Sun Life Financial Inc (SLF) 2009 Q3 法說會逐字稿

Ladies and gentlemen, welcome to the Sun Life Financial third-quarter 2009 results conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions provided. (Operator Instructions)

I would like to remind everyone that this conference is being recorded today, Thursday, November 5, 2009, at 9 a.m. Eastern time. And I would now like to turn the conference over to Mr. Paul Petrelli, Vice President Investor Relations. Please go ahead.

Thank you, operator, and good morning, everyone. I would like to start by introducing the members of the management team present for today's call. Providing you with some preliminary prepared remarks we have Don Stewart, Chief Executive Officer of Sun Life Financial; Jon Boscia, President Sun Life Financial; Dean Connor, President Sun Life Financial Canada; and Colm Freyne, Executive Vice President and Chief Financial Officer.

Also available to answer questions are Kevin Dougherty, President Sun Life Global Investments; Steve Peacher, Executive Vice President and Chief Investment Officer; Claude Accum, Executive Vice President Risk and Actuarial; Mike Stramaglia, Executive Vice President and Chief Risk Officer; and Lesley Thomson, Vice President and Interim Appointed Actuary.

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 all of them.

The slides to which the speakers will be referring are available on the Sun Life Financial website. Turning to slide two I draw your attention to the cautionary language regarding use of non-GAAP financial measures and forward-looking statements which form part of this morning's remarks. This slide reviews the reasons why forward-looking statements could be rendered inaccurate by subsequent events.

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

Thank you, Paul, and good morning. Earlier today Sun Life reported earnings for the third quarter of 2009. Earnings this quarter were impacted by a number of factors including the implementation of the equity and interest rate-related assumption changes announced on August 6, 2009, as well as continuing weakness in credit markets.

Although there are signs of stabilization in the economy, we remain cautious on the outlook. In the United States the pace of recovery appears likely to be slow and unemployment may remain at elevated levels for a considerable period. Consequently, consumer demand continues to be sluggish as households rebuild lost savings. Going forward consumers are likely to be more prudent with higher savings rates and lower appetite for risky assets.

However, despite economic uncertainty, the fundamentals of our business are solid and we see opportunities ahead to capitalize on key demographic trends that are favorable to our industry. The Board of Directors of Sun Life Financial has approved a quarterly shareholder dividend of CAD0.36 per common share maintaining the same level as the previous quarter.

We are maintaining momentum in our businesses despite a weak sales environment. In our Canadian group businesses we continue to win share adding to our industry-leading positions. In the United States we are investing in expanded distribution and marketing capabilities, and are building brand awareness through a national advertising campaign which Jon Boscia will speak to in more detail.

Our insurance joint venture in India has been doing very well as a result of expanded distribution. Birla Sun Life was one of the private players with the largest growth rate in the 2008/2009 fiscal years with a year-over-year growth rate of 41%.

In Indonesia we recently launched our joint venture with CMIB (sic), which provides access to the growing bank assurance channel in that country. The acquisition of the UK operations of Lincoln Financial, which closed on October 1, will increase Sun Life's UK assets under management nearly 60% and more than double the number of policies in force.

Looking forward key trends, such as increasing longevity and the continued transfer of responsibility to individuals for the retirement and health benefits, support future growth in the life insurance industry. Sun Life is well-positioned to capitalize on these trends. We have existing relationships with millions of customers around the world who seek advice and innovative products to help them achieve financial security.

So with that, it's now a pleasure to hand over to our Chief Financial Officer, Colm Freyne.

Thank you, Don, and good morning. Earlier today we reported a loss for the quarter of CAD140 million or CAD0.25 per share. The impact of previously announced updates to equity and interest rate assumptions reduced net income by CAD513 million after tax and within the advised range of CAD450 million to CAD550 million.

To the extent that long-term economic conditions are consistent with the Company's best estimate assumptions, the majority of these additional reserves will emerge into income over time. The rebound in equity markets during the quarter provided a positive contribution to earnings of CAD161 million, consistent with the sensitivities described in our Q2 disclosures.

Downgrades in the Company's investment portfolio in the quarter resulted in an additional CAD194 million of reserves for potential asset defaults in the future. Although the pace of rating downgrades in the corporate bond market subsided somewhat in the quarter, rating actions and structured products continued at an elevated pace.

Credit impairments and losses in Q3 were substantially offset by the previously established reserves for such losses as well as by gains on sale of securities backing surplus. Our self-originated commercial mortgage portfolio continues to perform comparatively well. Net impaired assets for mortgages and corporate loans net of allowances amounted to CAD210 million as at September 30 on the total portfolio of CAD20 billion.

Gross unrealized losses for available-for-sale and held-for-trading bonds declined to CAD0.5 billion and CAD2.7 billion, respectively, from the CAD1.1 billion and CAD4.9 billion reported at Q2. Further detail on our invested assets can be found in the appendix to the slides.

