Sun Life Financial Inc (SLF) 2009 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Sun Life Financial first-quarter 2009 results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions).

I would like to remind everyone that this conference call is being recorded on Thursday, May 7, 2009 at 9 a.m. Eastern time. I will now turn the conference over to Paul Petrelli, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Joanne, 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; Rob Manning, President and CEO of MFS; 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.

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.

And with that, I will now turn things over to Don.

Thank you, Paul, and good morning, everyone. Earlier today, Sun Life Financial reported earnings for the first quarter of 2009. External market conditions continued to be a major factor in our first-quarter earnings, but less so than in fourth quarter 2008. While disappointing, negative market effects largely translated into reserve strengthening rather than cash losses. Rick McKenney will be providing detailed information on the results.

Although the economic environment is turbulent and the future remains uncertain, Sun Life continues to be well-capitalized, with a diversified, conservative and seasoned portfolio of invested assets. More fundamentally, our endurance is founded upon a balanced portfolio of customer-focused businesses. Our business lines are operating well, and we continue to invest in disciplined growth across the enterprise.

Strong customer franchises support our major business lines, where we have ongoing relationships with millions of customers. These long-term relationships generate steady cash flows. In 2008, for example, we generated over half of our annual insurance premiums from regular, recurring and renewal business. These revenues are generated by our stable growth businesses, including group and individual, life, health and annuity lines.

The importance of a diversified and balanced business model has intensified during this time of crisis. Our businesses range over geography, products and markets. Our protection businesses, ranging across individual and group life and health insurance, deliver more stable and consistent earnings. As you see in today's results, these businesses are performing well despite the turbulent environment.

Our wealth management platform ranges from retail and institutional asset management to our annuity and group pension businesses. These wealth businesses continue to present significant upside potential despite the current economic turmoil, as demographics around the world present unparalleled opportunities to help individuals manage their personal financial security and retirement.

We are a leading life insurer in our home market of Canada, where we continue to win market share in all of our lines of business. MFS is a world-class global asset manager that is attracting positive inflows in a very challenging environment. Our Asian businesses offer long-term growth potential. We are well-positioned for growth in the United States, where our financial strength has made us a beneficiary of the flight to quality occurring in the US life and annuity businesses.

We are attracting top variable annuity wholesaling talent. During the first quarter, we hired 19 new wholesalers from several of the top 10 US insurers, each of whom was a top producer within their former company.

And while industry sales continued to be affected by the market turmoil in Q1, we have seen a significant divergence from industry sales trends and key products, where we benefit from the flight to quality, as well as excellent fund performance at MFS. Fund performance at MFS continues to be outstanding, with 93% of funds ranked in the top half of their respective Lipper categories based on three-year performance as of March 31, 2009. This performance has driven positive net flows in the first quarter.

We have seen this momentum continue in the month of April, where MFS had its first month of positive net retail flows in several years.

Our Canadian businesses continue to perform strongly. Canadian segregated fund sales and SunWise Elite Plus in particular continued to gain strength and are up 17% over Q1 2008. Sales of fixed interest products in Canada, including accumulation annuities, GICs and payout annuities, increased 128% over the prior period one year ago.

Group benefits had impressive sales growth in Q1, while group retirement services continued to build its leadership in the Canadian defined contribution industry in 2008, capturing 47% of the industry's new sales and 51% of total DC market activity.

In the United States, we are gaining momentum. Total combined domestic sales are up more than 40% versus the prior year and are up in each business line. Variable annuity sales are up 8% versus the fourth quarter compared to industry sales that are estimated to be down in the region of 30%. This sales growth translated into net positive domestic VA sales for the first time since the third quarter 2007.

In Asia, individual insurance sales were up 8% over the same period last year, driven by continued growth in India.

Finally, we continue to invest in disciplined growth across all of our businesses. In summary, our financial strength and sound business model provides a solid foundation as e continue building momentum in each of our markets. Sun Life is well-positioned to emerge from this recession as a stronger, more focused and competitive company. Despite these trying times, we remain confident in our future.

With that, and is now a pleasure to hand over to our Chief Financial Officer, Rick McKenney, who will walk you through the quarter results in greater detail.

