Sun Life Financial Inc (SLF) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Life Financial first quarter 2010 results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (Operator Instructions). I would like to remind everyone that this conference call is being recorded today Thursday, May 6, 2010 at 10 a.m. Eastern time.

I would now like to turn the conference over to Mr. Phil Malek, Vice President Investor Relations. Please go ahead, sir.

Thank you, Theodora, and good morning everyone. Welcome to Sun Life Financial's first quarter 2010 earnings conference call. Our earnings release and the slides for today's call are available on the investor relations section of our website at sunlife.com.

We will begin today's presentation with an overview of our first quarter operating results by Don Stewart, Chief Executive Officer of Sun Life Financial. Following those remarks, Colm Freyne, Executive Vice President and Chief Financial Officer, will present the first quarter financial results. Following Colm, Steve Peacher, Executive Vice President and Chief Investment Officer of Sun Life Financial, will provide investments overview for the quarter.

We will then follow with a question-and-answer session. Members of management are also available to answer your questions on today's call including John Boscia, President Sun Life Financial; Dean Connor, Chief Operating Officer Sun Life Financial; and Rob Manning, Chairman and CEO, MFS Investment Management.

Turning to slide tow, I draw your attention to the cautionary language regarding the use of non-GAAP financial measures and forward-looking statements which form a 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, Phil, and good morning everyone. Yesterday Sun Life announced results for the first quarter of 2010. The Company reported net income attributable to common shareholders of CAD409 million for the quarter, a significant improvement over the substantial loss reported one year ago. Return on equity was 10.5%.

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

Results this quarter were generated from continuing execution of our business priorities and also reflect improvements in the economic environment. It is important to note that although the financial results have advanced from last year there is still work to be done and we remain focused on delivering sustainable earnings growth. I will speak to several highlights from the quarter.

Looking at our top-line growth on slide five, total premiums and deposits growth was up 23% over the prior year on a constant currency basis. We continue to benefit from broad distribution capability, superior fund performance at MFS and strong net sales in our US variable annuity business.

Mutual fund deposits increased 76% on positive retail flows at MFS. Managed fund sales which represent institutional sales at MFS and McLean Budden, grew by 14% over the same period last year. Life and health was up 6% and other wealth declined by 8% primarily on lower sales of fixed annuity products in the United States.

Looking at our Canadian operations on slide six, sales of individual life and health insurance increased 30% over the prior period one year ago with increases in both career and wholesale channels. We continue to execute on our strategy of shifting to a more profitable sales mix as exemplified by term life sales which rose 43% in the quarter.

In group benefits, business in force grew 5% from CAD6.7 billion to CAD7 billion. Gross sales in group retirement services were up 8% year over year primarily due to strong growth in corporate accounts. My Money for Life, an innovative new guaranteed retirement income solution for plan members has been well received by plan sponsors. Innovations of this nature underlie why Sun Life is ranked number one in the 2009 Defined Contribution Survey of Benefits Canada with a market share of 36%.

In the direct channel, pension rollover sales grew by 43% compared to the previous year. Sales in both group life and health rollover products and voluntary benefits increased over the prior year. These results demonstrate our continued strength in the Canadian market where Sun Life has a strong leadership position. At the end of 2009, we were number one as measured by premiums and deposits serving six million Canadians.

Canadians have voted Sun Life as the most trusted life insurance company in Canada. This honor was based on a recent poll conducted by Harris Decima. In addition, Canadian Business Magazine has named Sun Life among Canada's 20 most reputable companies. Sun Life was ranked number 12 overall and was named the most reputable financial institution.

Turning to slide seven, in our US operations, we continued to execute on key strategic initiatives to drive sales growth in co-life insurance, simplify our variable annuity business, improve wholesaler productivity and build our brand. Domestic variable annuity sales posted another strong quarter, up 45% compared to the same period one year ago. Continued sales momentum and stable surrenders drove variable annuity net sales to $392 million. The simplified variable annuity product we launched in the quarter has been well received in the market with a considerable increase in average monthly sales following its release.

We continued to add top-tier wholesalers to our distribution platform and are seeing a rapid ramp up in their productivity. In variable annuities, we are growing faster than many of our competitors reporting the fourth largest increase in market share in 2009. In life insurance, we doubled our external wholesale in force.

We continue to build our brand and name recognition in the US. As mentioned in last quarter's call, Sun Life Stadium was host to February's Super Bowl which was the most watched telecast in US history.

As a result of our overall initiatives, we have seen aided awareness among consumers quadruple during the past five months. We have also seen a significant increase in visits to Sun Life's US websites and an enthusiastic reaction from our distribution network and our customers.

On slide eight you can see that MFS continues to deliver sterling results. Assets under management in the quarter grew to $195 billion. This growth was driven by market performance and strong positive net flows of $3.1 billion. Margins continue to improve and came in at 30% for the quarter.

Turning to Asia on slide 9, individual life sales during the quarter were strong in all markets with the exception of India where regulatory driven product changes impacted our sales activities. Individual life sales in China were up 325% driven by sales in the bank assurance channel. In fact, Sun Life's Ever Bright Q1 sales ranked second among all foreign insurers and was the top North American affiliated joint venture. Sales in Hong Kong were up 48% with increases in both the agency and bank assurance channels.

