Sun Life Financial Inc (SLF) 2010 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Sun Life Financial fourth-quarter 2010 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 is being recorded today, Thursday, February 17, 2011, and I will now turn the conference over to Mr. Phil Malek, Vice President Investor Relations. Please go ahead.

Thank you and good morning, everyone. Welcome to Sun Life Financial's earnings conference call for the fourth quarter of 2010. 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 fourth-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 fourth-quarter financial results. 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.

Turning to slide 2, I draw your attention to the cautionary language regarding the use of non-GAAP financial measures and forward-looking statements, both of 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.

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

Thank you, Phil, and good morning, everyone. Yesterday Sun Life reported results for the fourth quarter of 2010. We reported net income attributable to common shareholders of CAD508 million, well above the CAD296 million reported a year ago. Return on equity was 12.4%, compared to 7.6% reported in the fourth quarter of 2009. Earnings for the full year 2010 were CAD1.583 billion compared with net income of CAD534 million in 2009.

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

Results this quarter benefited from the solid execution of the Company's business strategies and initiatives as well as improvements in underlying economic conditions. Colm Freyne will be providing detailed information on the financial results.

At this point, I will highlight some operational achievements. As noted on slide 4, a number of records were posted in 2010. Sales in SLF Canada's individual insurance business reached a record high level, exceeding CAD200 million. At MFS, year-end asset levels of $222 billion and gross 2010 sales of $53 billion were both new records. 2010 individual life sales in China were more than double 2009 levels.

We ended the year in a strong capital position with a minimum continuing capital and surplus requirements ratio for Sun Life Insurance Company of Canada of 228%.

I am proud to note that Sun Life Financial has again been named one of the global 100 most sustainable corporations at the World Economic Forum. Sun Life is the only North American insurance company named to the global 100 list in 2011 and this is the fifth time in seven years we have been so recognized.

Looking at topline results on slide 5, total premiums and deposits were up 4% over the same period a year ago mainly due to strong institutional fund sales at MFS and in our Hong Kong business. Excluding the impact of currency, overall premiums and deposits increased by 8%. The 4% decline in mutual fund deposits reflect lower retail fund sales at MFS compared to a particularly strong fourth quarter in 2009.

The increase in life and health was driven by strong sales in Canada, China, Indonesia, and the Philippines. Other wealth products were down 2% due to lower fixed annuity sales in our US operations as we continued to deemphasize sales of that product.

Turning to slide 6, our Canadian business remains a solid contributor to the Company's overall results, with strong sales growth across most product lines. Individual life and health sales were up 16% with increases in both the career and wholesale channels. Sales of fixed interest products including accumulation annuities, GICs, and payout annuities were up 11% over a year ago.

Group benefits demonstrated impressive topline growth in the fourth quarter, with sales up 217%. Group retirement services continued to build on its industry-leading position, with sales up 133% over the prior year.

In the direct channel, pension rollovers continued to be strong with a 12 month average retention rate of approximately 50%. Total annual sales of pension rollover products exceeded CAD1 billion for 2010.

Sun Life continues to develop innovative web-based tools for Canadians. In the fourth quarter, we launched a unique retirement education micro site, myretirementcafe, which enables customers to learn more about retirement planning.

Turning to our US business on slide 7, domestic variable annuity sales in the fourth quarter of 2010 were $757 million, a 6% increase from the same period a year ago. As expected, US individual life insurance sales were down 46% due to our decision to exit the no-lapse guarantee universal life insurance market. Sales of core products excluding no-lapse guarantee universal life increased by 23% in the fourth quarter as we focus on other products with greater potential for sustainable profitable growth.

In particular, our success in the small-business market has been robust with full-year sales up almost 40% versus 2009.

Despite a challenging environment, the US Employee Benefits Group continued to deliver profitable growth with record sales in the fourth quarter of $382 million, an increase of 18% compared to prior year. Sales benefited from the specialized distribution model implemented in the first quarter.

In the 2010 Operations Manager's Roundtable Survey, key distribution partners ranked Sun Life number one out of 16 insurers in five categories. Our US operations were also recognized by DALBAR with the 2010 pre and post sales service awards, the highest award given to companies for exceeding industry norms in sales desks and call-center service.

Turning to slide 8, MFS delivered another impressive quarter with positive net flows of $5.1 billion, bringing the total net flows for 2010 to over $14 billion. Operating margins remained strong at 31%.

MFS continues to have excellent fund performance with 85% of retail fund assets ranked in the top half of the Lipper categories based on three-year performance. This continuing solid contribution from MFS reflects the success of its global sustainable investment platform.

Turning to Asia on slide 9, individual life sales excluding India were up 18% with strong contributions from China, Indonesia, and the Philippines. Sales in India continue to be impacted as the marketplace adapts to the sweeping September 1 regulatory changes to unit-linked products. The industry requires more time to fully adjust to the new environment.

Having said that, Birla Sun Life has introduced new products and we are in the process of further expanding our product portfolio. Expansion activities elsewhere in Asia continued in the fourth quarter, with Sun Life Everbright approved to open three new branches in China, expanding our footprint to a total of 36 cities. We launched Sharia-compliant and other new unit-linked products in Indonesia.

I am please to announce that Sun Life Financial and the Yuchengco Group in the Philippines have just entered into an agreement to form a joint venture company, Sun Life Grepa Financial Inc. This new joint venture will enable Sun Life Financial Philippines to launch a bank assurance relationship with the Yuchengco-owned Rizal Commercial Banking Corporation, known as RCBC, and provide quality protection products to the bank clients nationwide. By tapping into RCBC's network of over 350 branches and over two million customers nationwide, this deal expands our distribution reach and will help drive future growth in the Philippines.

