Sun Life Financial Inc (SLF) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Life Financial Q4 2009 conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions)

I would like to remind everyone that this conference call is being recorded today, February 11, 2010, at 10 a.m. Eastern Time. I will now turn the conference over to Paul Petrelli, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator. 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, Chief Operating Officer Sun Life Financial; and Colm Freyne, Executive Vice President and Chief Financial Officer. Also available to answer your questions are other members of management, including our Chief Investment Officer, Steve Peacher.

As many of you know, while the primary purpose of our call today is to update equity analysts and investors on our results and answer their questions, our audience also includes media, industry peers, rating agencies, our regulators, our employees and our distributors, and we welcome them. The slides to which the speakers will be referring are available on the Sun Life Financial website.

Turning to slide 2, I draw your attention to the cautionary language regarding use of non-GAAP financial measures and forward-looking statements, which form part of this morning's remarks. This slide reviews the reasons why forward-looking statements could be rendered inaccurate by subsequent events.

With that, I will now turn things over to Don.

Thank you, Paul, and good morning. Earlier today, Sun Life reported earnings for the fourth-quarter 2009. The Company reported net income attributable to common shareholders of CAD296 million for the quarter. While these results were an improvement compared to the same period a year ago and to the previous quarter, our net income was impacted by continued weakness in credit markets, in particular the United States commercial mortgage sector.

Looking back at 2009, our diversification across products, distribution and geographies has allowed our businesses to continue to execute on their strategies. We've delivered solid topline growth despite weak economic conditions. Total company premiums and deposits grew by 59% over the fourth quarter of 2008.

Before I turn the call over to Colm Freyne, Dean Connor, and Jon Boscia, who will review the financial and operational results in more detail, I will speak to several highlights from the quarter. In Canada, our businesses continued to deliver strong and consistent performance with meaningful sales increases across most product lines.

In the US, we made significant strides during the fourth quarter and indeed throughout 2009, to strengthen our distribution capabilities and build name recognition. Sun Life's strength and stability has been a distinct advantage in building our operations.

Strong relative performance and expanded distribution drove record sales growth at MFS Investment Management. In Asia, fourth-quarter sales increased 16% compared to the previous period, and we see a continuation of economic growth across the region.

Looking ahead to 2010, we see signs of improvement in the world economy. The International Monetary Fund predicts global economic growth this year of 3.9%. However, credit markets are still feeling the effects of the worst recession period in 60 years, and recovery in markets such as the United States continues to be fragile.

In addition, the regulatory environment is expected to evolve as governments and regulators work to develop an appropriate level of financial regulation.

Capital guidelines for financial services companies are also under review, although the precise impact on life insurers will not be known for some time. The fundamentals of our business are sound, and we continue to see opportunities to capitalize on key demographic trends. We are reaching out to serve new customers, as well as building on our existing relationships with millions of customers around the world.

Before I turn it over to Colm, I'm pleased to announce that the Sun Life Board of Directors has approved a quarterly shareholder dividend of CAD0.36 per common share, maintaining the same level as the previous quarter.

I now ask our Chief Financial Officer, Colm Freyne, to review our fourth-quarter results in more detail.

Thank you, Don, and good morning. Turning to slide 6, earnings for the fourth quarter were CAD296 million, or CAD0.52 per share. The favorable impact of equity markets in the quarter was more than offset by the impact of both investment downgrades and impairments on mortgage investments.

Moving now to slide 7, in the third quarter of 2009, we provided you with our estimated 2010 normalized earnings. From this point forward, we are replacing this term with estimated 2010 adjusted earnings from operations. Although the estimated earnings pertains to the full year of 2010, on slide 7 we have provided a reconciliation of fourth-quarter earnings.

It is important to note that this reconciliation is based upon attribution of market and other impacts in the quarter, and is a non-GAAP measure. The assumptions and methodology for estimated 2010 adjusted earnings from operations, as described in detail in the Q4 earnings press release, remain unchanged from the third quarter of 2009.

Credit and tax items were the most significant impacts on earnings this quarter, and I will address credit in more detail on the following slide. The estimated adjusted earnings from operations of CAD344 million are on an annualized basis at the low end of the CAD1.4 billion to CAD1.7 billion range we provided last quarter, due to a number of factors.

First, the level of new business strain was higher in the quarter, mainly due to higher sales in the US individual life business. Additionally, earnings on surplus continued to be reduced by our higher than normal liquidity position.

We have been reinvesting over the course of the quarter. However, the focus has been on redeploying assets from portfolio rebalancing activities. While it will take some time, we expect to continue to invest at a measured pace throughout 2010.

A number of tax-related items impacted results in the quarter, including the benefit of tax rate reductions enacted in Ontario, higher tax-exempt investment income, and the resolution of a number of uncertain tax positions.

Slide 8 provides more detail on the credit impacts to the overall results of the Company. Charges related to net asset impairments and other credit losses totaled CAD184 million for the quarter. Ratings deterioration and structured products continued at an elevated pace in the fourth quarter. Downgrades in the quarter resulted in CAD92 million of reserve strengthening.