Thank you, Don, and good morning. Earlier today, we reported a net operating loss for the quarter of $186 million or $0.33 per share. This operating loss does excluding charge of $27 million after-tax related to restructuring costs incurred as part of the Company's effort to reduce expense levels and improve operational efficiencies.

Similar to the last two quarters, we experienced significant capital market impacts across the Company, given the further decline in equity markets and continuing tight credit environment. Although we have seen a rebound in equity markets thus far in the second quarter, we continue to believe that 2009 will be a challenging environment.

With this backdrop, it is important to note that the Company has taken a number of actions to successfully manage through this environment. From a capital perspective, in addition to shifting our portfolio by monetizing our investment in CI financial late last year, internally, we have focused our capital deployment to some of our key product lines. We have also implemented expense savings initiatives, which will generate annualized cost savings of CAD50 million pretax.

And finally, I would point out that recently we accessed the public capital markets, successfully raising CAD500 million in a debt offering.

Now, with regards to the quarter, slide 7 highlights the impact of asset impairments on the results of the Company. Equity and credit impairments were CAD76 million, or CAD0.14 per share, in Q1 '09. On the credit side, the loss reflects the amount by which credit writedowns exceeded the amount expected in first quarter in the reserves. The impairments were experienced across a number of our asset classes, such as US securitized assets and corporate credit.

As for equities, related impairments of CAD42 million, or CAD0.08 per share, were caused by the writedown of positions on available-for-sale equities, which have been significantly underwater as a result of the economic downturn.

The reserves impacts in the quarter, outlined on slide 8, were the main drivers of the negative results this quarter. It is important to note that although this reserve strengthening reduces current period income, these do not represent cash losses to the Company, and will fluctuate based on the macro environment.

The first impact is from downgrades in the portfolio. This resulted in a need to book an additional CAD167 million of reserves for potential asset defaults in the future. The rate of ratings downgrades in the corporate bonds by the major rating agencies accelerated sharply in the first quarter of 2009. For example, downgrades by Moody's in the first quarter of 2009 nearly equaled the number of Moody's downgrades for the full year of 2008.

While significant, with over 1200 names in our portfolio, our experience will roughly track these downgrade-to-upgrade trends.

The drop in equity markets also resulted in reserve strengthening, net of huge benefits of CAD325 million, in line with the sensitivities provided in our fourth-quarter disclosure. This includes the impacts of declines in our current and future fee income, the impact to reserves for segregated fund guarantee benefits, reserves for universal life benefits, and the offsetting benefits of our hedge program.

Our hedging program performed within expectations and helped to offset some of the impact of reserve strengthening related to guarantees, and contributed CAD100 million to earnings this quarter. Since the third quarter of 2008, the cumulative positive impact of the Company's hedging program is more than CAD900 million.

To continue to provide insight into our equity position, this quarter we have included enhanced disclosure in our MD&A, as well as in the appendix, on our guaranteed benefits amount at risk. We are well reserved, with the reserves plus allocated capital providing roughly 70% coverage of the guarantee value. It is important to note that although these benefits are currently in the money, based on where markets stand, we expect little of this to result in actual claims.

Finally, we increased reserves in our US individual life business. This included further increases to actuarial reserves to reflect the low current interest rate environment and the implementation of an internal reinsurance transaction for capital efficiency.

On slide 9, we highlight our sources of earnings. This reiterates the negative market impact described on earlier slides in our experience losses and assumption change lines. The expected profit on imports business is down CAD35 million as well, primarily due to the decrease in fee income in our asset-based businesses related to the drop in equity markets.

This quarter's unusual tax rate was driven by Canadian income tax rules which were finally enacted in the first quarter, resulting in an adjustment to both actuarial reserves and income taxes. These actions reversed adjustments made in prior quarters. When the rules were proposed but not enacted, and bring net income in line with what is expected under the new rules.

Lastly, before we move from sources of earnings, we have provided an update to our 2009 earnings and capital sensitivities in the appendix. Equity market sensitivities have remained consistent, but you will note that the down 100 basis point interest rate sensitivity has increased. This is largely due to the current very low interest rate environment on some of our individual life insurance lines, and we have also reduced some of the interest-rate hedging in the VA and segregated fund business due to the very low current interest rate environment.

Moving on to the business group performance on slide 10, this quarter, we provided the detailed views of business group results in the appendix, as this level of detail is now available in our financial supplement as well.

