Sun Life Financial Inc (SLF) 2011 Q2 法說會逐字稿

Welcome to the Sun Life Financial second quarter, 2011 conference call. (Operator Instructions). I would like to now let everybody that the conference is being recorded today, August 4th, 2011, at 10 AM Eastern Time, and now would I like to turn the conference over to Mr. Phil Malek, Vice President, Investor Relations. Please go ahead.

Thank, you and good morning. Welcome to the Sun Life Fiinancials earning conference call for the second quarter of 2011. Our earnings release and slides are available on the Investor Relations section of our website at www.Sun Life.com We will begin today's presentation with Don Stewart, Chief Executive Officer of Sun Life Financial. Following those remarks Colm Freyne, Executive Vice President and Chief Financial Officer will present the second quarter financial results. Following Colm's remarks, Wes Thompson, President Sun Life Financial US, will provide an update on the US operations.

Following the prepared 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 mornings remarks. This slide reviews the reasons why a forward-looking statement could be rendered inadequate by a subsequent event. And with that, I will turn things over to Don.

Thank you, Phil, and good morning. Yesterday Sun Life reported results for the second quarter of 2011. I'm pleased to say that our businesses successfully managed through the relatively weak market conditions over the quarter. The Company reported operating net income of $425 million, a significant improvement over operating net income of $155 million recorded in the same period a year ago.

Operating return on equity for the second quarter was 12%. Year-to-date, the operating return on equity has come in at 12.7%. Total assets under Management rose to $474 billion, as of June 30th. Our businesses are building top line momentum as they continue to execute on a number of strategic initiatives designed to generate sustainable, profitable growth.

Colm Freyne will provide more financial details later in the call, but first I will comment on the operational performance of the business groups. Looking at top line results on slide five, adjusting for the reinsurance agreement in our Canadian group benefits business, and the sale of the insurance business, total premiums and deposits were up 9% over the same period a year ago on a constant currency basis. Managed fund sales increased by 29%, due to robust institutional fund sales at MFS, as well as continued strong sales in our Hong Kong pension business.

Other products increased by 3%, due to solid sales in our Canadian group retirement services business. Mutual fund deposits declined by 2%, reflecting more retail fund sales at MFS. Life and health premiums were flat. Turning to our Canadian operation on slide 6.

Sales of Individual life and health insurance increased by 4%, over the second quarter of 2010, due to higher sales of Universal life, and the continued success of their Sun participating product. Year-to-date, individual life and health sales are up 11%. Sales of individual investment products decreased by 14%, primarily due to lower segregated fund sales, and lower sales of fixed products. Mutual fund sales in our career sales force increased by 39%, over the second quarter of 2010.

Group benefit sales were up 29%, driven by growth in the medium size case market. A recent industry standard report released by Fraser Group confirmed our number one position in the group benefits market as of the end of 2010. In group retirement services, sales were up over $1 billion, versus the second quarter of 2010. Pension roll-over sales increased 9%, to $255 million, with the fourth quarter average retention rate of 51%. We continue to expand the product shelf in Canada.

At Sun Life Global Investments we added three new mutual funds to our lineup during the quarter. A Canadian equity fund, and a balance fund (inaudible) by Black Rock, and a bond fund by MacLean Budden. Wes Thompson will provide an update on the U.S. business later in the call . I will provide an overview as of slide 7.

Annuity sales in the quarter increased by 4%, compared to the same period a year ago. Sales in individual insurance continued to reflect the discontinuation of no-lapse guarantee Universal life sales and were down significantly. Sales in the U.S. benefits group were down 14%, as lower sales in stop loss and dental, more than offset increased sales in the life and disability lines. Turning to MFS on slide 8.

Assets under Management reached a record level of $240 billion US dollars, compared to $183 billion US dollars a year ago. MFS reported gross sales of $14.5 billion US dollars, up over $1 billion from a year ago, and net sales of $3.2 billion US dollars. Margins showed improvement. MFS continues to receive industry recognition, winning three awards at the Financial News Awards for Excellence in Investor Services, including the Best Client Service Team, which the firm has won for the second year in a row.