In closing, in 2010, the Company took significant steps to adapt the business model to compete in today's business environment. We took significant steps to shift our business mix and product design to businesses and products with a more optimal risk return profile.

In 2011, we will continue to focus on those businesses with lower capital requirements and flexibility around pricing and guarantees while building on our established risk management practices.

With that, I will ask our CFO, Colm Freyne, to speak to our fourth-quarter results in more detail. Colm?

Thank you, Don, and good morning, everyone. Results in the fourth quarter benefited from continued improvements in equity markets and favorable interest rate movements. On slide 11, we have provided the reconciliation of fourth-quarter net income of CAD508 million to our estimated adjusted earnings from operations of CAD359 million.

As noted on this slide, favorable equity market movements contributed CAD181 million to earnings in the quarter. Interest rates were higher at the end of the fourth quarter compared to the third quarter and resulted in a positive impact of CAD113 million. Management actions and updates to actuarial assumptions in the fourth quarter resulted in a net charge of CAD58 million.

As we said on our earnings call last quarter, while we generally review actuarial assumptions in the third quarter, some of these reviews come through at other times of the year. Nonrecurring expenses arising from key projects and initiatives in Canada and the UK businesses resulted in a negative impact of CAD29 million.

The strengthening of the Canadian dollar versus other currencies decreased net income by CAD13 million. Other experience including CAD5 million of net credit experience had a negative impact of CAD45 million. The amount of specific impairments booked in our commercial mortgage portfolio in the fourth quarter was consistent with the amounts booked in each of the first three quarters of 2010.

Our sectoral provision for commercial mortgages at Q4 amounted to CAD76 million compared to CAD79 million at the end of Q3. We have not yet seen a clear improvement in the performance of our US commercial mortgage portfolio and as such, the valuation of our provision at the end of 2010 resulted in only a minor change versus the level at the prior quarter.

While there are encouraging indicators, the economic recovery in the United States remains sluggish and unemployment levels remain elevated. Nonetheless we continue to believe that the performance of our commercial mortgage portfolio will improve over the course of 2011 barring significant changes to the macroeconomic environment.

Adjusted earnings from operations for the 12 months ending December 31, 2010, were CAD1.446 billion, within the range of CAD1.4 billion to CAD1.7 billion which we previously provided. As I stated last quarter, the further we move away from the third quarter of 2009, which was the baseline for adjusted earnings from operations, the attribution back to the environment at that time becomes more complex. We have focused on adjusting for items with a larger impact but did not seek to capture all second order effects, which may have impacted adjusted earnings from operations as time passed.

While we will not be providing adjusted earnings from operations going forward into 2011, we will continue to break out key earnings impacts in our quarterly results.

Slide 12, we provide details on our sources of earnings. Expected profit on in-force business was CAD446 million, down CAD58 million over the same period last year. It is up marginally from the third quarter of 2010.

The year-over-year decline is attributable to the release in 2009 of the previously established margins for higher levels of asset defaults, the strengthening of the Canadian dollar, and higher hedge costs due to lower interest rates.

New business strain was CAD52 million, an improvement of CAD63 million from a year ago, reflecting our exit of the no-lapse guarantee market in the United States and the lower strain associated with reduced sales in India. Experience gains of CAD246 million reflect the positive impacts of stronger equity markets and higher interest rates.

Assumption changes and management actions were a negative CAD85 million pretax or CAD58 million after tax. These updates were primarily related to mortality updates in the Canadian segregated fund and payout annuity businesses as well as valuation model adjustments in the US business.

Earnings on surplus of CAD92 million are up from the fourth quarter of 2009 due to higher levels of gains on the sale of available-for-sale securities.

Taking a closer look at the performance of our business groups on slide 13. SLF Canada reported net income for the quarter of CAD182 million, down from the CAD243 million reported a year ago. Positive impact from equity markets was partially offset by the unfavorable impact of swap spread movements in the quarter and the changes to actuarial estimates and assumptions mentioned previously. We use interest-rate swaps to manage interest-rate risks as part of our hedging program. These swap instruments lose value when spreads widen and the impact runs through the income in the quarter. This quarter swap spreads in Canada widened by 15 to 25 basis points.

In the United States, we reported income of CAD267 million, compared to a loss of CAD9 million reported a year ago. This improvement reflects the favorable impact of equity markets and interest rates.

As well, results in the fourth quarter of 2009 included the negative impact of credit impairments and reserve increases for downgrades on the investment portfolio.

Earnings from MFS were CAD57 million, up from the CAD49 million reported a year ago. Margins improved to 31% from the 29% reported in the fourth quarter of 2009. Earnings from our Asian operations were CAD28 million, up marginally from the CAD27 million reported in the fourth quarter of 2009. The earnings contribution from India improved due to lower new business strain associated with a lower level of sales. This improvement was partially offset by lower earnings in our Hong Kong operations due to higher new business strain arising from a change in business mix.

Our UK operations reported a net loss of CAD11 million compared to income of CAD9 million a year ago with the positive impacts from the Lincoln acquisition being offset by increased expense levels related to industrywide regulatory costs as companies prepare for Solvency II and restructuring costs aimed at reducing run rate expenses.

Turning to capital on slide 14 and our regulatory capital position, you can see that we further strengthened our minimum continuing capital and surplus requirements ratio for Sun Life Assurance Company of Canada to 228%. On December 31, we completed the previously announced sale of our reinsurance business. This increased the MCCSR ratio by 14 points.

In addition, at the end of the fourth quarter, we entered into an external reinsurance agreement for the insured business in our group benefits business in Canada, the implementation of this agreement resulted in an increase in the MCCSR ratio of 12 points. This was partially offset by a 6 point reduction for the redemption of CAD300 million of debentures in the quarter.

