your next question comes from John Reucassel from BMO Capital Markets. Please proceed.

Thank you. Rick, you mentioned the $400 million in exposure to UK hybrids. I assume that's a gross number. Is that right?

Gross meaning -- ?

It's not net of any write-downs?

Yes. We have not actually written down the bonds. As everything else, they're mark to market so that is the current carrying value.

Okay. And the -- could you tell us, it looks like about $7.5 billion of general fund assets in the UK. Could you give us a sense of how much is exposure to UK banks or UK financials? However you want -- that is a breakdown of sub-debt or senior debt.

I just gave you at the high level -- the bank exposure, and I don't have in front of me exposure straight senior debt.

But so -- is that $400 million that was just UK hybrids, right?.

UK, Tier 1 and upper Tier 2.

Okay. Okay. And then a question for Don --

If I could pause one thing. That is actually total exposure, not just within UK portfolio but across the entire company.

Okay. Okay. Don, just a question on the dividend -- an operating loss this quarter, $0.71 last quarter. Could you talk a bit about the process about what the Board goes through when they look at the dividend and the sustainability, and the difficult operating environment you guys have talked about?

What the Board does, John, is take a look at a wide range of indicators. The Board has a very considered process to look at our dividend each quarter. In this particular quarter, we saw the dividend as reflecting a strong overall financial position and we were comfortable continuing our dividend at the previous level. I think that's about all I can say on the dividend.

If you'll look at -- how many more quarters of earnings below a dividend is the Board comfortable at continuing that dividend?

The Board was comfortable declaring the dividend at the level which was published this morning. We see these conditions as much more about a strong capital position, as opposed to the inevitable pressure on earnings from the incredible stresses on equity and credit markets. I can tell you that the Board was very comfortable with this decision. The Board will look at the dividend every quarter as they have done in prior years.

Okay. And then, sorry, I'll squeeze in one last question. The sensitivity on MCCSR, Rick, when you talked about declines in equity markets, it is at a 10% decline would lead to a 3% to 5% decline in MCCSR. Is that 3% to 5% as far as percentage points or -- ?

John.

Or is that 3% to 5% -- so we went from 232% to 227% or going from 232% to 220%?

227%.

227%. Okay. Thank you.

Your next question comes from Darko Mihelic of CIBC World Markets.

Thank you. Good morning. First a couple of questions and then I'll requeue, I suppose. The first question is with respect to the asset default, the $164 million increase to reserves. I'm -- what I'm struggling with is understanding -- when you have a large portfolio, and I'm trying to understand the sensitivity to credit. Maybe I can phrase the question this way, when we saw the almost doubling of impairment for mortgages, quarter-over-quarter in the US.

And we think about you're suggesting that credit will be a headwind, is this assumption increase or this increase in credit reserves -- what would it take to have this repeat itself? In other words, maybe you can let me know, where do you think these impairments could go and how well reserved are you? For example, if these mortgage impairments were to double from the current levels? Can you give us any sense or any help on that? Because it seems as though in your opening remarks, really credit was suggested to be a significant headwind in 2009 and we're just -- we have our own view on credit but I'm wondering how well reserved you are. To tag on to this question, sorry for the length of it. Is this also an increase -- does it also assume a change in portfolio mix going forward? Thanks.

If we look at the change in the assumption into 2009, that is double of what we have normally expected so we're reflecting that in 2008 results. What see see coming through in 2009, we'll have so see how the market plays out in terms -- whether those results come in or expected or not. But that is the level we're comfortable with as we look into 2009 which will have us fully reserved for that. We have to see hi that plays out.

Does it assume a portfolio mix -- a change in mix?

No. Just assumes the more difficult environment expected in 2009.

Some of your competitors have adjusted their ultimate reinvestment rate. No discussion here or at least haven't seen much on the interest rate reserves. Can you help us out -- what happens if long bonds stay this low, how comfortable are you with your URR and what would be the sensitivity be?

The URR actually declined over the year in Canada by 20 basis points -- a similar amount in the United States. If the interest rates stay where they are, the expectation is that the URR at the end of 2009 would be 20 basis points lower than where it ended 2007. It would have no different effect than it had in 2008.