Other impacts this quarter include a CAD165 million charge related to reserve strengthening in our US individual insurance business for updates to policyholder behavior assumptions as a result of decreasing our lapse assumption. Offsetting this was a tax recovery of CAD101 million, also in our US business, from previously unrecognized tax benefits related to impairments taken on invested assets. And, also, additional reserves releases resulting from the segregated fund product repricing implemented during the quarter occurred in our Canadian business.

Moving on to business group performance on slide seven, Sun Life Canada reported net income in the quarter of CAD219 million, up from CAD157 million reported a year ago due to the favorable impact of strong equity market experience and segregated fund product changes previously mentioned. In the US we reported a loss of $386 million compared to a loss of $502 million reported a year ago. The benefit of stronger equity markets in the third quarter was more than offset by the noted assumption changes and downgrades on the investment portfolio.

Earnings from MFS were $39 million, down from the $47 million reported a year ago but an improvement over the $27 million reported in the second quarter. Assets under management increased to $175 billion, a 12-month high. MFS has held the line on expenses and margins were solid at 28%, up from the 23% reported in Q2.

Earnings from our Asian operations were CAD13 million, an improvement over the loss of CAD8 million reported a year ago as we benefited from improved market conditions. The loss of CAD2 million in the corporate segment reflects lower earnings from our UK operations which were also impacted by the equity and interest rate assumption changes and by investment downgrade.

Turning to slide eight you can see that our businesses delivered solid top-line growth in the quarter. Total premiums and deposits grew by 29% over the prior year on a constant currency basis. We continue to benefit from strong contribution and superior fund performance at MFS and net sales in our US variable annuity business were strong.

Analyzing premiums and deposits on a constant currency basis, life and health premiums and deposits were up 5% mainly due to strong sales of fixed products in Canada and continued sales momentum in our Asian operations. Wealth deposits increased 18% on positive retail flows at MFS and strong US variable annuity sales. Managed fund sales, which represent institutional sales at MFS and McLean Budden, were strong growing by 62% over the same period last year.

Turning to slide nine, you can see that strong relative investment performance at MFS resulted in positive net flows of $7.7 billion in the quarter, including $1.9 billion of net retail flows. The outstanding investment performance at MFS and its expanded distribution capabilities position MFS to be a strong contributor to sales and earnings growth at Sun Life.

Looking at our capital position on slide 10, you can see Sun Life remains well-capitalized with a minimum continuing capital surplus requirement ratio for Sun Life Assurance Company of Canada of 219% at Q3. The decline compared to last quarter is largely from the impact of the implementation of the equity and interest rate assumption changes previously noted.

Our liquidity position remains at higher than normal levels with CAD12 billion in cash, cash equivalents, and short-term securities. This continues to be a drag on earnings and we have begun gradually redeploying some of the extra liquidity into higher-yielding investments and would expect this to proceed at a measured pace going forward.

Turning to our sensitivities on slide 11. In addition to the regular quarterly updates, our revised sensitivities reflect the impact of the updates to equity and interest rate assumptions this quarter. You can see that interest rates have become more sensitive to a downside shock.

While the earnings impact from interest rate movements appear to be greater than equity market movements, it is important to point out that a 100 basis point decrease in interest rates is estimated to be a less likely scenario than a 10% equity market decrease.

On slide 12 we provide an estimate of our normalized earnings for 2010 in the range of CAD1.4 billion to CAD1.7 billion. The 2010 normalized earnings represent an estimate of the after-tax financial results of the Company based on the expected emergence of earnings consistent with current best estimate assumptions. The estimate assumes approximately 8% annualized growth in equity markets during 2010, a business mix which includes the recent UK acquisition, and foreign currency rates, credit spreads, and interest rates consistent with September 30, 2009, levels.

The estimate is also based on investment returns, tax rates, capital requirements, mortality experience, and policyholder behavior consistent with the current best estimate assumptions. Estimated 2010 normalized earnings do not include management actions, some changes in assumptions, or experienced gains and losses -- such as market impacts on segregated fund guarantees, credit impairments, changes in credit rating on the Company's fixed income portfolio, and investment-related gains and losses -- the net effect of which the Company cannot reliably determine.

The estimated 2010 normalized earnings are below the average annual operating earnings of CAD2.1 billion experienced from 2005 to 2007 and reflect today's lower asset levels and account values, lower investment income, higher risk management charges, and a number of other factors.

Management is taking a number of steps to drive growth in the earnings. We continue to focus on productivity gains by managing our liquidity and in ensuring our tax efficiency. Continued high underwriting standards will support ongoing mortality and morbidity improvements.

Estimated 2010 normalized earnings are based on a number of assumptions and qualifications which are described in detail in the Q3 management discussion and analysis.

It is now my pleasure to turn the call over to Dean Connor who will walk through the operational results for SLF Canada.

