Sun Life Financial Inc (SLF) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Sun Life Financial second-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, August 5, 2010 at 10 a.m. Eastern Time. I will now 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 second-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 second-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 second-quarter financial results. Following Colm, Wes Thompson, President of Sun Life Financial US, will provide an update on the US business. We will then follow with a question-and-answer session. Other members of management are also available to answer your questions on today's call, including Jon Boscia, President of Sun Life Financial; Dean Connor, Chief Operating Officer of Sun Life Financial; and Rob Manning, Chairman and CEO, MFS Investment Management.

Turning to slide 2, 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 reported net income of CAD213million for the second quarter of 2010, down from the CAD591 million reported a year ago. The decline in earnings reflects very different market conditions as compared to the second quarter of 2009. Weakness in equity markets, as well as unfavorable movements in interest rates, resulted in the need to strengthen reserves this quarter. This contrasts with the strong equity market recovery and rising interest rate environment of a year ago. Colm Freyne will provide a more detailed analysis of the financial results shortly.

While adverse market experience had a negative impact on the financial results, our operational performance remains solid. We continue to manage the business to mitigate the effects of a volatile economic environment. Our actions include changing product design and mix to reduce risks and increase profitability, as well as focusing on expense management.

At the same time, our businesses are building their market positions through the development of innovative products to meet the changing financial needs of our customers. Wes Thompson will review our US operational results later in the call. Meanwhile I will share some highlights from our other business groups starting with slide 5.

Excluding the impact of currency, our top-line momentum remained steady with an increase in premiums and deposits of 5% over the prior year. Mutual fund deposits were up 40% due to strong retail net flows at MFS. Other wealth products were down 23%, mainly due to lower fixed annuity sales in our US operations as we deemphasized this business. Total premiums and deposits in Canadian dollars were down CAD1 billion with currency movements offsetting the strong growth from retail sales at MFS.

Turning to our Canadian operations on slide 6, our core strengths in Canada were reflected in the operating results again this quarter. Individual insurance sales of CAD52 million represent an increase of 24% over 2009. These strong sales were driven by higher Sun term sales, which also improved the profitability of our product mix. Sales of fixed interest products, including accumulation annuities, GICs and payout annuities increased 19% from the same period a year ago. In group wealth, pension rollovers increased by 21% to CAD233 million with a four-quarter average retention rate of 50%.

In June, two new Sun Par products were launched, extending the solutions available to Canadians seeking to protect their families, save for retirement or optimize their estate planning. These products will generate enhanced value of new business and further shifts the mix of business away from Universal Life.

On slide 7, you can see that MFS delivered another quarter of solid results despite volatile market conditions with net flows of $3.7 billion, including $2 billion of net retail flows. This represents the sixth consecutive quarter of positive net flows for MFS. Margins remain steady at 29%.

MFS investment performance remains strong with 83% and 86% of fund assets ranked in the top half of their Lipper categories based on three-year and five-year performance. Performance in the global international category was particularly impressive with 98% of fund assets ranking in the top half of their three and five-year Lipper averages as of June 30, 2010.

MFS continues to garner recognition for their achievements. You may recall, MFS was named as the number four fund family over a 10-year period for 2009 by Barron's. In a recent Morningstar study, MFS was ranked fifth overall of the 30 largest US mutual fund companies based on investment performance, management retention, manager tenure and (inaudible) stewardship.

Turning to Asia on slide 8, Individual Life sales were strong in all markets, excluding India, which continues to be impacted by ongoing major regulatory changes to individual unit-linked products. Life sales in China were up 92% driven by sales in the bank assurance channel. Sales in Indonesia and the Philippines were up 17% and 21% respectively.

I am also pleased to note that the China insurance regulatory commission has approved the restructuring of Sun Life Everbright into a domestic insurance company. We believe this restructuring will enhance Sun Life Everbright's distribution and growth and improve our long-term prospects in the Chinese financial services market.

Before I turn the call over to Colm, I am pleased to announce that the Board of Directors of Sun Life Financial approved a quarterly shareholder dividend of CAD0.36 per common share, maintaining the same level as the previous quarter. And with that, I turn the call over to Colm.

Thank you, Don and good morning, everyone. As Don previously mentioned, in the second quarter, we continued to execute on our business strategies and to grow the top line in a number of our businesses around the world despite challenging market conditions. On slide 10, we have provided a reconciliation of second-quarter net income of CAD213 million to our estimated adjusted earnings from operations of CAD375 million. This result is within the estimated range of adjusted earnings from operations, which we provided in the third quarter of 2009.

The impact of declining equity markets in Q2 resulted in an adverse impact on income of CAD187 million. That's CAD0.33 per share. Interest rates also dropped significantly in the second quarter, resulting in an adverse impact of CAD99 million, or CAD0.18 per share. These impacts were in line with our disclosed market risk sensitivities. The S&P 500 index declined by 12% during the quarter and it is of interest to note that equity markets have rebounded since June 30 with the index up by 9% in the third quarter to date.

The impact of currency was an additional negative CAD14 million for the quarter. Offsetting these negative impacts was a CAD72 million tax benefit, mainly due to a favorable tax judgment in our UK business. The impact of investing activities on policy liabilities contributed a positive CAD39 million to earnings, and other net experience gains and assumption changes contributed a further CAD27 million this quarter.

