Sun Life Financial Inc (SLF) 2010 Q3 法說會逐字稿

Good morning ladies and gentlemen. Thank you for standing by. Welcome to Sun Life Financial Q3 2010 conference call. At this time, all participants are in a listen-only mode. (Operator Instructions).

I would like to remind everyone that this conference is being recorded today, Thursday, November 4, 2010. I would now like to turn the conference over to Mr. Phil Malek, VP Investor Relations.

Thank you Luke and good morning everyone. Welcome to Sun Life Financial's third-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 third-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 third-quarter financial results.

Following Colm, Keith Gubbay, Senior Vice President and Chief Actuary, will provide an update on the assumption changes and management actions for the third quarter. Following those remarks, we will have 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 of 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 reasons why forward-looking statements could be rendered inaccurate by subsequent events. With that, I'll now turn things over to Don.

Thank you Phil. Good morning all. Yesterday, Sun Life reported results for the third quarter of 2010. We reported net income attributable to common shareholders of CAD453 million versus a loss of CAD140 million reported a year ago. Return on equity was 11.2%.

Results from the quarter reflected improved equity markets, the favorable impact of management actions and assumption changes, as well as solid performance from our business groups. Colm Freyne will provide a more detailed analysis of the financial results later in the call.

I will highlight some of the notable items in the quarter. Total assets under management increased 10% to CAD455 billion, as we continue to leverage our enterprise strength in asset management. The Board of Directors of Sun Life Financial Inc. approved a quarterly shareholder dividend of CAD0.36 per common share, maintaining the same level as the second quarter of this year.

Turning to Slide 5, total premiums and deposits were down 19% over the same period a year ago, driven mainly by lower managed fund sales at MFS. While MFS experienced good managed fund sales in the current third quarter, sales were exceptionally strong in the third quarter of 2009.

Mutual fund deposits were up 5% due to positive retail flows at MFS. Life and health deposits were up 1%. Other wealth products were down 25% due to lower annuity sales in our US operations.

Slide 6 highlights the consistency and strength of our Canadian business. We continue to see momentum in individual insurance with insurance sales increasing by 12% in the quarter. This increase is attributable to the successful launch of new Sun Par products and strong sales in our career salesforce and wholesale channels.

Sales of fixed interest products, including accumulation annuities, GICs, and payout annuities, increased 32% from the same period a year ago. Group benefit sales were up 58% from the third quarter of 2009. Sales in national accounts increased 141%, adding to our leadership position in that segment.

In Group Retirement Services, pension roll over sales remain strong with a fourth-quarter average retention rate of 49%. Sales in our Group Retirement Services were down from a particularly strong quarter in 2009.

In Canada, we remain focused on building on our strong leadership position through strategic investment and value building growth. In the third quarter, Sun Life, in partnership with CI Investments, launched a new segregated fund, the SunWise Essential series. This product series allows clients to customize a solution to meet their individual needs for investing, retirement income, or estate planning.

Sun Life Global Investments Canada received regulatory approval to launch a new lineup of mutual funds into the Canadian market with sales that began on October 25. The initial lineup of funds leveraged the investment capabilities of MFS Investment Management and McLean Budden.

As part of SLF Canada's growth plans for the Quebec market, the Company appointed Isabelle Hudon to the new role of President, Sun Life Financial Quebec. Isabelle will be responsible for enhancing the Company's profile, building community involvement, and a growth strategy in Quebec.

Turning to our US business on Slide 7, we are focusing on products that provide long-term opportunities for sustainable, profitable growth. We have completed a number of rounds of derisking of our variable annuity product and accelerated our shift away from products that provide long-term irrevocable guarantees, such as No-Lapse Guarantee Universal Life.

Domestic variable annuity sales in the third quarter of 2010 were $794 million, a decrease of 27% from the same period a year ago, as we maintain a disciplined approach to growth. Variable annuity sales were unusually high in the third quarter of 2009, in advance of a round of risk driven product changes.

Individual insurance domestic sales were $26 million, representing a 56% decrease from the prior year due to lower corporate-owned life insurance sales and our exit from No-Lapse Guarantee Universal Life.

Employee Benefits group sales in the third quarter were $98 million, an increase of 9% compared to prior year, driven by strong stop-loss sales and consistent life sales, both supported by changes to our distribution organization.