Retail fund performance remains strong with 84% of fund assets ranked in the top half of the Lipper three-year categories. Turning to Asia on slide 9, total individual life sales declined by 11% over the same period a year ago, mainly due to lower volumes in India, where the industry is still on a recovery path from the September 1, 2010 regulatory driven changes. Excluding India, sales increased 43%. Sales in Indonesia increased 41%, with robust sales of the Shariah product launched late last year.

Sales in the Philippines were up 29%. Sales in China were up 95%, largely driven by sales in the Bank Assurance Channel. The pace of product development continues in our Asian operations. Sun Life Hong Kong introduced the first RMB product, The Sun, Dragon and Diamond Plan, designed to capture share in the growing market for RMB investing. It's been well received in the marketplace.

Before I conclude, I'm 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. With that, I will ask our CFO, Colm Freyne to discuss the second quarter results in

Thank you, Don, and good morning, everyone. Operating net income for the second quarter of $425 million is a very solid result, given the backdrop of unfavorable movements and equity markets and interest rates in the period. We benefited from stronger fundamental business performance in the quarter, positive investment experience and muted impact on earnings relative to the market movements we saw in the quarter.

Slide 11 outlines the key economic impacts to earnings in the second quarter of 2011. As you can see, we have positive experience from interest rates, and a modest negative impact from declining equity market. Strong risk management practices around market risks contributed to outperformance against the interest rate and equity market income sensitivities. Although interest rates declined in the second quarter, the net impact of interest rates was a $23 million contribution to earnings.

As we have previously noted in our Management discussion and analysis, our interest rate sensitivity disclosures have a number of simplifying assumptions, including an assumption that interest rate changes will result in a parallel shift across the yield curve, and the changes will occur instantaneously. During the second quarter, interest rates moved significantly by duration. The interest rate impacts relative to the sensitivities were primarily as a result of the smaller reductions at the long end of the yield curve. For example, yields on the US 30 year Treasury fell only half as much as the yields on the 10 year Treasury. Contributing to the gain this quarter were the higher than expected asset reinvestment rates, and favorable spread movements in Canada.

Generally, when interest rate movements are small in the quarter relative to the 100 basis point shock in the sensitivity disclosure, the impacts are readily offset by other items such as changes in duration, rebalancing and other asset liability management activities. Negative impact from declining equity markets was partially offset by the outperformance of underlying segregated investments, versus the related hedging instruments. We had solid credit performance in the quarter.

With net credit experience contributing a positive impact of $14 million after tax. We did not experience significant impairment from the quarter, and our results were within our best estimate assumptions. Continued strengthening of the Canadian dollar versus other currencies decreased net income by $10 million.

Over the past year we have seen the Canadian dollar strengthen, almost 10% against the US dollar. Which has had a negative impact on our results. We benefited from a lower effective tax rate in the quarter, due to adjustments on the finalization of prior years tax returns in Canada, and in the United Kingdom, as well as somewhat lower income taxes on investment income in Canada. As a result, our effective tax rate on an operating basis, was approximately 13% for the quarter.

Moving to slide 12. We provide details on the source of earnings for operating income. Last quarter I mentioned that we may be near an inflection point for expected profits, and that expected profit will reflect ongoing improvements to product design, pricing, business mix and other fundamentals. Expected profits this quarter were $471 million, for an increase over Q1 of $36 million, and for a year-over-year increase of $10 million. The positive impacts of business growth and higher assets under management as MFS, more than offset the negative impact of the sale of our life reinsurance business in the fourth quarter of 2010.

The Reinsurance Treaty in our Canadian Group Benefits business at the end of 2010 and the strengthening of the Canadian dollar. New business strain was $34 million, a notable and substantial improvement over the $69 million a year ago, and $62 million from the first quarter. This reduction affects the change in product focus in the United States, improved pricing, product design and business mix in Canada, and the lower strain associated with sales levels, product redesign and improved product mix in India. This is a lower level of new business strain than experienced in prior quarters. The level of strain in a given quarter is also influenced by sales volumes and business mix, and therefore will vary by quarter.