Credit experience was in line with the expected level for the quarter. The pace of downgrades slowed and we also experienced modest recoveries in the corporate bond sector on bonds which we had previously impaired. While the economic recovery remains fragile and challenges exist in certain market segments, we are satisfied with the overall adequacy of our provisions for credit losses. We continue to believe that our credit experience in 2010 will be improved over the level experienced in 2009, barring significant changes to the macroeconomic environment.

It is important to note that this reconciliation from reported net income to adjusted earnings from operations was based upon attribution of market and other impacts in the quarter and that adjusted earnings from operations is forward-looking and a non-GAAP measure. The assumptions and methodology as described in detail in the second-quarter earnings press release remain unchanged from the third quarter of 2009 when these were first presented.

On slide 11, we provide details on our sources of earnings. Expected profit on in force business of CAD460 million is down CAD76 million over the same period last year, mainly due to the significant appreciation of the Canadian dollar. The release of previously established margins for higher levels of defaults in the second quarter of 2009 also contributed to the decline.

The negative impact of new business is improved from a year ago, reflecting lower strain on sales in our SLF Asia operations, as well as lower sales of the US no lapse guarantee Universal Life product. Experience losses of CAD354 million reflect the negative impacts of weaker equity markets and the decline in interest rates in the quarter, offset by the positive impact of investing activities on policy liabilities.

Assumption changes and management actions of CAD22 million are in line with the level reported in Q1 and there were no single noteworthy assumption changes in the quarter. Earnings on surplus of CAD93 million increased by CAD21 million from a year ago, reflecting security gains on available for sale assets realized in the quarter. We continue to reinvest a portion of the excess cash position into higher-yielding assets, which will benefit earnings on surplus in future periods.

The tax benefit of CAD84 million in the quarter resulted from the low level of pretax income and the favorable resolution of certain tax issues, primarily the litigation in respect of tax loss benefits in the UK.

Moving to our business group results on slide 12, SLF Canada reported net income for the quarter of CAD146 million, down from the 210million reported in the second quarter a year ago as a result of the volatile market conditions this quarter. The majority of the adverse capital market impacts were reflected in the earnings of our US operations where we reported a loss of CAD95 million this quarter. The significantly larger decline in US interest rates compared to Canadian interest rates in the quarter contributed to this impact.

The 10-year US treasury dropped 89 basis points; whereas the decline in the 10-year Canada bond was 48 basis points. Earnings from MFS were CAD47 million, up 46% from a year ago as a result of higher average assets under management. Margins at 29% were up from 23% a year ago. Earnings from our Asian operations were CAD23 million, up from the CAD19 million reported in the second quarter of 2009 due to the growth of the in force business and improved results in India. The lower level of sales and reduced level of new business strain contributed to a positive net income result for India this quarter.

Our UK operations reported net income of CAD102 million compared to a loss of CAD50 million last year. The results this quarter reflect the positive impact of the Lincoln acquisition, as well as the CAD53 million tax benefit from the favorable tax judgment referenced earlier.

Turning to capital on slide 13, you can see that our minimum continuing capital on surplus requirements ratio for Sun Life Assurance Company of Canada was 210% at the end of the second quarter, the same level as at the end of Q1.

During the quarter, we raised preferred shares of CAD280 million at Sun Life Financial. The proceeds were contributed to Sun Life Assurance Company of Canada, which helped offset the impacts of capital markets. Significant cash resources remain at both the holding company and the operating company as at June 30.

I would like to highlight the improvement achieved and the value of new business. The last 12 months' value of new business of CAD735 million; represents an improvement of CAD207 million, or 39%, over the same measure a year ago. Product repricing and redesign in our US variable annuity business, higher levels of retail mutual fund sales at MFS, as well as the shift to a more profitable product mix in Canada have all contributed to this significant improvement.

The updated market sensitivities are found in the appendix on slide 20. These sensitivities highlight our ability to withstand future equity and interest rate shocks and reflects the positive contribution from our hedging programs.

Finally, I would like to provide an update on one element of the Company's conversion to international financial reporting standards or IFRS. Under the new standards, impairment testing of goodwill will be conducted at a more granular level known as the cash-generating unit compared to the reporting unit level under existing Canadian generally accepted accounting principles. We anticipate that we will record a net goodwill impairment charge of approximately CAD1.7 billion to be recognized in opening retained earnings upon transition to IFRS at January 1, 2011.

This impairment is a non-cash item and will not impact the level of regulatory capital or the calculation of MCCSR as goodwill is already deducted from regulatory capital under the capital framework. While this goodwill impairment charge required under international financial reporting standards is of a significant amount, it does not impact the Company's strategic direction or it's overall financial strength. I will now turn the call over to Wes Thompson.

Thanks and good morning, everyone. Over the past 18 months, we have been delivering against our business strategy in the US to build scale by bringing greater focus and alignment around our markets, products and distribution capabilities. As part of that effort, we continue to emphasize areas of the business that provide the greatest potential for profitable growth. At the same time, we have discontinued new business in areas as fixed index and book value annuities, which do not fit with our growth strategy.