Turning to Slide 8, you can see that MFS continues to deliver excellent performance with net flows of $2.3 billion. Margins improved to 31%. Total assets under management at the end of September were $204 billion. MFS' retail fund performance remains strong with 84% of fund assets ranked in the top half of their Lipper categories based on three-year and five-year performance.

Turning to Asia on Slide 9, individual life sales were down 15% over the same period last year, mainly due to lower sales in India, which was significantly impacted by industrywide regulatory changes to unit-linked products. Excluding India, individual life sales were up 34%. In particular, individual life sales in China and Indonesia were up 112% and 92% respectively. Sales in the Philippines increased by 26%, the highest quarterly production in the business' 115 year history.

Birla Sun Life Asset Management Company has been recognized as the asset management company of the year in India by Hong Kong's The Asset Magazine. The award acknowledges Birla Sun Life Asset Management Company's comprehensive and innovative offerings, its significant efforts to reach new investors, and above-benchmark performance for the year ended June 30, 2010.

In Indonesia, CIMB Sun Life, Sun Life's joint venture with the CIMB Niaga Bank, celebrated its first anniversary in July and was named Best New Company of the Year in Indonesia.

Before I turn the call over to Colm, subsequent to the quarter, we announced that we have sold our life retrocession business to Berkshire Hathaway. The transaction is part of our strategy of deploying capital to parts of our business that can best achieve strong sustainable growth. Colm will provide additional detail in his remarks. Colm?

Thank you Don. Good morning everyone. This quarter's net income of CAD453 million reflects the improvement in equity markets as well as the net favorable impact of management actions and assumption changes related to experience studies, which generally occur in the third quarter.

On Slide 11, we have provided a reconciliation of third-quarter net income of CAD453 million to our estimated adjusted earnings from operations of CAD353 million. As noted on this slide, the rebound in equity markets contributed CAD156 million to earnings in the quarter. The third-quarter review of actuarial assumptions, together with management actions, provided a net positive contribution of CAD49 million. Keith Gubbay will provide additional comments on the assumption updates following my remarks.

Credit experience, excluding US commercial mortgages, was broadly in line with the expected level for the quarter. However, the commercial mortgage sector in the United States continues to be under pressure. As a result, we have further strengthened the mortgage sectoral allowance by CAD57 million pretax, or CAD40 million after-tax, to recognize the ongoing challenge in the US commercial mortgage market.

The net negative impact of interest rates in the third quarter was CAD15 million. The interest rate sensitivities we provide are estimates which assume parallel movements across all yield and spread curves, along with a number of other specific assumptions. Actual results for any given period made very.

In the third quarter, while ten-year treasury rates did decline, in Canada overall we experienced a flattening of the yield curve rather than a parallel move. The short end rose between 20 and 30 basis points while the long end fell about 30 basis points.

As well, in Canada and the US, swap yields declined by more than treasury rates. The non-parallel movement in rates resulted in a lesser increase in segregated fund liabilities than would otherwise be expected. The larger decline in swap yields resulted in a larger gain from segregated fund hedges than would otherwise be expected. In addition, asset portfolio rebalancing during the quarter generated some interest gains which also offset in part the negative impact of interest rate movements.

Other net experienced losses of CAD60 million include CAD32 million of unfavorable mortality and morbidity experience, split about evenly between our life retrocession reinsurance business and our US employee Benefits Group business.

Finally, I would like to remind you that this reconciliation from reported net income to adjusted earnings from operations is a non-GAAP measure and is based upon attribution of market and other impacts in the quarter. As we move further away from the third-quarter 2009 baseline for adjusted earnings from operations, the attribution back to the environment at that time becomes more complex. We focus on adjusting for items with a larger impact, but we do not seek to capture all second-order effects which may impact adjusted earnings from operations as time passes.

On Slide 12, we provide details on our sources of earnings. The expected profit on in-force business of CAD443 million is down CAD100 million over the same period last year. The third quarter of 2009 represented an elevated level for expected profit, as it included the release of previously established margins for higher levels of asset defaults, as well as equity risk reserves on our segregated fund business built up as a result of the very low equity market levels in 2008 and early 2009. In addition, the impact of higher hedging costs and foreign currency translation also contributed to the decline.

Experience gains of CAD95 million reflect the positive impact of stronger equity markets, offset by adverse credit, interest, mortality, morbidity and expense experience. Assumption changes in management actions were CAD97 million pretax.

