Sun Life Financial Inc (SLF) 2011 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Sun Life financial first quarter 2011 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation we will conduct a question and answer session for analysts. (Operator Instructions). I would like to remind everyone that this conference is being recorded today. And I would now like to turn the conference over to Mr. Phil Malek, Vice President of Investor Relations.

Thank you Luke. Good morning everyone. Welcome to Sun Life Financial's earnings conference call for first quarter of 2011. Our earnings release and the slides for today's call are available on the Investor Relations section of our website at sunlife.com.

We will begin today's presentation with an overview of our first quarter operating results by Don Stewart, Chief Executive Officer of Sun Life Financial. Following those remarks, Colm Freyne, Executive Vice President and Chief Financial Officer, will present the first quarter financial results. Following 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 two, I draw your attention to the cautionary language regarding the use of non-IFRS financial measures and forward-looking statements, which form a part of this morning's remarks. This slide reviews the reasons why forward-looking statements could be rendered inaccurate by subsequent events.

And with that, I will now turn things over to Don.

Thank you Phil, and good morning everyone. Yesterday Sun Life reported results for the first quarter of 2011 under International Financial Reporting Standards. Shown in slide four, the Company reported operating net income of $472 million, an improvement over operating net income of $434 million for the same period one year ago. Operating return on equity was 13.5%. Colm Freyne will be providing detailed information on our financial results including key impacts arising from the conversion to IFRS. Meanwhile, I will speak to highlights from the quarter. The first quarter of 2011 continued to feature solid performance from each of our business groups, as well as demonstrated progress on key priorities.

Turning to premiums and deposits on slide five, there were a couple of events that took place at the end of 2010, and we have adjusted the first quarter 2010 figures to reflect the impact of these. The events were of course the reinsurance agreement in our Canadian group benefits business, and the sale of the life reinsurance business from our Corporate segment. Normalizing for these items, total premiums and deposits were up 2% over the same period a year ago on a constant currency basis. Life and health sales were up 4%, reflecting increased sales in our Canadian business. Mutual fund deposits increased by 12% due to continued strong retail fund sales at MFS. Managed fund sales decreased by 6% due to lower sales at McLean Budden and MFS after a particularly strong first quarter in 2010. Partly offsetting this decline were strong fund sales in our Mandatory Provident Fund business in Hong Kong.

Turning to our Canadian operations on slide six, sales of individual life and health products increased by 21% over the first quarter of 2010, driven by continued success of our Sun Par product. Sales of Fixed interest products including accumulation annuities, GIC's and payout annuities continued to demonstrate momentum and were up 7% over a year ago. Group benefit sales were up 14% from the first quarter of 2010, primarily due to growth in the small to mid-sized case market. Benefits Canada Magazine recently reported we have assumed the number one spot in the Canadian group benefits marketplace.

In Group Retirement Services, sales were down significantly over the first quarter of 2010, however, pension rollover sales increased by 29% with a four quarter average retention rate of 52%. Our Canadian business continued to make strides in the use of innovative customer-facing technology. GRS successfully piloted enrollment sessions for group retirement plans using the Blackberry Playbook and group benefits increased the electronic processing of claims by 76%. I am pleased to report that Sun Life was named the Most Trusted Life Insurance Company in Canada for the second consecutive year in the 2011 Reader's Digest Trusted Brand Consumer Survey.

Turning to our US business in slide seven, variable annuity sales in first quarter of 2011 increased by 8% compared to the same period a year ago, driven by higher activity in our international high net worth business. In domestic US, we launched new variable annuity products in December. While domestic sales were lower compared to 2010, we are pleased with the momentum the products gained throughout the quarter. US individual insurance sales excluding no-lapse guarantee Universal Life were up 9% over the prior year. We continue to focus on the executive benefits market and building out direct producer distribution.

Our corporate-owned life insurance sales continue to be strong with sales up over 50%. Sales in the US employee benefit group were up 3% from the first quarter of 2010. During the quarter, the employee benefits group announced a new partnership with United Concordia to offer group dental plans. The agreement strengthens the dental benefits offered by Sun Life by adding United Concordia's extensive national network of dental providers, and its attractive plan designs.

Turning to MFS on slide eight, we are pleased to report another excellent quarter for MFS. With record assets under management of $232 billion, compared to $222 billion at year end 2010. This increase of $10 billion was driven by asset appreciation, and strong net sales of $2.1 billion Margins increased to 33%.

In recognition of outstanding performance, MFS was awarded the prestigious 2011 Lipper Fund Award for Best Overall Large Company. Ranking first out of 46 fund firms in the United States. This recognition is based on the firm's consistently strong risk adjusted performance across asset classes for the three-year period from January 1, 2008, through December 31, 2010. In addition, six MFS funds were also individually recognized for their top risk adjusted performance within the respective peer categories over different time periods.

Turning to Asia on slide nine, expansion activities in Asia continued in the first quarter. As we announced our intention to acquire 49% of Grepalife Financial and form a new joint venture, Sun Life Grepa Financial. The agreement is subject to regulatory approval. It includes an exclusive distribution agreement with Rizal Commercial Banking Corporation to provide access to its network of 350 branches and 2 million customers.