From an overview level, Sun Life Canada reported net income of CAD194 million in the first quarter of 2009. This is down from the prior year, but represents an improvement over the CAD55 million loss experienced in the fourth quarter of 2008. The decrease in earnings was attributable to the reserve strengthening related to the declining equity markets.

It is also important to note that the Q1 '09 marks the first reporting period where the earnings contribution from the Company's ownership stake in CI Financial is no longer included in results. The CI ownership stake contributed CAD0.08 to the Company's earnings in the first quarter of 2008.

As a point of reference, we have kept the proceeds of this transaction relatively liquid. So although this has dampened earnings somewhat this quarter, we believe it is the right priority given what have been uncertain times.

On the group side, the Canadian group businesses continued to perform well, with group wealth up 6% and group benefits up a very strong 33% compared to a year ago. In the US, we reported a loss of USD333 million for the quarter, which was an improvement over Q4 07, but down from earnings of USD113 million reported a year ago.

Annuities and individual life earnings were most impacted by the markets and reserve changes noted earlier.

In US group, the employee benefits group had their best quarter ever, with earnings increasing 153% to USD48 million from USD19 million in Q1 '08. Earnings from MFS were down CAD36 million consistent with the decline in asset levels and resulting impact on fee income. MFS margins continue to hold in at 21%.

Finally, our Asian operations were up CAD4 million, and in the corporate segment, while earnings from the Company's reinsurance business returned to its normal run rate, earnings from our UK operations were lower due to interest rate and lower equity markets.

Turning now to slide in 11, this quarter, we have provided more detail on our investment portfolio in the appendix, but I will take some time to highlight a few key tenants of our portfolio.

First, Sun Life's invested asset portfolio is well diversified by geography and asset class, with over 1100 names in the bond portfolio. Our issue limits keep us from any outsized concentrations, and we have below average holdings in most of the trouble asset classes, such as subprime and below investment grade bonds. This stems from our decision not to invest in below investment grade bonds by policy, and as of Q1 '09, 96% of our portfolio is investment-grade.

A few specific sectors to note. Our $14 billion financial sector bond portfolio is 98% investment grade. The top 10 holdings represent 36% of the total market value of the portfolio, and these have retained 90% of their value compared to amortized cost. Our exposure to asset classes such as RMBS, CMBS, subprime and Alt-A is also much lower than average for our North American peers.

The last key element to our book is the fact that due to our matching of cash flows, investing has been steady over time and provides a fair degree of seasoning. For example, our CMBS portfolio is well seasoned, with 86% originated in 2005 and prior, and has much lower exposure to troubled 2006 and 2007 vintages compared to the market.

Our self-originated commercial mortgage portfolio is diversified, with 4200 loans and a small average loan size of under $4 million and a weighted average loan to value of 55% based on our 2008 evaluations. We estimate that the LTV would be in the low to mid 60% range if all properties were revalued today.

These key attributes of diversification, conservatism and seasoning will not insulate us from the challenges in the economy, but we expect that we will perform comparatively well as we move through the credit cycle.

Turning to slide 12, you can see Sun Life remain strongly capitalized, with an MCCSR ratio for Sun Life Assurance Company of Canada at 223% in Q1, down slightly from year-end levels. We were active on the capital management front this quarter, and the CAD500 million of sub-debt issued remains at the holding company level and is not included in the SLA MCCSR. We also ended 2008 with an RBC ratio of 357%, which is above our target range of 300% to 350%.

In our operations, we continued to build a higher than normal liquidity position, with now over CAD10 billion in cash, cash equivalents and short-term securities, which is double our levels a year ago.

Finally, the Board of Directors of Sun Life have approved a quarterly shareholder dividend of CAD0.36 per common share, maintaining the same level as the previous quarter.

Moving to premiums and deposits on slide 13, we saw an 11% increase from the first quarter of 2008. Life and health premiums and deposits were up 9% due to strong sales momentum in a number of our lines. Managed fund sales, which represent institutional sales at MFS and McLean Budden, held in despite the decline in equity markets.

As to be expected, the decline in equity markets impacted wealth deposits, which despite an increase year over year, were down on a constant currency basis due to retail mutual fund sales.