Earnings on surplus of CAD63 million are down from a year ago due to lower gains on the sale of available-for-sale securities in the quarter. In the third quarter of 2009, we experienced a higher-than-normal run rate of security gains, whereas in the third quarter of 2010, we had CAD1 million of such gains. A portion of the charge for the commercial mortgage sectoral provision in the amount of CAD14 million is reflected in this line in the current quarter. In addition, the more challenging macroeconomic environment has generally weighed on investment returns.

Taking a closer look at the performance of our business groups on Slide 13, SLF Canada reported a net income for the quarter of CAD262 million, an improvement over the CAD219 million reported a year ago. Earnings benefited from the increase in equity markets, more favorable credit experience, as well as the movements in interest rate swap spreads mentioned previously.

In the United States, we reported income of CAD41 million compared to a loss of CAD413 million reported a year ago. The positive impact from equity markets was offset by the negative impact from declining interest rates, unfavorable morbidity experience, and the strengthening of the sectoral allowance for US commercial mortgages.

Earnings from MFS were CAD55 million, up from the CAD43 million reported a year ago. Margins improved to 31% in the quarter.

Earnings from our Asian operations were CAD37 million, up from CAD13 million reported in the third quarter of 2009, mainly due to a net gain of CAD19 million resulting from the restructuring of Sun Life Everbright Insurance Company, where our interest was reduced to just under 25% from 50% previously as a result of the introduction of two strategic investors. Results also benefited from lower new business strain in India.

Our UK operations reported net income of CAD50 million compared to net income of CAD10 million a year ago, due in part to the positive impact of the Lincoln acquisition.

Turning to capital on Slide 14, you can see that our minimum continuing capital and surplus requirements ratio for Sun Life Assurance Company of Canada was 208% at the end of the quarter, relatively unchanged from the previous quarter's ratio of 210%.

As Don mentioned in his remarks, subsequent to the quarter, we announced the sale of our life retrocession reinsurance business to Berkshire Hathaway. The reinsurance business, although profitable, was not a growth business for Sun Life. We will free up a significant amount of capital from this transaction.

We estimate the positive impact on the capital ratio of Sun Life Assurance Company of Canada at approximately 10 to 14 percentage points in the fourth quarter based on a combination of the purchase price received and the capital and reserves released on the sale of the business. This transaction does not include Sun Life's runoff reinsurance business.

I would also like to comment on the value of new business, the details of which are included in our statistical supplement. The last 12 month's value of new business of CAD745 million represents a 45% improvement over the prior year's 12-month period. 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.

I'll now turn the call over to Keith Gubbay.

Thank you Colm. Good morning. I'm going to provide some background on our assumption change process and I will describe the main items that impacted this quarter's results. Then I will talk about a few specific items that may be of particular interest.

First, our assumption change process -- under Canadian GAAP, actuarial liabilities are based on an up-to-date view of future experience, including provisions for adverse deviation. Given this framework, we normally study our experience and review all our significant assumptions on an annual basis. Generally, we try to consolidate our assumption changes into the third quarter in order to minimize undue volatility, but some changes will still come through at other times of the year.

On Slide 16, you can see that, this year, the total impact of method and assumption changes and management actions was CAD49 million favorable. I would like to comment on the two large items in the table.

First, mortality and morbidity shows a gain of CAD216 million. The main driver was a favorable change to the mortality basis, primarily in the US individual business. There was also a modest release of reserves on group lines in both the US and Canada. Secondly, lapse and other policyholder behavior shows an adverse change of CAD217 million.

The biggest impact was in the Bermuda Universal Life business. Given the low interest rate environment, we are now projecting lower lapses and we are increasing the lapse provision for adverse deviation in our accumulation style Universal Life products. The changes are due to the attractiveness of the minimum guaranteed crediting rate under the low interest rates projected in our reserve scenarios. Under Canadian GAAP, the liabilities include an allowance for the cost of these guarantees on a present-value basis.

In addition to this lapse rate change, we conducted a study of premium funding levels on flexible premium Universal Life contracts in the US. This resulted in an increase in liabilities.

Finally, there was also an adverse change in the Canadian individual business relating to lapse assumptions on term insurance renewals. I would note that the CAD101 million of other includes the Asia restructuring item as well as some modeling refinements.