Thanks, Colm. We had another solid quarter in our Canadian operations with a debt income of CAD219 million. This is up from CAD157 million in Q3 2008 which included CAD31 million from our ownership interest in CI Financial.

In individual wealth sales of fixed income products, including GICs, accumulation annuities, structured settlements, and payout annuities, increased 38% year over year from CAD140 million last year to CAD195 million for this quarter. Segregated fund sales declined by 26% from CAD598 million last year to CAD443 million this quarter, reflecting lower overall market demand as well as the pricing and derisking changes we announced in the second quarter. Our changes were followed by similar pricing and product changes by other insurers and we continue to work on developing new product ideas in this area for the future.

Individual insurance sales in the third quarter of 2009 were consistent with the prior year with continued improvement in our product mix. In the wholesale channel our term insurance sales increased 37% this quarter and critical illness sales were up 23%. Overall, given the challenging economy, we are pleased with our third-quarter sales and our progress in both the Sun Life career salesforce and our wholesale distribution channel.

Group Retirement Services had a good quarter with sales of CAD1.4 billion, up 16% over prior year. These sales included CAD243 million of retained assets from members leaving their group plans representing a record 57% retention rate. Assets under administration also reached a new record in the quarter at CAD42.6 billion, and this was achieved through a combination of strong sales and improved equity markets.

Group Benefit sales increased 27% this quarter to CAD70 million of new premium. Year-to-date we lead the Canadian market in sales at CAD283 million, up 67% over prior year. Our momentum continued to build in the corporate accounts market with small and mid-sized employers with sales growth of 16% this quarter and 32% year to date.

Our client retention rates continue to be among the best in the Canadian industry. And as a recent example through a competitive bidding process we were successful in retaining the federal public service healthcare plan, which is the largest employee benefits plan in the country. Business in-force grew 7% from CAD6.5 billion to CAD6.9 billion.

We do continue to see lower recoveries in long-term disability, which is not surprising as it's more difficult for people to return to work in the current economy, and that contributed to lower earnings in the quarter.

The pace of innovation at Sun Life Canada continued with the launch of our Granite target date funds in GRS. We introduced Advisor Match, a unique website that future clients can use to find their match among our career salesforce advisers. And we launched a new non-redeemable GIC product for sale by our career salesforce.

Expenses were essentially flat in the quarter versus the prior year and down 4% year to date as we continue to manage expenses tightly and reinvest savings in new technology and processes that boost service to clients and advisors and enhance our productivity.

So to summarize, with CAD219 million of net income and strong overall sales momentum the Canadian operations had a solid quarter and we are well-positioned for the future.

With that I will turn it over to Jon Boscia.

Thanks, Dean. In the third quarter the US continued to make significant progress on the two tracks we have been discussing throughout the year -- flawless execution of the strategic refocusing of the business and creating sustainable organic growth across all business lines.

In previous discussions we said our strategies in the US would focus on driving growth in core life insurance, newly derisked variable annuities, and continued emphasis on the employee benefits business line. That renewed focus has already begun to pay off.

Core life insurance sales, which are sales excluding corporate and bank owned life insurance, are up 23% in the third quarter over the same period last year, while total life sales are down 36% due to a large COLI sale in the third quarter of 2008. The current economic environment has put continued pressure on the profitability of no lapse guarantee, or NLG, products which currently represent half of our core life sales down from more than 90% in 2007. Effective January 1 we will be substantially increasing rates on NLG and expanding our efforts around the small business market, further accelerating our efforts to shift our product mix.

Fixed and fixed indexed annuity sales were down 44% from prior period and 34% sequentially. This was an expected result given our opportunistic approach to the market. Fixed indexed annuity sales remained negligible. As previously stated, we have made a strategic decision to withdraw from this market.

Domestic variable annuity sales were up more than 128% versus prior period and 30% sequentially. More impressive were net sales in excess of $700 million for the quarter and $1.3 billion year to date. These results occurred in the face of two rounds of product derisking that has restored profitability on new product sales to near our target levels and has significantly reduced our capital at risk.

The Employee Benefits Group produced a 3% growth rate in sales versus the prior period. Sequential sales in EBG were down $29 million due to typical sales seasonality in Q2.

In our efforts to strengthen our wholesale distribution unit since the fourth quarter of 2008 we have turned over approximately two-thirds of our external wholesaler force. In the process we have improved average wholesaler productivity by more than 70% compared to 2008 levels. It takes three to five years for wholesalers to achieve top-tier productivity levels. We are especially enthusiastic with these results given that the majority of our salesforce has been with us for less than one year.

In addition, we recently hired a new head of life sales and he has already developed a plan to refine the selling model and to double the number of sales professionals by the end of next year. In EBG we have grown our salesforce from 159 representatives at the end of 2008 to 182 today.