Our actions have strengthened the underlying fundamentals of the US business and improved our risk profile. I will now provide you with a brief update in each of our business lines. On slide 15, you can see that in Individual Life, we have reduced the sales of no lapse guaranteed Universal Life products to 30% of core sales in the second quarter, which is down from 95% in 2007.

To further accelerate our shift away from this business, we are exiting the NLG market so that we can focus our capital on markets with greater potential for sustainable profitable growth. NLG continues to be a price-driven market, which compresses margins and presents limited ability to differentiate our offerings. This decision to exit the NLG market will reduce new business strain in the near term. We also expect to see improving ROE and reduction to our interest rate sensitivity longer term as we continue to shift the business mix.

We expect to see some pressure on overall Individual Life sales over the next year while we build momentum in other products and distribution channels. We have taken deliberate steps to prepare for this transition, which has helped us maintain sales levels in our core products thus far. We have grown our presence in the small-business market with our Sun [Executive] product, which has accounted for 55% of core sales year to date.

We have leveraged our success in this market to create a similar current assumption UL product in the individual market, which we launched in June. We are also developing capabilities in the linked benefits space, a high-growth market where few competitors play and Sun Life's financial strength will provide a competitive advantage. We will continue to expand our life wholesaling force to support this growth initiative.

In our annuities business, we substantially reduced the risk profile of our VA business, improved wholesaler productivity and in the first quarter, the most recent period for which marketshare data is available, we achieved a top 10 market position. As you can see on slide 16, 67% of our wholesalers have been with Sun Life for less than two years. It is important to note that tenure is a key driver to productivity. As such, we still have considerable runway for productivity gains. Variable annuity sales in the second quarter were up 7% year-over-year despite the volatile markets. The sales reflect continued improvement in wholesaler productivity of 15% year to date.

In the group business, we continue to invest in our strong, scalable platform, especially as we position ourselves for growth in the voluntary market. The voluntary business makes up about 25% of our in force business and we recognize the importance of education and enrollment in the voluntary market and we will continue to invest in our people, processes and technology as we move forward.

The group business has been resilient through the recession; although continued depressed economic conditions have pressured our results this year. In the face of intense competition, we have maintained our pricing discipline, which has contributed to a decrease in sales year to date. Last quarter, we reorganized the group distribution to bring more product specialization and better alignment with our markets. This was strategically implemented in the historically lowest sales quarter of the year to better position the salesforce for the year-end drive. We are seeing improvement with second-quarter sales more than doubling sequentially. It is important to note that our group sales are seasonal and billed throughout the year with 70% historically recorded in the second half of the year.

One of our top priorities since we told you about the US strategy in 2009 has been to maintain our focus on expense management and operational efficiency. On slide 17, you can see that we have made improvements in both variable annuity new business expense and maintenance fees despite significant investments over the past year.

While we will continue to invest in key areas of the business, including distribution, brand, technology and risk management, we expect direct expenses to be flat to down. The bottom line is we are executing on our strategic priorities, which are focusing on markets and products that offer profitable growth, building stronger distribution capabilities, strengthening our risk management capabilities, increasing brand awareness, and improving operational efficiency. With that, I will turn it over to Don for his concluding remarks.

Thank you, Wes. Just say in closing, our earnings this quarter were depressed by challenging economic conditions. We continue to take action to mitigate these challenges, including building a more profitable product mix and taking a tough line on expenses. We continue enhancing productivity in our distribution channels and build our brand around the globe. Management is executing on strategic growth initiatives to capitalize on key secular trends favorable to our industry. At the same time, we are focused on managing risks and maintaining a strong capital position. And with that, I will go back to Phil for Q&A.

Thank you, Don. Before we open up 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 your questions during the allotted time this morning. With that, I will now ask Theodora to please poll the participants for questions.

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

Hi, thanks very much. First question, you talked a bit about new business strain. Strain was down by about half relative to the last couple of quarters. You talked about Asia and US being positive contributors there. But can you talk a bit about the sustainability? Is that improvement in Asia sustainable? Is this a new range for new business strain or might even get better with the exit from the lapse guarantee?

I will take a first go at that response. So I think the level of business strain does vary quarter to quarter. Certainly, the impact in Asia this quarter was impacted -- the result this quarter was impacted by the reduced level of sales in India and as was mentioned regulatory developments in India have contributed to a slowdown in sales. So we would expect sales in Asia to pick up as that regulatory environment settles down. However, as you mentioned, the no-lapse guarantee decision and the exit in that particular space will reduce the strain on that product.

But directionally from here, do you still expect it to be relatively lumpy or have we seen a downlink in strain that is at least partially sustainable?

I think the current level is a reasonable level, but it will vary quarter to quarter depending on the absolute level of sales activities across the entire enterprise.

That's fair. A couple of things on capital and I apologize; I jumped on the call late, so I may have missed this. Can you update us on the contingent or excess capital at the holding company? And a related question, was any capital put into the US subsidiary this quarter?