Net impairments, primarily in our structured asset and commercial mortgage portfolios, amounted to CAD92 million after-tax. Although there are some encouraging signs of recovery in the economy, the commercial and residential real estate sectors continued to face challenges. Because of this, we expect the impact of credit conditions on our commercial mortgage portfolio to be a headwind in 2010, and we have taken a sectoral provision of $34 million after-tax in anticipation of deteriorating performance in parts of our direct commercial mortgage portfolio in the US. This amount is included in the CAD92 million previously mentioned.

Looking at the invested asset portfolio as a whole, gross unrealized losses on available for sale and held for trading bonds improved marginally to CAD0.4 billion and CAD2.4 billion respectively in the quarter, from CAD0.5 billion and CAD2.7 billion respectively at Q3. Further information on our invested assets can be found in the appendix to the slides.

Turning now to slide 9, SLF Canada reported net income for the third quarter -- sorry, for the quarter of CAD243 million, an improvement over the loss of CAD55 million reported a year ago. Earnings in the fourth quarter benefited from the impact of strong equity market experience, rising interest rates, and tax benefits from tax rate reductions enacted in Ontario, and higher levels of tax exempt income.

In the US, we reported a loss of CAD9 million, compared to a loss of CAD679 million a year ago. Results were given by driven by downgrades in the net credit impairments. Earnings from MFS were CAD49 million, up from CAD30 million here ago.

Assets under management increased to $187 billion, a 12-month high. MFS held the line on expenses, and margins were solid at 29%.

Earnings from our Asian operations were CAD27 million, an improvement over the CAD16 million reported in the fourth quarter a year ago.

Our UK operations reported net income of CAD9 million, down from the CAD40 million a year ago, reflecting the effect of changes in equity markets and interest rates on hedging instruments. We closed the Lincoln UK acquisition in the quarter, and we look forward to the positive impact of the acquisition on our 2010 results.

Moving to premiums and deposits on slide 10, you can see that our top line grew very significantly in the quarter. Total premiums and deposits grew by 59% on a constant currency basis. An important contributor to this strong topline result is MFS, where superior fund performance and expanded distribution capabilities continue to translate into higher sales levels.

Analyzing premiums and deposits on a constant currency basis. Life and health premiums and deposits were up 7%, mainly due to sales in the US individual life business. Mutual fund deposits increased 62% on positive retail sales at MFS. Other wealth products, including US variable annuity sales, grew by 18%.

Managed fund sales, which represents institutional sales at MFS and McLean Budden, were exceptionally strong, growing by 133% over the same period last year, due to a number of new large institutional mandates at MFS.

While the value of new business for the last 12 months at CAD521 million is down from the CAD712 million at the end of Q4 2008, product changes made it both Canada and the US have resulted in an improved level of VNB for the fourth quarter of 2009 on a sequential basis.

Looking at our capital position on slide 11, you can see Sun Life remains well-capitalized with a minimum continuing capital and surplus requirement ratio for Sun Life Assurance Co. of Canada at 221%.

At our US operating subsidiary, Sun Life US, impairments and downgrades in the investment portfolio are expected to result in the need to inject additional capital. Following the capital injection, the US subsidiary's risk-based capital ratio is expected to be at the high end of our target range of 300% to 350%.

Capital requirements for financial institutions are currently under review, and we are monitoring developments closely. It remains difficult to predict the extent and timing of future changes at this time.

Looking ahead on slide 12, in Q3 we provided the 2010 estimated adjusted earnings from operations in the range of CAD1.4 billion to CAD1.7 billion. A number of factors including the uncertain economic conditions, the absence of share repurchases as we replenish capital, and the uncertainty about future capital requirements have resulted in an update to our previously-disclosed return on equity estimates.

Our objective over the medium term is to achieve an operating return on equity of 12% to 14% over a three- to five-year period. We will continue to focus on maintaining a strong capital position and effectively deploying our capital.

The Company expects to maintain the current level of dividends which are subject to the approval of the Board of Directors each quarter, provided that economic conditions in the Company's results allow it to do so by maintaining a strong capital position.

It is now my pleasure to turn the call over to Dean Connor.

Thanks, Colm, and good morning. I'll be addressing our business results for SLF Canada and MFS. I'm pleased to report that our Canadian operations delivered another strong quarter. Net income of CAD243 million was a significant improvement over the loss of CAD55 million experienced in the fourth quarter of 2008. Full-year earnings for SLF Canada were CAD866 million compared to CAD645 million for 2008.

Individual insurance sales in the fourth quarter grew 13%, reflecting strength in both our Sun Life Advisor salesforce and independent wholesale distribution channels.

We logged another successful year of growth in our sales force with a net gain of 60 for the year. We continued to execute on our strategy of shifting to a more profitable sales mix, and in December increased prices for our Sun limited pay universal life product in response to the lower interest rate environment.

In individual wealth, segregated fund sales declined year-over-year by 35%, stabilizing at third-quarter levels at CAD34 million per week. Sales of fixed income products, including GICs, accumulation annuities, structured settlements and payout annuities increased 58% year-over-year to CAD255 million.