Turning to Slide 17, I'd like to spend a couple more minutes on three items of particular interest. First, the economic scenario generator, or the ESG. The ESG projects future equity and interest rate returns and is used in developing Canadian GAAP liabilities. Generally speaking, the life insurance and [seg] fund products, lower equity returns or interest rates, or higher volatility, will increase actuarial liabilities.

As you will recall, we made significant changes to the ESG last year and recalibrated the model to include the very volatile 2008 market experience, as well as to include periods of prolonged low interest rates such as the 1930s. The changes we made last year have proven to be robust and the impact of the current ESG update on seg fund liabilities was modestly favorable in both Canada and the US.

We do not expect to make material changes to the form of the ESG used for our Canadian GAAP liabilities, even if we experience a longer period of low interest rates, unless of course there are regulatory changes. We will continue to update the ESG for new experience annually.

Next, I'd like to describe our interest rate assumptions. Generally speaking, for long-term life insurance blocks of business, lower projected interest rates means higher liabilities. If rates fall, this drags down the reinvestment rates in future years. The present value of this change is recognized in the current period under Canadian GAAP. This is quite different to the US GAAP treatment.

Our Canadian GAAP liabilities are based on testing a range of future interest rate scenarios, starting from the actual market yield curve at quarter end. In our Canadian business, the scenario that drives our liabilities currently is one that drops to 90% of the current yield curve and then ends up with a long-term new money reinvestment rate 20 years out of 3.75%. The US business uses a [sarcasic] model that is comparable.

A key question in the current environment is what happens if rates stay low for a prolonged period? If rates continue to stay at current levels, each quarter there would be a slight drag from the failure of rates to increase as assumed in the model. But this is quite a slow process. So there may be a modest drag on results, but unless there is a change in the underlying method, there should not be a large discontinuous impact.

Finally, I'd like to comment on variable annuity policyholder behavior assumptions. On VAs, we have now had a couple of years of experience with guaranteed benefits being significantly in the money, and we've also had a couple of years to observe policyholder behavior with regard to utilization of the guaranteed withdrawal benefits.

This year, we conducted a thorough analysis of our experience and sought external input and peer review of our assumptions. Our assumptions are dynamic in that we adjust policyholder behavior assumptions depending on whether or not the guarantees are in the money. The experience is still somewhat limited, and we did make modifications to various components of the assumptions as a result of this review. However, there was little net effect on the actuarial liabilities.

I'd like to close by making the observation that under Canadian GAAP for life insurance -- that Canadian GAAP for life insurance is quite different than some other financial reporting systems. The key contrast is that Canadian GAAP takes a comprehensive holistic view of the future and looks to capture within the liabilities the cost of future options and guarantees on a present value basis. The intent is to provide a robust provision against future contingencies, which is increasingly important in today's uncertain economic environment.

With that, I'd like to turn the discussion back to Phil.

Thank you Keith. We are pleased to be able to say that we've had an increase in the analysts covering Sun Life throughout the year, so to help ensure that all of our participants have an opportunity to ask questions on today's call, I would ask each of you to please limit yourself to one or two concise questions and then to re-queue with any additional or follow-up questions. With that, I will now ask Luke to please poll the participants for questions.

(Operator Instructions). John Aiken, Barclays Capital.

There's been no real movement around the adjusted earnings from operations. Colm, I don't know if you can expand upon what's been affecting this, particularly with the strength of the value of new business that you talked about. Don, I don't know are you are willing to opine where growth may come from through 2001 and 2012.

So I'll take the first part of that question. So with respect to the expected or adjusted earnings from operations, we provided the range of CAD1.4 billion to CAD1.7 billion as being the range for 2010. On a year-to-date basis, we are at about CAD1.1 billion, so we are tracking within that each quarter.

And a number of factors that have proved to be headwinds over the course of the year would include the low level of interest rates, the lower level of security gains realized on the available-for-sale securities in the surplus, so a number of factors again in the United States with the slow recovery in the economy there and the higher levels of unemployment.

So I think that we still, on a quarter-to-quarter basis, we are within the range, but I think you really need to look at this over the slightly longer period.

If I join in, just a comment, generally on growth in 2011/2012, effectively building on what Colm has said, growth will be dependent on economic conditions.

In part, some of the things we're seeing in both sides of the North American border is high levels -- or high relative levels of unemployment are constraining both consumer spending, but also in our group businesses the number of people at work and the number of people taking on additional benefits and making additional savings.