So in respect of the capital position, we have commented in the past on the level of the capital at SLF, the holding company, above the 200% MCCSR level and at June 30, that amounted to CAD250 million. It is interesting to note that the equity market rebound I referenced earlier in the quarter to date would on its own have contributed to an increase in that capital level to approximately CAD500 million if we were to measure it as of today's date. We did not contribute any capital to Sun Life US in the quarter. Sun Life US continues to be at a healthy RBC ratio. We manage Sun Life US's RBC ratio in the 300% to 350% range. At year-end, it was 362% and at Q2, while we have not absolutely finalized the calculation, it is consistent with the year-end level, slightly above.

And the change at the holding company level, so that CAD250 million is down from I believe CAD700 million maybe last quarter?

Yes, it was slightly above that last quarter.

Now is that a function of putting capital down into the Canadian sub or just a function of the math relative to the 200 --?

It is a function of the math. It is the calculation on an MCCSR basis of SLF's capital, which includes the consolidated results of Sun Life US, which, of course, in the US is managed on an RBC basis, not on an MCCSR basis. There are fundamental differences between the two methodologies.

Thanks. And one last one if I might, probably for Dean and again, you may have mentioned this in your comments. Group retirement services, premiums down or sales down 62%. Certainly there is some seasonality in those numbers, but that looks pretty extreme to me. And looks to be in contrast at least to an extent to some of the peer results I have looked at. So can you give us a bit of color on what is going on there and what the pipeline looks like for the second half of the year?

Well, Steve, I think the -- it is not so much seasonality, but there was, if you will recall, a significant amount of activity in the market a year ago when one of our competitors sold their business and exited the market. And we were successful in winning a significant share of that business and that helped our sales in the same quarter last year. And so on a year-over-year basis, you would see that coming through.

As you indicated, it is a lumpy business. The sales come through in large chunks. We look ahead -- I won't comment on specific sales, but there are some good opportunities and some pieces of business coming our way that we are confident about and we continue to see this as a growth business for us. We continue to record a large percentage of the sales activity in the Canadian market with over I think 50% of the market activity in the first six months of the year.

Thanks for that color. I will leave it there. Thanks very much.

Tom MacKinnon, BMO Capital Markets.

Yes, thanks very much. Just a couple questions about the investment portfolio. Just noted the investment-grade concentration on the structured product portfolio continues to fall quarter over quarter. I think it was 86% first quarter; it is 84% this quarter. I think, Colm, you mentioned that had you followed your general rule of increasing provisions when a portfolio basically -- if the below investment-grade concentration increases, there would have been a hit and I think that number was something like CAD0.09 in the first quarter. If you can tell us what that is in the second quarter and then I have a follow-up.

Well, let me answer the accounting question first and then I will hand it over to Steve Peacher to comment on the performance in the portfolio. When we talked about the results in the first quarter, we were really bridging you from how we were doing things in 2009 over to the methodology in 2010. So as we continue through 2010 with respect to the structured investment portfolio, we are not computing and measuring for you the amount of the impairment had we not changed our approach.

Our approach on this particular portfolio is to look at it from the perspective of a total lifetime loss estimate and to compare that to the amount of reserves and impairments that we have taken. And to the extent that we have sufficient reserves and impairments relative to that expected lifetime loss, we are not adding to the reserves in the quarter. So with that, I would hand it over to Steve.

Thanks, Colm. Tom, this is Steve Peacher. As Colm mentioned, we decided, given the unique nature of these assets, that the most straightforward and the best way to look at these and account for these going forward was to focus on what our lifetime loss estimates are for these securitized assets.

I think the key point is that our lifetime loss estimates have not changed since the beginning of or since the end of 2009. So in other words, our lifetime loss estimates at the end of the second quarter were the same as our estimation of those lifetime losses at the end of the year. And they were also the same at the end of the first quarter.

I would say that we do -- we review those estimates monthly. They are based on very detailed models that look at the actual loan level estimations within the underlying collateral and I would also say that the macro environment, unemployment levels, GDP growth, etc. are very consistent with the assumptions inherent in those losses.

So of course, the real estate markets, both residential and commercial in the US, are not out of the woods and so those lifetime losses, those lifetime loss estimates could change though I don't see anything at the moment that would suggest that they would.

Okay. So even though the rating agencies seem to think otherwise over the last six months, you guys are comfortable with your lifetime loss estimates?

Well, we continue to identify specific impairments. So as you know, many of these securities that ultimately are likely to incur losses are still current. And so we are making assumptions that, at the end of the day, what will the ultimate losses be on these securities. But each quarter, we identify specific securities, which may have hit a trigger point and we take impairments against those securities, which are then because -- as long as the lifetime loss estimates remain stable, we will release reserves to offset those specific impairments. So I think that is consistent with the fact that you do continue to see downgrades on these securities.

Okay. And a follow-up question I guess with respect to the mortgage portfolio (technical difficulty) think of the commercial mortgage portfolio. You took a CAD55 million sectoral provision. I am looking at the mortgage impairment gross up CAD64 million quarter over quarter and net up CAD62 million quarter over quarter. Are you still comfortable -- first of all, did you release any more of this mortgage, commercial mortgage sectoral provision in this quarter? And secondly, how do you comment on the fact that the impairments are up significantly quarter over quarter yet there hasn't been any kind of significant credit hit?