Total individual life sales in Asia declined by 25% in the first quarter over the same period a year ago, mainly due to lower volumes in India. Sales in India of $105 million were down 33% from the first quarter of 2010. However, they represent a 46% increase over the sales reported in Q4 2010, as the entire life industry continues to adjust to the far-reaching September 2010 regulatory changes. Sales in Indonesia and the Philippines continue to be strong, increasing 39% and 12% respectively. Three of Sun Life Hong Kong's MPF funds have received Benchmark 100 Fund of the Year Award, including two Best-in-Class Awards and one Outstanding Achiever Award. As you can see from the foregoing, each of our business groups contributed to a solid start to 2011.

Before I conclude I am pleased to announce that the Board of Directors of Sun Life Financial has approved a quarterly shareholder dividend of $0.36 per common share, maintaining the same level as the previous quarter. I will now ask our CFO, Colm Freyne to walk you through our first-quarter results in more detail.

Thank you, Don, good morning, everyone. As Don noted the Company began reporting under International Financial Reporting Standards in the first quarter of 2011. This introduces wide-ranging changes to financial reporting, and I will review some of the key impacts to Sun Life as compared to the previous reporting regime, as further outlined on slide 11.

As we noted on our April 26 press release, we have highlighted operating net income as a key metric in our financial reporting under IFRS. Beginning this quarter, operating net income excludes the impact of certain hedging relationships that do not qualify for hedge accounting in Sun Life Canada, and the impact of fair value adjustments on share based payment awards at MFS. We believe that excluding these items from our reported results provides information that is useful to investors in understanding our performance.

In our Canadian business, we use cross currency swaps to hedge foreign exposure related to a portion of invested assets in our surplus that are denominated in US dollars. Under IFRS, these hedging relationships do not qualify for hedge accounting. In consistent movements between Canadian and US swap curves may result in reported income volatility. In first quarter of 2011, this volatility resulted in a $9 million after tax negative impact to earnings.

Over the longer term, to the extent that these hedging instruments and related invested assets are held to maturity, we expect that the hedges will be effective and the quarterly net income impacts will offset each other. Under IFRS, share based payments awards issued by MFS that are based on its own shares, are required to be accounted for as liabilities, and measured at fair value each reporting period until they are vested, exercised and repurchased by MFS. As a result, the MFS compensation expense will vary under IFRS for changes reported in fair value through the income statement. In the first quarter of 2011 this fair value adjustment resulted in a negative $25 million after tax impact to earnings. The adjustment to operating net income for MFS share based compensation aligns the accounting treatment for these awards with other share-based compensation plans at Sun Life Financial, which are treated as equity settled awards. Furthermore this adjustment will enhance the comparability of the MFS results with other publicly traded asset managers in the United States.

Slide 11 highlights also three other notable impacts from the conversion of IFRS that are not adjusted for in operating income. Sun Life's series of medium term notes are now classified as investment contracts, and are no longer valued using the Canadian asset liability method of valuation. Instead, the liabilities and the supporting assets under these contracts are fair valued independently, with the difference between the value of the assets and the value of the liability for the current period reflected in net income. Until these notes mature in 2013, we will experience some quarterly earnings volatility, as the fair value of the assets and the fair value of the liabilities in a particular reporting period may not fully offset.

Properties held predominantly to earn rental income or capital appreciation are classified as investment property, and can be measured using either the fair value or the cost model. We have chosen to measure these properties using the fair value model at each reporting period with the change reported in income.

As outlined in our 2010 annual management discussion and analysis, under IFRS our innovative capital securities, Sun Life exchangeable capital securities will be included in the diluted earnings per share calculation. Under IFRS these securities are required to be included in the calculation of diluted earnings per share, without regard to the likelihood of their conversion to common shares. This resulted in a dilution of $0.03 per share in the first quarter. The dilutive impact of these securities will remain until they are redeemed or matured. The Series A securities are redeemable at the Company's option later this year. And we would expect to redeem them under normal circumstances. If this Series A is redeemed, the dilutive impact will be reduced to $0.01 per share per quarter until the remaining series have been redeemed or matured.

Slide 12 outlines the key economic impacts to earnings in the first quarter of 2011. Operating net income of $472 million includes after-tax net gains of $46 million from increases in the fair value of real estate classified as investment property. We review the valuation of our real estate portfolio each quarter, the changes in market value in the first quarter were driven by a combination of lower capitalization rates along with improving market fundamentals. Positive equity market performance contributed $35 million to earnings this quarter. The contributions from equity markets was at the high end of the range of the sensitivities disclosed in the fourth quarter of 2010, primarily due to positive basis risk in the SLF Canada results, whereby the underlying investment funds outperformed the relevant index. The net impact from rising interest rates was $6 million, but the positive impact is partially offset by the unfavorable impact of swap spread movements in the quarter. The strengthening of the Canadian dollar versus other currencies decreased net income by $14 million, reflecting the substantial impact of the stronger Canadian dollar on our results.