So I think growth in 2011/2012 is going to be quite dependent on economic conditions, both as to interest rates and generally as to consumers' willingness to put past additional financial security.

Obviously, MFS has a lot of momentum. I think that's a big positive. And some of the adjustments in Asia were truly one time. There were major revisions to the life insurance world in India that took effect September 1. We think we'll see a bit more stability going forward. A couple of the other places had significant growth. We'd expect that to carry on in 2011 and 2012.

Thank you very much.

Steve Theriault, Bank of America Merrill Lynch.

A couple of questions -- first question, I'm trying to gain a better understanding of the interest-rate impact in the quarter. So you said that activity in the swap market was an offset to lower rates.

Can you tell us a little bit about the mechanics of anything that you undertook in the quarter to mitigate rate sensitivity? Going forward, how should we attempt to gauge the potential for interest-rate charges? Will swap spread movements be a more important component than it has been in the past?

I think you've touched on a number of the factors. If I could start by really starting at the beginning here, where we look at the performance on interest rates relative to the previously published sensitivities, so in the quarter, as you saw, we outperformed, if you will, in a lower rate environment.

We touched upon a number of the factors, including the non-parallel shift, particularly noticeable in Canada, the tightening of swap spreads, which benefited us, and also some activity that we undertook from an asset liability management perspective to take appropriate action in the rate environment.

I think that touches on an important point, that the sensitivities are laid out to show you what happens if there is an instantaneous shock. However, the management action does take place because we want to position ourselves as we go through the quarter, as rates move around.

I think that's a factor that did benefit us this quarter and we would anticipate, going forward, we would attempt to do the same thing. I'll ask Mike Stramaglia to perhaps say a couple of additional comments.

Really just to build on Colm's comments, the explanatory notes accompanying our sensitivity disclosure do outline a wide range of assumptions that underline these cancellations. By necessity, those are required to really simplify the calculation and deal with all of the significant number of moving parts that can create quite a lot of variability and range in these estimates.

So Colm has hit on a couple of key ones, the assumption of a parallel shift. We know that, in practice, that rarely ever happens. It assumes that all global markets move in unison. Again, in reality, we know that's generally not the case.

The shocks themselves are based on movements in government bond yields, and assume that credit spreads and in particular swap spreads are unchanged. Again, in practice, we know that there is simultaneous movement in different parts of the capital markets, and there's interaction effects between these movements.

And as well, as Colm mentioned, the instantaneous shocks that are also based on the composition of assets and liabilities at a particular instant in time. Again, in reality, we know these portfolios are very dynamic. You have new business coming on; you have lapses; you have assumption changes as we did in the quarter.

Importantly, we know that the composition of the hedge portfolios are dynamic. Particularly in a trending market, we are rebalancing our hedge programs. That can play an important role in helping to mitigate the volatility in a trending market. So it's important that the sensitivities are considered in the context of the particular scenario as it is defined, including all of those associated assumptions.

If I was to look at Q3 and some of the highlights in terms of some of the areas where we did see the positive variance relative to those sensitivities and those underlying assumptions, I think we've hit on these. Swap spreads in Canada contracted about 20 to 25 basis points, so obviously not the -- no change assumption underlying the pro forma sensitivities. That meant we are able to take a positive mark on our swap positions, and that is accretive to earnings.

Yield curve shifts in the quarter were not parallel in the US. The long end of the curve only came down about half as much as the ten-year point. A lot of the sensitivities in the US are to the longer end of the curve, so that would produce a positive variance relative to the pro forma sensitivities, particularly if you key on the ten-year point, say.

In Canada, the short end actually rose. So again a non-parallel shift. So collectively, that was accretive, relative to the sensitivities. And then the portfolio rebalancing, both in the variable annuity portfolio as well as the fixed annuity portfolio, was also, as a result of that management action, it did mitigate yield the underlying sensitivity to the reducing interest-rate environment.

That's helpful. Just as a quick follow-up, the ALM activity that happened in the quarter. If I think of it in very simple terms, should I think of it in terms of being derivative-based or buying longer duration assets?

It primarily would be derivatives-based. So most of our dynamic trading programs tend to be in the derivatives markets.

Thanks very much for that. One more if I might? I noted the cautionary language regarding OSFI's new seg fund draft advisory. Can you talk a little bit about how you think this will impact seg fund and VA pricing, both in Canada and the US, starting next year?