In March, we celebrated a successful decade as a public company by opening the stock exchanges in Toronto, New York and Manila.

Looking into the remainder of 2010, the world's economies are still in a fragile state and the pace of recovery is uncertain. We remain focused on the execution of our business priorities while maintaining a strong capital position.

With that, I will now ask our Chief Financial Officer, Colm Freyne, to discuss our first quarter results in more detail.

Thank you, Don, and good morning. Net income of CAD409 million in the first quarter demonstrates a solid start to 2010. Earnings benefited from the improved economic environment including positive equity markets and improving credit conditions as well as a number of other factors such as realized investment gains.

Turning to slide 11, we have provided a reconciliation of first quarter net income of CAD409 million to what we consider to be an estimated adjusted earnings from operations. Equity markets contributed CAD23 million above the baseline expectation as markets continued their recovery in the first quarter.

Assumption changes and other net positive experience contributed CAD27 million this quarter. This contribution was made up of a number of items including positive impacts from interest rates, security gains and asset liability rebalancing partially offset by negative impacts such as credit losses and expenses.

Credit experience was much more favorable in the first quarter relative to the same period a year ago with a reduction in the severity of downgrades and impairments on structured investments and an offset from the reserves established for such credit losses over the past 18 months. As such, credit losses were not a material factor in our reported earnings this quarter.

In 2009, we completed an extensive review of our structured investment portfolio including reviewing detailed cash flow projections and future loss estimates provided by an independent party. Based on this review we believe that we are adequately provisioned barring any significant changes to the macroeconomic environment. It is important to note that this reconciliation from reported net income to adjusted earnings from operations is based upon attribution of market and other impacts in the quarter and that adjusted earnings from operations is a non-GAAP measure.

The assumptions and methodology for estimated 2010 adjusted earnings from operations as described in detail in the Q1 earnings press release remain unchanged from the third quarter of 2009.

Management is taking a number of steps to drive growth in earnings. We continue to focus on the execution of our business plans, driving productivity gains and managing our liquidity position. Steve Peacher will provide more detail on our invested asset portfolio and address our liquidity position later in the call.

Slide 12 highlights our sources of earnings. The expected profit on in force business is up CAD51 million over the same period last year primarily due to the contribution from MFS which benefited from asset growth on improving equity markets and positive net flows.

The impact of new business is higher than a year ago reflecting strain on sales in our SLF Asia operations as well as sales of the US no lapse guarantee universal life product. The no lapse guarantee product was repriced in Q1 which will result in lower sales and strain in future quarters.

Experience gains and losses reflect the impact of improved equity markets and credit experience in the quarter. Assumption changes of CAD28 million were in line with Q4 levels and there were no single noteworthy assumption changes in the quarter. Earnings on surplus of CAD102 million reflects security gains realized in the quarter and improved significantly over Q1 '09 which was depressed due to economic conditions.

Turning to results by business group on slide 13, SLF Canada reported net income for the quarter of CAD238 million, an improvement over the CAD194 million reported a year ago. Earnings benefited from improved equity and credit conditions as well as the favorable impact of asset liability rebalancing.

In the United States, we reported income of CAD88 million compared to a loss of CAD470 million a year ago. Earnings were impacted positively by stronger equity markets and improved credit offset by new business strain mentioned previously. The strengthening of the Canadian dollar decreased reported earnings by CAD17 million. Earnings from MFS were CAD49 million, up from the CAD28 million reported a year ago. Margins continued to improve and are now at 30%.

Earnings from our Asian operations were CAD4 million, down from the CAD17 million reported a year ago primarily due to unfavorable morbidity experience in Hong Kong and higher levels of new business strain.

Our UK operations reported net income of CAD50 million, reflecting the favorable impact of the Lincoln acquisition and improvement of overall market conditions.

Turning to capital on slide 14, you can see we continued to maintain a solid capital position with a minimum continuing capital and surplus requirements ratio for Sun Life Assurance Company of Canada at 210% in Q1. Looking at our US operating subsidiary, Sun Life US, impairments and downgrades experienced in our investment portfolio throughout 2009 resulted in the need to inject additional capital into this subsidiary. Following the capital injection, the risk-based capital ratio for Sun Life US was 362% above the target range of 300% to 350%.

The CAD400 million capital contribution to Sun Life US consisted of CAD300 million of excess capital paid as a dividend from Sun Life Assurance Company of Canada and CAD100 million from the holding company, Sun Life Financial. Significant cash resources remain at both the holding company and at Sun Life Assurance Company of Canada following these capital contributions.

In the appendix to the slides this quarter, we have included our 2009 embedded value disclosure. We continued to deliver growth in embedded value in 2009. Embedded value from operations which is before changes to the discount rate, currency adjustments, and capital transactions increased to CAD19.9 billion, up CAD2.5 billion, or 14% from the beginning of 2009.

The year-over-year decline in the value of new business reflected higher hedging costs as well as the inclusion of C/I in the 2008 result. However, I would like to note that the last 12 month value of new business as of Q1 '09 improved by 14% due to the impact of product repricing and redesign in our Canadian segregated fund and our US variable annuity businesses. Embedded value per share amounted to a CAD31.31 at the end of 2009.

The updated market sensitivities are found on page 18. These sensitivities highlight our ability to withstand future equity shocks and reflect the positive contribution from our hedging program.