I would also like to comment on the value of new business as shown on slide 15. The last 12 months value of new business of CAD765 million represents a 43% improvement over the prior year's 12-month period. The significant improvement was driven by product redesign and repricing in our variable annuity and segregated fund businesses, improved product mix in our Canadian individual business and also by strong gross sales at MFS.

I will now turn the call over to Phil for questions and answers.

Thank you, Colm. 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 yourselves to one or two questions and then requeue with any additional questions.

With that, I will now asked Luke to please poll the participants for their questions.

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

A question for Colm or maybe Mike. I believe some of your hedging, your hedging is still macro-based. Can you update us on how big a component that is? How much higher hedging costs have with the improved markets? And what are the prospects for some unwind of the macro hedge program anytime soon? I guess what I'm trying to understand is how much the hedging costs which I think are included in expected profit are hurting the results and how optimistic should we be that hedging costs could moderate any time in the near future?

Perhaps I will say a couple of words on that, Steve, and then I will hand it over to Mike for some additional comment. I think the important part to remember in respect of our hedging program is that we have a complete program in place with respect to our hedging activities. So while there have been impacts over the year as a result of higher hedge costs due to the lower interest rate environment, we have over the course of the year included the various risks in the program which we designed to hedge. And accordingly, that aspect isn't something that we need to be overly concerned with as we move into 2011.

As you say, there have been impacts over the course of the year with respect to hedge costs and macro hedge costs and dynamic hedging programs and perhaps this is the point where Mike might make a few comments.

Thank you, Colm. As Colm said, our hedge program is fully mature and really any changes in the costs associated with those is really going to be just a reflection of market conditions and the normal operation of the hedge program.

So for example, if we do see an increase, continuing increase in equity markets and if interest rates continue to go up and market volatility continues to come down, so generally favorable market conditions, that will translate to reduced hedging costs. If we look at sort of the marginal costs as a result of new business activities, as we continue to derisk our products, the cost of hedging those guarantees is also going to come down. So over time, that should help to reduce the costs over the longer term.

But the costs are going to be largely dependent on market conditions and obviously those can move both ways.

When you talk about rates, is it really the swap rates we should be focused on here?

Well, there's a whole bunch of variables that go into determining what the actual costs of hedging is, so for example in the case of equity markets, there's a broad range of different markets that we are exposed to, a number of different indices that we use to hedge against, a range of different interest-rate markets, currency markets play into that. Certainly swap rates are a key part of that but even there there are sensitivities to different key rates along the curve. So there's a number of moving parts and you really need to look at the net impact of all of those.

Okay. One more if I might, then. The group benefit reinsurance initiative was a little bit of a surprise to me, so along with the sale of the reinsurance business, that's now a couple of meaningful moves to take capital ratios higher. So on one hand I believed that Sun Life was pretty comfortable with capital with an MCCSR close to 200, but we maybe that is not entirely correct. So I have two questions.

One, do you feel the need to look for ways to get capital ratios higher given all the uncertainties with respect to regulatory capital? And secondly, what kind of earnings impact should we expect in Canadian group benefits as a result of the reinsurance deal?

It is Colm here again. So on the point around the capital initiatives, I should start by saying that we constantly look at our capital position and we constantly evaluate the best mix between risk and capital in a variety of ways. These initiatives often takes quite some time to come to fruition. So while it may appear at the fourth quarter, it's an event that we have in working on for some time as we look to be effective in terms of risk mitigation and capital efficiency.

The earnings impact on the group benefits reinsurance transaction would be in the range of CAD20 million, CAD25 million per annum after-tax and the point you made earlier about our views around capital and uncertainties in capital, I think you make an overall point there is a valid one. That from a capital perspective going forward there is still uncertainty. The regulatory requirements with respect to variable annuities and segregated funds we've spoken about this in the past, they continue to evolve and will take some time to evolve.

And we also look at our other capital positions. You will have noted that we have capital trust securities which, a number of which will come up for redemption later in 2011 and we pre-financed a portion of that. So we evaluate all of these aspects as we consider our capital position but we feel we are at the good, strong capital position as we sit here today.

Thanks very much.

Robert Sedran, CIBC.

Good morning. I guess just to follow-up on the issue of capital, is it too early to know or do you think you will have to downstream some capital into the US subsidiary again this year?

No, that's a good question, Robert. With respect to our US subsidiary, we have not yet totally finalized our RBC calculations regulatory-based capital requirement and risk-based capital requirement in the US. But at this point, it does sit at approximately 410%, which is above our target range and we are very comfortable with that level and we did not downstream capital to the US in the fourth quarter, nor do we have any plans to do so.

Okay. Thank you, and just to follow-up on the issue of expenses then, I know the operating expenses were called out as an unusual item this quarter. If I look at slide -- page 24 of the supplementary, was the entirety of the increase shown on that page unusual or one time, if you will? Or is there something structural that might keep the run rate elevated going forward?

With respect to expenses, no, we did not take all of the portion of the increase and designate it as being one time. We are mindful that designating any unusual expense increase as one-time is something we should be cautious around, so we are pretty rigorous around that.

Expenses are up year-over-year. They're up in a variety of areas. They are up with respect to variable arrangements, variable compensation arrangements for example where we have had strong sales growth and you will have noted the very strong performance on sales across a variety of businesses and also notably at MFS.

We have a number of project-related expenses. I called out a couple of those with respect to the UK on Solvency II initiatives for example as we ramp up for those particular initiatives.