Expense management has been a key area of focus for Sun Life US. We have held overall expenses relatively flat year to date while simultaneously engaging in significant talent recruitment, technology upgrades, building out a marketing unit, and preparing to launch our first-ever US branding campaign. Beginning this week you will see our US national ad campaign on broadcast television, in print, and online.

To sum up the quarter, I am pleased with the progress we are making in the US. I believe that doing what you say you are going to do is management's task. All items we have discussed throughout the year are fully on track and many of them are ahead of schedule.

There were significant financial impacts in the US stemming from assumption updates and reserve actions as you have heard. But in summation Sun Life US core sales results, net flows, distribution channel expansion, talent management, and brand building are very encouraging signs of systemic positive progress. We have got great momentum and we are excited here.

I look forward to continuing to share updates, good and bad alike, as we go forward. With that I would like to turn it back over to Paul.

Thanks, Jon. 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 re-queue with any additional or follow-up questions. We will make every effort to take all your questions during the allotted time this morning.

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

(Operator Instructions) Michael Goldberg, Desjardins Securities.

Thanks. I have a couple of questions. First of all, I am confused about the impact of the tax recoveries on earnings that you talk about. If you exclude the after tax CAD513 million impact of assumption changes, CAD194 million negative impact of credit issues, and CAD161 million positive impact of equity experience, what was the impact of tax recoveries or reversals on third-quarter earnings?

Michael, the impact of the tax recoveries in the quarter was CAD101 million and that was in respect of impairment losses taken -- impairments that occurred previously but which we had not tax effected. And these primarily relate or in fact entirely related to our US business group.

So is the amount CAD101 million, excluding those three items that I mentioned?

The way to think of it is that the US results were positively impacted by CAD101 million of tax -- recognizing the tax benefit of impairments taken in prior periods.

And that is not included in the CAD194 million of credit issues?

Correct.

Okay. And my second question is how much bonds now are valued at less than 80% of cost for more than six months, bonds or fixed income?

Approximately 2.1 billion.

Thank you very much.

John Reucassel, BMO Capital Markets.

I just have a couple questions on the sustainable earnings or normalized earnings that you provided and I just want to make sure I understand the sustainable earnings. What type of credit impairment assumptions are in that sustainable earnings number guidance that you gave?

The credit assumptions are the normal best estimate assumptions which are based on our review of the various asset categories that we have in our mix. So these would be long-term assumptions around credit impairments.

Okay. Would it be higher or lower than what -- I assume they would be lower than what you experienced in this current quarter? Would that be safe?

Yes, clearly the experience to date in the past year or so has been amplified by the economic recessionary times we are in. The assumptions around credit are, of course, reviewed annually to ensure that our best estimate assumptions reflect the long-term averages. So there may be a little bit of an increase as we go forward as we take account of the recent experience, but they are based on longer term estimates.

Okay, and I will stop after this question. OSFI is out there looking at some new capital rules. They are doing a quantitative impact study. For me the one that is particularly interesting is on the credit side for Sun Life. Has OSFI talked to you or could you talk to us a bit? Did they give you the heads up that this was coming? What do you think the potential impacts are?

We are just trying to understand what is going on between the industry and the regulators.

It's Mike Stramaglia here. I think it's still early days to truly try and quantify what the impacts are. We have been working very closely with OSFI throughout the design phase of this framework.

As you mentioned, there is a quantitative impact study that we are in the process of responding to. That won't be forwarded until mid-December to OSFI and we expect that will go through a number of rounds of review and revision before it actually culminates in final changes. So it's still very early days.

Tom MacKinnon, Scotia Capital.

Thanks very much. It seems to be a lot of noise kind of in the results, but I assume that with summarizing the front -- the CAD513 million, pre-announced CAD194 million, and downgrades at CAD161 million in reserve fees -- sort of are actually the big movements that we should be looking at.

I guess maybe the point I should say is this CAD101 million you talk about in tax recoveries, is that effectively supposed to somewhat offset the lapse rate change in the US?

And you also mentioned something about gains from interest rate changes in Canada as well. I guess I am just trying to get if we back out the CAD513 million, CAD194 million, and CAD161 million described basically early in the release we get a number somewhere around CAD0.72 a share. Should we be looking at that number? Is that the number that we should be looking at, or am I correct in saying that stuff that is later on in the release effectively should be somewhat netting to zero?

Tom, it's Colm here. I agree with you it is a noisy quarter with a number of fairly substantial items that move in opposite directions. I think it is important to take account of the tax item, as you mentioned, for the US.

When we think of backing out items and coming to a more normalized number I think we prefer to think of it at this stage as the 2010 normalized earnings that we have provided as the current quarter continues to be quite noisy and has been impacted by some substantial items as you mentioned.

Well, how am I to read that? Am I supposed to say that the midpoint of your -- what you have got going out is, say, [CAD280 million]? Does that mean somewhere around CAD0.70, CAD0.72 this quarter is not unreasonable?