I will now turn the call over to Steve Peacher to provide a review of our investment portfolio.

Thank you, Colm, and good morning. Turning to slide 16, I would like to provide an update on our invested asset portfolio. Sun Life's portfolio was well diversified by geography, asset class, industry sector and issuer. The asset base is very high quality as we do not invest in below investment grade bonds by policy. As of the first quarter of 2010, 96% of the bond portfolio was investment grade.

Our self-originated commercial mortgage portfolio is diversified across 4000 loans and the weighted average loan-to-value ratio for the portfolio is in the 60% range based on our most recent valuations. We have gone to great lengths to ensure that our real estate valuations are as current as possible including hundreds of off-cycle property visits and an increased number of third-party appraisals where necessary. It is worth noting that over half of our commercial mortgage portfolio was in Canada, a market that has held up much better than the United States.

The level of gross unrealized losses declined significantly in the first quarter to CAD2.1 billion from the CAD2.8 billion recorded in the fourth quarter as credit spreads continued to narrow.

Impairments during the quarter were down meaningfully from the fourth quarter. We experienced lower impairment charges on public bonds and importantly our loss estimates on the securitized assets stabilized in the first quarter after increasing throughout 2009. Credit experience in privates continues to be good.

We did see elevated impairments in commercial mortgages in the United States relative to historical experience but this was largely offset by the release of a portion of the sectoral mortgage provision taken in the fourth quarter.

The financial impact of downgrades was also significantly lower in the first quarter versus the fourth quarter. While the overall amount of downgrades did not decline versus the fourth quarter, we did see fewer downgrades in the below investment grade category. Downgrades to the below investment grade rating category have a much larger impact on reserves than downgrades within the investment grade categories.

There is a great deal of focus on investing excess cash during the quarter in the public, private and mortgage markets. While overall cash levels were reduced significantly, we still have a ways to go. An offsetting factor was that in the first quarter we were completing a derisking program that began in the second half of 2009 and this program has now been substantially completed. We are continuing to put money to work in the second quarter and expect that overall cash levels will be down to the CAD8 billion range by midyear.

Turning to the outlook for investment assets for the remainder of 2010 and into 2011, credit markets have improved dramatically. The economies in the United States and Canada have stabilized. Financial institutions have largely been recapitalized. Corporate balance sheets are strong and earnings are improving. We have taken actions to reduce many of the riskier holdings on the balance sheet and we feel comfortable with the adequacy of the impairments and actuarial reserves related to credit losses that are on the balance sheet.

Of course there are caveats. While the residential real estate markets in the United States appear to have stabilized, this stabilization is at low levels and is still fragile. Unemployment which is a key driver is stubbornly high. The commercial real estate market continues to be under stress and the ultimate losses on assets tied to real estate markets in general are difficult to predict with precision.

The situation in Greece and other heavily indebted countries such as Spain and Portugal have heightened concerns about sovereign risk. However, we would note that we have no direct exposure to Greece and very limited direct exposure to sovereign credits in the euro zone. We do have exposure to the UK of course commensurate with the currency profile of the liabilities.

In short, we continue to believe that our credit experience in 2010 will be significantly better than in 2009 but we also recognize that challenges remain in certain market segments and that improvement may not happen in a straight line.

I will now turn the call back to Don for a wrap up.

In completing our formal remarks this morning, I will highlight again the impressive momentum our business has continued to deliver. 23% growth in premiums and deposits across the enterprise, 16% growth in assets under management and significant sales growth in Canada, the United States and China. These results demonstrate the success of our strategy to capitalize on growth opportunities in all of our markets.

We continue to build on our broad distribution reach and relationships with millions of customers by providing innovative products and services that help our customers reach their financial goals with confidence.

And with that, I will turn the call over to Phil for the question-and-answer period.

Thanks, Don. Before we open the call to questions, I would ask each of our participants to limit themselves to one or two concise questions and then to requeue with any additional or follow-up questions. We will make every effort to take all of your questions during the allotted time this morning.

With that, I will now ask Theodora to please poll the participants for their questions.

(Operator Instructions). Steve Theriault, Bank of America-Merrill Lynch.

Thanks very much. First question for Colm or for Steve. Can you quantify for us the reserve release that netted against the gross credit losses in the quarter? I don't think I actually saw the absolute number anywhere.

Yes, Steve, it's Colm here. Let me spend a moment just setting the scene with respect to credit for the quarter. As we have highlighted, the net impact of credit for the quarter was a fairly nominal amount. The amount CAD6 million was the amount that came through in the quarter. But the way I would think of this is that if we break it into its component parts on the mortgage side, we had specific provisions of CAD9 million, and as Steve mentioned and he will comment further on this, the general allowance that we had established at the end of the year was drawn down to offset that because the general -- was set up in contemplation of such losses.

More importantly on the structured investments, this is a large complex portfolio as we have talked about previously and the level of allowances and reserves credit default reserves that we had established at the end of the year was sufficient in our view that the amounts that would otherwise have come through in the quarter as a result of downgrades on specific [Q-SIPS]and as a result of cash flow testing on the individual securities was not recorded in the quarter. And that amount would have been approximately CAD50 million.