There are other one-time type of expenses that we called out and they relate to restructuring and in many cases it's really to ensure that we are investing in a more productive operating model going forward.

And then of course, there are the ongoing expenses that you would expect around salary increases and investing in advertising brand, etc. So a host of items but I think the one-time items we called out were the ones that we felt were particularly unique to this quarter.

So it sounds like the run rate is perhaps a touch higher than it had been, correct?

That is correct in respect of the fourth quarter, yes.

Thank you.

John Aiken, Barclays Capital.

Good morning. Don, I wanted to -- or Colm, I wanted to know whether or not you're comfortable reiterating midterm targets particularly for ROE. I think on the discussion at the Investor Day you were lukewarm on reiterating I think it was the 12% to 14% range. But I wonder if you have any commentary for either 2011 or your outlook for the next three to five years?

John, it's Colm here. Perhaps I will also have a go at that. So, you're quite right. We did point out at Investor Day that we were going through our year-end process as we finalized our plans etc. for 2011 and beyond. And as we worked through that, we did confirm that 12% to 14% medium-term objective for ROE continues to be appropriate and really we've touched on a couple of the items as to why that continues to be appropriate at this time. There is of course the uncertainty around regulatory capital requirements that I alluded to.

In addition to that particular item of course, there's also the issue around the available capital and as you know on the banking sector, there's been a lot of activity in recent weeks with respect to contingent capital and capital qualifying for regulatory purposes in the bank sector.

That conversation hasn't entirely moved over to the insurance space at this point but we do expect that there will be a discussion with our Canadian regulator around that going forward. So we think in light of all of that, the 12% to 14% medium-term objective remains the appropriate objective at this time.

Thanks, Colm. With that 12% to 14% over the midterm with what we've seen recently with Sun Life being underneath that, can we look for -- can we look to the point the Philippines acquisition that you announced this morning as a recovery in appetite for potential acquisitions or was this just opportune and was a nice tuck-in within that region?

Actually we've been working on this particular joint venture for a very considerable period of time and in that sense, it's emblematic of we are always looking at opportunities, sometimes they take a fair amount of time to consummate, but you can rest assured that we are in the deal stream, we are looking at opportunities and that only gives us an opportunity to speak to them when they actually happen. Many of them don't but there's a great deal of activity going on at all points in time.

Understood. Thanks, Don.

Andre Hardy, RBC Capital Markets.

Thank you. I want to go back to expenses and ask it a little differently. In Q4 '07, Q4 '08, Q4 '09, and then of course this quarter, there is a big spike in expenses in Q4 relative to the prior three quarters and then that generally trended back down in subsequent quarters. So I just want to understand a little better the CAD29 million after tax that you are flagging as unusual. If you use round numbers that would be about CAD40 million pretax or operating expenses of CAD900 million, again using round numbers.

Should we expect the normal seasonality to help expenses come down relative to that CAD900 million adjusted number?

Andre, it's Colm here again. I think it is fair to say that in many companies in our industry and in the financial service base, the fourth quarter does represent a bit of a truing up of expenses and some of that can be related to finalizing amounts with respect to compensation arrangements based on full-year plan, etc.

With respect to the items that we called out, none of those relate to compensation expense true ups, if you will. They relate to restructuring initiatives that I mentioned for the UK corporate office, Canada, and consequently they would not recur and I think you can expect that going into 2011 the first quarter would be a lower expense quarter, all things being equal.

It's probably a related question, but if we look at MFS on page 15, not a lot of operating leverage sequentially in the context of a fairly material increase in revenues. Again, is that due to quarter or year end comp adjustments and we're likely to see more operating leverage next year?

I know Rob is on the line so I think I will pass along to him after I just make an overall comment, which is that we do think there is operating leverage clearly within MFS, and so I wouldn't sort of read into one quarter's results that that's not there. But I'm sure Rob will expand on that.

Yes, Colm, I think that's an accurate statement. Everyone should also know that we are investing quite a bit of money on branding in our client service platform globally. As the business has scaled up in the platforms that we are on have expanded, we found it necessary to spend more money in the short run to hopefully build the business and the foundation in a durable way for the long run.

But I do think as you see the assets begin to rise that you will see operating leverage not as significant as in previous cycles because of the regulatory costs that we have talked about, but MFS today manages at the end of the year CAD222 billion and we are doing it with fewer people than we had when we had CAD150 billion. So there is operating leverage, but we are spending more money on certain aspects of our business right now.

Is mid-30s still realistic in the context of rising assets?

Absolutely.

Thank you.

Mario Mendonca, Canaccord Genuity.

More of a broad (technical difficulty)

Mario, you're not coming through. Either your line was cut off or possibly you are on mute.

MR. Mendonca, if you could hit Star 1 on your phone.

Why don't we move on a come back?

Doug Young, TD Newcrest.

Just this is my first question. Related to the US operation, maybe there's a few parts to this, but it just seems like a better quarter than what we had expected and I know there's some positive items that came through in the US and some negative items in Canada. So it would be helpful if you could split out maybe some of those items and quantify that and the impact. That would be one.

And the second part of that in the group side is it just seems like a lot of your competitors are talking about disability claims going up and becoming more competitive. I think you've mentioned that before as well but it seems like earnings were up in the US group and sales were up in US group, so I just wanted a little bit more color on what you are seeing.

This is Wes Thomson. I'll start with the last two questions. I think your first question had -- was a bit more global around US and Canada and breaking out what's happened in the quarter.

But in terms of our group business, what we are seeing in terms of claims experience has been within the expected range. However, the rate of incidence, which is a count-based measure did rise in the fourth quarter. So we continue to monitor these areas closely and one of the things that is encouraging is that recoveries have remained stable in the quarter. So we don't see any change in sort of the return to work rates that have historically been there.