Turning to slide 14, you can see that we continue to maintain strong sales momentum in each of our business groups. Sales in our group businesses in both Canada and the US remain strong, with Canada's group benefits operations posting robust growth of 97% from the first quarter of 2008, and the US employee benefits group reporting a 15% increase over the same period.

In the US, core sales of individual life insurance grew by 15% over Q1 '08, and annuities were up 57% on opportunistic fixed annuity sales. In Asia, individual insurance sales were up 8% over the same period last year, driven by continued growth in India.

Across the globe, we continue to remain focused on our margins. Given the low interest rate environment, volatile equity markets and the cost of hedging, our value of new business has been pressured. As a result, we have seen a decrease in 12 month VNB numbers from CAD755 million to CAD562 million due to these factors, as well as lower asset management sales. We are in the process of repricing and redesigning some products to return these margins back to our expectations.

Before we open up the lines for questions, I would like to reiterate that while economic conditions continue to present challenges, our risk management culture, financial discipline and balanced business model have kept us strong. Combining this financial strength and our ability to invest today for growth tomorrow in our businesses will serve us well as markets stabilize.

I would now like to turn the call back to Paul.

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 Joanne to please poll the participants for questions.

(Operator Instructions) Andre Hardy, RBC Capital Markets.

Question is on your group businesses in North America. With unemployment rates rising very rapidly, are you starting to see higher claims costs? And looking at your numbers, it doesn't seem apparent. But maybe the right way to ask that question is how much of an increase in claims costs should we expect as a result of a tougher employment environment, and have you taken pricing measure or operating actions to mitigate that?

Andre, we are very cognizant of the fact that rising unemployment could impact some of our group lines, both north and south of the border -- this is Don Stewart speaking. At this juncture, we have not seen any strong signs of increased disability claims coming our way, as is evidenced from the actual first-quarter results.

I can assure you we are very, very watchful on leading indicators, and we are very focused on looking for this coming our way, because based on prior experience, we would expect to see at least some impact from unemployment on disability. Of course, we are seeing some impact from lower employee populations, but that is to be expected, and that is simply mathematics.

So I assure you that we are on top of it from a pricing point of view, but there are no strong signs of disability claims or other claims being heavily impacted at this point in time.

And is it just because it is too early, or some of the pricing that you've put in place or some of the claims management measures you've put in place have allowed you to see through this?

We have very robust claims management processes. And I think trying to forecast what will actually happen when you have disability in the pipeline -- which you get some leading indicator from the short-term business, but it's not conclusive because we don't always have the short-term disability business -- I can only say that we have very good indicators, and we are on the situation. But we are not seeing any strong evidence at this point of incoming and impending claim fluctuations in the upward direction.

Thank you, Don.

John Reucassel, BMO Capital Markets.

Thank you. Just a quick question for Rick to start with. On the Canadian individual insurance and investment, it looks like that had the most beneficial impact from the changes in taxes. Could you give us an idea of how much that was in the quarter? And I'm just trying to -- the numbers there have been pretty volatile. Is there a sustainable number out of that business now that CI is gone you could point us to -- or better understand the earnings potential from that business?

Just to isolate it on the tax side, the overall benefits to the Canadian business were about CAD39 million after-tax. So it's spread out. I think it does concentrate more in the individual side of the business.

In terms of the run rate for the Company overall, I think you would have to -- meaning the Canadian business overall, you would have to back out some of the impacts. But we think we had a pretty good quarter in Canada, save some of those impacts, and we will be back to a normal run rate, all else being equal, as we go into the future quarters.

Okay. And then the credit weakness, is it coming from any one source there, or is it kind of widespread? Are there some places we should be watching in particular?

I think I highlighted two of the areas that we actually saw credit spreads widen, and it's certainly an area we're watching. And those are in the financial space, as everyone is watching there. We think our portfolio is in pretty good shape, as I mentioned in some of my remarks, with our positions -- the vast majority maintaining at least 90% of the market.

And then as the world has been watching, on securitized assets, we continue to watch, as well. But given some of the underlying factors that I mentioned, such as seasoning and others, we are going to have to see how that is played out. That has been the source of some of our unrealized losses and as well some of our smaller levels of impairments. But those are the things that we, as well as the rest of the world, are watching, and we feel well positioned.

And just on the private placement portfolio, have you seen any deterioration there or so far it has performed as expected?