Nonetheless, the actions we have taken in recent months are having a positive impact on new business strain. Gains of $7 million reflect the market impact on slide 11, partly offset by various other items including higher expenses from investments in growth and service initiatives, and net unfavorable policy holder experience. Assumption changes and Management actions did not have a significant or material impact on the quarter's results, contributing $3 million pretax. Earnings on surplus of $79 million were down from the second quarter of 2010, as the prior year benefited from higher investment gains and other investment income.

Taking a closer look at the performance of our business groups on slides 13, we continued to take actions to improve business fundamentals in Canada, which, in turn, delivered strong earnings growth in the second quarter of 2011. SLF Canada reported operating net income of $22 million, up from $131 million reported a year ago. The increase was attributable to more favorable equity and interest rate impacts, improved product profitability and business mix, and the favorable impact of investing in higher yielding assets. In the United States we reported operating income of $110 million, compared to a loss of $127 million a year ago.

This improvement reflects more favorable interest rate and equity market impacts and lower new business strain and the positive impact of invests in higher yielding assets. These positive contributions were partially offset by unfavorable morbidity experience in our Employee Benefits Group. Operating earnings from MFS were $66 million, up from the $47 million reported a year ago on strong net sales and growth in assets under management. Margins improved to 34%, up from 29% a year ago.

Earnings from our Asian operations were $30 million, up from the $24 million reported a year ago. Our operations in India were profitable again this quarter, mainly due to the lower new business strain previously described. Our U.K. operations reported income of $56 million, compared to income of $104 million a year ago. Net income in the second quarter of 2010 reflected a $53 million tax benefit. Corporate support, included under the Corporate Segment, had a loss of $59 million compared to a loss of $24 million a year ago.

Results this quarter reflect the net cost of reinsurance for the re-insured business in SLF Canada's Group Benefits Operation. The results in the second quarter of 2010 include earnings from the life reinsurance business that was sold in the fourth quarter of 2010. Finally on slide 14, we outline the regulatory capital position for Sun Life Insurance Company of Canada. We ended the second quarter with a minimum continuing capital and surplus requirements ratio of 231%, up slightly from the 229% reported at the end of Q1 2011. I now turn the call over to Wes Thompson, who will provide an update on the U.S. business.

Thanks, Colm. And good morning, everyone. Today I would like to discuss three key themes in the U.S. business.

First, we have made significant progress towards improving the consistency of our results by focusing on profitable, sustainable products and markets. Second, we are investing and building capability in key growth areas and third we are further integrating our distribution capabilities to fully leverage our strengths across all markets. Let's start with the progress we have made to improve the risk profile and the profitability of our existing U.S. business. In the variable annuity market we are growing with a simplified product portfolio.

At the end of 2010 we launched an innovative product portfolio which increased pricing flexibility and improved risk profile. Domestic sales in the second quarter increased 12% sequentially, and was 84% of our sales coming from this product. Sales and profitability are emerging in line with expectations. We have also been shifting away from products with long dated irrevocable guarantees, such as no lapse guarantee UL.

While we are experiencing temporary pressure on the top line, these actions have directly benefited earnings in individual insurance where we have reduced our new business strain by over $50 million year-to-date. Our actions, when combined with targeted expense reductions, have allowed us to invest in critical areas that will drive future growth, such as distribution, brand and technology. We will continue to invest in the areas that will further improve our long-term profitability and risk profile. These product segments include the voluntary, link benefit and executive benefit businesses.

I will now discussed the capabilities in these key growth markets, beginning with voluntary. There is a growing demand for employee paid benefits, as financial responsibility continues to shift from employers to individuals. As we previously discussed, this voluntary market offers tremendous potential for growth and the ability to design product with attractive returns and risk profiles. In order to increase our presence in this mark we will create a suite of stand alone products for employees, we will develop customized enrollment tools and platforms and improve the custom relationship management systems and increase our voluntary sales capable.