In the fourth quarter, we launched a competitive non-redeemable GIC and introduced our accumulation annuities and redeemable GICs to the wholesale channel. We also announced a new partnership with the National Bank of Canada. Our career sales force advisors will now be able to refer clients for our RFP loans, mortgages and an all-in-one product with improved client and advisory experience.

Moving to group benefits, our sales in the small and midsized corporate accounts market, an area of strategic focus, grew 30% in the quarter. Overall group benefit sales declined 45% in the quarter, due to some large sales in Q4 of the prior year. And for the full year, group benefit sales increased by 29% to CAD331 million, advancing our market share once again. Business in force grew 6% from CAD6.5 billion to CAD6.9 billion of annual premium.

Group Retirement Services had another strong quarter, with gross sales up 58%. As reported by LIMRA for year-to-date Q3 '09, GRS continued to lead in the defined contribution industry, capturing 41% of total DC market activity and 37% of payout annuity activity.

In January, we launched an innovative new solution that provides GRS plan members with a predictable lifetime income as they approach retirement. This is a simplified GMWB benefit that responds to the needs expressed by our GRS clients and their members. It's called my money for life.

One year ago, we created a direct distribution channel in Canada, bringing together pension rollover, direct sales and specialty markets. Direct distribution had a successful first year. Pension rollover sales grew by 33% to CAD259 million, with a 56% retention rate for the quarter. The retention rate for the full year was a record 51%.

Our new group life and health rollover product launched last February, exceeded expectations with CAD4.5 million of premium sold in its first 11 months. This product allows departing members of our group benefit plans to convert their company life and health insurance to a personal policy all over the phone, or to speak to a Sun Life advisor for more detailed advice.

Expenses for Canada were up 6% in the quarter, 5% from one-time items. For the year, expenses declined by CAD13 million or about 1%, marking another year of significant productivity gain for our Canadian operations.

Moving to slide 15, you can see that the strong momentum at MFS continued into the fourth quarter. Earnings were $47 million, an increase from the $25 million reported a year ago. Strong relative investment performance at MFS resulted in impressive positive net flows of CAD6.1 billion in the quarter, including CAD2.2 billion of net retail flows.

Gross sales in the fourth quarter of CAD15 billion and annual gross sales of CAD48.5 billion were the highest in the Company's 86-year history. Net flows finished the year at just under CAD19 billion. And expressed as a percentage of the underlying assets, this would put MFS at or near the top of the industry. Assets under management increased to CAD187 billion, up 40% from the prior year.

MFS's retail fund performance remains strong, with 83% of fund assets ranked in the top half of their respective Lipper categories based on three-year performance. Performance in the global international equity style has been especially strong, with 97% of fund assets ranking in the top half of their three- and five-year Lipper averages at the end of 2009. And last month, in recognition of this excellent performance, Edward Jones handed MFS to its preferred family of funds list.

MFS continued to build its institutional business which now represents 58% of assets, up from 28% of assets a decade ago. This comes from the firm's truly global investment platform and its strong culture, and uniquely positions MFS to capture an increasing share of the estimated CAD23 trillion global pension market, and to continue to be a solid contributor to the overall results of the Company going forward.

With that, I will now turn it over to Jon Boscia.

Thank you, Dean, and good morning. I will be discussing our operations, starting with the United States, and proceeding to Asia. The fourth-quarter loss in the US of CAD9 million was a significant improvement versus Colm's previously mentioned loss of CAD679 million a year ago, and it gives me confidence going into 2010.

Turning to slide 17, it has been one year since the Business Group completed a strategic review to better align markets, products, distribution and service to drive sustainable topline growth. The positive sales momentum we experienced through the first three quarters of 2009 continued into the fourth quarter, while also making significant progress on the following six strategic initiatives discussed throughout the year.

First, drive sales growth in core life insurance to reduce dependency on NLG and BOLI products. Second, de-risking our variable annuity business and increasing profitable sales. Third, build on the strength of the Employee Benefits line. Fourth, upgrade our wholesale distribution force. Fifth, increase Sun Life's name recognition in the US; and sixth, keep a tight control on operating expenses.

I'll provide some color on each of these strategic initiatives. Looking at our individual life insurance operations, total insurance sales increased 7% over the fourth quarter of 2008. No-lapse guarantee sales accounted for just 48% of core life insurance sales, down from 95% only two years ago.

Second, the latest variable annuity derisking occurred in Q4 and involved modifications to product design, investment allocation and price, all of which are intended to improve the product risk profile and profitability of the new business. Quarterly variable annuity sales were up 57% compared to the same period last year.

Net sales for the quarter were CAD379 million, and were CAD1.9 billion for the full year. After two rounds of derisking, the product is within our target profitability range. Immediately following the product changes in late Q3, our initial sales declined in early Q4, yet we saw gradual improvement each month during the fourth quarter, as the quality of our wholesaling arm and financial strength of the Company prevailed.