John, it's Jim Anderson. In the private placement portfolio, it is performing exactly as we expected. There is no adverse deviation whatsoever in it.

Okay. And then last question for Don. Just on the dividends, you know, it has been a tough three quarters. Could you update us on if you continue to have losses here or payout ratios well in excess of 100%, when do you look at the dividend, or are you happy to carry a dividend that is well in excess of 100% for a year or two? How would you -- could you give us some thoughts on that?

Indeed, John, and I'm not sure that I am going to add anything to a previous dissertation on this topic.

I had to try, Don.

Do my best. We decide the dividend -- the Board of Directors decides the dividend each quarter based on careful consideration of a wide variety of factors. And in view of our financial strength and our confidence in the future, we continued the dividend this time at the same level as previous. And next quarter, we will repeat this exercise, we will look at a wide variety of factors and we will make the decision accordingly. And I am really not able to add to that particular perspective on the world, John.

Thank you.

Jim Bantis, Credit Suisse.

Good morning. Two quick questions. If I can get you to look at slide 8, Rick, you had briefly talked about the other with respect to the reserve impairments. I'm sorry, I missed your explanation regarding it. Could you take me through it again?

Certainly. The CAD0.17 that we highlight on slide 8 is really made up of two items, both related to our individual insurance business in the US. One of them being a reflection of the low interest rate environment and an increase in reserves as a result of that. And that was about CAD0.10 of the CAD0.17.

The other is CAD 0.07 would come from a reinsurance and internal reinsurance transaction that we did for capital efficiency, which needed an increase in reserves purely to reflect some of the changes in the models as a result of that. And that was about CAD0.07. Those are just two items.

Got it. Now I'm just curious, typically, these changes with respect to low interest rate environments typically occur Q4. Was there anything that happened Q1, or can we expect such adjustments to continue as the level of rates potentially go lower or change?

The particular impact you are talking about on the lower interest rates was really a carryover reflection of just the general environment that we've seen, so that is not something we go through on a normal basis. Low interest rates are a challenge for the business overall, but nothing of this nature would we expect imminently.

Got it. And with respect to slide 7, the credit-related impairments, this is in excess of the CAD164 million of asset default assumptions that were booked in Q4. Is that correct?

No, actually, I think you have to look at quarter by quarter. So what we booked in Q4 will come in ratably over the course of 2009.

All right, so this is just for this quarter?

Yes, just -- take a quarter of that and you get a rough estimate of what that would look like.

Appreciate it. And then just a final quick question on the UK operations. I may have missed your commentary, but reported nil in terms of earnings this quarter.

Yes, so actually, if you look at the movement in the equity markets in the UK, the impact there coming through our results, as well as a reflection there as well of the low interest rate environment. Once again, we expect that will come back to normal levels.

As opposed to any investment losses coming from UK hybrids or anything of that nature?

No, nothing like that.

Got it. Thanks. I'll requeue.

Michael Goldberg, Desjardins Securities.

Thank you. First of all, thank you for the information on equity related in the money guarantees. I think it is very useful.

First question, could you tell us how much unrealized corporate bond losses there are now that have been below 80% of cost for more than six months?

Sure, Michael. When you look at the overall portfolio and the greater than 20% below cost for six months, we would have reported that number is up to CAD260 million in the first quarter on our available-for-sale assets. If you look at our held for trading, and I would say these are held at market, but if you went back to the original cost that they were at, that number would be CAD2.6 billion.

Is that the sum of both, or is that just the held for trading?

The CAD2.6 billion is just the held for trading. If you aggregated those two together, it would be CAD2.9 billion.

Okay. And secondly, I just want to make sure I understand your earlier comment on the impact of the unusual tax rate on earnings. Is that impact CAD39 million overall?

Correct.

Positive or negative?

Positive. It was a positive impact, release of [pad] as a result of those changes, in the final implementation.

Thank you.

Doug Young, TD Newcrest.

Good morning. Just the first question, Rick, you said opportunistic sales of fixed annuities in the US, and I'm hoping you can give us a little more color, given the challenges you've had in that business.

And second, I apologize, on slide 11, when you went through your financial exposure, I wasn't able to jot it down. So if you can give me those numbers again, that would be much appreciated. Thanks.

Doug, this is Jon Boscia, and let me answer the opportunistic fixed annuity sales while Rick is gathering the information for the other part of the question.