I think you could look at it like that. I mean another way you could perhaps examine it would be on the source of earnings, if you were to look at the expected and adjust for the new business strain. Also if you look at the earnings on surplus, it is at a higher level this quarter than would normally be the case.

We did experience security gains. So if you adjusted that by say half and then applied a tax rate at the range, the normalized range that we have provided in the 18% to 22% I think you would get to a number around that level.

Okay. As a follow-up I know the sort of working group that OSFI is talking about here really isn't looking at something implemented for some time. But we do know that you are going to be able to take credit for hedging this year end. To what extent do you think your MCCSR is going to be impacted by that?

At this stage we have not got a plan to take any further substantial credit for hedging. But perhaps, Mike, you might want to comment on that?

There aren't any material changes in terms of the seg fund capital framework planned for the end of this year. There has been some changes on some of the second [order] impacts in terms of what the C1 requirements are on the hedges. But in terms of wholesale credits for hedges that is not something that is imminently in the cards.

Okay. And then one follow-up just with respect to Jon Boscia. You talked about changes to your product to derisk it and improve profitability going forward in terms of US variable annuity. When was that implemented in the third quarter and what impact do you think that will have on sales going forward? And how is the fourth quarter looking with the new product in place?

Tom, we had two rounds of de-risking that had taken place -- one in February and one in August. So the one that was in August was a bigger impact compared with the one in February. And as we announced it in August, I think it is probably fair to say that sales representatives out there were trying to get a lot of excess sales in in the September time period, beginning of September before the full switchover.

So we initially saw a little bit of a dip in our sales after that initial surge had come through. But as we look into October, we have resumed back up to a normal type of sales level. So I think the expectation for the fourth quarter is that it will be a good sales quarter for us with a fully de-risked product and much better profitability associated with it.

Okay, thank you.

Eric Berg, Barclays Capital.

Jon, I'm not sure what a normal level of sales is. Are you saying -- it sounds like -- you sort of had a fire sale or again under the wire sale in the September quarter, and that it would be reasonable to expect that because customers and their advisers rushed to buy the product in advance of the change, the December quarter sales will show a decline relative to September. Am I inferring the correct conclusion from your comments?

Eric, I think that's reasonable, that we would expect to see a little bit of a dip in Q4 compared to Q3.

Okay. My next question -- I have others, but I will re-queue after this question -- relates to the Universal Life business with no lapse guarantee. You mentioned that the environment is challenging profitability. What specifically is going on? Is it the level of interest rates? Is it the slope of the yield curve? Is it lapses? What is happening in terms of the economics of the product that is making it, for the industry, not as profitable as perhaps manufacturers would have liked? Thank you.

Eric, I think as we look on a go-forward basis, the biggest impact to the profitability for the no-lapse guarantee business is the current level of interest rates and the assumptions that are behind that. It is not the spreads; it is not the slope of the yield curve. It is just the absolute level of interest rates.

Okay, thank you. I will re-queue.

Mario Mendonca.

Sorry to do this to you, but I want to clarify those items this quarter. The CAD513 million I understand, the CAD194 million and the CAD161 million. Tax recoveries were CAD101 million. What did you say the lapse -- the effect of the changing lapse rates in the US was?

I believe we said it was $150 million. Paul, do you have it?

Mario, it was $150 million and if you translate to Canadian about CAD160 million.

Pretax or after tax?

After tax.

After tax. And then these interests gains, what were they?

Our interest gains this quarter were not significant.

Okay. So the adjustment for the lapse was actually greater than the tax recoveries is what you are telling us for the quarter?

That is correct.

Okay. Any major adjustments coming to reserves in Q4?

We conduct our reserve reviews, or actuarial assumption reviews throughout Q3 and Q4. We have conducted a significant portion of the reviews in the US in the current quarter for Q3. Some reviews continue and I think reviews in Canada will continue in Q4.

At this stage we are not aware of any significant items that we would bring to your attention.

Thank you.

Doug Young, TD Newcrest.

I have to say I think most of my questions have been asked. But I guess one thing I want to just go to the sources of earnings and the split of the experienced gains and losses, the 205 and the 726. Can you just -- all those unusual items, can you slot those items into those two buckets for us?

Well, I think if we start with the assumption changes the amount of the assumption changes and the source of earnings at CAD726 million that is largely explained by the actuarial assumption changes updates that we had preannounced, which amounts to CAD731 million pretax. But there are other items that go through this line item.

The lapse assumptions we talked about, we had expense assumption changes as well in the US, and then these are offset by other items that occurred as a result of the review in the third quarter, primarily in the US. I think the point here is that some of these movements were fairly large. I think amplified by the circumstances, the times we have been living through.

So, again, I think it is a somewhat noisy quarter but largely this assumption change item is explained by the CAD731 million on the actuarial updates.