Slides 13, we provide details on our sources of operating earnings. Expected profit on in force business of $435 million is down $35 million over the same periods last year. Positive impacts of business growth and higher assets under management at MFS were offset by the negative impact of the sale of our life reinsurance business, the reinsurance treaty and our Canadian group business, that group benefits business, and the strengthening of the Canadian dollar. New business strain was $62 million an improvement of $47 million from a year ago. Reflecting our exit of sales in the no lapse guarantee market in the United States, and the lower strain associated with reduced sales, product redesign, and improved product mix in India. Experience gains of $116 million reflect the gains from increases in the value of real estate properties in our Canadian business, a positive impact of stronger equity markets, and higher interest rates.

Overall, our credit experience for the quarter had a positive impact of $9 million. As increases in commercial mortgage provisions were more than offset by the positive impact of upgrades and strong results on our fixed income portfolio. Assumption changes and management actions resulted in a $17 million pretax contribution to earnings in the quarter. Earnings on surplus were strong at $95 million, although down from the first quarter of 2010, due to lower investment income.

Taking a closer look at the performance of our business groups on slide 14, SLF Canada reported operating net income of $250 million, up from the $232 million reported a year ago. This year-over-year increase reflects the gains on real estate properties mentioned previously, as well as the favorable impact of investing in higher yielding assets. In the United States we reported operating income of $180 million, compared to $121 million in Q1 2010. This improvement reflects the positive impact of rising interest rates, as well as a favorable morbidity experience in our employee benefits group stop loss business. Operating earnings from MFS were $62 million, up from the $49 million reported a year ago. Margins improved to 33% from the 30% reported a year ago. The impact of fair value adjustments on share-based payment awards described previously was $25 million after tax.

Earnings from our Asian operations were $44 million, up from the $4 million reported a year ago. The earnings contribution from India improved due to the lower new business strain previously discussed. Our UK operations reported income of $43 million, compared to income of $57 million a year ago. Net income in the first quarter of 2010 reflected more favorable investment experience. Corporate support included under the corporate segment had a loss of $107 million, compared to $29 million a year ago. This higher level of loss reflects foreign exchange losses of $14 million on the termination of a net investment hedging relationship. The first quarter of 2011 also reflects reinsurance costs related to SLF Canada's group benefits operation.

Turning to capital on slide 15, where we outline our regulatory capital position, we reported a minimum continuing capital and surplus requirements ratio for Sun Life Assurance Company of Canada of 229%, up slightly from the 228% reported at the end of 2010. The impact of the IFRS conversion on our capital position was not material in the quarter. Under regulatory IFRS transition guidance, companies can elect to phase in the impact of the conversion to IFRS over two years. At the end of this period, the MCCSR for Sun Life Assurance is expected to decrease approximately 5%, as a result of the adoption of IFRS. We ended 2010 with a risk-based capital ratio for Sun Life US of 435%,comfortably above the target range of 300% to 350%.

In the Appendix to the slides this quarter we have included our 2010 embedded value disclosure. Embedded value from operations which is before changes to the discount rate, currency adjustments and capital transactions, increased to $19.3 billion, up 9% from the beginning of 2010. Embedded value per share amounted to $32.54 at September 30, 2010, up from $31.31 at the end of 2009. We now complete our embedded value analysis at September 30th each year, and we have reflected the pro forma impact of the sale of the reinsurance business in the 2010 results.

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 a questions on today's call, I would ask each of you to please limit yourselves to one or two questions, and then to requeue with additional questions. With that, I will now ask Luke to please poll the participants for their questions.

Thank you. (Operator Instructions). Your first question today comes from the line of Steve Theriault of Bank of America Merrill Lynch. Please go ahead.

Thank you very much. Good morning everyone. Just a quick numbers question, a question to start for Colm, or maybe for Steve. With regards to the real estate mark to market, which was I think $46 million this quarter, do you expect this to be a consistently positive contributor to earns under IFRS, or would this characterize this as an unusually high number that could flip around? Is this line item in any way predictable?

Well, it's a very good point around the transition to IFRS and the impact on our real estate portfolio. I think a couple of points to bear in mind here. We have disclosed the full impact of the more positive real estate environment in the quarter of some $46 million, and some of that is as a result of the securities that support our capital account, and some of that is as a result of securities that back our liabilities. So to the extent that securities backing liabilities and favorable performance on those would always come through our results, I think you could take that as being not an increase in volatility, and just to put these numbers in a little bit of perspective for you, Steve, I would a say it is about a half and half split in terms of the $46 million.

So the portion that does back our capital account however will be more volatile. That is because clearly as these are fair valued under IFRS that result will come through and another piece of complexity around this is that our real estate portfolio is substantial, and a large portion of that relates to participating policyholder business, and accordingly, the results on the fair value increments there go through to the Par account. With that, I would perhaps ask Steve to comment a little more specifically on just what happened in the real estate market in the first quarter.

Thanks, Colm. This is Steve Peacher. I would say this first quarter was a bit unusual in that we saw, what drove in the increase in valuations this quarter was an increase in observed transactions at lower cap rates and this feeds directly into our valuations. And so I wouldn't expect to see this level of movement in valuations in coming quarters. I will say that our outlook for the rest of the year is that the real estate market will continue to be strong, we think fundamentals will continue to improve at the margin. We think there is a lot of interest in real estate at this point and that could have continued marginal, we could see cap rates continue to decline marginally. But I would not expect to see this degree of change in valuations going forward.