This is Steve again. Let me comment on that. In fact, we did release a portion of the sectoral provision in the second quarter as we did in the first quarter. I would say that the level -- the specifically identified impairments gross before the release of the sectoral provision was essentially flat in the second quarter versus the first quarter. So the level of our impairments identified in the commercial mortgage portfolio were flat in the second quarter versus the first quarter and we did release a portion of the sectoral provision. There is approximately CAD22 million pretax left in that sectoral provision.

And I would say in general regarding the commercial mortgage portfolio, of course, those impairment numbers are dominated by the US portfolio and I would say that the commercial real estate markets continue to be under stress in the US. The same is true for our portfolio and I wouldn't say that we have seen that pressure abate.

Your comment on the gross carrying value of impaired mortgage is flat quarter over quarter?

No, the amount of new -- what I meant to say was that the amount of new impairments identified in the quarter was flat with the amount of impairments, new impairments identified in the first quarter so that you would be increasing the amount of -- you are identifying new loans for impairment, but the amount of impairments you are identifying in the second quarter was consistent with the amount of new impairments we identified in the first quarter.

I will have to follow up on that because the numbers certainly indicate a big jump in terms of the gross and net impairments, mortgage impairments from the first quarter versus the same change from the fourth quarter of last year.

And then finally with respect to core insurance sales in the United States quarter over quarter, individual insurance sales, significant falloff. I know you have been bridging away from this no-lapse guarantee product for some time now. How do you account for the fact that it looks like industry sort of sales might be somewhat flat, but your core domestic individual insurance sales are down significantly quarter over quarter?

This is Wes Thompson. The quarter-over-quarter decrease is a direct reflection of our pricing increases that were implemented in the first quarter for NLG that had a significant impact as we went into the second quarter and quite frankly, the desired impact, as we now, as you know, have announced exiting of the NLG business. We are seeing growth in our other product areas, which will be the areas of growth for us going forward.

What were the percentage of sales that were NLG in terms of core in the first quarter?

The percentage of sales NLG to our total sales in the quarter was approximately 30%.

In the first quarter as well?

In the first quarter, it was higher as a total percentage. I'll get that information for you in one second here, okay, first quarter sales.

I am just having trouble figuring out if NLG sales are 40% of the total in the first quarter and 30% in the second quarter why the total core sales affectively were about a third what they were from the first quarter.

In Q1, our Q1 NLG sales would have reflected a fairly significant increase in sales in January, which was a carryover from the price increase that was effective first of the year, but we had business coming through the pipeline. So a bit of a firesale is how I would describe it in terms of the impact to Q1. And then in Q2, as that ran through the system and the price increase had the full effect, is where you see the significant downshift in sales.

Okay, thanks.

Robert Sedran, CIBC.

Good morning. Two questions, quick ones. Expected profit was down again this quarter at the consolidated level on the sources of earnings and I know it is ridiculously complicated to try to talk about expected profit at a consolidated level, but can you give even an idea of what might be happening here and what the major factors are taking it down?

Yes, Robert, the impact of currency in the year-over-year comparison on expected profit was significant. The methodology that we use for expected profit for conversion to the Canadian dollar is slightly different from the approach on the net income statement. So it amplifies the effect on the year-over-year comparison because it takes a balance sheet approach. So the actual decline in currency or the strengthening of the Canadian dollar contributed a bigger impact. So currency was a major impact, so we wouldn't expect that kind of an impact to be seen on a go-forward basis, certainly in that magnitude.

Last year, there was a double default release, which is -- sorry, I really should describe that slightly differently. We had established additional provisions for our credit loss going into 2009 and as that released last year, that contributed to the expected profit. That is not recurring this year. So those were a couple of the items on the negative side.

There are positives. The assets under management at MFS, for example, is higher and that contributes to expected profit, as indeed does the Lincoln acquisition in the UK when we compare year over year.

So it's fair to say there is nothing really abnormal about the level at which it has come to?

No, I think the way to look at it is, as you quite rightly say, it is complex and there are some particular drivers. But to the extent that you would be looking at it from the point of view of is it saying something about the fundamentals of the business, the attributes I have just provided I would think would suggest otherwise.

Okay. And just quickly, I know it is still early, but can you give a sense of the year-end assumption reviews and even by order of magnitude, are we expecting something material and perhaps what the specific issues or specific variables might be?

Well, as you quite rightly point out, we do a review in the third quarter and there are many moving parts to that review. I can assure you that the review is underway, but at this point, we do not have a quantification that we could share with you at this stage and we will continue to work through that for third-quarter reporting.

Okay, thank you.

Andre Hardy, RBC Capital Markets.

Thank you. I was going to ask about this review, but I guess you don't want to answer. Just one question then, on the impact of investing activities on policy liabilities, do you mind being a little bit more descriptive on what it is that you're doing that is leading to gains and how recurring that might be in upcoming quarters?

Yes, the description that we have provided you may have seen in prior quarters. We have referenced this particular item as resulting from tactical trading. And really what is occurring here is, as we place certain investments into the investment portfolio backing insurance liabilities, to the extent that the yields on those assets, be they private fixed income, private placement type assets, can be in excess of what was previously priced in the portfolio. And that results in a pickup from a reserving perspective and that is reflected in the quarter. So it tends to be a little lumpy, but it is certainly an item that we have reported on previous quarters and we will continue to report on going forward.