So if you think of it by the virtual fact that we had a CAD6 million charge and we had CAD9 million for specific mortgages that we offset with the general allowance and there was approximately CAD50 million made up of downgrades and impairments with respect to structured investments that would otherwise have come through on a net of tax basis, were it not for the fact that we were satisfied with the overall level of default provisions in the reserves based on our lifetime estimated losses for these securities, you can see that the amount grossed up would have been some CAD65 million.

Okay, that's very helpful. And just to clarify from your remarks, when you say you mentioned earlier that you think you are adequately provisioned from a credit standpoint, am I right -- I'm cautious here -- but should we take that to mean that credit losses should trend towards de minimis for the rest of the year even if we see more downgrades particularly of non-investment-grade debt?

Perhaps I could just make an introductory remark on that and then turn it over to Steve. But I think the short answer would be no, we should not anticipate that it would be de minimis on every quarter going forward. The specifics this quarter resulted in that result but I think Steve might comment more on the overall portfolio.

Yes, to break it up a bit, I think that on securitized assets the key factor is our lifetime loss estimates on the securitized assets. And as mentioned while those lifetime loss estimates on the securitized assets increased throughout 2009, that estimate did not increase in the first quarter and we have a reasonable expectation that that lifetime estimate won't increase over the course of the year. Though of course it is subject to many macroeconomic factors that we can't predict.

If you look at the other components of the asset base, we did see meaningful declines in impairments related to public bonds but I don't expect it -- I expect that market (technical difficulty) to continue to face some challenges so I wouldn't expect zero problems in that area going forward during the year.

We continue to have very good credit experience in Canadian mortgages and privates and I would expect that to continue but I wouldn't say that we would have no credit problems there. And on the US mortgage side obviously there continue to be headwinds and I think that impairments will continue to run at elevated levels versus historical experience on the US mortgage side.

So while I will just repeat that we do expect to see much better experience in 2010 versus 2009. I would not expect that to trend to zero.

Fair enough. If I might, one more quick one. How much excess capital would Sun Life possess at quarter end? And more specifically, is there contingent capital at the holding company or is excess capital really to be reverse engineered to solve for a 200 MCCSR at the (inaudible) level?

So let me attempt the answer on that. I am not sure I fully appreciated the question on the reverse engineering. But with respect to the holding company, the excess above 200% translates into CAD900 million of capital and importantly, there is CAD700 million of cash available at the holding company level.

Robert Sedran, CIBC.

Hi there. Good morning. Actually I just want to follow up on that capital question. Can you explain why if there is that level of excess or cash sitting at the holding company level, why you would have taken it out of Canada and dividended it down?

I think that question, Rob, maybe suggests that we are not somehow comfortable with the ending position with respect to the capital at Sun Life Assurance Company of Canada and that at 210%, MCCSR level, we believe that that is a strong level of capital and we are very comfortable with that. And the capital and the cash that we manage is managed on a pool basis so we would draw down from Sun Life Assurance or from Sun Life Financial at the holding company level depending on the circumstances.

But we do believe that the closing position at 210% MCCSR for SLA is a very satisfactory position.

And would you have required [OSTI] approval to transfer capital out of Sun Life Assurance or is that as long as you are sort of keeping it internal somewhere they don't care as much?

Well the capital requirements are fully in accordance with the requirements of the regulator and there is full transparency with respect to the capital positions of the company.

So okay. And one last one I guess just to follow up. So forgetting for a moment the 210 MCCSR, if we assume just at the holding company level -- did I hear you correctly in suggesting you have CAD900 million in available capital at the holding company level that could be downstreamed to either US or Canada?

Yes, that CAD900 million represents the excess above 200%. 200% MCCSR ratio

So that -- that is only Sun Life Assurance Canada or is that the entire --?

Sun Life Financial, the excess above a 200% MCCSR ratio for Sun Life Financial is CAD900 million.

I'm sorry you're speaking about a consolidated capital ratio there?

That's right. At a consolidated level.

Tom MacKinnon, BMO Capital.

Thanks very much, good morning. Just to follow up on this capital thing, that excess -- that is a consolidated MCCSR and that is CAD900 million above 200% MCCSR, is that correct?

That is correct, Tom.

So there is 500 -- if you do the arithmetic on it, there is actually 500 of that 900 would reside in SLA because that is the amount that is over 200% there. Am I correct in that (multiple speakers)?

Yes, when you do the calculation for SLA, the 210% MCCSR, the excess above 200 is 500 million.

So this 700 in cash at the holding company level, there is obviously some liabilities at the holding company level so I would say if this 900 is comprised of 500 at SLA and another 400 sitting in the hold co, is that the correct way of describing this amount over 200?

No, I think I would sort of bring you back to how it is structured so that when we do the SLA MCCSR, we are consolidating the various portions of SLA and we compute the capital ratio and we provide you with the detail there of the excess over 200, well, it is published 210%.

SLF of course holds the operations that are outside of Sun Life Assurance such as MFS and Sun Life US, McLean Budden. And when we do a computation of the MCCSR at that level, we come to an amount as I have indicated where there is 900 million excess and there is cash available at SLF.

So it is not necessarily additive here (multiple speakers)?

No, we're really looking at two consolidations (multiple speakers).

Now that 900, that includes as if you would have run the US subsidiary on an MCCSR basis as well. Is that correct?