Probably a positive number, just not as positive?

Yes. That is what I would expect.

Okay. One more if I might for Wes. Last quarter the VA product you launched I think in December, it was just ramping up and you sounded pretty positive for the prospects in the new year. Now I note variable annuity sales are flat versus Q4. A little surprising for me given some of the quite strong numbers we have seen elsewhere. I know you are competing, maybe not competing with some of the larger players at this stage. I guess my question, should I be surprised at the flattish nature of net sales, how is the new product doing, and assuming a supportive environment should we see net sales turning higher through the year, or is this what we should expect for 2011 by and large?

What I think you are seeing in the quarter is what we saw in the quarter was an increasing level of sales as we went through the quarter, so the new product was launched late in 2010. And so from a, just from a wholesaling standpoint, really began to ratchet up as we went through the quarter. So we did see as expected a gradual improvement, and quite a good one too between January and March, and would expect to see that improvement continue looking forward.

I would also say that sales early in the year were affected by a couple of other players who announced some additional derisking, fairly major players and whenever you do that there is a tendency to have assets move to those particular companies temporarily, so for lack of a better word a fire sale. So that tends to affect other carriers in some cases. But I am optimistic based on the trends that we saw during the quarter looking ahead.

Thanks. I will leave it there.

Your next question comes from Robert Sedran of CIBC World Markets. Please go ahead.

Thank you, good morning. Colm, would it be possible to get the numbers on slide 12 the key economic impacts on a pretax basis? I guess what I'm trying to get at, is that if I remove these items from the sources of earnings I still see a fairly large experience gain, which I would gather is related to more traditional risks, mortality and morbidity, et cetera, in fact, if you look at the explanations in the MD&A by segment, they seem to have had favorable experience during the quarter. Is there a way to actually quantify what the impact of that experience was, and whether it was much higher than usual or in line with expectations that you had in the quarter?

Yes, well, thanks, Robert. I think one way of looking at the key economic impacts that we have outlined vis-a-vis the source of earnings is to think of the experience gains line of $116 million, which as you say is a pretax number. And then as you look at the economic impacts for equity, interest rates, you should add credit in there. I told you that after tax that was about a $9 million impact. Real estate and you put them on a pretax basis. You are in the sort of zone of $105 million or so.

Currency, the currency item of $14 million doesn't all map over to that experience line item. Currency is spread across the source of earnings so that is probably one reason why you're looking at something perhaps that you wouldn't map over directly. And you are quite right, there are some positive impacts on our insurance side, so our policyholder side where morbidity and mortality we have mentioned in our discussion was positive, on the other hand, there are some negatives that also flow through some expense overruns for example. But I think you can largely think of the $116 million as being reflective of the economic impacts that I have mentioned with some other pieces around the positive mortality/morbidity, but offset by some unfavorable expense experience.

Okay. That is helpful. Thank you. Then just looking at the tax rate, even if I try to adjust for the fact that I gather the fair value of the real estate assets had a pretty significant impact on the tax line this quarter, even if I try to adjust for that I still land with a tax rate that would be below what a normal tax rate would seem to me, but that is just sort of me doing a back of the envelope calculation. A, is that correct, and B, is there anything that I should read into that lower tax rate in terms of a sustainably lower tax rate going forward?

Well I think the tax rate is a little bit of the perfect storm, as we transition to IFRS and we had the impact of real estate coming through, and then we had the added piece that the overall impact of real estate was larger than you see come through on the common shareholders account, because as I mentioned previously, there is a portion and a substantial portion of real estate that is on account of our policyholders. But if we go to the source of earnings, and you look at the tax line of $98 million on slide 13, and you relate that to the $601 million of earnings pretax, you do get a rate of 16.3%, and that is as you quite rightly say on the low side. That reflects the facts that we have a range that we talk about for our taxes of 18% to 22%. This would be at the lower end of that range. It does reflect the slightly favorable impact on the taxes even notwithstanding my point earlier that a large portion of that favorable impact goes to the par account, but there is still clearly a positive impact for the common shareholders. If you adjust all of that, Robert, I think you get back to a rate that we would say is at the low end of our range, but is within our range, and we are not uncomfortable with the overall tax position this quarter.

Great, thank you.

Your next question comes from Doug Young of TD Newcrest. Please go ahead.

A point of clarification. So slide 12 you have $46 million from the benefit from real estate revaluation, and then slide 13 in experienced gains you have the $116 million. How much of that $46 million went through that $116 million? Are you suggesting that only half went through, the other half went to the par policyholders?

No, the $46 million is the piece that is for the common shareholders, the overall increase in real estate in the quarter was substantially larger. You are talking more in the range of $200 million for positive experience on real estate for the entire portfolio. But recall our entire real estate portfolio is in fact in Canada it is in the $3 billion range.

Yes. Okay. That is fine. A few number questions. On the corporate unit loss, $107 million you mentioned $14 million related to the FX hedge relationship. How much was related to the Sun Life, what I am trying to get at I guess is how much of that $107 million loss is recurring, and how much is one-time in nature? So I'm going to guess the $14 million is one-time, what else is one-time in that item?