We have several distinct advantages in the voluntary market. First, our traditional employee benefit business provides a strong base, especially with our distribution scale and recent technology investments. Second, we plan to leverage the knowledge and expertise of our colleagues in Canada, who have invested in capabilities to serve this market. Third, we will use our individual insurance capabilities to develop solutions for the specific needs of individuals at their place of work. And lastly, will have a dedicated team that will be responsible for executing on the strategy, with a goal of being a leading provider in this market.

Growth in the voluntary market will also enhance our traditional group business by adding scale and deepening relationships of brokers and employers as the market evolves. Moving to the executive and link benefit space, the shift in demographics is creating a demand for innovative solutions for individuals and business owners in the executive benefit segments. These are underserved segments of the life insurance market, where we can achieve relative scale, and profitablity targets, and they align well with our group and annuity capabilities.

In the small to mid-size executive benefit segment, we have gained traction with our Sun Executive Product and in the larger corporate owned life insurance market, we have built a strong reputation and deep distribution relationships. In the Link Benefit Market, we recently launched our first product. Sun Care, which combines life and long-term care insurance. With the streamlined underwriting process and ability to protect retirement income, this product will be appealing to many of our variable annuity advisors we already do business with.

Now in order to drive growth and direct resources to these more profitable markets, we will be closing select traditional UL and VUL life product to new business, and I would like to underscore the note "select" which we will discuss later. There are significant challenges in the traditional life market where product innovation has given way to comoditization and narrowing margins. Even scaled players are challenged to achieve more than single digit returns on new business in these traditional segments. The products we are closing account for less than 15% of our life sales in 2010, and only 3 million in the second quarter, but required relatively high fixed costs associated with new business support. As a result, we expect to reduce the run rate expenses associated with these products, in order to invest in key growth initiatives, particularly in voluntary and distributions. I will now discuss how we'll leverage our distribution strength. We will further integrate our group and individual distribution arms to bring a broader range of solutions to our intermediary partners.

To support our business focus we will add voluntary and link benefit sales specialists, strengthen enrollment capabilities, enhance our small business market capabilities and sales support, and improve our technology platforms. As our business mix shifts over time, we expect profitability and VNB to improve and the risk profile to shift away from market based risks, and towards traditional insurance risks. We remain committed to profitable growth in our traditional employee benefits and our retirement income businesses.

Our plan is to focus on growing areas of the insurance market, where we can achieve leadership positions while delivering innovative solution, sustainable results and shareholder value. I'll now turn the call over to Phil for questions and answers.

Thank you, Wes. To help ensure that all 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 to reque with any additional questions. With that, I will now ask Luke to please pull up participants for their questions.

Thank you. Ladies and gentlemen we will now conduct a question and answer session. Your first question today comes from the line of Robert Sedran of CIBC. Please go ahead.

Colm, on the issue of the experienced gains lines, if I back out the impact of the market or macro forces that you detail in your slide, it seems like there's a reasonably sized negative there, which I assume is traditional insurance risk, the mortality, morbidity. It's talked about a little bit in the MDMA, but it's not really quantified. "A," am I correct. "B," can you quantify it, and also talk about which products it may be and how sustainable that negative experience may be, or how concerned you may be that that negative experience may sustain itself in coming quarters.

Thanks for that question and it allows to us comment a little bit around experience and the impact of experience on the business and underlying business results. So, on the source of earnings, the $7 million of pretax reported, and after you adjust for the items noted with respect to economic impacts, interest rates, credits, equity markets, which are disclosed on an after tax basis, if you adjust those to a pretax basis, $37 million, you have a $30 million item attributable to other experience in the quarter, and mortality, morbidity and lapse experience does account for that. There were other offsetting items around expenses and investment gains, but the overall experience on mortality and morbidity and lapse , came to $30 million, approximately, pretax, and that was really comprised with the positive in Canada, with respect to morbidity and mortality, but a negative in the U.S.