That's right. That is calculating the US on an MCCSR basis.

And is there any from the US above 200 on an MCCSR basis? Because obviously we should negate to the extent the US would be above 200 because you have always had to throw money into it anyway.

The characterization of throwing money into it --

I didn't mean it in that context but you want to maintain it at an RBC level, not on an MCCSR level.

Well yes, we do publish the RBC and it is at very solid level at 362. And as you know, we have funded the US in order to maintain that level.

But this 900 doesn't include any -- does it include any impact of the US being -- US sub being over 200% MCCSR or are you able to (multiple speakers)?

No, I haven't deconstructed that and I do not have that available.

And what would that number be if we -- this 900 million number be if we did everything at a 220 instead of a 200 MCCSR?

That is not a number I have available either.

Well just given the context of the new 200 could move to a -- and new capital requirements could be a 220, I think that is something that we would be interested in having.

Yes, I think you make a point really around the increasing capital requirements and I think as we all know, there are a number of initiatives that are underway particularly in Canada with respect to segregated funds where there is a possibility and indeed perhaps a likelihood of an increased capital requirement. We are fully engaged in those discussions with the regulator and more to come on that story.

Okay and then just to follow up quickly with Steve, you said you feel with respect to your securitized portfolio, you don't feel there would be any kind of significant increase in 2010. Now there continues to be slippage in the investment-grade portion of this portfolio.

So how -- what happens if the investment-grade percentage was 90 in the third quarter, then 88 in the fourth quarter, then 86 in the first quarter of this year. If it falls to 80 by the end of the year, are you still comfortable with your statement?

Well, I would say that we are not -- we are basing our estimates on lifetime losses based on a detailed analysis at the security by security level. It is really not -- we feel that looking at ratings is really probably not the best way to judge lifetime loss estimates and it is really based on a much more granular forecast of security level expected experience.

And so to the extent we see more downgrades, our goal is to have a loss estimate that incorporates potential future downgrades. (multiple speakers) The ratings are really not really the driver of our loss estimate. (multiple speakers). It is a more detailed analysis.

And can you walk us through the -- you set up a sectoral provision for US commercial mortgages; you mentioned headwinds going forward. Now you have already released some of that that you set up 90 days ago. Can you walk us through your thinking there?

Well, the sectoral provision was set up in the fourth quarter with the expectation that the US commercial mortgage market would continue to be under stress in 2010 and in fact we have seen that. So I think the fact that part of a sectoral provision was released in 2010 is consistent with the reason it was set up in the first place. I

You know, if you look at the US commercial mortgage market -- it is interesting right now because we continue to see across in the marketplace increases in vacancy rates and pressure on leasing rates and therefore pressure on net operating income at property levels across the marketplace. However, there seems to be a fair amount of money coming into the real estate market. So it may be that valuations have started the bottom but there is still pressure on property level cash flows.

Michael Goldberg, Desjardins Securities.

Thanks. I still want to clarify the numbers that you talked about on the gross amount of impact of downgrades and impairments and the reserve release. So if I have got it correct, there was a CAD9 million specific provision against mortgages and there is CAD50 million release of sectoral reserve on -- is that commercial properties?

No, Michael. Let me try to clarify that. So with respect to the 9 million (multiple speakers)

It would be helpful if you had this in the slide presentation by the way.

Yes, I understand that this is a little complex to go through so let me spend a moment on it again. The CAD9 million with respect to the commercial mortgages is in respect of specifics and we drew down the general allowance that we established last quarter in respect of that item. So there was no net impact to the income statement for that.

With respect to the other items, it is a little bit more complicated in the sense that the amount we were advising you of was the amount that we would have recorded were in not for the fact that we were satisfied with the overall level of reserves at the end of the fourth quarter in respect to structured investments. And those amounts would have amounted to some CAD50 million.

If we were to go back a year ago when there was a lot less certainty when we had a lot less visibility into these particular investments and the economic situation was unfolding very rapidly, and had we been on that basis a year ago, we would have recorded some CAD50 million that we did not take this quarter. So perhaps a better way to think of it rather than saying we drew down the reserves is we did not increase the reserves by the CAD50 million that otherwise we would have increased it.

Okay. And so to put it another way, if you hadn't had that reserve there against the structured credit then you would have had a CAD56 million reserve this quarter. Is that correct?

We would've had a CAD56 million when you add the CAD50 and the CAD6 million that we did report together with the CAD9 on the mortgages had we not established the general allowance for mortgages which brings you back to the CAD65 million I mentioned.

Now separately you mentioned that there are several items included in the CAD27 million assumption changes and other items. Can we get a little more granularity on those items? Are any of them more than CAD10 million?

Let me just give you a quick overview of that so when we look at the (multiple speakers)

-- we can take down numbers also?

I would suggest to you, Michael, that the amounts are not significant. There is a number of pluses and minuses. And one way to look at it is to compare the CAD27 million to the amount for assumption changes. In the source of earnings, there is a CAD28 million pretax which largely accounts for the CAD27 million in the adjusting items, the assumption changes and other. And then there are other pluses and minuses with respect to some of the items that you would expect to see both from an experience perspective and from an adjustment perspective as we bring you back to the level of earnings that we advised at Q3 of last year that was basically our earnings power.

Are any of the offsetting items CAD10 million or more?