I am sorry, I thought you were directing that question to Dean. Would you mind repeating that?

Sorry, Yes. The corporate unit loss of $107 million, you mentioned $14 million which correct me if I'm wrong appears to be one-time. I'm just wondering what other one-time items would be in that $107 million loss?

On the corporate support line and it is, I would just start by mentioning that corporate support by its very nature tends to be quite volatile. It reflects allocations, it reflects security gains, project costs, et cetera, and it also includes the results of our runoff reinsurance business, and why the runoff reinsurance business which was not part of our reinsurance sale is not a material contributor either way, but it can result in a slight positive or a slight negative. So I just mention that because the overall change year-over-year is substantial, as you have noted.

And if we think about the $107 million for the quarter, it is on the high side of what we might think about as a more normal level support of corporate support costs. If we back out the $14 million that takes you down to the $90 million range. There are some other one-time items that we would see as well that would if you backed those out, they would be around the $10 million range. I would say something around the $80 million level would be a number that would be more consistent with where we would see things on a go-forward basis.

I would, however, caution that the corporate support category by its nature is somewhat volatile. Security gains which might be consistent on a total company basis quarter-over-quarter sometimes can vary between the portion that is recorded in the businesses, because some of the security gains might be in the business group capital in the US or Canada. Other times it is in the corporate segment. That can be a driver. Tax contingencies and releases can be a driver there as well. I think $80 million would be a number that you might want to sort of think about on a more normal basis for the quarter.

My final point on the investment hedge item is that this is a complexity that largely came through as a result of our transition to International Financial Reporting Standards, and that it is a big transition. Lots of moving parts. So in some cases we had the currency translations reset to the retained earnings account on transition. So we had what we believe to be effective arrangements in place, but sometimes you get a little bit of a disconnect, where the positive will go through retained earnings, and the negative come through subsequently in income. That is what happened in this case.

Okay. Lastly on MFS, I guess Rob is on the line. I mean, net sales were down so I guess I was a little surprised given the strong performance but maybe I'm missing something. Maybe you can give us a little update on the relationship with Edward Jones. Then I don't know in is for Rob or Don, but you are backing out the IFRS related noise related to the comp plan. I guess is this something that will probably continue, so should we be backing it out? And is there anything you can do to eliminate that accounting noise? Thank you.

Well, this is Rob. I'll talk about the flows. It's been a challenging environment particularly in retail, given all of the shocks to the system that we have had. I guess the good news is if you look at our mutual fund sales in the first quarter , we were up 8.5% on a gross basis, which is running around 2 times the industry average.

But what happened is there was a scare in both munis and a reallocation out of fixed income because of inflation fears, and in taxable and muni bonds which are two categories where we have substantial assets, the redemption rate jumped from the low 20s to the 40s during the quarter. So the reason why our net flows were not where we had hoped they would be relative to the strong gross sales that we have had, was basically because of that factor. That has reversed itself, but unfortunately people have not come back into the equity market, they are sitting on the sidelines in cash. That is really how we have been positioning the firm from an investment point of view, as well as a branding point of view. We are patiently waiting, we don't know when that will happen.

But if you look across of our distribution platforms globally, our growth sales are running ahead of where they were, and we are pretty optimistic that the trend can continue. I think on the IFRS issue, and others can comment if they would like, you are going to continually have to adjust that out of the Sun Life earnings because MFS has an ongoing equity plan, which we give out to our employees, which is very important for retention, and obviously building the business. And the only way to alleviate that would be if MFS were a public entity, and there is no interest in anybody wanting to do that, so it is just a factor of life and we're going to have to deal with that.

And it is Colm here again, and to clarify a point we made earlier on the real estate gains, as the $46 million, that half of that goes through the earnings on surplus, and the other half goes through the experience line item. And just to conclude as well on the point that Rob made is the accounting is the accounting. This is a different regime. Other companies who report under IFRS have found themselves making similar adjustments.

A good example would be Allianz with PIMCO. We find that this is an adjustment, it is very explainable. It is a good news story as the value of the firm increases. It does result in a higher expense, but it is driven by an increasing valuation in the value of MFS, which is driven by underlying business growth.

Thank you.

Your next question comes from the line of Gabriel Dechaine of Credit Suisse. Please go ahead.

Good morning. Just on the strain, the decline on the year-over-year I know we saw it last quarter as well, but is it possible to give me the magnitude of that decline, what is stemming from your pullout of the no-lapse guarantee market, what is coming from repricing, redesign, and what is coming from the situation in India?

Yes, Gabriel, I can give you an overview. The total change year-over-year at $47 million, the largest contributor to that is the exiting of the no-lapse guarantee business in the US, and that contributed approximately $35 million, and India's change year-over-year would be sort of in the $15 million to $20 million range. So those would be the two big items. And we constantly as you would expect, we look at improving product design to ensure that we do minimize strain, so there are other initiatives across the organization constantly looking to improve the impact of new business on the bottom line.