The U.S. result was mainly in the EBG area and employee benefits group and we did have a lapse experience negative in the U.S. as well. But perhaps on the substantial point which is around the experience on employee benefits group, and maybe would I ask Wes to comment on how that business is performing and how we view that experience of the

Colm, I would say that I think it's important to note that year-to-date net income is up versus prior year, $55 million versus $42 million. I think that's the fundamental result that we see. I think quarterly results, as you know, in the group business can move around. So we look to see if there are significant trends in such areas as incidents loss ratios, et cetera.

And 2010, we did see incidents rates increase over the rates that we have experienced during a relatively strong economic period of 2005 and 2008, but they are still within an acceptable range. And what we are experiencing year-to-date in 2011 is consistent what we have seen in throughout 2010. I would say, again, given the current economic environment, it's within the range of expectations.

Your next question comes from the line of Steve Theriault, of bank of America. Please go ahead.

A couple of questions. First for Colm. Last quarter you indicated that hedge cost were stabilizing. Can you talk about the level of hedge costs that came through Q2 versus Q1.

Were they relatively comparable, and with rates moving lower here, can you remind us, should we expect an increase in hedge costs going forward. And also I would be interested if there was any material active management in the quarter with regard to rate sensitivity. If you can walk us through that. And secondly, when I look at the bond portfolio I see an increase in single As, a decrease in AAAs.

Is this a function of yield enhancement? And if so, how much of an effect is this having and how big of an opportunity is this going forward? Thank you.

Thanks, Steve. On the first point around hedge costs, we would say in the second quarter the hedge costs were in line with the prior quarter. So nothing particularly unusual around that, and in line with comments we made previously. Clearly if interest rates stay at a low level that will have an impact on the overall program.

But in terms of active management and interest rate activity in the quarter, as we have noted in our prepared remarks, we really did see a lesser impact as a result of the impact of the changes on rates being more pronounced at the short end of the curve and our exposure is at the long end and in Canada, we did see, as I mentioned improvement in reinvestment rates so that took us from neutral territory to positive territory. And as I also mentioned, there is constant ongoing asset liability management activity.

We would expect in a choppy market to be able to take ongoing actions to make sure we mitigate our mismatch risk, and this all has to be taken within the context of insurance liability which is close to $90 billion so these amounts may seem somewhat large against the base in which measurements are taking place. They are not as large.

So if rates were to stay where they are now, for example, clearly that would likely be an earnings subject to mitigation, but does it increase the cost of hedging as well?

In terms of the first point, if rates were to stay where they are today, clearly rates have reduced since June 30th and that reduction has been more pronounced at the long end as a result of recent activities, primarily in the U.S. So we have seen that and that would have an impact on the results in the quarter. In terms of the impact on the hedge program, I think we are still comfortable with the range that we have talked about, the 50 to 55 basis points being the range but again, you will have to look at how long those rates were to stay down and the effectiveness of our overall hedge program.

Steve, this is Steve Peacher. After the movement you are noticing to single A securities and now AAA line reflects a deployment of excess cash which has been continuing for some quarters, as opposed to a broader strategic shift between our ratings mix.

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

Thanks very much. Just following up on the positive experience gains you got from a declining interest rate environment. Colm, you mentioned you have higher than expected asset reinvestment rate.

Now does that mean that you actually increased, or did you change what kind of assets you would be reinvesting in from the first quarter to the second quarter? Did you move down the credit scale and pick up yield that way? I'm trying to figure out which you actually did here.

That's a good question, Tom. And I should clarify, no, there was no change in asset mix. So this was not a question of saying we are going to shift from one type of assets to a higher yielding asset, which, of course, would come with additional risk.

This is, looking at in Canada, where we do invest in provincial bonds spreads on those did widen out so that gives a little pickup, but that's a program we have had in place. Again I could clarify, the amounts we are talking about here are not large. The additional pickup on that was somewhere in the range of $10 million, just to be very clear, it's not because we have changed our asset mix in the portfolio.