Separately, I've been hearing that peers have been characterizing some of your newer product design changes as maybe a little bit aggressive. So perhaps you could address that for us, and maybe refresh us on where you see yourselves in the US variable annuity marketplace? I'll leave it there. Thanks very much.

If I could comment initially on the OSFI advisory, as you will have noted, OSFI has made public the advisory. However, you'll have also noted there is a consultation period which takes us through to the end of November. We, along with other industry participants, will engage and are actively engaged in dialogue with our regulator as to the precise requirements and how these rules are to be implemented. As you've noted, they are effective January 1 for new business. We will continue to work on successful implantation of these requirements come January 1 of next year.

With respect to the comments on our variable annuity products and our segregated fund products in Canada, we continue to work actively to ensure that we have the right mix and balance between product features and also risk management activities. I would perhaps ask Wes to provide a comment on the specifics in the US of how we are designing products in the US.

Yes, We've continued on a sequence of de-risking actions while really under the effort of balancing shareholder value with customer value. Our most recent de-risking action is going to reflect itself in a launch of a next generation of product later this year; it will actually be launched late November, early December.

It's a continuation of our efforts to increase our ability to have greater control over the assets and, for this particular product, will also enable us to have price adjustment capabilities not only on new business but also on in-force. So our focus continues to be around balancing that value proposition between shareholder value and customer value.

Colin Devine, Citi.

Good morning. Just a couple of quick questions. With respect to I guess potentially other areas, Don, of the Company that you view as noncore or actions you might be able to take, are there perhaps some business lines that you could reinsure out? I'm thinking perhaps the US indexed annuity block, which is obviously noncore anymore. For Colm, is there any more updates on how you're thinking IFRS is going to impact Sun next year?

It's Don. Just to respond to the review of businesses that may or may not be core going forward, I can assure you that we have all of our businesses on an ongoing review, and in particular those businesses that are perhaps more apparently noncore where we've already taken action.

If there is a possibility of, as you point out, reinsurance or some other transaction that would enhance value, we look hard at that. Obviously, I'm unable to share specifics. You'll recall our interchange on the retrocession business some time back, but I can assure you we're looking at businesses on an ongoing basis with particular emphasis on those businesses that are less key to the future than others.

Would it be less key and also then capital intensive. I'd also be thinking of the secondary guarantee UL line. If you've now reserved it up, I assume the hit to get rid of it shouldn't be that significant.

The capital intensity is one of the key factors as well as a review of the future risk adjusted returns. So we take all of these into account, and it's an active program.

It's Colm here. On the IFRS question, we continue to work through as we prepare for a full implementation of IFRS on January 1, and we've added a little bit in our MD&A this quarter, as we do each quarter, as we get closer to the implementation date. But really nothing new to add relative to what we discussed in the Management Discussion and Analysis last quarter. There are a couple of areas where there is additional volatility under IFRS as we compare those results to the Canadian GAAP regime. They are well laid out I think in the MD&A.

The bigger item of course is IFRS Phase II on insurance contracts. We and others in the industry, both in Canada and internationally, continue to have a very active dialogue with the international Accounting Standards Board and other influence-makers and decision-makers on the shape of that particular standard.

Doug Young, TD Newcrest.

Colm, the first question is just the excess capital at the hold co. I know you've given it under the parameter of above a 200% MCCSR in the past. Just wondering where that stands.

Then second, Don, just on the life reinsurance transaction, I guess I figure you liked mortality risk and I do understand that this frees up capital and is a less growth maybe area. But I thought there was a general desire for mortality risk. Has that changed, or are there other ways you can take on mortality risk after completing this transaction by maybe retaining more? Thank you.

It's Colm here. So the amount of excess capital above 200% at Sun Life Financial is approximately CAD300 million at September 30.

Doug, responding to our appetite for mortality risk, in terms of protection, because of course mortality risk comes at us in two ways. There's longevity, where it can be something of a headwind, and protection, where it tends to be a tailwind. We do like mortality risk going forward. We see ourselves as being able to get that in more capital-effective ways than through reinsurance.

Obviously, we are presently in a number -- we have a number of reinsurance treaties in-force, and these get looked at on an ongoing basis. The ability to retain mortality risk through both our group insurance and our individual insurance is something of a focus.

We think we can do that in ways that are perhaps less capital-intensive than through the reinsurance. But the transaction in no way signals a change of view as to our positive appetite for mortality risk. That's very much the case going forward.