In terms of the competitive environment, I think it is -- has continued to be challenging. You may recall that earlier this year we did announce that we were changing our distribution strategy and segmenting our field force to a more specialized approach. That did impact our sales in the first two quarters. We began to see the expected impact of that change increasing productivity in the third quarter and that continued to bode well for us in the fourth quarter.

And so really the focus there has been on driving greater productivity within our existing salesforce and bringing more focus to our core multi-line product portfolio, which did result in a nice increase in sales in the fourth quarter.

But we continue to be very disciplined around our underwriting process. It really has been I think bringing greater focus to the markets that we want to drive sales in.

Wes, would you call the market becoming more rational or less rational?

That's a great question. What you see typically are one or two players that seem to get out of sync, and that tends to rotate. So I don't know if I would describe it as less rational. I do think that there was a period I'd say earlier last -- late last year, earlier this year where we did see some pretty aggressive moves as typically demonstrating itself in much longer-term rate guarantees which we do not participate in.

Maybe, Wes, while I've got you, the variable annuity side, you launched new products in Q4. I think you've launched a new product in Q1. Higher prices, less features, but your sales are up. Can you talk about -- is that being driven by more your competitors kind of doing a lot of the similar things or improved productivity or can you maybe just talk about the dynamics there?

Sure, again a combination of things. I think it's important to recognize that there are generally fewer players in the VA space in the US. What we are seeing is very unusual trend that I haven't seen in the years that I've been in this business, which is five players dominating the marketplace and taking over 55% of market share. So we are not interested in playing in that group. We are very confident and comfortable with the level of risks that we are assuming and the level of sales. So we are seeing sales within our prescribed level that is in line with what our expectations are from a wholesaler productivity perspective and we will see increasing wholesaler productivity which will drive our improvement going forward.

And these sales -- have the sales that you've shown in Q4, does that include the new products? Has there been a material amount or is it still the old product?

It was a combination, so we launched in early December, so we did see that new product have some impact in the fourth quarter, but not an awful lot. We are seeing -- we are encouraged by the product as its continued through so far in the new year.

Okay, just Colm, one last one. The excess capital at the Hold Co. above the 200% MCCSR, I know I ask that every -- or someone asks that every quarter, so I figured I would throw that one in.

Sure, and with the capital strong capital level at Sun Life Assurance, that also translates into an excess at the Hold Co. which at December 31 was CAD1.6 billion above the 200% level.

Thank you.

Mario Mendonca, Canaccord Genuity.

Good morning. Phil, can you hear me now? Quick question on the IFRS adjustment, CAD2.2 billion. Can you split that between the common shareholders equity and other? Or is it all common shareholders?

Yes, that all goes to retained earnings. We have talked about the items before, Mario, if you recall the CAD1.7 billion on goodwill, just over CAD300 million with respect to the pension adjustment, and then there are other bits and pieces that make up the difference to take it to total of CAD2.2 billion.

Just for perfect clarity, although the adjustment will be done on a retroactive basis, that hasn't been reflected in your book value per share that you disclosed this quarter?

That's correct. The financial statements, all our disclosures are still based on existing Canadian GAAP.

Okay. And then maybe a more philosophical question. Prior to the crisis, it became -- well, throughout my entire experience with life cos, you always see, almost always see positive policyholder experience, whether it be mortality, morbidity, expense particularly. But more recently that hasn't played out for several of the life cos. And Sun Life particularly over the last little while. Has something changed or is this just volatility and I should maybe wait a few more quarters before I arrive at any conclusions?

Mario, I think it's a great question and as we try to dissect what has happened over the past couple of years through the crisis I think we are all looking to make sure we are learning from that and seeing are there additional steps and actions we should be taking.

I think your conclusion that maybe it's a little too early to read something more profound into it is probably the right reaction at this point. Quarter-to-quarter, it does vary and I think we want a little bit more under our belt before we could conclude on that.

And maybe just following along on that for a moment, maybe this is something for Keith to think about as well. Policyholder experience gains and losses, can you think of that as a sort of -- maybe give us a range plus or minus in any given quarter CAD30 million, CAD40 million, CAD50 million? Is there any way you could offer something like that?

Yes, this is Keith Gubbay. The numbers are not very large here. The biggest item in terms of variance has been around expenses recently and we have had some discussion of that.

The other items I have a list going back for the last five quarters tend to be in the CAD5 million to CAD15 million range. Sometimes they offset, sometimes they don't. And so I am not personally reading very much into that. We do our assumption setting process. We rigorously look at the experience. We try to set our assumptions to reflect what we see.

So I don't have any particular concerns with that one sort of portion around the expense run rate where we have seen a little bit of tick up.

And then that is five quarters you're looking back, expenses, mortality, anything else that comes up as negative?

Well, mortality has actually been up and down. Q3 was adverse but there were other positives in other quarters. Lapse has been pretty neutral. Yes, there's nothing that stands out there.

Okay, I appreciate your help.

Tom MacKinnon, BMO Capital

Thanks very much, good morning. A question really just with respect to the mortgages here. The net impaireds, the significant increase quarter-over-quarter here and with both on the gross and the net, and I'm wondering if you can give any more color on this, maybe you can flag how your watch list percentage has changed.

Was there any release in terms of provisions for default associated with mortgage or for that matter it looks like these things went down significantly from CAD3.1 billion to CAD2.9 billion actuarial provisions for default just quarter-over-quarter. Was there any kind of release in that to help offset that? And I have one more follow-up.

Okay, so perhaps I will just start out on the actuarial piece because I think the real substantive discussion here is around what is happening with the underlying portfolio. So there was no unusual movements with respect to reserve releases on the actuarial side.