A number of them would be in that range but there are no significant or large items that I think we need to discuss.

I suggest that you break this out to avoid these questions in the future.

We'll certainly look at our disclosure around these items, Michael, to make sure that we are providing the required level of detail disclosure.

That would be appreciated. Now also, Steve, you noted that you have still got 4% noninvestment grade bond holdings. And this has been an issue for Sun Life ever since you acquired Keyport a number of years ago. Should we be looking in the future for you to wait for these bonds to mature? Or as markets improve, should we be expecting that you will be selling down these bond holdings?

I think it really depends on a -- it is bond by bond analysis in terms of where there is value relative to the underlying credit profile. So we feel like overall the quality assets is very high, 4% as a percentage of the bond portfolio is obviously we would like it to be lower but it is a fairly low number. And we want to make sure that we are making good economic decisions as we look at the market.

So I would expect to the extent that the market continues to improve there is a likelihood that we might make future sales but we are at a level where we think we can judge each situation individually based upon the underlying value and the price we get for the bond.

So on balanced, what does that mean? Does it mean that you are going to -- that you are more likely to hold to maturity or sell?

I think it depends if we can get the value that we think is appropriate. So what I would say another way is that if we have securities that may be trading at a discount but we are highly confident in our ability to recover par, then we would be less likely to sell of course. So it is strictly depends on the value we can receive in the marketplace relative to what we think the securities will recover over time.

Okay. And I have got one last question for Don. Don, are you managing the Company with the objective to maximize operating profit or to maximize total profit?

I think that is a distinction, Michael, that might not be a major driver in the sense that we endeavor to manage the Company to deliver the shareholder results that we have set out in our MD&A and also to run a good business.

I am not sure I understand your answer.

We manage the Company, as I said, to achieve the objectives that we have set out in some specificity in our MD&A and we are also endeavoring at all points to improve the quality of our business.

Okay, thank you.

Colin Devine, Citi.

I have got a couple of questions. First, I think on the capital, you can probably save us all a lot of time on this call is just as in the US, you published the numerator and denominator for the MCCSR numbers and then we can all do the math ourselves and come up with what we think is excess capital based on target MCCSR ratios.

Moving beyond that though for Don, looking at the dividend, I want to revisit this again. When we look at the payout ratio today and that you have now had to contribute capital down into the US, how much longer can Sun continue at its current earnings level to maintain the dividend where we are right now?

Then a question with respect to the US and the negative spreads there. Now maybe you are just the only one company I've seen this for but I haven't come across any others that still have negative spreads. When can we expect that to return to positive and can you discuss what your target pricing is on that for us?

And then lastly, there is really no talk on M&A that doesn't sound like there is a whole lot of excess capital even if a 200 MCCSR is the number, is M&A really off the table right now?

Let me and endeavor to address the first and third of your questions. So specifically on the dividend. I have been responding to this question for some double-digit number quarters now and in fact, in this particular quarter, a recoverage of the dividend is roughly in line with historical norms where when we were buying back shares plus paying a dividend, we were roughly at the 50% level.

The Board of Directors of Sun Life assesses the capital position of the Company and whether the dividend should be paid at whichever level each quarter and they were making a decision this particular quarter to continue the dividend at CAD0.36. So my answer is not fundamentally different from what it has been on the last number of quarters.

Okay. And the rating downgrade from S&P is not a factor in that you are not under pressure from the rating agencies to address this?

We are reasonably confident in our position on capital overall and that includes our relationships with the various rating agencies.

So let me move on to your third question so that someone can come back and answer the second question. But your third question on M&A is there continues to be as there usually is significant activity in the market behind the scenes. Obviously there is a couple of very prominent M&A transactions going on right now under way. And I won't comment on the specifics of these but they clearly are indicative of activity in the market place at the high end. We are as always have a number of changes and opportunities in the inventory and we look at these one by one. We are more driven as we've said in the past by fit and size.

But we are in the deal stream, we are active and our silence is merely indicative of the fact that these are confidential, still underway situations and of course as you very well know, there is a very high rate of attrition between activity and result in the M&A field.

So we will now move to the second part of your question and Keith I believe will answer that.

This is Keith Gubbay. I would say that the reported number includes the effect of credit losses and impairments but does not include the release of reserves. So the credit losses are still being assessed in that number.

So given this was a quarter of unusually low credit losses, is it fair to say then that number is likely to get somewhat worse before it gets better?

Well, I think Steve spoke to the credit environment and the uncertainty of that environment. So I think we'll continue to see credit losses come through on the structureds and there may be other areas where we have credit losses. But the reserve releases are just not reported in that line so the earnings effect is a little different than is implied by the net spread number.

Doug Young, TD Newcrest.

Good morning. Just I guess there has been discussion on the commercial mortgage portfolio and I know in the US there has been discussion in NAIC about changing commercial mortgages and the capital charge for that. And I know it is still pending but have you done any work in terms of if that was adopted what the impact on our your RBC could be?

It is Colm Freyne here. It is a little early for us to be able to comment on that. We are certainly very much reviewing the developments and we will come back to that later in the year.

Okay. Don, I guess maybe big picture, you know if we take a look at this quarter and we assume that credit remains benign and similar credit that we have seen in this quarter. I mean is Q1 really indicative of what we should expect in terms of earnings power from Sun Life?