Okay. Thanks. Then just a brief commentary if you will on Asia's sales declining outside of India. Sounds like the Philippines are good and Indonesia, but it looks like Hong Kong and mainland China would have declined substantially, what is going on there? And then in the US group business, I was pleasantly surprised to see you avoided some of the claims issues that were affecting some of your US comps. If you want to say how that was done, strong underwriting or something along those lines, and as far as your sales how much of your sales over the past 12 months have been multi-year terms? And that is it for me.

It is Don Stewart, I will just comment briefly on the Asian sales, with specific emphasis on China. The jump from 2009 to 2010 was over 300%. So if you actually look at the sales over a slightly longer basis than 12 months, the rate of increase would be equivalent to approximately 100% a year. So reality is that in comparing 2011 first quarter with 2010 first quarter, we are setting a very high bar. I think you do need to look at a longer base line to get a better sense that actual sales are rising pretty significantly on that longer base line.

Having said that, there is more competition going on in China, and it may be hard to continue to grow at 100% per annum, but we promise you that we will do our best. I think on the US claims side, I will ask Wes to comment?

Just from an overall perspective, what we are seeing is it is fairly consistent with the industry. LTD incoming claims which is a dollar based measure, has increased slightly, but it is still within the averages that we have seen over the preceding five quarters.

The good news is claim recoveries which is the return to work component has remained stable. The improvement of the quarter really was driven by claims experience specifically in our stop loss line. I wouldn't expect that sort of improvement on a quarter-to-quarter basis but we are very pleased with our underwriting and claims management results. We believe that is a key part of our value proposition, and it's reflecting in our consistent results in our group business.

And the sales, how much are you offering multi-year terms?

So typically in the industry, you will find a majority of what we call the core lines, the life, disability lines are two to three years, and we are in the core of that. That is what you will normally see, stop loss, and our stop loss business is an annually priced business line. What we are seeing out there and we have said this on prior calls, there are several companies and they tend to change, that on case by case basis will offer much longer term guarantees, rate guarantees, and we typically try to stay away from that type of business.

Thank you very much.

Your next question comes from the line of Andre Hardy of RBC Capital Markets.

Thank you. I want to go back to real estate, and this is probably for Steve Peacher. I know in theory you are supposed to value your portfolio quarterly, but the reality is you have so many properties that is probably impossible, so should we expect more noise at year end perhaps, and whether that would be Q4 or Q1 you can clarify when that would be, because presumably you will do your evaluations with more rigor at that point. On a quarter-to-quarter basis presumably the valuation changes will be driven by external factors, rather than property specific factors, and if that's the case, what indicators do you suggest we look at to try to predict the quarterly moves in the valuation of your real estate book?

Andre, I would say that we have put in place a very robust process to make sure that our valuations are up to date on a quarterly basis. Of course, we will do a full appraisal which is a time-consuming process , and is a combination of both external appraisals and internal work, for each property on an annual basis. But every quarter, we closely monitor each property and the market that each property is in, to look for any material change in terms of market activity, cap rates, property fundamentals, et cetera. If we see that we will update the valuation on a quarterly basis.

While we will do an annual appraisal we have got a robust quarterly process to make sure our valuations are up to date on a quarterly basis. And our valuations we would, we will have some spacing throughout the year. The best time we find to do valuations is early in the year when you have the results from the previous year, and your budgets for the new year are up to date. But we think we have a robust quarterly process.

In terms of indicators, we closely obviously are tracking cap rates in the market. There are some third party sources of market cap rates though it is not, I would say easy for those outside of real estate to follow. I think that one indicator that is a good coincident indicator this quarter is performance of REIT stocks. We saw valuations up this quarter, and I believe one of the REIT indices here in Canada was up 13% for a quarter, so that is certainly one data point to track.

Thank you very much.

Your next question comes from the line of Joanne Smith of Scotia Capital.

Good morning. I apologize if you have covered some of this stuff in more detail earlier. I was a little bit distracted from something that happened here, but I have a couple of questions on the experience gains, in terms of on a line by line basis, because I am trying to analyze the businesses by unit. And it is hard to see the actual core run rate earnings of the businesses when you don't disclose a source of earnings table by segment. So I was wondering if maybe you could talk about some of the influences on the segments other than what you have already discussed that we need to consider when we look to model our earnings going forward.

The second question I have is regarding the new business strain, and you talked about the fact that a good portion of it was the US business, and the walk away from the NLG business, and then the remaining with Asia, particularly India. I was wondering if you can talk about how much of that lower new business strain was a change year-to-year, because the improvement in both of those regions' earnings was quite dramatic. I want to get a sense as to what is really going on there from a core business operations perspective, other than just the noise from writing less capital intense business?

So Joanne, I think there is a lot covered in your question and I certainly appreciate the desire to relate all of these moving parts back to individual businesses. One of the aspects of course is that you do in any given quarter get movement that can be offset so that you can get ups and downs in the quarter, and I think as we look at it we find that trying to provide you with an overall view is a good starting place.

Then in terms of what's happening at the business I think it is useful to drill down and talk specifically on business line results. But I think I would go back to the point I made earlier on the economic impacts being a significant contributor to the experience gains and losses in the quarter. And those are, the economic impacts are laid out on page 12, and then you have the positive impact of credit which would come through in experienced gains and losses as well.