Okay. One last question here on the quarter for me is the reinsurance business. Can you help me understand one thing? You're suggesting that you're going to put this into run-off. Wouldn't now be a time to chase this business? Am I missing something? Wouldn't now be the time when premiums would go up and margins would improve in the business? Can you help me out with that?

This is Don Stewart, Darko. The business is actually composed of seven different sub-segments. And the business we placed in run-off is a business that largely deals with pools and minor lines. The ongoing active business is the plain vanilla yearly renewable term where we have much more visibility into the underlying fundamentals of the business. That's the business that we are continuing to write and, indeed, as you observed, that's a business where we do see good margins going forward. And in fact, the reinsurance business delivered good value of new business in 2008, largely arising from these lines.

Like many of our businesses, there is much more granularity at work than what we publish when we look at the entire line. Your question is spot-on and we are continuing in the segment of business that is fundamental to what we do, which is underwrite life insurance on a year-by-year basis and we do see good margins going forward.

Okay. Thanks very much.

Your next question comes from Andre Hardy of RBC Capital Markets. Please proceed.

First one is for Rick on the topic of liquidity. How much of your liabilities could be prepaid?

Prepaid. I think that I would send you to our financial statements that we'll be putting out here shortly, where we actually break down our liabilities in terms of how they roll off from a maturity schedule. I don't have that here in front of me.

Do you know if your liquidity resources exceed that theoretical number?

They do. And that is where we stress-test to make sure that they do. That is why you see the cash position of $9 billion and government position which are highly liquid of another $15 billion on top of that.

Okay. Just a really quick one on the MCCSR, all the changes that were proposed around Christmas. Did you have time to put that all in the MCCSR or is there more impact from those changes that we'll see in future quarters?

I think most of those are in. There was some talk of other changes which have not been completely finalized, at least operationally which may come in the future, but I don't see them having a large impact.

Last one, I'm not sure if it is for Don or Jon, but I'm a little confused in what I'm hearing on fixed annuities. On the one hand, I'm hearing you don't seem to love this business but you don't want to get out. There is probably never going to be a better quarter in which you write fixed annuities. It is similar to Darko's question on reinsurance. Isn't this a good time to put business on?

Yes, Andre, this is Jon. It is a good time to be putting business on and we are continuing to sell fixed annuities as we sit here today. Fixed annuities is a business that I look at as opportunistic, meaning when we are able to make the spreads, we will aggressively sell. And when we can't make the spreads and achieve them, we'll withdraw from the markets. That has implications on what forms of distribution one might use because some forms of distribution channels will allow you to be in and out. Others want you to be there all the time. And it's not a business that we want to be in all the time because the margin pressures can be pretty significant from time to time.

What am I missing here? Your FA sales were up 25 % year-over-year, which is pretty low for competitors or for that market, based on what competitors have reported. Is it that distribution shift you're talking about?

I think in the fourth quarter, we had a lot of items going on. One of the things in the fourth quarter that we were mindful of is we had made a decision to be very careful with our new money in putting it into the market, because we were concerned with credit spreads. We didn't want to put out a lot of business on where we were putting interest rates -- liabilities on, but yet keeping our cash position -- or our investment position largely in cash and more liquid instruments. Therefore, we were cautious in how aggressively we went after the markets.

Okay. Thank you, Jon.

Your next question comes from Mario Mendonca from Genuity.

First, for the accountants in the room. When a held for trading security, a security that is held -- accounted for as held for trading, declines in value because credit spreads have exploded in the quarter, does that get reported as negative investment income in the quarter?

Yes, it is reported in the investment income line as negative so you will see in the statement of operations in the financial statements a large negative.

A bit of advice for Paul Petrelli, there are a lot of people that actually believe that Sun Life had $3 billion in credit losses this quarter. It might be worthwhile -- or this year, it might be worthwhile clarifying that -- a question that Colin asked, online rather than off-line. Because just by the nature of the e-mails I'm getting, some people actually believe there was $3 billion in credit losses. I will get to the actual questions I have. The 300% to 350% RBC ratio in the US, if you were to downstream, say, $100 million or $200 million in capital of this excess capital, how many points would that add to the RBC? If you just give us some sensitivity of -- downstream $100 million, downstream $200 million -- what does it mean to RBC?