But with that, I'd just like to hand it over to Steve Peacher to comment on what's happening with the underlying portfolio.

Yes, well, I will say that with the underlying portfolio, as Colm mentioned during his comments, the pace of specific impairments in the fourth quarter was very consistent with the pace in the first three quarters. So while we haven't seen an acceleration in the deterioration of the portfolio, we haven't seen the portfolio improve meaningfully at the same time.

One thing I will note is that the number of impaired -- the gross book value of impaired loans that you see reported in the fourth quarter increased. One of the biggest drivers of the increase in the fourth quarter was impaired loans which were determined to be impaired but for which we took no provisions because we may have taken a -- we may have made an adjustment to loan terms. We may have pushed out amortizations, etc., but they are loans for which we fully expect to get a full recovery.

I think that's an important noted when looking at the increase in the book value of impaired loans.

You mentioned it was the pace in terms of the gross impaireds consistent really with the last three quarters, but it was certainly up a lot higher this quarter than it was the last three quarters.

Sorry, Tom. What I was alluding to there was the level of specific provisions taken (multiple speakers)

Okay, pardon me. What about the ABS portfolio. The below investment grade percentage here continues to increase and you also mentioned in the press release that you had some reserves mitigated some of the losses throughout the year with respect to that.

So was there anything with respect to the ABS portfolio here in terms of reserving noise? What would happen if the below investment grade bond percentage -- or below investment grade percentage of this portfolio fell to, say, from its current 17% to say, 20% or 25%? What could we expect going forward with respect to that?

Well, this is Steve Peacher again. With our structured products portfolios that you are referring to, both CMBS and RMBS, as we mentioned for the last few quarters and since the end of last year, we're really focused on our estimates of lifetime loss estimates and we have keyed our approach to those assets based not on ratings, which we view as in this environment somewhat not representative but more on our estimates of lifetime losses.

Those lifetime loss estimates for the portfolios have been consistent throughout 2010 and in fact, we see actually some signs of improvement which may mean that those loss estimates could come down in future quarters. But the important point to note is that our lifetime loss estimates for those portfolios have been stable for over a year now.

All right, so you differ from really what the rating agencies are saying in terms of the way you are quantifying this risk, I guess.

Well, I think we are taking a very granular approach to the analysis of these portfolios from a detailed bottom-up analysis of the underlying collateral in every CUSIP we own and then how that transfers through securities. We now have many different data points and points in analysis in many different ways and through many different scenarios, and we are very confident those lifetime loss estimates that we've made continue to be stable.

Tom, if I could just add to that, it's not so much that we differ. It's really around how we have approached it from an accounting recognition perspective, because if you recall back in 2009, we had significant credit charges come through the income statement and that was related to both reserve increases and actual impairments that we were taking.

And we reached a point where we looked at the lifetime losses and we evaluated this, as Steve mentions, in a variety of matters, ways, and we determined that we were in a reasonable place around that at that point with all the caveats about what would happen going forward. And we continue to evaluate it on that basis so that the fact that security might be downgraded does not in itself drive a charge in the income statement because we're looking at it from a total perspective.

Finally, the provision for defaults in the actuarial liability [sell] CAD200 million just quarter-over-quarter. Can you highlight as to what was moving that? I don't know if there is any kind of upgrades.

I would imagine a portion of that is related to currency. I don't have the specific --

Quarter-over-quarter shouldn't be that much, though.

Well, it would be a factor but not all of it, I agree. But there's nothing that I can think of specifically around that. We perhaps can take a look at that and if there is anything to advise on off-line, we can do so.

Okay, thank you.

Darko Mihelic, Cormark Securities.

Thank you. I was going to revisit the question with Mike and hopefully this time we can get quantitative answer. Mike, how much did hedging costs hurt you year-over-year and quarter-over-quarter?

And maybe you could tell us like where it impacted expected profit, whether or not there's other areas that it would come into the earnings stream? And if you could also just mention what was the major driver?

Okay, so hedge costs during the quarter cost us about CAD68 million after tax, so that represents about 69 basis points, 70 basis points relative to the guaranteed values being hedged. If we kind of forecast that looking forward over 2011, again the costs are a function of expected market conditions. So based on assuming that equity markets return about 10%, say 2% a quarter plus 2% dividend for the year, assuming interest rates stay more or less at levels that we started the year, we are projecting about CAD200 million of hedge costs for the year and that would represent between 50 and 55 basis points of the guaranteed values being hedged.

The drivers of that, as we said earlier, it's a function of the market conditions and level of volatility, interest rates, where market levels are relative to the embedded guarantees, volume of business written, etc.

Okay, maybe just -- that CAD68 million of after tax, if you could just maybe -- where would that show up in the source of earnings?

So all of our hedge costs show up in our expected profit line of our sources of earnings.

Regardless of whether or not it's over and above what you said for the -- in other words, it's nothing that would show up in expected gains or losses?

The expected costs show up in expected profits. The actual costs, the variance from that show up as experience gains and losses.

Okay, so if I say 70 basis points versus a 50, 55 expectation, presumably some of the CAD68 million this quarter ended up in experience gains and losses. Would that be correct?

Yes, that is right.

Okay, maybe just one last question and thank you for this level of detail. What would the CAD68 million this quarter compare to last quarter?

I am sorry, so point of correction, the CAD68 million for Q4 is actually the expected hedge costs for Q4 and that's what would have shown up in the expected profits line under the source of earnings analysis.

Okay, so there would be another -- so was there an impact in the experience gains and losses this quarter? In other words, did you have anything over and above that or below?