Third, sales of CAD323 million in our Employee Benefits Group were consistent with the record level set in Q4 '08, and this was accomplished alongside of the successful introduction of a new technology system that will not only improve efficiencies but provide competitive advantage in the marketplace.

Fourth, we have made great strides in strengthening our wholesaler distribution force, as we were able to attract many of the best people from our key competitors. Average wholesaler productivity increased 75% compared with 2008.

Fifth, in the fourth quarter, we successfully launched our first brand awareness campaign, employing television, print, and online advertising to increase awareness of the Sun Life Financial brand throughout the US. Following the exploits of the Sun Life guys, as they seek to make Sun Life a household name, has played well on both sides of the border as well as in Asia through cable TV.

Subsequent to the quarter, we signed an agreement to acquire naming rights to the stadium that plays host to the NFL's Miami Dolphins, as well as numerous other major sporting events, including last weekend's Super Bowl and the earlier Pro Bowl, which is the NFL's all-star game.

The media exposure surrounding those two events will go a long way towards improving our name recognition throughout the US. To give you an idea of the media exposure, we have an outside supplier track the number of impressions in the news media, which includes print, radio, TV and online. One impression is defined as one person seeing the name one time.

From year-end until this past week, Sun Life Stadium recorded 3.1 billion media impressions; a very impressive and cost-effective vehicle for generating name recognition. This level of penetration is worth an estimated $18 million in advertising.

Sixth, it is important to note while we have made significant investments in building growth initiatives for the future, we maintained our focus on expense management and operational efficiency. Expenses for the year were relatively flat versus full-year 2008.

While credit conditions had a negative impact on earnings in the quarter and the full year, the positive momentum in the US business is building. The strategy to align markets, products, distribution and service capabilities have served us well in this tough economic environment, as well as entering 2010.

Turning to slide 18 and Sun Life's operations in Asia. The fourth-quarter earnings for Sun Life Asia were CAD27 million, a 69% increase compared to CAD16 million for the same period in 2008, and more than a 100% increase over the CAD13 million for Q3 2009. Sales in the fourth quarter were also strong, up 16% compared with the year-ago period.

Individual life sales of CAD217 million were up 16% over 2008, with the sales coming from all countries, in particularly Hong Kong, China and Indonesia.

In several markets, customers continue to be cautious about investment-linked products due to the market volatility. Slower sales in those products have been compensated by the demand in our traditional insurance products, indicating the value of a balanced product line. In Asia, truly the best is yet to come.

We expect regulatory approval of our restructuring in China in the coming months, and this change will allow us to grow faster. Sun Life Everbright had an excellent quarter in individual life sales, and the bank assurance channel was strong and group sales were higher as well.

In Indonesia, we are pleased with our performance during 2009. We launched our life insurance joint venture with Bank CIMB Niaga and added two Shariah-compliant funds to our asset-link platform. We believe we are well-positioned to capture an increasing market share in the Indonesian market.

In India, the Birla Sun Life sales force has increased to 170,000 at the end of Q4, providing us with a stronger distribution network. We are aggressively growing the operation there to gain market share and solidify our position.

With that, I would like to turn it back 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.

Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator Instructions) Steve Theriault, Merrill Lynch.

Thanks very much. A couple of questions, one for Colm. I would be interested in hearing a bit of your outlook for credit for 2010. I know you touched on it, but how much visibility do we have for this year? Should we expect higher or lower run rate credit costs versus what we saw in the last couple of quarters of 2009? And outside of commercial mortgages, are there any other areas you might highlight as areas of concern?

Thanks for that, and I will just say a few words on the expectation, and I will ask Steve Peacher to also comment. I think, clearly 2009, in the latter half of 2009, we continued to see an elevated rate of impairments and downgrades. As you heard in my remarks, we've also made provision on the mortgage side by adding an amount for a general provision to recognize that while performance in the portfolio continues to be quite good so our level of nonperforming mortgages is at a low level, we still continue to see some pressure there. And loan to values, for example, continue to evidence that.

So we have taken some steps. We think that between the reserves we've taken in the actuarial liabilities and respective downgrades and the steps we've taken with impairments, that we clearly have seen the heavy lifting in 2009. We do anticipate, as evidenced by the fact that our normalized earnings range of CAD1.4 billion to CAD1.7 billion still remains intact, that we will see a diminution in charges in 2010.

This is Steve Peacher. I would really reiterate Colm's comments. I fully expect that our credit experience will improve in 2010 versus 2009. I think one indication of that is if you look at the pace of downgrades in the portfolio in Q4, it ran at about half the rate or maybe slightly less than Q3. And I think we are going to -- that is indicative of the trend we're going to see in terms of both downgrades but also credit experience.

And in terms of areas of uncertainty, I think that all assets that are tied to real estate have a degree of uncertainty around them that has to be recognized. But I definitely think it will see improvement in 2010 versus the experience in '09.

Would you say the pace of downgrades for structured products was mirroring the nonstructured, the nonstructured piece this quarter?

I definitely think we saw an elevated level of structured product downgrades versus other sectors. In fact, the number of structured product downgrades was well over half of the downgrade activity that we saw among the assets in the quarter. And I think that the rating agencies are working hard to get kind of ahead of the game, and I think they have made big progress in that regard.