One second, Mario, I'll get that. We've gone back and looked and if your first part was a question as well, I think the credit losses that we've seen in the US are much closer to the $500 million range. Most of that you would have seen in the third quarter and actually in this quarter, credit losses in the US were only $130 million after tax --

Right. People don't understand the available -- the held for trading accounting in Canada and that is why that question was asked about $3 billion. Rather than doing it off-line, I think you should make that clear because it actually did affect the stock. By the nature of the e-mails I'm getting, people don't get it.

I appreciate that. To answer your question, for 10% change to the RBC -- I'm giving it to you in reverse, is about $40 million in capital.

Say that one more time?

10% equal to about $40 million in capital.

10 points is $40 million in capital? Does $2.5 billion in excess capital they you say you have -- is that $2.5 billion of cash in the holding company or is it spread throughout the Company?

It's spread throughout the Company, but most of it is actually resident in some Sun Life assurance. We have the ability to access that capital pretty readily.

Stock is trading at about 0.7 or 0.8 times book. Do you feel comfortable with that valuation you can actually do deals with the US? Or are deals out the window because valuation is [so poor]?

Mario, if you look at the world in total, it is a comparative assessment. We see situations whereby, there are significant diminution in value in other entities. Also, as we observe from time to time, this line of business has potential, as well as saying -- whole entities. But I think it is a comparative gain.

You could do it at that valuation level?

We'll see where we settle down when all of the fourth quarter is digested. When you see a stock of a major financial institution and assurance space move 30% in one day, you're living in very volatile times. We don't think that this will continue for all time, so we will see some settling and some stability eventually, just not for some time. I think each deal has to get looked at individually on its own merits.

Finally, what is going on in retro? I don't understand this business -- like claims. What business was it? I don't understand what is going on here. Why such a big loss in the life retro business?

The life retro business, as I observed, is made up of seven separate sub-segments. Some of the sub-segments, going back over a decade, had some true-ups in the last two quarters of 2008 and these were very significant. I would observe that the business has actually made money. The life retro business -- write large within the Company, has actually made money every year from 1994 onwards which is as far back as I've got records at hand. This year was truly an anomaly in that particular trend as is quite distinct and separate from health reinsurance which is tending to be a very negative business and it's not one we've written for some very considerable time, in fact over decade. So the life retro business is made up of these sub-segments. And a couple of the sub-segments in the last two quarters generated actuarial reserve increases from business that was written a very long time ago.

What assumptions were [strengthened], was it mortality?

Largely -- Bob?

This is Bob. One is we changed our recapture assumption coming through the year. We saw recaptures increasing, and so we increased that assumption and that created a reserve strengthening.

Recapturing the folks are not renewing they're taking back their business because there is some profits embedded in that.

They'll increase their retention and then come back and recapture the business up to that retention.

Bob, are we going to get one of these charges every quarter for the next five or six?

We don't expect that.

Thanks.

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

Quick questions on Slide 8. Just looking at Slide 8, with respect to the changes to asset default assumptions. Rick, can you give us a sense -- you said it is doubled in term of the potential losses. But how does that relate to, let's say, 1992 into, when you think of the rate of default? Is this enough to absorb the type of grim economic conditions we're looking for for the balance of 2009?

Bob Wilson. Our default assumptions that we put into the reserves are initially based upon long-term averages out of Moody's, because the assets that we own are long-term. And then we put a -- generally a 100% margin on top of that. Then for 2009, we've doubled that number. The $164 million-ish is an after-tax number to start with. Basically, what's in the reserves for 2009 in total is roughly pre-tax of $400 million for defaults out of bonds and mortgages. Now we actually had more than that in 2008 because of the unusual circumstances. We don't expect that we are going to have losses on the order that we had in Q3 on an ongoing basis.

Just to clarify it. The default assumptions are based on bonds and mortgages, as opposed to securitized assets or CNBS or other assets?