On the experience gain side we have that CAD205 million loss as recorded, and that is impacted by the downgrades we have talked about offset by strong equity markets. And then we did have negative experience on credit spreads as a result of the lower reinvestment rates going forward. Then there were a number of other smaller items included in there.

And the negative impact from the credit spreads, you haven't indicated what that amount was?

We haven't spiked that one out separately. It was offset by some other items. Overall, it's not as significant as it has been in some prior periods.

Okay. And then I look at -- I guess for Jon -- on the US division and I try to kind out back out what seems like a lot of noise and I get to profit. If I take out the 295, the 167, the 160, the 89, and the tax gain, I get that they are roughly $35 million to $40 million of earnings. Is that kind of normal do you think, or was there other stuff going through in the US that was really weighing down this quarter?

Well, I will start on that and perhaps Jon might want to add some comments. Again, if we look at the US, I have just mentioned that we had a significant amount of assumption change activity in the quarter. We also had the impact of taxes as you have noted.

As we look at normalized earnings we do think the better way to approach that is on more of an annualized basis. And we have provided that view for 2010.

The only thing I would add to that, Doug, is to reiterate what Colm had said. I don't think as it relates to the US we can back out the items that have been mentioned here and say that Q3 is therefore indicative of a normalized earnings run rate. Q3 would be considered actually quite low relative to the normalized run rate.

Okay, great. Thank you.

Andre Hardy, RBC Capital.

Thank you. I am looking at the sources of earnings as well and looking at the expected profit on in-force business being up 16% year over year. I compare that to asset growth including off-balance sheet of about 5%. Your book value is up a little more than that.

Can you help me understand why the expected profit from in-force business seems so strong in the context of these other metrics?

Well, there is an impact from the reserve increases that we have taken over the past year as equity markets had declined and with credit events. So we have more in the reserves that we will release into income as more normal times return, so that is a contributor to the higher level of earnings on the expected basis.

So if nothing changes does this number drop off by CAD40 million quarterly starting in Q1 '10? I am really talking about the CAD160 million of credit reserves put in place earlier in the year.

We have taken account of the expected pattern on the in-force as we developed our normalized earnings view for you, so that has been taken into account. There are some pluses and minuses, but that has been considered.

And then two quick ones on capital. The first one is under current rules how much capital do you have at the holding company that could be downstream? And then that may be an irrelevant question if you are asked to do an MCCSR on a consolidated basis. There my question is how meaningful would that be in terms of a decline to your MCCSR, if that is how it was done going forward?

As you know, we disclosed capital at the operating company for Sun Life Assurance and at the hold co we consider our investment in Sun Life US and our investment management businesses. We have capital at the hold co which would be available at the downstream.

We think that with the OSFI proposal, the regulatory proposal out there that you are aware of, there will be more to come on that. But I think we continue to believe that an appropriate way to view the capital is at the operating company and the RBC ratio for Sun Life US, which we manage to the 300 to 350 level. And we continue to manage at that level.

Would the capital at the hold co level change in the last quarter? Would you be willing to answer that?

The capital at the hold co, the sensitivities in the hold co continue to be modest to relative to the equity markets. We haven't seen a big change as a result of that, other than the fact that the assumption changes. Also as you consolidate at the hold co level those assumption changes that drove the reduction in the capital level at Sun Life Assurance Company of Canada would also apply at the hold co.

Okay. But I guess last quarter it was talked about there was a little bit less than CAD1 billion at the holding company. Maybe I am wrong but I seem to remember that number. Would that still be the same number?

Capital; there is still additional capital at the holding company.

All right, I will leave it at that. Thanks.

Darko Mihelic, CIBC.

Thank you. Paul, please don't slap my wrist too much; I am going to ask two questions since everybody else asked more than one.

My first question is for Colm. In your commentary regarding the CAD1.4 billion to CAD1.7 billion of normalized earnings you mentioned that you are working to improve that using productivity and taxes and so on. Presumably you wouldn't have mentioned those initiatives unless they were actually material.

Can you give us any sense of what it is you are thinking about doing on the productivity side or tax side that could provide upside to the CAD1.4 billion to CAD1.7 billion range?

Well, thank you for that question. Actually, I would think of it a little bit differently. When we develop the normalized earnings we are not taking account of management actions. And our point here is to emphasize that management will continue to take actions to enhance productivity, whether it's through initiatives around how we organize ourselves, how we approach procurement activities, etc., those initiatives continue.

Taxes; of course, we always look to be efficient in our tax structures. So these are initiatives that we would always have on the go. And we thought it was important to point it out because the normalized earnings view does not take account of those initiatives.

So these things are sort of back pocket, but you are not willing to talk about them now?

There are no specific items that we would draw to your attention.

Okay. Another question I guess for Jon. I want to go back to the second round of derisking that you have done with the products in the US. Can you maybe give us an idea or give us a better idea of what it was you actually did? Was it removal of riders, did you change pricing?