I guess the essence of my question is are the market conditions that have led you to book these gains changing at all?

This is Steve Peacher. Many of those gains come from our private placement portfolio where spreads have been very attractive coming out of the financial crisis. And we still think it is an attractive place to be investing, but there is pressure on spreads. So some of the yields in spreads in that sector, which leads to some of these gains, there is pressure on those spreads in the marketplace.

That's helpful. Thank you.

Doug Young, TD Newcrest.

Yes, I guess a lot of my questions have been answered or asked. I guess the one question is on the -- I guess it goes back to the actuarial review process. And when I look at the URR and we run the numbers, it would appear that there is the potential that there is going to have to be adjustments made. And I know you use stochastic modeling, but you do have to abide by the URR assumption I believe. And I guess this is something you may have some additional color on, but can you remind us where your URR assumptions are and what the potential impact might be related to that?

This is Lesley Thomson. We don't have a single URR, as you said. We run a number of scenarios of future interest rates, of possible movements in future interest rates, so there really is no single URR. We always start the scenarios from the current environment. So as the current environment moves, we start from a different place, but then we run a number of scenarios in the future.

But does the CIA not require that you at least abide by what the URR calculation would be regardless of your use of stochastic modeling?

There is a base scenario, which we have to run according to the CIA standards and that uses an average of moving averages of long-term interest rates. That is in the neighborhood of 4.5% right now. That is just one scenario that we run though.

That is your assumption or that is based on what --

No, that is prescribed by the CIA.

Okay, and I guess my question I guess is really kind of getting down to it is do you anticipate an impact based upon -- or is it too early to tell based upon your work on the URR and your stochastic modeling?

I think this really comes back to the question about the assumption changes that we conduct in the third quarter. Certainly you saw the impact of interest rate declines in the current quarter. And as those types of events occur, we report on them quarterly. But the larger set of assumption changes that we undertake annually in the third quarter, we will need to refer back to you at a future meeting.

Okay. And then just another quick follow-up. Wes, I think in your comments you indicated that you've exited NLG, you would have an impact of improving ROEs and reducing the interest rate sensitivity longer term. Can you give us any more additional color on that? And then just a follow-up question on the group side for you, Wes, as well. I know group sales were down. How much of that has related to the restructuring that you did earlier this year or is really none of it related to that? Thanks.

I will take the first question first. On the NLG, it really is too early to tell and provide any details around the longer-term impact in terms of the ROE and impact to earnings. It will be a function of how our new business mix emerges. We are introducing new products. We are building a linked benefit product that we will introduce later this year, early in 2011 and making investments for wholesaling that product and we have a significant amount of expertise in doing that inside of our organization. And so we are very hopeful that those will be -- these additional current assumption type products and linked benefit products will be our growth engines.

Clearly over the shorter term, we will see some improvement in new business strain as a result of our exiting NLG since it is a very significant part of the strain that we have experienced, particularly in this current economic environment.

Moving to the group business, I would categorize as the impacts on our revenues, our premiums this year as perhaps, in the first quarter, somewhat linked to the -- our slow sales somewhat linked to the realignment of our sales organization. We are though seeing a significant improvement in sales -- as we did see a significant improvement in sales as we went through the second quarter. Clearly, you can't ignore the external environment. And as I said in my comments, we are maintaining pricing discipline in the face of some fairly aggressive actions that are going on out there.

Okay, I will leave it at that. Thank you.

Darko Mihelic, Cormark Securities.

Hi, thank you. A question for Colm. Can you just elaborate a little bit on your efforts to deploy liquidity and the impact or can you help us size the possible impact on earnings from surplus?

Yes, I think we have commented on this topic before and the level of cash that we carry on the balance sheet and our plans around that. I think I will hand over to Steve Peacher for a few comments on that.

Yes, let me give some color on the level of cash at the end of the quarter. There was CAD9.6 billion of cash on the balance sheet at the end of the second quarter, which was down from CAD10.6 billion at the end of the first quarter. But there are two adjustments that I think are worth thinking about.

One is we had about CAD900 million of commitments that had not yet been funded, so those are investments, typically private placements and mortgages, that have been committed to, but we will fund over the next number of months. So that is not out of -- that would need to be conceptually taken out of that CAD9.6 billion. And also shortly after the quarter on July 6, we paid off a CAD1 billion [MTN]. So if you adjust for those two items, you kind of get a pro forma number just under CAD8 billion. And to get back to normalized levels of cash, we probably still have another CAD1 billion or so to go in terms of investing excess cash.

Okay, and what would that -- I mean I am just trying to size earnings on surplus because it is bounced around a little bit. It seems to have leveled out here somewhere around CAD90 million to CAD100 million let's say per quarter. I'm just trying to understand what that number could be. And maybe, Colm, you can help me out here and just sort of revisit what is the number that you are using for your adjusted earnings from operations for earnings and surplus in that particular line item?

Well, I think you're right generally and directionally to say that, with the higher levels of cash, which of course are returning very nominal returns at this point that as we invest that cash, we will have a pickup. I think also on the earnings on surplus, it has, as you say, bounced around a little bit, partly because we had some impairments on assets in the portfolio primarily through 2009 that has eased off at this point.