Maybe if I can just sneak in here for -- on the US Group side, I guess I was surprised by the strong earnings in the quarter. We've heard from a few of your competitors in the US that disability claims have been creeping up. I'm just curious as to what you are seeing on that front.

This is Wes. We have experienced a very moderate increase in incidence rates over the last several quarters. It has been very moderate. But termination rates continue to remain consistent, and so while it has been moderate, I should also mention that it's relative to 2009, where we had a relatively lower level of incidence rates than we had historically experienced prior to 2009.

So one could say that, during a recessionary period, there is a tendency for employees to not perhaps go out on a disability claim that perhaps would be valid under a normal environment for obvious reasons of being concerned about being out of work.

What we might be now seeing is maybe a movement to a more normal -- normalized trend in terms of that incidence rate. But we are monitoring it very closely and we are managing it to all of our abilities.

Mario Mendonca, Canaccord Genuity.

Two quick follow-up questions. First, Colm, the CAD300 million in excess capital at the hold co., that's up from CAD250 million last quarter. With equity markets doing what they've done, you would've guessed that it would've got a little higher than that. I think you suggested as much on the last call. What constrained it this quarter? Why only the CAD50 million move?

There's a lot of moving parts as we compute the required capital for SLF. So in a given quarter, you can have impacts from market risks and the amounts that we are taking credit for in the reserving process for capital. So, I wouldn't draw too much from it in a given quarter.

What was it then that actually caused it not to go up as much? You said (multiple speakers).

I don't have a specific attribution that I can give you on that.

Is any capital downstream to the hold co.?

No, there was no capital downstream to the hold co. in the quarter.

To the op co. I meant.

And I should say that the Sun Life US, the RBC ratio continues to be in the range that we've previously discussed with you. At year end it was 362%, and continues to be at the high end of our 300% to 350% range at the current time, slightly above 350%.

A follow-up question for Wes. Your answer on the VAs, was that to suggest that rather than having to increase pricing because of the change in capital standards or proposed change in capital standards, the way Sun Life would rather address this is by altering the fees -- sorry, the structures, rather? The actual features of the product, so that they're a little more attractive under the Canadian approach?

Really, my response was more to we have been conducting a very broad and comprehensive series of changes to the product across the board. So fees are one aspect of a number of things that we have been doing on an ongoing basis.

The comment around fees was more around our ability, prospectively, to be able to adjust fees based upon a set of variables and guidelines, external benchmarks that we would be able to make those changes going forward, both on new business and the existing business once we have written that business, obviously, going forward.

Wes, do you expect Sun Life to lose market share next year because of changed product features? Say, for example, if Lincoln, Met, and Pru don't really follow suit with those features, do you expect Sun Life to lose share in VA?

We believe that there's obviously great opportunities for growth across this marketplace with 70 million baby boomers sprinting to retirement. We do have an unusual market condition within the US today that we have not seen for a long time. That is, if you look at nonproprietary product sales, you have three companies who are in effect well in excess of 50% of the market share and are playing very aggressively. We don't intend to play in that space.

Thanks very much.

Michael Goldberg, Desjardins Securities.

I have a couple of questions. First of all, how much of the total basis change came from reinsurance, including how much of the CAD216 million change in mortality and morbidity? This is the business that you subsequently sold.

So, on the question on the reinsurance part, I'll ask Keith to say a word on that.

Yes, the net effect of assumption changes for the reinsurance retrocession business was positive CAD5 million. There were some adjustments in mortality and the lapse line relating to reinsurance, but we haven't split those out.

Okay, so what would have been the offsetting items to the mortality gains that you would've had in the life retro?

We amended some of the assumptions relating to recapture of the retro business by the reinsurance counterparty. So that was an adverse change which offset some of the mortality improvement.

Also, what was the gross impact of lower interest rates, excluding the asset liability management? Why was there no similar offset from asset liability management in the second quarter?

It's Colm here. I think we went through this in a fair bit of detail earlier on. In any given quarter, there will be different actions that will be taken, and it's hard to relate one quarter to another as the interest rate movements differ obviously each quarter.

We haven't broken out for you the gross amount before the impact of the asset liability management rebalancing, and I don't think that particular item is worthy of further breakout. I think it's in the context of our overall activities for the quarter that you should review that.

My final question is what is it about the recent OSFI advisory that concerns you the most?