Well, we actually had overall positive experience gains on account of equity experience for the quarter. And that would have shown up under the gains and losses line. I think in the slide 12, I think experience gains and losses total of CAD246 million, a significant portion of that would be attributable to the positive equity performance over the quarter.

And positive performance or, in other words, your hedging program maybe wouldn't have fully tracked and you would have had a positive experience in there as well; would that be correct? Or is this all breakage?

Perhaps I could just add a point of clarification here. We do get into levels of attribution here that become quite complex. So I think the key point as I see it is around the hedge cost, and we come back to the point I made earlier that it is embedded in our run rate, in our expected profits. And every quarter there will be an experience amount around that.

We spent some time talking about the impact on equity and interest rates, etc. And I think the rate in Q4 was not that dissimilar to the rate in Q3. I think some of the questions here do go to the expected profit. We have -- year-over-year we have seen a decline in our expected profit on in-force, and we have commented on that previously.

But just to reiterate, a portion of the decline year-over-year is as a result of the increased level of double default or of default provisions that we had taken in 20008 and respective 2009. That will run off the end of this -- well, it has just now run off and as a point of comparison. And our expected profit was up slightly from the prior quarter, so I think would indicate more of a run rate as we go forward.

Then we have a variety of actions around the expected profit to improve that as we go forward.

And maybe, Colm, one last question for you then. Is it, in your opinion, the best source -- we should be looking at the source of earnings as the best sort of way to describe your earnings in any given period? Would that be appropriate?

I think the source of earnings is a good place to describe the earnings and the attribution. However, as you can see, it's not a very detailed schedule and this is a large, complex consolidated operation. So when you try and distill all of that to one schedule, you are going to end up inevitably with a bit of oversimplification.

And we will do our best to explain the drivers, but yes, I think the source of earnings is a good point of reference.

It might be helpful I think to maybe actually use some description of it in your news release, because there isn't any. And then maybe just one last question.

With respect to these hedging costs, 70 basis points was the expectation for this quarter. You mentioned it wasn't really any different from Q3, so I guess the bottom line takeaway is whatever has moved or changed in the quarter, the expectation is that it would be lower growing forward, 50 to 55 basis points. Would that be correct, Mike? Is that --?

It is indeed and again that is a reflection of the higher interest rates now, the fact that markets have moved up, volatility has moved down.

Okay, great. Thanks a lot. That helps a lot.

Gabriel Dechaine, Credit Suisse.

Good morning. Maybe it would just be helpful here if we could break out the experience gains that you are adding back to get to adjusted earnings from operations. You've got the CAD45 million negative item and it's got CAD5 million of unfavorable credit impact. I guess some expense -- one-time expense items and could you fill out the rest?

More importantly, why would we be adding that back or especially a big portion of that?

Gabriel, as we have reminded you, we have had this construct of taking a headline number being the reported earnings, which are in accordance with our accounting basis, and bringing it back to the adjusted earnings from operations that we talked about well over a year ago at this point. And as we did that, we wanted to break out the various items that were not consistent with the base level assumptions that were set at the time we established that initial range of CAD1.4 billion to CAD1.7 billion. And so that's the reason why we have been breaking out these items and I think we have been consistent in how we've gone about this.

You're right, there are a number of items included in other end when there's a category called other, there is always a question as to what's in there. It made up of a bunch of items, so I think individually nothing significant. True up in terms of some of our asset liability management modeling for example would be one item.

Credit, we've talked about and we feel it is important to call out the credit item because that has been an item that we have spent considerable time on over the past year. That's the reason why we break it out like that.

As I have mentioned, we won't be providing this type of reconciliation going forward, but we will continue to call out the major drivers in the quarter, which would be equity markets, interest rates, credit, and if there are other unusual items such as tax, we will continue to talk about those.

Okay, on the capital, I didn't quite get the response that you were giving to Steve, so why -- maybe urgency is the wrong word here -- you undertook the additional step of reinsuring some of your group business and that's hurting your profits going forward. Given that you are already well above the 200%, and it doesn't look like your US subsidiary needs any capital injection, what's the motivation there?

Then just a quick follow-up for Rob on MFS. Those flows that you discussed on the Investor Day, 70% equities and 30% fixed income, that was across the business or is that in retail? And I guess you're not expecting any major shift if fund flows start turning more to equities then, equity products, sorry.

Rob, maybe I will ask you to go first and I'll come back on capital.

Yes, we are -- we continue to be opposite the industry with almost 75% of our flows coming from equity and fixed income. We are benefiting from that as we speak and the ICI just reported yesterday that significant inflows have begun to come into equity products and we are seeing that in our retail business.

Institutionally it's by geography and distribution channel. Some markets have more fixed income than equity, but we tend to be -- which is based on our investment outlook continuing to tell people to put money into large-cap global high-quality companies.

Thanks.

Gabriel, coming back to the point on capital, I really don't have a lot to add to what I mentioned earlier. The transaction with respect to our group benefits business was done thoughtfully around the right mix of risk mitigation, capital efficiency, impact on the business, etc. And we believe it is quite an effective transaction for us to enter into.

And in respect of the other driver in the quarter, the reinsurance business unit, we've talked about that previously in terms of its strategic fit, volatility of earnings, the amount of capital that's required, and that was the result of that. And as we go forward, we've talked about some of the capital topics that face us and the industry over the next couple of years so we continue to think that we are managing all of these moving parts appropriately.

Thanks.

Colin Devine, Citigroup.

Good morning. Hopefully three fairly fast ones. First I guess for Wes or Colm, with respect to the US, I certainly would find it helpful if you could give us just a little more granularity on how equity markets and interest rates impacted the annuity and lifelines given they've been such an ongoing source of volatility over the years.