The other factor that drives this particular line item is the level of security gains. We have not planned for a level of security gains to come through in our adjusted earnings from operations. And to the extent that they do arise, that would contribute. But I think the level that you see there, give or take CAD10 million, it is probably not a bad place.

Okay, thanks very much.

Mario Mendonca, Canaccord Genuity.

Good morning. Probably for Colm. The ROE guidance you provided in the past, it is about 12% to 14% over the next three to five years. Would you rethink that guidance in the context of the goodwill charge? I am not so much asking so much whether you would increase the guidance, but does the goodwill charge in a sense push that achievement of that range up a little bit if you follow my line of reasoning here?

No, absolutely. And I think it is important to note that, as we develop the guidance around the target, the medium-term objective of 12% to 14%, we did not go into that thinking that one way we would achieve that would be through the application of international financial reporting standards. So while it does have an impact on ROEs going forward, we still work with the 12% to 14% from the perspective of looking for other drivers to improve profitability and return on equity. And this is an annual process that we go through as we develop those medium-term objectives and we will come back to that later in the year.

Now because you aren't contemplating the goodwill charge, does that necessarily mean that you would think of something higher than 12% to 14%?

Well, I think that will be a part of the annual review process. There is a lot that happens in a given year that feeds into the establishments of those objectives.

Okay. So we can't assume something either way right now?

I think it would be wise not to.

Okay. Onto IFRS for a moment, not Phase I, but what is coming through in 2013? I am trying to get a flavor from all the insurers frankly on how you think about IFRS then and whether you think IFRS could have an effect on the way you operate your business, meaning products you sell, how you sell them, the features and the assets used to support them or whether you think IFRS will just result in a very long explanation and reconciliation process? What do you think, Colm? Will it be a combination of the two or is one more important than the other?

Well, I think you have touched on both aspects that will clearly be required as we move forward with IFRS and Phase II and the in force book of business is the in force book of business, so when you shift from one reporting regime to another, you are clearly limited in how you can deal with what you already have. And when you think about new business, you can obviously take some steps -- if you feel it is appropriate -- to take some steps in order to maybe better work with a new reporting regime. So lots more to come on this topic. Obviously a big development to have the standard -- the exposure draft out, published at last after a long period and there will be a lot more conversation on this topic going forward.

Maybe just one final thing on this. Would you envision Sun Life ever changing the asset mix supporting the existing business to lessen the volatility? Is that even a possibility?

I think that would be a step that we would always look at with a view to the economics. So any step that was detrimental from an economic perspective, I think we would look very hard at how to explain the results in accordance with a reporting standard with an eye to the economics in order to provide the best solutions for shareholders.

That helps clarify things. Thank you.

Colin Devine, Citi.

Good morning. Just a couple quick ones. I guess, Wes, with respect to the US, you have been pulling back from the secondary guarantee. Do you think today's announcement will be a big surprise for your distribution system? And also maybe if you could just clarify what it was about the product that you didn't like and is that going to show up in assumption changes in the third quarter?

And also then with respect to the annuity business, where you are pulling back from the fixed products there, I think they still contribute a fair amount of the earnings for your segment. Should we be thinking about fairly modest earnings growth for it going forward? And I guess for Colm, I appreciate we are really not going to get an answer on the assumption changes and I am just wondering how we should take that. Last year, you conveyed it early. I think what everybody is trying to get at is should we be reading something into the fact that no guidance is coming today, that maybe something very big is coming down the road?

And then also, do you expect that under IFRS Sun's earnings are going to become more volatile as I recognize you haven't had a long time to look at the exposure draft?

So Colin, this is Wes. I will start off with the distribution question. We did make a series of calls to our key distributors beginning at the end of day yesterday and quite frankly, the feedback that we have been getting is quite consistent. First, we have been signaling and discussing our concern around no-lapse guarantee with all of our key distributors over the past probably good 12 to 18 months.

One of the I think surprising comments that we did get fairly consistently was from a number of distributors who recognize that NLG has moved to being a pure commoditized offering in the marketplace and therefore many advisers that we are talking to are saying they are pressured only to have that product in their arsenal for defensive purposes and it is not solutions-driven to the point of taking away from the value of the advice generally speaking and what companies can do to differentiate. So that is the sort of core message that we are hearing.

Clearly, as we have been transitioning deliberately away from NLG, we have been building capabilities, Colin, in other areas in terms of current assumption, our business owner type product portfolio and later this year, early next year launching a linked benefit product in the market, which will be a life with a long-term-care component to it.

What don't we like about the product? I think generally as a sort of broader statement, I would say it is characterized by the long-duration guarantees with the significant exposure to reinvestment risk and under our particular accounting regime, it is particularly punitive on a quarter-to-quarter basis as we are seeing in this very low interest rate environment.

So we are also looking ahead and looking at things like IFRS and the very significant impact that it will have on our ability to earn a fair return on that product going forward.

And so Colin, if I could take your question on the assumption changes, as you recall, a year ago, we did announce the range of outcome on the update on Q3 assumption changes and that was really related to one particular item and it related to assumption changes based on models around equity levels and interest rates. There were two components to that. The piece on interest rates was part of a regulatory requirement. The piece on equity rates really reflected what at that point was the addition of a period of extreme volatility into the long-range volatility factors that we were using. So that in itself was a very significant item and that was why we preannounced the range of outcome on that particular item.