Okay. Second one if I might on contingent capital. Could Colm or maybe Don, could you quantify -- you know, a couple of quarters ago, the number that was being indicated was about CAD1 billion. And you mentioned something about injecting capital -- sorry, I missed that -- into a US subsidiary for year-end.

Could we get a sense of what the contingent or excess capital level is at the holding company, net of any adjustments that you can foresee?

Yes. So perhaps I can just clarify the point with respect to our US subsidiary first. As at Q4, we go through the year-end process with respect to risk-based capital for Sun Life US. We are in the midst of that, and we do expect that we will require a capital injection in order to bring that RBC level to 350%, which would be at the high end of our normal range of 300% to 350%.

Notwithstanding that, we believe we continue to be well-capitalized at the SLF level. SLF has excess capital above the 200% MCCSR level, and I think we did mention a couple of quarters ago that that was approximately CAD1 billion, and it's still approximately CAD1 billion; slightly less, but close to CAD1 billion.

Okay. Thanks very much.

John Reucassel, BMO Capital Markets.

Thank you, and a question for Don. Don, Sun Life has been a standout here amongst its peers, and it has kept the divi stable. But if I look at the payout ratio of 150% in '09, 103% in '08, and I guess if we look at your normalized earnings number and you take the midrange, it looks like about a 52% payout ratio in 2010.

Then you overlay that with proposed rules on the banks, which might have some strict regulations on dividends and payouts. And I know your capital position is good, but what comfort can you give to investors that the level of dividend is sustainable kind of even in the wake of a tough earnings environment and uneven or unknown regulatory changes?

Thank you, John. If we look across the last several years, the aggregate of buybacks and dividends has been roughly in the 50% range. So looking out into 2010, a dividend-only payout ratio of 50% would be consistent with a total return of money to shareholders over the last several years.

As far as the continuation of the dividend, I think this question has come up in the last three calls, and my answer remains the same, that the Board of Directors sets a dividend each quarter. The Company is well-capitalized. I did mention that we saw 2010 as looking somewhat better than the recent past, and so we see ourselves, absent any major shifts, continuing to provide the dividend, but it is a quarter at a time.

Okay. Just maybe, Colm, just on the injection of capital, I guess how much do you think is going to be injected? Is it CAD100 million or is it CAD500 million? And if you didn't do the injection, what would the RBC have been in the US sub?

Well, I think both questions really drive at the same answer. And I would caution you that because we are so focused through January on our Canadian GAAP financial reporting and MCCSR, our US processes continue. And we are not at the point yet where we could with certainty provide you with the amount. But we do know that directionally, there will be a capital injection required and we will finalize it over the next couple of weeks.

Do you have a sense, though? Is it CAD100 million or is it CAD500 million or --?

I would rather not hazard an amount at this point. We will certainly update you the next time at the next call. But I think our comments on the overall level of capital at SLF provides you with assurance that from an overall liquidity and capital perspective, we have the wherewithal to make the required injection.

Sure. And just to be clear, you said you are consolidating -- your MCCSR at SLF would be above 200% on December 31; is that correct?

That's correct. The excess over 200% is at CAD900 million.

Okay, great. Thank you.

Michael Goldberg, Desjardins Securities.

Thank you. You described how the adjusted earnings from operations were either at the low end if not below the range that you've indicated, and said that this was due to higher new business strain and also liquidity higher than normal.

Could you quantify those components and their impact on operating earnings?

Well, I'll have a go at that, Michael. And I think if you look at the sources of earnings on page 28 of the deck, you'll see that the expected profit on the in-force at around CAD500 million, and the impact of new business at CAD115 million. If we reduce the new business impact by some CAD30 million, we would be at around CAD80 million.

And then the earnings on surplus at CAD51 million are at a little bit at the low end of where we would expect some specific items in the quarter. We might see a level there that might be more like CAD80 million on an annualized basis -- sorry, CAD80 million for the quarter. You could annualize that.

If you take those numbers, I think you arrive at an amount that would be within the low end of our range. I think the danger here would be to try to extrapolate from one quarter where there are some moving parts.

How much -- if you want to put it -- excess liquidity do you actually have over and above what your expectation would have been?

Well, I think at the total Company level, you can see that we're at some CAD12 billion, and I might ask Steve Peacher to make a comment on our investing plans. But CAD12 billion compares to a much lower level before the credit prices and economics conditions turned on us, so we would expect to get that CAD12 billion invested over time.

Yes, I think -- this is Steve Peacher. Of the CAD12 billion of cash, certainly there is a run rate level of cash. So in terms of excess cash, we're probably around the CAD5 billion or so level, give or take. And we are at a pace at which I think that will get fully invested over the next couple of quarters, depending on market conditions.

Okay. Just turning to a couple of risk metrics that we've talked about in the past. Could you give us the amount of bonds now over 20% below cost for greater than six months?

The amount this quarter is CAD1.7 billion. Is the 80% and six months?

That's right. And also the amount of at-risk variable annuity guarantees at year-end?