Well, we are still positive even without that. So the rates went down in the long end, and then you pick under $10 million as a result of this change in your reinvestment rates. So somewhere you picked up some more money. And did you do any asset liability rebalancing, or something like that, to actually help you in the quarter with respect to interest rates?

I think that when we think about the interest rates, Tom, the impact of the lower impact up along the yield curve had quite a muted impact on the overall profile in the quarter, and then to swing us into the positive territory, was impact such as the one I described with respect to Canada. Some tightening of swap spreads which gave us a little bit of a pickup, and just the ongoing activity that takes place in any dynamic and rebalancing portfolio. So nothing in particular to say that is a change and approach in philosophy.

So we should be really looking at the long end, even though the long end went down in the second quarter, you are able to offset that with other stuff.

The long end did go down as you rightly point out, but a lot of people think of the exposure using the classic bench mark of the U.S. ten-year treasury. And the long end went down considerably less than the U.S. ten year treasury. So you are absolutely right. Focusing on the longer end was appropriate and that was a factor in the quarter.

Okay. And there wasn't anything unusual other than that. We will just focus on the long end in the third quarter and if everything stays necessarily the same as it is now, we wouldn't anticipate there to be a positive earnings impact from interest rates in the third quarter.

I think it's fair to say that as interest rate declines are more pronounced, relative to that 100 basis point shock we provide in the sensitivity disclosures, and as they happen more rapidly, then the experience is more negative for the reasons that we've commented on.

Okay. Thanks for that.

Your next question comes from Doug Young of TD Newcrest.

Hi. Just a few questions, first in the U.S. Life side. I think even if we take out the impact of no lapse guarantee, your Sun Life exec sales were down. So I was just wondering what was going on. Second, in Canada, obviously there is weak segments from sales and Sun Life advisory sales were weaker, just hoping to get a little color on that. And thirdly, I know in past to Q2s you give us a sense of if there's any anticipation of significant reserve adjustments in Q3 and Q4 and the fact that you haven't mentioned anything, is that no, there's nothing on the horizon.

Perhaps I will take the latter part of that question and we will hand over to Wes on the U.S. sales side. With respect to assumption changes, you're absolutely right. The third quarter is the quarter when the majority of those land and at this point we are continuing to work through that process. Work underway. And nothing to report at this point.

With respect to the individual sales in the U.S., I think it's important to recognize that as we exit, no lapse guarantee, we have been historically highly dependent on a single channel, the BGA channel, for the distribution of our life products in the U.S.. So there was clearly a spillover effect to the other products that we are continuing to going forward with, particularly the executive benefits product.

But what we have been doing is building capabilities to diversify our distribution capabilities in the U.S. across multiple channels, including independent broker dealers, wires, benefit brokers and others, so the longer term effect, while we are seeing this temporary pressure on our sales, I fully expect that longer term we end up with a more diverse and stronger distribution capability and the short-term trade-off is coming in the way of a sustainable long-term strategy from a product and bottom line earnings perspective.

Hi Doug, it's Kevin Dougherty speaking, In regards to your questions on Canada, first in regard to sales. Yes they are down, and that's part of a deliberate strategy to shift our product mix more and more to mutual funds and guaranteed products. So that is right on what we are planning. In regards to the current sales force, sales were affected by a particularly large convention that we had in the second quarter, owing to great sales in 2010, so we had many more advisors up in a convention for are a couple of weeks this year. But since returning from convention, sales are back to pretty well robust levels, so I think we will see good results in Q3.

Kevin, just to follow up on the market, how do you find the competitive landscape at this point?

I think we're meeting our targets in terms of what we are trying to achieve in the seg fund side. It has been interesting to see more crowded marketplace than it was 12, 18 months ago, and some fairly aggressive product features in the marketplace which we are staying away from.

Thank you.