And can you give us a sense of -- to put this into context what else is happening in the industry? Are you seeing others that do the same or will Sun Life look clearly different relative to some of your competitors?

Good question, Darko. What we have done is we have made changes to just about every rider within the variable annuity product offerings. These relate to deferral of bonuses, to the frequency of step ups, to differentiating withdrawals based upon age tiers, to maximum amounts that could be in the equity funds, and we also increased pricing. So we hit it pretty much across the board in each of the categories.

I would say that in the US from an industry perspective there are still a couple of companies, but not very many, that are outliers out there with more aggressive features and capabilities. But I would say that by and large the majority of companies have either undertaken similar derisking activities to what Sun Life has done and some have even, for all intents and purposes, withdrawn from the market.

I think the net effect of all of that is it's going to be a much more rationally priced market with good behavior going forward than what it had been over the course of the last several years.

Okay, that is interesting. Thank you very much.

Tom MacKinnon, Scotia Capital.

Thanks. Just a follow-up with respect to credit. Looking at the structured products portfolio on slide 26 it looks like there has been some slippage in terms of what has been investment grade. This was somewhere around 96% maybe in the first quarter, 95% investment grade in the second quarter, now it's 90% investment grade in the third quarter with probably the biggest declines coming in the RMBS portfolio.

What are you seeing in terms -- if anything it looks like the pace of the downgrades has picked up? I would have thought that maybe it would have dissipated because certainly the below investment grade percentage of your bond portfolio has remained relatively constant quarter over quarter. Can you give us any color with respect to what is happening here and what you are trying to do to deal with these credit hits that continue to hurt EPS?

Tom, this is Candace Shaw, Head of Fixed Income. You are correct that our investment portfolio, which is getting hit and it isn't a result of the function of some, I think, teaser rates that are coming in to impact in the first quarter of next year which is causing some of the Alt-A and subprime issues to sort of get hit a little bit faster.

We think that although we are seeing this decline, I think we have taken enough reserves on the RMBS portfolio. We are also planning a valuation of the securitized portfolios by an outside independent adviser to help us get a handle on it going forward.

So this valuation by an outside adviser never did happen in this quarter, is that correct?

Representative: Well, we do have a portfolio manager, a third-party manager who manages these portfolios for us and they give us their independent valuation. But we are bringing a third-party in going in next year.

And if I want to look at the EPS or the credit hits that happened in the quarter, can you give some way of determining whether it was -- what percentage of it was related to structured products and what percentage was related to --?

Yes, about half of the hit this year, or sorry this quarter, was due to structured products. Again, those aren't necessarily real experienced losses. What they are is based on a model and the assumptions in the model.

So some of them will in fact come to fruition, but the actual number that we put in for impairments is calculated by the models that are used to generate a cash flow stream according to the accounting rules.

So that is not necessarily downgrade-related then, that is just a change in your own assumptions. Is that correct?

The actual impairments, yes.

Whereas the other half would be bond related, which would be downgrade related, is that correct?

Yes, maybe I could just -- Colm here -- may I could just add a comment. So the downgrades is the rating action in the quarter. The impairments that you have discussed -- we had impairments, as Candy mentioned, and we have, as you recall, we had previously established reserves to take account of higher expected losses on investments.

So as they came into play in the quarter, the net impact of the actual impairments were offset by the reversal of the previously established reserves for such losses together with security gains that we realized. The net effect of which was that the amount of actual realized losses incurred in the quarter was fairly modest, fairly nominal.

Oh, so this one -- this stuff about half being structured products and half being downgrades, so I guess this half being downgrades is only CAD194 million. What was this hit with respect to structured products and what was this reversal? Is this something that is just coming out now?

No, no. I think there has been a misunderstanding here. The downgrades is for the entire portfolio. You were asking specifically on did we have impairments, losses in the quarter and that is what I was explaining. That the amount of losses incurred in the quarter was nominal.

Okay, so but the --

Reversal of the --

But there were downgrades that were related to structured products that flowed into this CAD194 million, is that correct?

Absolutely, absolutely.

Okay. And that CAD194 million was sort of half in unstructured and half the rest of the bond portfolio. Would that be a safe way of looking at that?

Half to two-thirds was definitely from structured products this quarter, yes.

Okay, thank you very much.

Michael Goldberg, Desjardins Securities.

Thanks. In view of the assumption changes you have made to strengthen reserves and the off-setting reduction to book value and your expectation that this strengthening will still eventually emerge into earnings, do you foresee increasing your return on equity objective at some point?

The return on equity objective is refreshed annually in our annual report; we advise on our medium-term objectives. And so we will be looking at that as we work our way through the balance of this year. So the indicative return on equity from the normalized earnings we have provided you with is exactly that for 2010, but longer-term, medium-term objectives have not yet been finalized.

But does the reserve strengthening that you have done actually work in favor of ultimately increasing the return on equity objective?