If you think of the insurance results we did have favorable mortality and morbidity results, and we have talked a little bit about that, and maybe Wes might say a little bit more about our experience in the US on the group benefits side, for example, which was a good quarter. And then in terms of the new business strain, I would say that again, reading too much into any given quarter is probably not the right approach. We are pleased with the results on a year-over-year basis. And we do see the positive impact in India, but of course India has also gone through regulatory changes to the product set and Don spoke about that, so there is a repositioning taking place there. One might not read too much in that aspect with respect to India. I think it is important to note that this is a line item we focus on across the organization to ensure that our products are designed in order to minimize new business strain, but and with that perhaps I'll ask Wes to say a few words about the insurance impacts in the US.

I would perhaps continue on the line of the new business strain. If you think about the actions we did undertake in 2010, a big part of those actions was to improve the sustainability of our business. So if you think about the new business strain as one item, we took the actions on NLG really began to see those in the fourth quarter of 2010. So that I would expect that to continue to come through in earnings as we go through this year. It will differ by quarter because depending on the level of sales that we achieved first quarter of 2010 happened to be a fairly significant sales quarter, because we had also announced in the prior year, the end of 2009 a pricing increase on our NLG business, which then created a bit of a fire sale in the first quarter of 2010. So on a comparative basis, it would translate to a significant improvement in strain now that we're not in the business. And so that's one way to think about it as you go quarter to quarter.

Okay. Thank you, Wes. That adds some color to my understanding of what is going on there. Can you just on a more broad note, and this is my final question and maybe we can take some of these offline. Can you talk about what is happening in terms of distribution? One of the strategies that I think you are trying to achieve in the US is to find some of the niche areas. For example, the executive life insurance business, and I was wondering if you could talk about how you have kind of redirected distribution to kind of highlight the types of products that you now want to focus on?

I will speak just briefly on that and not take too much time. I would be glad to discuss it offline. Yes, NLG as we have talked about previously has become a very commoditized product. The channel that sells that product is highly commoditized, it is a third party wholesaling channel in general. What we have tried to focus on are those markets and segments where we can bring our direct company wholesaling force to bear.

As we do in our group business and our variable annuity businesses, which we view as a more sustainable value proposition to the end customer and to the advisers that we work with. We are building that capability out. The flip side of the equation on exiting NLG, is we did see as you know, a decrease in our domestic UL sales, but I am very confident that the alignment of our wholesaling force, the building of that wholesaling force going more directly to producers in the kinds of markets that you have articulated, the small business owner market, will really bear fruits for us, and will be more sustainable long term. And improve our profitability because they are products that have less strain, and therefore better value to us.

Thanks very much.

Your next question comes from Mario Mendonca of Canaccord Genuity.

Thanks. Perhaps for Colm, if you look at the expected profit with the information that we have, you sometimes have to be a little creative on how you model these things out, but comparing it to for example your average AUM, so a very broad ratio, that ratio has fallen now since pretty much Q2 of 2009. If can't be currency related because of course we are talking about a ratio where the denominator are in the appropriate currencies. Could you talk us through what has caused that to decline so significantly since Q2 2009?Is there anything on the horizon that you can see, allowing it to stabilize and perhaps lift over time?

No, Mario, I think the importance of the expected profit is clearly understood by us, and you are quite right that there has been a decline, particularly we go back to 2009 levels. One aspect and we have talked about this previously is that in 2009 we did see the impact of the release of previously established reserves that have been established through the credit crisis for expected losses. We did see that come through in expected profit, so that was artificially or perhaps that is not quite the right word but it was increasing the amount of the expected profit. And as we look at what has been happening over the last little while, we are seeing strong growth in assets under management. Quite correct that will drive expected profit going forward.

In terms of hedge costs that would be another area where we did see higher levels of hedge costs come through in prior periods. We think that we may be at a point now where those hedge costs are more stable, and not on an inclining, increasing basis. They did decline somewhat in the current quarter. So we think we will be at a point where adjusting for all of the caveats around expected profit, around currency and the other impacts we may be at a point where things have stabilized, and we would expect as assets under management are strong, that we would expect to see some improvement in the trend in this particular line going forward.

And to be clear, I am not so much thinking about a year-over-year growth in expected profit, because I understand that will take time because of the reinsurance, the sale of the reinsurance business, and of course the group reinsurance. I am really referring to a sequential basis. Just to be clear, when you referred to stabilizing and possible growth over time, you too are also referring to it on a quarter over quarter basis or sequential basis, is that fair?

Yes, I think in any given quarter there is noise. So we look at the year over year as perhaps the trend over the quarters as being more important than any sequential move, because there are methodology changes that can get reflected here, that can impact other lines on the source of earnings. But we are focused on it and we will continue to address it in our discussions with you.

Thank you.

Your next question comes from Colin Devine of Citi.