I think I've made it fairly clear that as, we think about this advisory, we are in the consultation phase, and that's a complex area, as you know, so a lot of consultation taking place, both pre the advisory being released and through the consultation period, which ends at the end of November. So it would be premature at this point to signal specific comments on the advisory.

Tom MacKinnon, BMO Capital.

Thanks very much. A couple of questions. One is can you elaborate as to what the EPS impact is going to be when you actually close the sale of the reinsurance operation? Is it to be material? How should we look at that?

Yes, so the proceeds on sale are -- the accounting gain on sale is not expected to be material. You could think of somewhere in the range of CAD0 million to CAD30 million. We've obviously got some work to do to finalize the final purchase price equation, but it will be a small amount on a net accounting basis.

Thank you. A follow-up with respect to the -- there was a CAD32 million in terms of unfavorable mortality and morbidity experience, but at the same time there was CAD216 million in terms of reserve releases related to what would likely be favorable mortality and morbidity experience. In what lines were the unfavorable mortality and morbidity experience? Were any of those lines involved in a reserve release as well?

Yes, the two areas where the quarter's experience was a little adverse were the reinsurance retrocession business and the group insurance businesses. The main release on the mortality side was in individual insurance in the US, as well as the reinsurance unit.

I think it's important that we don't focus too much on a single quarter's results when looking at mortality. We tend to assess that over a longer period. As you well know, the trends here are very favorable for mortality over the long run.

All right, so suffice to say that reinsurance had a mortality reserve release but it did have a little bit of unfavorable mortality in the quarter.

That's correct, yes.

Now, just with respect to the interest rates, we're looking at yields here down 10 basis points just today. If I'm looking at your disclosure, which you have, it certainly just calls for all we want to do is have parallel shifts. If they are not parallel, I can understand that.

But I think one thing you alluded to here is in terms of the use of swap spreads to have -- give you some sort of gains in your seg VA reserving. Now is any of that included in this -- in your sensitivity of -- interest rate sensitivity here? If not, how should we try to model that going forward?

So as we described earlier, the sensitivities out of necessity, really, have a number of simplifying assumptions, just because there are so many moving parts and interactions between these. One of those assumptions is that swap spreads don't change.

So to be clear, the sensitivities are really only based on assuming movements in the senior credit, government bond issues. So that's why you're going to get variances when swap spreads, credit spreads, you know, changes in the shape of the curve, etc., actually come through.

Luke, this is Phil Malek. We have time for one more quick question before we turn the call over to Don Stewart for some closing remarks.

Colin Devine, Citi.

One quick one for the investment portfolio. I'm a little curious about your change in outlook for the US commercial mortgage portfolio because, frankly, that's completely at odds with the experience of all of your peers. So are we back to more of a company-specific problem with this investment portfolio, again, as, frankly, we've had in the past?

This is Steve Peacher. I'll comment on that. I don't know if I would say that we are seeing a company-specific problem. I think we continue to see quite broadly continued pressure on US commercial real estate vacancies, rental rates, and we are seeing that.

I think it is really a function of the broader economy as has been frequently described to me that real estate is effectively the economy in a box. If we see unemployment persist in the range of 9% to 10% in the US, I think we're going to continue to see pressure on real estate fundamentals.

That doesn't necessarily mean valuations in real estate will continue to go down. We are seeing some bottoming in cap rates, but we are seeing continued pressure on fundamentals of the commercial mortgage market. That is what was reflected as we looked forward in our -- the addition to the sectoral provision, as Colm mentioned.

Ladies and gentlemen, this concludes the question-and-answer session. Mr. Malek, please continue.

Before I turn the call over to Don Stewart for his concluding remarks, I'd like to thank all of the participants on today's call. If there are any additional questions, we will be available after the call. A recording of the call should be available on our website later this afternoon.

With that, I'll turn it back over to Don for some closing remarks.

Closing our overall business model and established risk management practices have been instrumental in managing through these turbulent times. We remain focused on adapting to meet the challenges of the new environment, to deliver long-term, sustainable value to our customers and to our shareholders.

I'll conclude with a brief tribute to Jon Boscia, our President. As previously advised, Jon will be retiring early next year. I want to acknowledge and thank him for his many contributions to Sun Life over a very intense period that he has served as our President. We are delighted that Jon will be continuing his association with Sun Life through our Board.

Thank you, Luke. We're all set with today's call.

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