The decision that we made in the first quarter of 2008 was consideration of both the amount of maturing fixed annuity contracts we are going to have in 2009 -- I meant to say first quarter of '09. It reflects the anticipated maturities in the rest of 2009. And then the decision do we want to actually liquidate some of the assets that we have there that are seasoned, have high coupons associated with it, to meet those liabilities, or would we prefer to sell new contracts and maintain the higher coupon, better seasoned assets. And we decided that the latter of those two approaches was a better decision to make at this.

So don't overread, I would say, into the first quarter sales that we're aggressively going after fixed annuities. We remain committed to just a pure opportunistic basis, point of sale, all aspects of that consideration weighed together.

On the financials, I assume you mean the bonds with the -- of financials. The exposure is CAD14 billion?

Yes, I am. Yes.

So actually, you will find in the appendix we have some more detailed disclosure about our financial bonds as well.

Okay. And then you mentioned 36% or top 10 was 36%. I didn't catch the number. I apologize.

Yes, so 36% of it was represented by the top 10, and those maintained 90% pricing levels.

Thank you.

Tom MacKinnon, Scotia Capital.

Thanks very much. Good morning, everyone. Question with respect to the tax and how that was worked in on Exhibits 7 and 8. What kind of tax rate did you use when you have those -- or when you figured out the net income associated with those? Or maybe better, what would be the pretax figure?

The tax rate in Canada is roughly 32%. The CAD39 million that was referred to is the net effect of the enactment. But when you look at the pretax and the post-tax, as you will recall, the CIA gave instructions to the actuaries to make sure that if implementing the new tax rules was going to cause a gain, then the actuary had to back it out in the liabilities until such time as they were enacted.

What many aren't aware of is that certain parts of the tax changes in 2007 effectively were enacted immediately, because they did not require anything to go through the House of Commons. To be honest, I can't remember which parts of it. As a result, the tax people on the accounting side had to book items in tax that needed to be offset in the actuarial liabilities, because you would have a disconnect between tax and what the actuaries were doing, which caused the actuaries to increase the liabilities in this particular case.

So a lot of what you are seeing in the strange tax rate for the quarter is purely a move between the tax line in the balance sheet and actuarial liabilities, where either a deferred tax liability or a pure tax provision had been built into the actuarial liabilities. So it is a lot of noise signifying nothing, when you actually look at it. And we have had strange tax rates ever since -- quarter by quarter, ever since the tax changes came in and then weren't enacted for a period of close to two years.

The CAD39 million is the net effect, and that is the only number that is really important. The rest just confuses the issue.

What is the pretax number from slide 8, 586? What are you using there? I mean generally, are you using the 61% tax rate we saw in the quarter or are you using something more like your average run rate? Same on slide 7.

Well, those would be at differing tax rates, depending upon where the impairments actually were. And the pretax numbers -- if you will bear with me, I will find -- or make an attempt to find them, because I do have them.

I think just to cut through it, Tom, when we look at the local, it is based on local tax rates, not the marginal rate of 61% we saw in the quarter.

If I look at the downgrades, Tom, the CAD167 million downgrades in the actuarial liabilities on a pretax basis is CAD257 million. The 325 for equities is 476 on a pretax basis. So that would be a [effective] tax rate of 31.7% on that line and 35% for the previous. The write-downs, the tax rate was 34.7%, so it reflects a blend of US tax rates and Canadian tax rates and British tax rates.

And that would have been the same kind of tax rates you probably would have used when you did this exhibit in the fourth quarter of '08?

Yes, correct.

Okay. That's fine. And I noticed in the fourth quarter you talked about asset impairments on securitized assets of CAD64 million after tax. About half of it was CMBS related. Don't see any of that in this quarter.

Yes, I think that number in the quarter was about CAD40 million after-tax across all of the securitized portfolios.

In this quarter? Is that correct?

Yes.

Where does it show up -- is it in the -- are you showing it in your credit-related number?

That would be in credit-elated. Understand, the credit-related, as I mentioned, also shows some of the reversal of credit reserves that were coming out in the quarter, as well.

What was the reversal of credit reserves in the quarter then?

If you recall at Q4, one of our assumption changes was that we doubled the default assumption for 2009. Naturally, as 2009 unfolds, those reserves are released to cover the losses. So we netted the effect in terms of showing the credit-related costs.