We have a different assumption for securitized assets, but our starting position is history. And we use -- there isn't that much history on securitized assets and actual defaults, so we treat a securitized asset that is rated as AA as not being a AA.

Got it.

It falls into our normal matrix of default assumptions, but we do not consider the ratings to be realistic so we use different ratings on those bonds than the ratings that they have from the rating agencies at present.

Okay. I can follow up off-line. I want to do ask a question with respect to the [Geitner] plan did not have significant impact on the life codes, in terms of TARP money or other types of benefits. I'm just wondering if either Don or Jon thinks this will accelerate the prospects for consolidation in the US life insurance sector sooner rather than later, perhaps given that managements in the US were expecting some benefit from the treasury plan?

Jim, it's Jon. I think that it's too early to be able to tell, yet. I think that the administration probably came out with their emphasis on the consumer level itself because there was so much pressure coming out of Congress to make sure that the next wave of either TARP funding, as well as the bailout, was going to get to the individual homeowner in the purchase of troubled credits.

Because Geitner did not highlight TARP for the insurance industry, I don't know that that would necessarily mean that there is not going to be any of this there. The HLI and other organizations are continuing to keep the insurance sector higher in treasury's mind than it otherwise would be. I do think that your basic premise that if TARP monies are not available, would that accelerate some type of consolidation is accurate. But I don't know if that means TARP monies are not yet available.

Thanks very much.

Patrick, do we have any more callers.

Your next question comes from Doug Young of TD Newcrest. Please proceed.

Most of the stuff has been addressed. Just have a few numbers questions. Rick, you mentioned there was a derivative gain in US individual insurance and some noise in MFS. Can you quantify that?

Derivative gain that we saw was in the $130 million range. And then MFS, you're probably talking about plus and minus 10, tight numbers for both years.

Okay. And then the equity hedge gain, what was that in the quarter?

The hedge gain that we saw in the quarter related to our GMXB portfolio was about $700 million after-tax.

That was after-tax. Okay. And just on page 21, on the operating expense side, it was a little bit of a bump-up in quarter. I'm curious as to -- is there anything else in that number that I should be looking at?

Doug, it's Paul. Some of that is currency. A good portion of that is currency. I assume you're referring to page 21 of the supplement.

Yes. That's fine. Okay. Thank you.

Your next question is a follow-up question from Michael Goldberg of Desjardins Securities.

Thank you. You've noted that you've doubled your default expectation in 2009 from normal levels. And that's -- you're looking at history. I don't have a lot of history to look at. But I'm wondering if you could give us a little bit of a lesson in history, and tell us in the early 1980s downturn which was a very severe downturn and in the early 1990s, what was the actual default experience relative to normal default experiences at those times?

Michael, we don't have those numbers in front of us. We would have to get to you on that. It is quite a detailed question.

Okay. Couple of other things. You were asked about your ultimate reinvestment rate assumption. And you've just talked about what the change in ultimate reinvestment rate would be if rates stay constant. But you didn't actually answer the question. Did you change your URR assumption?

We changed -- our URR is based upon the CIA formula for URR. We did not make any adjustments to the formula. But because of interest rates being lower than they were five and 10 years ago, the URR over 2008 for Canada and the US declined by approximately 20 basis points in each territory.

No, I understand that and that works on the basis of a formula. What I want to know is did you change your company's assumptions where that formula sets the maximum URR that can be used?

The answer to that is no.

Okay. And you also said that you held your CTE level unchanged from the third quarter. What is the CTE level that you're using right now?

It varies by territory and business, because we -- we're using a formula which was related to the in the [money-ness]. In Canada, the CTE level is 80. In the US, it is 75. For run-off reinsurance, the GMIB business, which is the vast bulk of the liability, is at CTE, is 65 because it is incredibly in the money. And GMDB in run-off reinsurance which is probably the 35% of the reserve in run-off is at CTE 80.

Thank you very much.

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

Okay. Thank you very much, Patrick . I would like to thank all of our participants on the call today. If there are any additional questions, we'll be available after the call and should you wish to listen to our rebroadcast, it will be available from your website later this afternoon. With that, I'll say thank you and good

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