Well, I won't deluge you with the various caveats that are going on in the economic environment which obviously remains highly volatile and highly uncertain particularly in the euro zone. Given an environment for the rest of the year that resembles what we saw in the first quarter, then I think we would expect that the various numbers reported in the rather lengthy title of adjusted earnings with various other qualifications I won't repeat is broadly representative of our view for 2010 as a whole.

I guess where I am trying to go at is there wasn't -- I mean this wasn't -- there wasn't a lot of additional positive items that we can't get at or that we don't see that was positively impacting. That is not the case essentially?

I think we have had a pretty detailed and granular discussion on some of the specifics around credit and there were not any other major items. This was a relatively straightforward quarter if there is such a thing recognizing the complexities overall of our business.

Okay, just lastly, just your interest rate sensitivity did change again in quarter. Just looking for any comments as to why that would be?

It's Mike Stramaglia. Earlier in the presentation, Colm Freyne referred to the extensive review of the structured investment portfolio that management undertook during the quarter. Part of that initiative, we also reviewed the way that structured investments were being modeled for purposes of determining the sensitivities that you referred to.

Given the nature of those assets, there is obviously a complex set of interactions between interest rates, pre-payment speeds, future credit, reserves, net income, etc. They are obviously a lot more complex than modeling interest rate sensitivities on regular coupon paying bonds.

As a result of that review, we enhanced our methodologies for determining those sensitivities and the Q1 results reflect those changes and we think they provide a more appropriate reflection of the Company's interest rate sensitivities for net income.

And you can see the end result is that the interest rate sensitivities have returned to what I would call a more, quote, normal signature where we do see the losses in the down interest rate environment and then gains in the rising interest rate environment. It doesn't reflect any fundamental repositioning or tactical trading in the portfolio.

Okay, so this is essentially what we should be expecting. This isn't something that goes on every quarter in terms of a review. This was something that was unusual?

I think, yes, given the complexity and impact of the structured investment portfolio, it is not something that you would expect every quarter.

Eric Berg, Barclays Capital.

Thanks very much and good morning. My first question relates to the establishing of the specific provisions for real estate. When you did that, and concurrently took down your sectoral provision, is that essentially because that is how the accounting is supposed to work? Namely a generic or a omnibus provision is initially established and then is replaced with no earnings impact when the specific provision is established? In other words, one replaces the other. Is that sort of how the bookkeeping works -- is supposed to work here?

It's Colm here. Let me comment on that. So we do a very detailed review as Steve has mentioned with respect to the mortgages. And at certain points we might determine that we need a sectoral allowance or a general allowance because we have not completed some of the specifics reviews. So at the end of the fourth quarter, we were at a position where we thought with the level of uncertainty and the deterioration in the mortgage portfolio and the mortgage environment in the US that we would in addition to the other specifics that we incurred on an ongoing basis that we would set up a sectoral allowance which we did.

And then this quarter we drew it down. There is still three-quarters of so of the provision is still available to us and over the course of this year, we will continue to conduct the specific reviews and if indeed we need to, we would consider topping it up again. But this is a quarter by quarter review.

I guess my question though is why would you be essentially signaling that things are getting better? It just seems to be contradictory that in one point or in one action you would be drawing down a reserve booking income as a result which would suggest that you are increasingly confident about the outlook for commercial real estate but concurrently established specific reserves. Those two moves taking down the general increasing specific would seem to be at odds.

Well let me preface the comments here by saying that the amount in respect of the mortgages was CAD9 million so this was not a significant amount and our ongoing review of the mortgage portfolio I think I would ask Steve to comment on that and his views on what is happening in the broader environment.

Well one comment I would make in terms of the process we went through is that in the fourth quarter we looked at in light of the environment, we looked at the portion of the portfolio which we could -- where we couldn't identify specific provisions but which based on loan-to-values and debt service coverage ratios we thought that some portion might have an issue going forward. And it was really looking at that pool that led to the establishment of the sectoral provision.

And then as we got into the specifics of this quarter, some of the loans in that pool we actually were able to identify with specificity that there were going to be problems. So in other words, the loans where we identified the specific provisions were part of the broader pool that we looked at when we established the sectoral provision. So I think it did make sense to offset those specific provisions with a sectoral provision that was established in light of the likelihood of stress continuing in 2010.

And you know we continue to believe that the impairments we identify will run at elevated levels over the course of the year just given the environment. And we tried to anticipate as much of that as we could in the fourth quarter with that provision.

Okay, my second and final question relates to the minimum continuing capital and surplus requirement discussion that we have had. In the US of course, the equivalent RBC, is sort of uniquely an insurance company concept. It has nothing to do with holding companies it has nothing to do with affiliated entities. I sort of have a two-pronged question. What is the relevance if any of the MCCSR to Sun Life US which I believe is a Massachusetts company. Wouldn't it be governed uniquely by RBC or is the MCCSR relevant?

And this concept of a consolidated MCCSR ratio covering sort of all sorts of things that have nothing to do with insurance, it is not something that exists in the US. Can you explain this consolidated concept because again in the US, the equivalent RBC refers uniquely to insurance companies.

I think you make a couple of very good observations there I think with respect to the first item, I would say that the RBC ratio is the key ratio for Sun Life US, no question about that.