So you've got -- is that because you sold these things and then because you doubled up the default assumption, it came right back into earnings?

No, Tom, we haven't sold them. But the natural progression is --

Okay, so that is just -- what is the impact of that?

Well, it was 160 that we put up for double defaults in 2009, and in a quarter, 40 million reverses out, out of the actuarial liabilities, as an actual runoff.

Okay, so one quarter of the 160 would come back and in this quarter. Is that correct?

That's correct.

Okay, so you already picked up 40 million from that. So then you have 40 million on the CMBS -- the hit on CMBS, and then the residual has to be other credit-related?

Yes.

Okay, thanks for that clarity. And then finally, you talked about the slippage in the portfolio, and as Moody's sort of -- I think it you said it downgraded more stuff in the first quarter of '09 than it did in the entire 2008.

Approximately the same, yes.

What has that trend been like over the last month and a half or so? The pace continued or -- in terms of Moody's, or --?

No, I think it slowed down, but I don't have data for that, Tom.

Okay. Thanks very much.

Mario Mendonca, Genuity Capital Markets.

Good morning. A couple of quick questions. In the past, significant increases in CMBS or -- maybe not CLO, but corporate bond spreads -- have had a negative effect on the US, the fixed annuity business. We have seen spreads come in pretty hard in the last little while. Is it fair to say that those -- what was a negative effect in the past reverses next quarter, or in subsequent quarters?

I'll talk about the first quarter, which we actually did not see credit spreads across our portfolio -- and this is across the broad portfolio -- really move. So what we've -- you'd have to project forward in terms of how credit spreads moved. That will impact the many places that we've talked about the credit spread widening and the impacts it would have which would come back.

Now, since the end of the quarter, your quarter, March 31, the credit spreads have come in a fair bit. Is there anything you can tell us to gauge what kind of an effect that can have on your fixed annuity business?

Mario, I would rather not do that until we get out to the quarter end. I think your trend lines and presumptions are correct, but we still have a fair ways to go in the rest of the quarter.

The CAD94 million increase related to lower interest rates, I think more than half of that relates to lower interest, the other half to the reinsurance. Is that a change -- that wouldn't be a change in the URR. I would suspect it would be a change in the IRR. Bob, is that fair?

It is basically model refinements on our stochastic models that we use for interest rates in the US.

And you referred to this being relating to prior periods, so it sounds like you adjusted the models and that picked up something that happened in the past. Is there anything you can offer there that would help me understand that?

Not really. As with everybody, we run our -- our cash flow testing is a quarter in arrears, and then we update it.

Okay. But maybe going back to Rick's comment, this is not something we will see regularly, because this was an update to the model, not something that you are going to do next quarter, clearly.

That's right.

Okay. And real quickly, the CAD0.07 related to the internal reinsurance transaction, if it was internal, why wouldn't there be sort of like a CAd0.07 gain in the other segment, the segment that benefited presumably?

The net of it was to increase reserves, reflecting different moves across geographies and other elements to it. So it wasn't just a reclass between lines. It actually was an overall increase in reserves in the Company.

And even though it was internal, it caused reserves on a consolidated basis to go up.

That can happen in some of those transactions.

All right. Is that the one that boosted the RBC in the US?

No, actually, the impact was not that great.

Okay. Final question. The C1 risk reserve, CAD2.8 billion up from CAD2.3 billion last quarter. That is a big move, and I'm sure not all of that went into earnings (inaudible) -- or is that -- maybe a bit of that is currency. But can you help me understand that move?

Well, some of it is currency. But if you look at the -- reserves are on a pretax basis, so as I mentioned to Tom, the downgrades were CAD257 million of that during the quarter, which did hit income. So out of the CAD500 million change CAD257 million comes straight from that one particular aspect.

Some of the rest of it comes from the fact that we sold a bunch of fixed annuities in the US and a bunch of GICs and fixed annuities in Canada, which tended just to increase the reserves. So it increases the provision for defaults, but it doesn't really hit income because we sold the business on a profitable basis.

I understand now. And then, if I can just real quickly here, the holding company liquidity, you're holding a lot more liquidity. You're saying that impacts earnings. Can you give us a sense of how important is that? How many pennies would that take off in a given quarter that you were holding more liquidity?