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

Good morning. The expense reduction, and you're expecting individual life. You can quantify those and let us know how much of that will be falling to the bottom line, or if its all going to be reinvested in the business. The U.S. group mortality and morbidity trend, something had you last year this quarter, you had it in Q1 but that was masked by some recoveries and stop loss. Sounds like there is a bit of a trend here in morbidity and we are seeing that in some of the other group players in the US. I am just wondering why I shouldn't be worried here. And credit default risk reserves down about $200 million, despite your allocation to single A bonds increasing and triple A bonds decreasing. Is that mostly FX related.

So Gabriel, it's Colm here, I will take the couple of financial pieces around that question and then hand over to Wes. So on the first point around will we expect a charge coming through in the third quarter. We don't expect that we will have a specific charge coming through, there will obviously be some additional costs as we transition, but these will be occurred over some period of time. So nothing significant expected to come through in the third quarter. On you point around the provisions within the actuarial liabilities for future losses, you mentioned $200 million. You should of course not that that is since December 31, because that's a comparison from June 30th back to December 31 in the management discussion and analysis. And it is made up of FX as you quite rightly say, some other factors such as mix changes. So nothing in particular to draw to your attention there.

Actually on the expenses, I wasn't talking about a one time cost. I was talking about the run rate expenses being down once you rationalize your product line. So I'm wondering if that benefit increases profitability or it's reinvested in the business.

I think Wes will speak to that.

Ok. Fine.

In our life business, I think if you look at the results in our group life business. The results have been moved around, but incidents improved in Q2, versus last quarter and prior year, and actually severity also versus Q1, 2011, was slightly worse. Improved I should say, versus Q1. But was slightly worse versus 2Q 2010. So due to larger sized claims, so we continue to monitor that marketplace but we don't see anything systemic that tells us that we've got an underlying problem here, but we obviously in this arena are continually focusing on any trends and incidents, and severity of the claims in the life business.

What about group life?

And then the expense reduction in the US, we expect that the severance expenses related to the changes that we have announced in the US, will be incurred over the next few quarters. We don't anticipate that these expenses will have a materially impact in terms of earning in any one quarter, but I do expect that as we continue to increase our investment in voluntary, we will divert some of those saves that will go to the bottom line in 2012, to these new initiatives that we are investing in.

So there will be some expenses flowing to the bottom line.

Yes there will be. We are not going to quantify it at this point.

And just the last one. On the morbidity claims and disability experience. Is there any trend there, any sector in particular where you are seeing some weakness. Any regions, if you could shed some light that would be great.

No, in fact we just did an extensive review of that and there aren't any, what we are seeing in terms of the slight increase that we have seen, I think I mentioned earlier that if we look at the 2005 to 2008 rates of incidents. And you think about that period as one of the strongest economic periods, it's a pretty good baseline to then compare to. We saw a slight pick up in 2009, very slight, and then another slight pick up in 2010. We have been tracking in about that same range, from and incident perspective, through June of 2011. There is nothing discernable that we can point to that would create cost. What we do see is where has been an increase, it's predominately in sort of the more subjective areas of claims. Things like mental illness, soft tissue, so that is the only corelation that we see driving some of that increase, but again, within the range of expectations, given the existing economic climate.

You had it in Q1 but that was masked by some recoveries and stop loss. Sound like there's a bit of a trend here in morbidity and we were seeing that with some of the other group players in the U.S. I'm wondering why I shouldn't be worried here. And then credit default risk reserves down about 200 million despite your allocation that single A bond increasing and AAA bond decreasing. Is that mostly affects related? All right. Thank you.

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

Thanks. Wes, I appreciate the color you gave to the US strategy. That was very helpful to us. And I just wanted to zero in a little bit on this.

Do you have a timetable that you can share with us in terms of when you expect this transition to kind of get to the inflection point where we are starting to see the old business be less of an influence and the new business starting to come online quickly, and what types of milestones should we be looking for in terms of US earnings So we can gain the actual success of this strategy. Thank you.