Michael, it's Paul. It's about CAD1.3 billion for the total company.

Thank you.

Eric Berg, Barclays Capital.

Yes, thanks. Eric Berg from Barclays Capital. I just wanted to clarify, on slide 7 where you are showing the adjusted earnings from operations and reconciling it to what you reported, should you we think of the CAD344 million as your estimate of what the corporation would have earned if the assumptions underlying your original guidance for 2010 given in the September quarter, if those assumptions had been realized? Is that what the CAD344 million is essentially?

Yes, the CAD344 million is to provide you with a path from the actual earnings for the quarter to the amount that we commented on at the third quarter, the CAD1.4 billion to CAD1.7 billion. So adjusting for the various items that would be outside of the normal expectations, which are embedded in the assumptions underpinning the normal operating earnings level.

Thank you. And then I just have one follow-up on Michael's question. Going back to the penalty that the earnings suffered as a result of liquidity and -- the adjusted earnings suffered as a result of liquidity and strain, was it that you wrote more business than you expected, which depress the CAD344 million number?

Or was the strain on the amount of business that you wrote greater than you expected? And if it were the latter, why was the strain greater than you would have expected? Are you paying higher commissions than you expected? What exactly is the issue exactly with the strain? Thank you.

Well, I'll have a quick comment on the level of strain. So the point here was to say that the CAD115 million of strain in the quarter is above the level that we would anticipate in a quarter, and that is going to depend on sales levels and volumes in a particular quarter. So we're really trying to provide you with an indication here that that is a higher level of strain, so there is some seasonality affected with that.

But in terms of specific actions that we are taking and continue to take to ensure that margins on products are strong and that strain is kept to a minimum, I would ask Jon perhaps to comment.

Eric, it was primarily due to higher than anticipated sales that we had in Q4. It was a good quarter for us. It was primarily related to life insurance, and the seasonality a life insurance is such that Q4 is bigger than the other three quarters in all typical years.

It wasn't more strain per sale than what was expected, as much as it was the good news of more sales.

Thank you, Jon. I'm all set.

Andre Hardy, RBC Capital Markets.

Yes, I have two questions as well. The first surrounds the current process with OSFI on segregated funds and the guarantees there. Can you update us on where you are at in this process?

Andre, it's Don. I'm afraid we can't say anything about matters relating with our regulators, other than to observe that it will be some time before we see a final capital rules for the life insurance sector.

So you are not expecting a resolution in upcoming quarters?

Certainly, I think it will take longer than one quarter, and perhaps we won't see anything until the end of the year.

Okay, no, that in itself is helpful. Thank you for that. The second question, if we go back to a year ago there were -- and I'm speaking from memory -- but roughly CAD160 million of, if you will, excess credit reserves that helped somewhat cushion the 2009 blow of credit. Do I understand correctly the similar cushion for the year ahead is CAD42

CAD42 million was -- this is [Leslie Thompson]. CAD42 million was the release of the fourth-quarter access provision. We still have double our normal default provisions for mortgages during 2010.

Let me ask maybe differently. Last year there was a CAD40 million quarterly benefit from having taken unusually large provisions at the fourth quarter of last year. What is that benefit next year?

Well, I think there is a piece that Leslie mentioned that we have put aside for mortgages in respect of 2010, but it's not at the same level as the amount for 2009, because that included the entire portfolio. And then we've also commented on the fact that on the asset side, we've taken a general allowance which amounts to CAD34 million after tax, in respect of mortgages which we took this quarter.

Okay, thanks.

Mario Mendonca, Genuity Capital Markets.

One quick point to clarify first. The charges on the CMBS and RMBS, the impairment charges, last quarter you suggested that there was an outside consultant that you were using to help with the marks. Was there any sort of cleanup this quarter on those marks associated with using an outside consultant?

This is Steve Peacher. No, we brought in -- it is true that we brought in an outside consultant. And the intent was really to just gain as much information as we could about complicated assets in a stressed environment. But there were -- that really validated the models and the approach we had been taking, and there were no changes to loss estimates or impairments or reserves as a result of that analysis.

Thank you. Another quick question maybe -- I'm not sure how quick. The expected profit line, the move from Q1 '09 to Q2 '09 was an important one, going from CAD426 million to CAD536 million, so more than CAD100 million. Could you help us understand what caused that move from Q1 '09 to Q2 '09, and now this subsequent decline, the decline from CAD543 million in Q3 '09 to CAD504 million in Q4 '09? That's obviously -- these are important numbers to the overall earnings, if you could help us understand those two changes.

Well, I don't have all of those analyses at my fingertips, Mario, but I will comment on the change year-over-year in terms of the expected profit. So a year ago --.

Colm, I'm referring to quarter-over-quarter, though. If you could think about Q3 '09 to Q4 '09, why the drop? Why the CAD40 million drop from one quarter sequentially?

Mario, it's Paul Petrelli speaking. I think what you are seeing there in the expected profit line is if you look at the full-year expected profit emergence, you would have seen the expected profit numbers in second quarter and third quarter of this year increase significantly. And that would have been a function of the reserves that we built up as the markets were declining in our segregated fund and variable annuity businesses.