And then with respect to the consolidation, what we attempt to do there is to consider all of the operations of Sun Life Financial, the holding company in accordance with an MCCSR framework although I agree with you that the framework itself doesn't lend itself to operations that are other than insurance operations. But we do consolidate everything in order to arrive at a consolidated MCCSR ratio which we do track and monitor and we have had a discussion around that earlier in the call.

And that is a framework that we have here in Canada. We do provide that information to our regulator here in Canada. So that is the framework and that is how we operate. It is not identical as you say to the situation in the US.

And this consolidated ratio is relevant to your calculation -- is a critical driver of your calculation of excess capital?

It is certainly a ratio that we track and monitor and we do provide you with that information, correct.

Darko Mihelic, Cormark Securities.

Hi, good morning. Just a question on the movement of or I guess employing the excess liquidity. So if we get to 8 billion by midyear, my question is could we think of that as saying okay, there is about CAD2 billion being deployed at maybe a 3% annualized rate higher than what you are at now. Where would that flow in the income statement? My suspicion is it would be capital earnings on surplus and a little bit of experience gains. But can you walk me through how this affects the income statement for Sun Life?

Yes, broadly speaking you are correct that the amount of the excess to the extent that it is not backing insurance liabilities will flow through in surplus. And to the extent that it is backing insurance liabilities to the extent that we have not invested the funds in a particular quarter that comes through as lower investment experience in the quarter. And indeed we did have some of that result this quarter.

And is CAD8 billion the right number? I noticed in the past with almost a similar sized balance sheet, you were as low as CAD6 million. So could we expect that as things will quote unquote normalize that you could even push that even lower?

Yes, I think the overall requirements around liquidity obviously people have recalibrated some of their views around that in light of the last couple of years but I think there is a possibility perhaps to drop it a bit below CAD8 million. We do have a maturity that comes due in July so that will also draw down on liquidity.

And last question, with respect to MFS, 30% operating margin. In the past it has been higher. My suspicion is that it is mixed but is there anything that you are doing to increase your margin as AUM rises? Or is this purely a mix issue and is there is really nothing on at MFS that suggests that we should look forward to a higher operating margin?

This is Rob Manning. I think in terms of the margin all asset managers going forward are likely to have a lower peak margin than in the past. And part of that is the infrastructure requirements and the regulatory requirements in both the retail and the institutional business. And particularly the fact that B shares which at some point maybe I could have a cup of coffee with anybody who is interested sort of change the economics of a retail mutual fund business.

But we do think that trough to peak margins are going to be lower but still in the mid-30s is something that we would target. For MFS, institutional margins tend to be slightly lower than retail. So one of the things to think about in terms of mix is both international assets coming in which our higher margin and retail particularly offshore which our higher margin than our institutional business.

So it will evolve. It is lumpy, it moves around quite a bit but I think the statement of peak asset management multiples is actually a earnings coming down from a margin point of view is a good way to think about it.

Mario Mendonca, Genuity Capital.

A question for Steve Peacher. Your discussion around the structured products in the MD&A perhaps not the MD&A but in your press release, you referred to low levels of subordination on some of these structure products and I suppose the crisis taught us that some of these products are kind of an all or nothing. Is there anything you can offer us to give us confidence that you are not sort of close to that line the all or nothing line on the CMBS and the non-agent CMBS or maybe perhaps what is the level of subordination?

Well, I don't have a figure that would give an overall level of subordination across either of those portfolios. It varies greatly security by security. So we have some securities where the subordination is multiples of what it might be in other securities. And to reiterate how we look at the analysis we go security by security, we model out the underlying the potential losses on the underlying collateral pool and then we run that through the cash flow hierarchy of the specific security and apply that to whatever subordination exists. And also the other relevant factor is the thickness of the traunch that we happen to own in a given security.

Those two factors will determine how sensitive the potential losses to a change in the key factors that drive the expectations of collateral performance. So I don't have an overall number. It varies greatly by security.

Perhaps you could talk then about the key factors that go into the model and drive those expectations.

Some of the key macroeconomic factors -- there are both macroeconomic factors and then there are specific factors relevant to specific securities. So macroeconomic factors would be unemployment rates and home price declines. And more specific factors would relate to the obviously the subordination in a given transaction as well as the geographic dispersion of the mortgages in the collateral pool. And on the commercial mortgage-backed side, it would very much be relevant -- would very much be a driver would be the specific properties underlying the collateral pool because that can be much lumpier than a residential mortgage backed security.

So if we take the two macro factors that we can all look at, unemployment and housing price declines, what sort of delta from where we are now would we need to see before we have reached that line?

Well I don't know if I have a specific quantitative answer to that question but what I can tell you is that we've tried to make pretty conservative assumptions. So we have assumed that unemployment stays at current levels for an extended period and we have assumed that home prices for instance actually have some deterioration from year-end levels.

So I think we have tried to build in conservative assumptions on those two key drivers. (multiple speakers). Further home price declines across the US from year-end levels. Year-end '09 levels.

Theodora, this is Phil Malek. I think we're out of time for today's call. I would like to thank all of the participants on today's call and note if there are additional questions we will be available after the call and should you wish to listen to the rebroadcast, it will be available on our website later this afternoon.

With that, I will say thank you and good day.

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