Second, with respect to MFS for Rob, Don sort of mentioned that sales weren't as strong and I guess I'd like to touch on that because sales -- mutual fund sales and I realize this was an outstanding quarter for MFS -- but did decline sequentially throughout the year. And I'm wondering sort of what's going on with your mutual fund sales and has that turned in the first quarter?

Lastly for Mr. Stewart, I had thought that this, that retirement might have been a possibility for this year from your perspective and I was wondering if you want to give us an update on where that stands?

Why don't we take these in reverse order? I'm trying to get to the gym every day instead of every second day. I'm thoroughly enjoying my job. Things moved a lot better in 2010 than they did in 2009 and 2008 and we are hard at work every day, Colin. So I'm pleased to say that no further news on that front.

So you are not planning retirement? You are not going to retire this year?

At some point I'm going to retire. That's between myself and the Sun Life Board. We recognize the passage of time, but I assure you I'm showing up every day and you can try me most Saturdays, just don't try me this Saturday.

I usually try you Sunday, but that's a definitive maybe. Okay, thank you.

Maybe, Rob, we will ask you to go next.

Yes, on the mutual fund flows, which is typical in the industry, it was incredibly volatile last year and what we saw as coming into the summer with the European crisis, fund flows were basically completely shut off, so the beginning of last year it was relatively strong in the summer, it died down because of fears of that and a double dip recession. And then we had a pretty good surge coming into the second half, particularly the last quarter of the year.

What I will say for MFS's point of view, which relates to the previous question, is we gave up a lot of mutual fund business because we don't want the long-duration bond products in our clients' portfolios because we think they're going to get hurt very badly when interest rates move up, which is beginning to happen as we speak.

What we have seen in January is that the mutual fund business was very strong and part of that is what I previously mentioned, that the flows have turned more to fixed income and out of munis and other fixed-income and you also have seasonality where people fund their 401(k) plans and their IRAs, etc., etc.

So knock on wood, if the market stays strong, which it has been, we would anticipate to hopefully get close to record sales in mutual funds as a company.

Colin, it's Colm here. I will just make a comment on the overall impact of equity markets on our businesses and then Wes might want to add to that. But we did, as we mentioned, we had CAD181 million from equity markets and that was a more positive performance than our sensitivities as disclosed at the end of the third quarter would've suggested. One might have assumed that we would be more in the CAD75 million to CAD100 million range as a result of those sensitivities.

And what we did see was outperformance in the quarter, so there's always basis risk and we've talked about that previously. And so the fund performance outperformed the relevant index and that contributed to the better results. Some of that was in respect of Canada. Some of that was in respect of the US.

And with that, maybe, Wes, if you had any additional comments.

Yes, I would also add, Colin, that we did see some gains from the lack of or the reduced strain from our exit in NLG in September of last year and I would expect that to continue to be a positive contributor.

In addition, in the US as you are probably aware, we have taken a number of expense initiatives, so we've seen flat expenses and particularly in our group business, we have actually reduced our expense base while also increasing the business in force and revenues.

So all of those have been computing factors. So I wouldn't want to just leave the impression that we are -- we have improvements just on the basis of the equity and interest-rate environment. So real management actions I think beginning to translate to the bottom line.

Trying to get at, and can you give us some sense of what the core earnings were on annuities and life? Because that is the point. Let's take out the market movements. Can you show us how you finally got those two businesses stabilized and growing again?

The overall benefit in the US from favorable equity markets was about CAD86 million and the overall favorable impact from interest rates for the US was about CAD42 million. So if you look at those two relative to the overall performance, that gives you a sense in terms of what the impact was of both the increased experience that we had with positive equity markets and interest rates. And then obviously the other factors are I think significant in our ongoing profitability of the business.

Okay, thank you.

Luke, this is Phil Malek. We are over time for the call, but we can take one more question before we end the call today.

Michael Goldberg, Desjardins Securities.

Thank you. Impressive growth in your sales and value of new business and I'd like to tie it to end with some other items. Overall, what is the present value of future profit included in your CAD84 billion of actuarial liabilities? In other words, your pad at year-end. How much did new business during 2010 add to this amount? And how much of it emerged into 2010 reported earnings?

Now you may shock me by actually answering these questions but more likely you won't, so please tell me why the owners of your Company shouldn't have this important information and can we move to elevating the level of discourse?

Well, Michael, you raised the point about the disclosure with respect to Provisions for Adverse Deviation, the PFADs previously and as we mentioned, we do not break that out separately. I think, really the view around that would be that it's driven by a lot of factors and to linkage the absolute amount to be expected profit in any one reporting period would be very difficult and would not in our view provide additional meaningful information.

But with that, maybe I will ask Keith Gubbay to add some comments.

Michael, I guess the other comment that I would add is that we have had embedded value disclosures, which really is a better way to look at the present value of future profits given the discount rate and the cost of capital and so on. And we intend to continue to do that. But there's a clear link between the EV and the PFADs.

Michael, if I could come back to the point around the value of new business, you know we do focus on ensuring that our products are constantly redesigned and appropriate from a shareholder return perspective to your point around shareholder requirements and the value of new business is a key metric for us. We are pleased to see a growth in the value of new business, but it has been challenging in a low interest rate environment and it is also challenging in an environment where capital requirements are higher to ensure that we have products that deliver value to new business that meets our requirements. So it's an area that we constantly focus on.

Luke, it's Phil Malek. We are out of time for the call today but I would like to thank all of the 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.

With that, I'll say thank you and good day.

Ladies and gentlemen, this does conclude our conference call for today. Thank you for your participation and you may now disconnect your line.