So at lower market levels, more of those reserves would have unwound as expected profit. And as markets have increased above our expected 2% a quarter rate, more of that reserve unwinds as experience gained. So the amount left to unwind is expected profit declines, and I think that is the effect that you are seeing there.

So on a go-forward basis, is the CAD504 million a better reflection of what we can expect going forward?

Yes, I think, Mario, the CAD500 million is a reasonable estimate of the expected profit, and it will vary. It depends again on other factors, so the amounts of assets under management at MFS, for example, to the extent that that continues to grow with market improvement and with the sales activities, that will also contribute positively to that amount.

And just to be very clear, the reason why the numbers look so high in Q2 and Q3 is because you've built up higher segregated from the reserves, the markets were stronger and so you had a larger unwind. It didn't go through experienced gains; it went through expected profit then.

There is a portion that comes through expected profit as a result of that. Yes, you are correct.

Thanks.

Rob Sedran, National Bank Financial.

Hi, good morning. My question is on the CAD1.4 billion to CAD1.7 billion range, and I guess it is sort of following up on a couple that we've had. It's a fairly wide 20%-ish range, but I'm hoping you can provide some sense of what would happen to put you at the bottom end of that range versus what might push you to the upper end of that range? And are any of these inputs externally observable?

Colm, I may have misheard an earlier answer, but does that range include or exclude the impact of credit costs? My understanding was that they are excluded from that range.

Yes, there is a normal level of credit embedded within that range, but credit experience beyond what we would normally estimate would not be included. So very adverse credit would not be included.

But in terms of why we have expressed it as a wide range, recall that when we developed this a quarter ago, we explained some of the headwinds that we see out there from an economic perspective. And while the past quarter, Q4, was a little positive in terms of some of the news coming out on the economic front and markets were up, certainly the start of this year has maybe undone some of that. And we've heard a lot of concerns about sovereign debt in Europe and other economic headwinds.

So we think a range expressed in this fashion is prudent at this time, given the wide variety of economic outcomes that we might see over the course of the next year or so.

So it's fair to assume -- it's fair to watch the broader macro trend, the bigger, which end of that range you might be biased towards, in other words?

I think that's right, and credit continues to be a headwind. We've talked about that, and market volatility continues. Equity markets have continued to exhibit some volatility.

Thank you.

Doug Young, TD Newcrest.

Hi, good morning. Just, I guess, two questions. The first is you've dropped your ROE objective for three to five years from 15% down to 14%. And I'm curious just if you can talk a bit about why. I think I probably understand, but if you can talk a bit about why.

And the second part of that question is from where we stand today in Q4, looking at Q4, what gets you to a 12% to 14% ROE? What are some of the drivers that really have to happen for you to achieve that?

And then I just have a follow-up question after that for Jon.

Yes. So on the medium-term objectives, you're quite right, we decreased the objectives from previously 13% to 15% over three to five years to 12% to 14% over the same time frame. And certainly there are some areas that will help us as we go forward. I think that to get to the high end of that range will take some effort, and organic growth is not necessarily the way that one would achieve that.

But certainly the factors that we talk about around the equity market levels, the credit environment, can be positive, very positive contributors to achieving that range if the world unfolds in a reasonable fashion. And the higher levels of assets under management will help. So those would be some of the factors.

The reinvesting our cash, higher cash levels that we've talked about, that will also contribute. Lower levels of new business strain as we continue to ensure that products are designed and priced appropriately, all of these will contribute.

We have the Lincoln transaction, which we've closed on in Q4 in the UK. That will help earnings in 2010. So there are a number of positives, but there are certainly a number of headwinds as well.

Colm, just if I can follow up. If things evolve as you expect in your best estimates, is that what drives a 12% to 14% ROE, if things just evolve like you expect? Is that what we should expect, a 12% to 14%?

Well, I think like any objective, it will require work and management attention to ensure we arrive there, but I think that we will develop and have plans to continue to improve the efficiency and effectiveness of the business.

Okay. Just to Jon, obviously, the US division is a big focus, and the annuity division again is where a lot of the noise came through in credit. And I guess the same type of question is what does it take for the US division to start to produce what you would consider normal results?

Yes, Doug, it's an excellent question. When we look at the annuity division inside of the US, we have to be mindful that it's a single number that is reported that comprises both fixed annuities as well as variable annuities. And the fixed annuity side is where the challenge has been, from both a credit perspective as well as much of the volatility.

We did announce earlier in 2009 that the fixed index annuity business was going to be deemphasized. The fixed annuity business would be transitioned to an opportunistic business. And we really have to manage our way out of the fixed annuity business and the credit exposures that we have, but we can't do that overnight.

We have a large block and it's on the books for the next several years. And we will do the best we can in working with the investment area to continue to provide shelter from downgrades and credit impairments, and we will continue to deemphasize that business.

Okay, thank you.

Darko Mihelic, Cormark Securities.