We actually would rough that out to say it is close to CAD20 million net a quarter of excess liquidity that we are holding. I would tell you that although we've built up a very substantial liquidity position, we are looking at the markets and where we can redeploy that liquidity through a cycle. So it is temporary in some natures, but at the same time, we are certainly enjoying that liquidity position today.

But only CAD20 million a quarter would be the benefit -- or sorry, the negative effect?

Yes, that is some just rough math, just to -- the differential investment rate, given how low interest rates are in the short end of the curve today that we are investing in.

Good enough for me. Thank you.

Andre Hardy, RBC Capital Markets.

I apologize for all the questions on tax, and I realize the outlook for earnings in the US is better. But you booked some significant tax benefits in the US as you've lost money on a pretax basis. If we were to reverse our loss position or continue to be in a loss position, at what point do you run out of -- I don't know what the right word is -- but at what point can you no longer be allowed to book tax benefits in the US?

One of the things you would have seen in the fourth quarter, we talked about that, that a fair amount of the losses we took we did not book the tax benefits on. So it is something that we watch in our overall levels. And currently what we are setting up today, we are very comfortable with and it's reflected in our balance sheet, and we will just have to see how that trends over time. But we do expect profits out of our US business for a long period of time, and that is how the deferred tax assets will run.

The way to ask that question with a positive spin on it is, as you go back to an income position in the US, is there going to be an initial period of very low tax rates that will help you?

There could be, although I would say that that's -- we have to get back -- our positions back into gain positions, which means that credit spreads need to tighten considerably. And we need to stay at low interest rates for that particular aspect.

And is there anything you can give us to help us -- whether it is the first CAD500 million of pretax income, first CAD1billion that would come out at a low tax rate, and then we would go back to normal?

I wouldn't venture to give you numbers on that.

Thanks.

[Steve Terrio], Merrill Lynch.

Thank you very much. First question on capital, on slide 22 of your supplementary package. I apologize if you partially addressed this with Mario, but the asset default risk component is creeping up here after being pretty stable over the last it looks like at least two years. Is this due largely to downgrades, or is it currency, and should we expect this figure to rise in future quarters with the pace of downgrades?

Yes, that is what Bob is getting at. So it is mainly due to the provisions that we've set up as a result of downgrades in the portfolio. Currency will have a piece of that, as well as the generation of new business and need to put up more reserves.

And the second question, on slide 36 of the presentation, you talk about the CAD14 billion of financial exposure. If I look at the upper tier two and capital security exposure of 2% and 7%, respectively, that looks to be about CAD1.25 billion of exposure. Two questions. One, could you split that in some way by country? And is that carrying value or amortized cost?

I can say that is carrying value. I don't have the rough by country. We would have in the fourth quarter isolated our UK exposure around the total hybrid position; it was about CAD400 million of carrying cost.

Sorry, as of year-end or as of (multiple speakers)?

I don't have the split between the US and Canada.

Sorry, the CAD400 million, that was as of Q4 or as of Q1 for the UK?

That was Q4.

Okay, that's great. Thanks very much.

Do we have any more questions, operator?

No, but Mr. Bantis, are you still with us?

I certainly am. I didn't hear the cue for me, but --.

Go ahead.

Two quick questions with respect to the real estate portfolio. I am just wondering when the last kind of thorough asset-by-asset review was done to kind of reflect the rise in cap rates and the changes in the commercial real estate markets.

What we do for own real estate portfolio is roughly do about a quarter of the properties every quarter. So we do have a rolling process to do that. And that review is also split between internal reappraisals and external reappraisals.

So we are up to speed on it. There is always going to be a bit of a lag, but we do try to keep the portfolio as current as we can.

Got it. Thank you. And then a question for Don. The US environment continues to be a very fluid situation with respect to the US life co's management teams, TARP money. And I'm just wondering -- the Company has been very vocal about wanting to expand in the US via acquisitions or strategic fit, rather than size as the key factor. And I'm wondering if you can give us a little bit of your thoughts in terms of some of the moving parts in the US and what it means to your acquisition strategy.

I think we would say we've been responsive to inquiries rather than outstandingly vocal. But to address the specific question, obviously it's an extremely volatile environment and one would expect a prudent corporation to be looking at opportunities very carefully, and I assure you we are doing that.

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

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

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