Well, I wouldn't see it as being related to achieving a return on equity objective. I think the reserve strengthening was a product of requirements under the actuarial standards. To the extent that those assumptions are in excess of best estimate requirements, it will come back, emerge into income over time, and would obviously at that point increase earnings.

Is it fair to say that with or without the assumption changes the total of your expected earnings from in-force plus your experience gains would be the same either way? The only thing that really changes with the assumption changes is that you have now got more reserves so that more earnings would come from experience gains in the future and you have got less common equity.

I think you could draw that analogy. It's not perhaps how we would have analyzed it, but it is an output of your analysis.

Thank you.

John Reucassel, BMO Capital Markets.

Thank you. Just to clarify on your answer to Andre Hardy, I just want to make sure I understand. At least I thought I understood. Consolidated capital at SLF would -- I have always thought it would be higher than your SLA MCCSR. Is that true or no?

No, that is not what we were implying. We don't comment on the actual capital ratio at SLF. SLF of course holds, as I mentioned, MFS, McLean Budden and those are deductions from capital at that level. It also holds Sun Life US; so, no, I was not implying that.

Just a question for Don Stewart. With the new capital, potential new capital rules out of OSFI does this alter your approach to looking at acquisitions or does it make you hesitate on acquisitions? And does it remain a target-rich environment out there or is it --? It seems like the pace of activity is quite slow given what we have seen.

I think, John, it does remain a target rich environment. But, as you point out, there have not been a lot of actual transactions consummated; there is certainly many opportunities.

As far what prospective capital requirements do to our assessment of potential deals is they do factor in in a general way in that obviously more capital intensive businesses, insofar as we understand the emerging requirements, become less attractive or potentially less attractive depending on the given price.

So we bear the emerging environment very much in mind as we look out, but it's only one of a number of factors. Obviously the right price takes everything into account. So we are looking at things and we are well aware of potentially what is coming down the pipe.

Mario Mendonca, Genuity Capital Markets.

Don Stewart, a question for you. It has been a long time since we have talked about what Sun Life could do strategically with MFS. And I understand the Company did a review of this years ago and I think everybody remembers what the conclusion was.

Has anything changed either in terms of capital requirements at the holding company level as you just referred to, or perhaps MFS's stronger performance of late that might alter your view on what an appropriate thing to do strategically is with MFS?

I think the proper thing to do strategically with MFS, Mario, is to applaud the phenomenal performance it has delivered in the last 12 months and to not induce uncertainty by provoking speculation about things. We are very happy with the management team, their accomplishments, and what they are doing. And we are looking for that to continue for a long time.

Thank you.

Doug Young, TD Newcrest.

Just one follow-up. Just on the normalized earnings, Colm, you talked also about there being CAD12 million of cash and cash equivalents and you hold a lot of liquidity. It has been a drag on earnings. I am going to assume -- and you also talk about moving that at a measured pace back into the markets.

I am going to assume that is not in your guidance and I am going to assume you are not going to say exactly what your plans are. But can you talk about in a normal environment what cash and cash equivalents would be?

A good question on where we have been, where we are going. We are at CAD12 billion, as we mentioned, and maybe a year and a half ago or so we were at around CAD5 billion. So the right answer is somewhere between the two.

We will be investing and some of that opportunity to invest at more favorable rates; clearly current short-term rates are extremely low. Some of that will be beneficial as we move out that investing. We have plans around that, but I think it's a little bit early days to comment on where we will finally land.

But liquidity levels will be higher than they were pre the financial crisis, but they won't be at the CAD12 billion range. We would hope we would be able to work at a lower level.

Is this a year or is this a two-year measured pace? And I am correct to assume that is not in any of your guidance?

No, it's not included in the guidance. The portion certainly relating to the surplus, the assets backing surplus, that is the portion that is available to us. Within our normalized earnings where we are looking at the assets backing liabilities there are certain assumptions clearly in the assets backing liabilities as to the investment rates we will achieve. But there is some -- there is certainly opportunity on the assets in surplus to invest that and achieve some beneficial result.

And most of that liquidity is that in the assets backing surplus?

A portion of it is backing surplus, a portion of it is backing the liabilities.

Care to give us the split?

I don't have that currently available.

Okay, thank you.

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

Thank you, operator. I think Mr. Stewart would like to say a couple of closing comments.

As we wind up the call, we introduced the speakers and the individuals available to answer questions this morning. We had two new individuals available to respond to questions. As things turned out questions didn't come their way, but I would like to acknowledge Steve Peacher, our new Chief Investment Officer, and Lesley Thomson our new appointed Actuary, and welcome both of them in their respective roles.

In closing I want to thank Bob Wilson for his many, many contributions as Sun Life's appointed Actuary since May 1, 1998. Bob has stepped down for health reasons and our thoughts and best wishes go out to him.

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 should you wish to -- and should you 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 your participation and you may now disconnect your lines.