Hi, good morning. Just what to circle back here on a question that was asked earlier on the call, and I apologize if we're beating a dead horse. But judging from some of the e-mails I'm getting, there is some interest in this question. And again, it goes back to your capital position and your ability to pay out a high dividend.

And the question revolves around, I guess, given that we know capital standards are going to change and it's going to become more difficult, and given that we know a 50% payout from earnings in the past may have been appropriate in an era where rates were stable and regulators -- rating agencies really weren't being aggressive with insurance companies.

The question really revolves around why is it a quarterly decision to look at your dividend? Shouldn't we be thinking a little bit longer-term here about capital generation and really whether or not the 50% is appropriate in today's environment?

Thank you, Darko. It's Don Stewart. Just because I emphasized that the decision is made each quarter, I wouldn't want anyone to have the impression that our horizon is 90 days. It's a lot longer than that. We do look out, but we make the decision quarter-by-quarter because it's the prudent thing to do in these economic conditions.

I think your point about the future direction of the business and some of the macro forces at work is very valid. Nonetheless, it is our view that the dividend for the fourth quarter and being decided for the first quarter is a reasonable level based on our confidence for the year 2010. But I will continue to emphasize that that decision will be made a quarter at a time.

I also emphasize that we are looking out for some of the issues that you identified as well as many others, and indeed look out well beyond December 31, 2010.

Fair enough. I guess just a follow-up question. How does one appropriately price some products with so much uncertainty regarding your capital requirements? This question is really aimed, I think, at Jon for some of the US products that are being sold right now, where you are gaining share.

Yes, Darko. Again, an excellent question. I think one of the aspects that we have to recognize is that the US regulatory environment generally has lower capital requirements than what we see in Canada. However, the amount of capital that we assign to the products are consistent with C GAAP rather than US GAAP there.

So we are already pricing our products for an assumed higher-level, because we do believe that ultimately, US GAAP and Canadian GAAP are going to converge and become much closer. And some of the changes taking place by the NAIC will force US companies to have levels more consistent with what Canadian companies are, and I'm happy to say that we are well into that curve.

Okay. Thanks very much.

Operator, I think we have time for one question.

Okay, thank you. John Reucassel, BMO Capital Markets.

Thank you. Just a question on the sensitivity. I guess slide 29 of the package on the interest rates. So it looks like you -- can you explain to me what you've done? You effectively eliminated upside potential if rates move up, but your sensitivity to decrease in rates is a little less but about the same. Could you just describe what's happened through the course of the quarter there?

It's Mike Stramaglia here. Over the course of the quarter, as part of our regular asset liability management review and rebalancing, we did eliminate some of the -- or reduced the level of duration mismatch in a couple of our individual life portfolios in both Canada and the US. And that has contributed to the reductions that you are seeing here.

I think if you actually compare these sensitivities to what we had in Q3, they've come down more or less the same amount for both the 1% increase and 1% decrease sensitivities, so it's kind of moving in a symmetrical level in terms of the impact of that rebalancing activity over the quarter.

So you are fronting a mismatch the asset durations were lower than the liability durations?

Yes, effectively, when you've got exposure to declining interest rates, it's because your liabilities are -- just give me a second here -- exposure to declining interest rates is because the liabilities are indeed shorter than the assets. And so we were adding duration over the course of the quarter in order to reduce that sensitivity.

Keep in mind that for -- given the structure of our guarantees, there is a lot of embedded optionality in these products, so that there is always going to be exposure to downward interest rate shocks as those minimum interest rate guarantees come into the money.

So that is an inherent part of the business and -- but we do manage that to within specified tolerance of the ranges. And as a result, as I say, of just ongoing rebalancing and reviewing that activity in Q4, the sensitivities were reduced but in a symmetrical fashion.

Okay, and last -- I think I understand that, but I might have to come back. Are you more sensitive -- is it the absolute level of corporate A rates, or is there a distinction between movements in the risk-free rate and the spreads? Is it one more than the other or --?

These particular sensitivities focus on movements in risk-free rates. Credit spreads themselves represent another source of risk and sensitivity, and those can operate in different ways depending on the particular line of business and whether you happen to be generating positive or negative cash flows when those spread changes happen.

So generally, if you are generating positive cash flows and spreads come in, it means that you are putting money back out in a lower interest rate environment. If you are generating net negative cash flows in a given segment and spreads blow out, then you're having to liquidate assets to meet those obligations at a discount.

So there is a number of dynamics there. And, of course, when you have interest rates on a risk-free basis moving at the same time as spreads are moving with lines of business with different cash flow signatures, you can get all sorts of different outcomes.

Okay. I won't belabor that point, but thank you.

Okay, thank you very much. I would just like to quickly correct a statement that I made earlier. Michael Goldberg had asked about our amount at risk on variable annuity and seg fund products. I had referred to a CAD1.3 billion number. That is, in fact, the amount of reserves that we have as of December 31, backing those liabilities. The amount at risk is CAD4.3 billion, and that is fully disclosed on page 18 of our earnings press release today.

With that, 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 wish to listen to our rebroadcast, it will be available from our website later this afternoon. With that, I'll say thank you and good day.

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