But this year I would say is more back to a more normal environment where we have many moving parts and we continue to work through those as I mentioned previously. But nothing -- the item is not as significant as the item that we have disclosed to you last year.

On the IFRS front, there is a lot of discussion around how this will play out in practice. You're quite right about volatility and the debate rages around the appropriate discount rate used, whether it should be a risk-free rate, a risk-free rate plus a premium, how do you determine that premium. I think it is a little premature to land on exactly what the implications will be, but clearly it is a debate we will be very active -- well, we have been very actively engaged in and now that there is an exposure draft, you can be assured that we will be more actively engaged in as we finalize this.

Okay, and then as Wes said, it did play a factor in your decision to exit the SC UL market?

Well, I think Wes is pointing out the challenges of the reporting regime, but he is also referencing the economics where a very low interest rate environment and a product guarantee around interest rates is also a challenge.

Okay, thank you.

Colin, you also asked the question around our fixed annuity business where we have in effect discontinued business on the book value and indexed annuities and what that means for our earnings going forward. Generally speaking, the same thing applies there. We are managing the existing in force business actively and we, in some cases, will see reduced strain. We don't have distribution. We reduced the distribution capabilities around that, internal capabilities around that starting last year. So we really are just focused on maintaining that business to appropriate liquidity levels in terms of what we are looking for for new business.

But it is fairly high ROAs, so I assume it is going to make it tough to grow the bottom line in annuities or am I mistaken?

Are you speaking to the fixed annuity business?

Well, I was referring to just the annuity line, as your fixed annuities start to bleed off, which I assume most of them will go over the next five years, can the growth of the variable annuity business sort of compensate for that or are we going to be looking at sort of a much slower growth rate net for your annuity business, albeit one hopefully generating the higher ROEs?

We believe that over the period that we are looking at that the growth of our variable annuity business with higher ROEs will offset the downside of the lower ROE fixed annuity business.

Theodora, this is Phil Malek. We have time for one more question before we end today's call.

Tom MacKinnon, BMO Capital Markets.

Great. Thanks very much. Colm, just a question on the interest rate sensitivity here and then one quick follow-up on (inaudible) dilution. How should we look at the interest rate sensitivity? I effectively figured it would be the governments, less the spreads impact quarter over quarter. But how do we -- what is the weighting by geography on that?

I don't have the distribution by geography available to me. Maybe I will ask either Claude or Mike to comment.

It's Claude Accum here, Tom. The interest sensitivity we published at the end of the prior quarter was at CAD200 million to CAD300 million of decline per 100 BP drop, so the midpoint is about CAD250 million. You might break that down about 40% is in Canada, about 40% is in the US and about 20% is in other locations, which will probably follow the US more.

And should we look more -- if we are going to look at government less changes in spreads, should we look at corporate long rates?

In Canada, you had treasuries dropping about 45 bps, in the US about 90 bps. In Canada, I would probably use the provincial spreads more, long provincials, say 30 year. So rather than the 45 bps decline there, you would probably see closer to a 13 bps decline in Canada. And so that would explain some of the variants I think you're seeing.

What should we use in the US?

In the US, you can use a long treasury.

Just long treasury? No offset on the credits?

There will be lots of other things in there, but as a proxy (multiple speakers) use long treasuries.

What should we use for the UK? Long treasuries as well?

I wouldn't bother looking at other interest rates.

Okay. And then one follow-up thing and just, Colm, with respect to IFRS and the sleeks, when is it in 2011 that the par call date would be for the sleeks?

That is at the end of 2011.

So that means, all things considered, we are talking a CAD0.03 hit a quarter from IFRS on sleeks and so --

Well, this is a good example (multiple speakers)

That's another CAD0.12 then on numbers next year.

This is a good example of an item where you would look at the IFRS reporting regime and you would consider the implications of that reporting relative to our view of the dilution. And you could say that, if the likelihood of dilution, which is under an IFRS framework, really considers that the conversion would occur regardless as we would highlight that and I think you and others would then assess whether that was in fact a representative view of the world and whether that dilution was real.

Okay. So then you take that same stand with respect to the goodwill then?

I think there will be a number of items and certainly when it comes to the goodwill item, we would see this as very much in the category of a conversion from one accounting regime where the goodwill is on the balance sheet under Canadian generally accepted accounting principles to another regime where it is not on the balance sheet under a different framework, absolutely.

So you would highlight this as being some -- (multiple speakers)

I should clarify, the goodwill charge will not be a charge to income statement. It results -- it arises through the opening balance sheet adjustment.

Okay. So we are looking at CAD0.12 a quarter, CAD0.12 in 2011 from this next year, but you -- if you assume that things redeem that far, it would be -- that wouldn't be an issue in 2011?

Yes, I think the issue of IFRS and the ramifications thereof, we do plan to spend time with you and others later this year and we will talk through some of these items and I think we will have more to say on the topic.

Okay, thanks.

Great, thank you.

Theodora, we are out of time for today's call, but I would like to thank all of our participants and if there are any additional questions, we will be available after the call. Should you wish to listen to the rebroadcast, it will be available on our website later this afternoon. And 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.