Hi. Two questions, one for Wes. In terms of the life products that Sun is offering in the US right now, are you selling the term UL product? And then secondly, I guess for Don on the subject of M&A, clearly Sun has been in the paper over the past quarter with respect to perhaps expanding its group business in the US. I know you don't like to talk about specific transactions, but given the limited opportunities for M&A in Asia, it seems there may be a large property for sale in Latin America. I don't recall that you have ever talked about any aspirations to expand into Latin America. I was wondering if that was one thing that may be on the table, and then also is there anything that you'd be looking at with MFS in terms of M&A?

Colin, I will take the first question. We do not offer term in our traditional markets. We do have a group term product that is offered through our group insurance.

The term UL product that well, a company that you used to be familiar with.

No, we do not offer that.

Thank you. Colin, it is Don. To divest your multi component questions on M&A, you correctly observed that we don't comment on individual transactions, and I would emphasize the correctness of that perspective. In terms of the various opportunities around, we tend to be driven as we have said previously by fit, as opposed to size and geography.

Having said that, I would regard Latin America where our primary presence consists of the sale of international funds and international business, either out of outlets of MFS, or in the case of Sun Life's insurance products out of Bermuda, I would see that as an unlikely arena. I generally don't comment too much on geography, because sometimes deals show up in unexpected places. But I would say that Latin America is not a probable arena of future expansion. In terms of other M&A we have in fact completed a small acquisition in Asia, and so we continue to see opportunities in different places in Asia of varying sizes. Some of them small. Specifically in our own case to the Philippine expansion I covered in my opening remarks. So there will, continue to be opportunities in Asia.

In the case of M&A, MFS as you well know, M&A in the asset management space often results in significant distraction. I commented on the very fine performance that MFS has been delivering and outstanding awards with the Lipper coming in at number one out of 46. I think both Rob and the management of Sun Life are anxious that MFS continue to focus on its business, because they have been doing incredibly well and we are all looking for that to continue.

Thank you.

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

Excellent. Your next question comes from the line of Tom McKinnon of BMO Capital. Please go ahead.

Thanks very much. My question is with respect to US variable annuity business. Wes, this is about the third quarter in a row now it appeared to be that the Company is losing share vis-a-vis the market. I'm wondering and I know years ago Sun used to say that its goal was to be Top 10. Do you need to be Top 10? And secondly, if you do you want to be Top 10, do you want to improve the scale in this, and secondly is there any constraint put on that business as a result of C GAAP and higher, presumably higher capital requirements on new variable annuity business that OSFI imposes. I would assume you would try to price your business to hit an internal hurdle based on C GAAP results, with an OSFI capital standard. Is there any constraint with respect to that as well?

Let me perhaps take the first part of the question and obviously there is a dynamic environment going on with capital requirements. So I will hand that off to Keith Gubbay. The first part of the question, our strategy has been very clear in variable annuities which is to create a sustainable value proposition in the marketplace, and we have done that through a series of derisking our product to a level where we believe the risk/reward is at the right level. That included the significant retooling of our product, our next generation product that we introduced late last year. I think some of the maybe the bouncing around that you have seen is related to a number of the changes that we have been making as we refine that strategy.

But also I would say we have an unusual competitive environment that I have not seen in this industry ever, which is several companies, a few companies controlling over 55% of the marketplace. And despite that, we see a market that offers tremendous growth opportunities, and as I indicated earlier, we see a very nice trend occurring during the first quarter. So it is not fully reflected yet in terms of the opportunity that we see in our new product that we introduced late last year. So I am confident that we can grow that business at a pace and that reflects the kind of demand that's in the market. I don't believe it's sustainable that the top five players continue to take the kind of capacity on that they are taking, and therefore the marketplace I think will level out eventually and those that are rational and have products like we have I think will be able to offer a sustainable value proposition from a customer shareholder and broker perspective.

On the capital front I will move that question to Keith Gubbay.

It is Keith Gubbay. We do look at Canadian GAAP now, IFRS as our primary measurement basis when we look at product profitability, and so we do reflect the reserve in capital requirements of the Canadian regulator. Obviously, those are still under discussion so until they are resolved we won't know exactly where we end up, but we do take a forward-looking view, and make estimates of that in our analysis. The Q1 VNB for the variable annuity business was favorable. It was in our line with our targets, even exceeded some of our targets due to the favorable interest rate environment and repricing that is going on. I think in relation to the US market, I would say that US companies also tend to look at the business on a somewhat market consistent basis. So even though the US regulatory requirements are different, I think companies tend to look through that in general to the underlying economics, so they are not that different. We have done benchmarking that supports that view.

And it's priced to, the new business is priced to give a reasonably good return even under the new VA capital rules that off season posts, the ones on just new business, is that right? Because across Canada you would have seen significant retooling and price increases on new business. I'm just wondering if you did that to your US VA product, which sounds like you possibly have, does that put you at any kind of competitive disadvantage, vis-a-vis your US peers, who don't have to answer to OSFI if you will?

I think our standards are a little bit tougher, but I am not seeing that it is a very severe disadvantage.

Luke, it is Phil Malek, we are out of time today, but I would like to thank all the participants on today's call. If there are additional questions we will be available after the call. If you wish to listen to the rebroadcast, it will be available on our website later this afternoon. With that, I will say thank you and good day.

Thank you. Ladies and gentlemen, this does conclude today's conference for today. Thank you for your participation. You may now disconnect your lines.