So with respect to the first point, in terms of when you should expect to see us continue to grow in the new segments, I think it's important to recognize if we look at the segments that we are focused on, the link benefits arena, we just launched that product late June. So its in its early stages, while we have a number of state approvals, there are still some large states that we don't expect to get approved until later this year. So I would expect that we will begin to see a pickup in those sales really in 2012, more so than we would see in the balance of this year, just given the process of getting that product out in the street and in the hand of our wholesalers. With respect to executive benefits, I think the comment I made earlier holds true.

That is the transitioning of distribution capability, where we have been aligning more with the nontraditional producers in that marketplace. The benefit brokers, independent planning firms, wires, and so forth. And we are seeing some good, early traction there, but again, I would say it's going to be in 2012 before we really begin to see the pickup there. I do expect to see strong results in our corporate and life insurance this year and in fact, I don't think the first half of the year reflects the strong pipeline yet that we know that we have there yet.

So you should expect to see good results in the second half of the year in those lines. And that obviously the voluntary business, we are in that space now. But not in a significant way. So the investment that we are making in voluntary will also drive our core group business capabilities over the long-term. With respect to the earnings piece, I think you are already seeing the impact of the significant reduction in new business strain, and I should point out that on a relative basis, as we are successful in growing these new segments, there will be significantly less new business strain in all of these new products we are selling, and that's one of the real benefits of the switch that we are making.

Thank you. Just one followup. In terms of the linked product, the life long term care. Can you give us a little more details on the long term care aspect of that. I'm sure there are people a little worried about that, given the experience that others have had with that. Is there a restriction on the benefit there?

Unlike traditional long term care insurance, there are restrictions or limitations on the period and the level of benefit that is available. So there's a defined, up to a maximum of a defined period of benefit, and level of benefit. That's tied to the underlying life insurance benefit itself. We will get more details offline and it will take quite a bit of time to go through the specifications of the product, but we look at that risk profile as being very different than the traditional long term care marketplace.

Thanks, Wes.

Your next question comes from the line of Mario Mendonca with Canaccord Genuity. Please go ahead.

You can hear me now?

Yes.

Good, sir. Two questions, one on expected profit, expected profit sequentially was up about 8%. I understand the comment about volume growth. But your asset base on a sequential basis is only up 1%. I feel like I'm missing something in understanding that jump in expected profit from one quarter to the next. Is there anything special perhaps a shift from best estimate reserve to (inaudible) that would drive the higher expected profit? Anything you can offer us there?

Mario, yes. On the expected profit, I know this has been a topic of discussion with investors and with analysts, and an important topic, and we don't see anything in particular relative to Q1. What we would focus on is the positive experience both year-over-year and relative to Q1, and it really does reflect the ongoing activities that we have been commenting on, and we are, as you know, overcoming some fairly significant head winds related to the stronger Canadian dollar.

The sale of the reinsurance business unit last year, which did contribute to profit last year. But it really is more around the ongoing growth of profitable business in Canada, Asia, U.S., MFS. It's really across the board.

Colm, you say from one quarter to the next there's been no change in methodology and no change between allocations (inaudible) and best estimate.

No methodology changes.

But allocation changes, from one bucket of reserves, say best estimate to pfab.

Maybe I will ask Keith Gubbay to add a few word around that.

I agree with your comments, Colm. I would add there are some seasonal elements in a couple areas. EBG has seasonality based on historical trend, and its a little higher in Q2 than in the other quarters. As well as the individual business in the U.S. tend to be a little lower in Q1 and then increases during the year. And that's a peculiarity. So there are seasonal impact that make it higher this quarter.

Were there any allocation from best estimate and pfab.

There were no changes in methodology this quarter.

Or allocations.

Correct.

The next question relates to this pivot from VUL UL to voluntary. I was intrigued by the comment that there may be gains on the expense side. And, Wes, the reason why I was intrigued by that, when you think about who the big competitors are in voluntary, and you think of investments that need to be made and enrollment and in distribution, it would seem to me this may be reminiscent of what happened with variable annuities when the Company had to upgrade the distribution force. My question is what kind of investment needs to be made to build up a strong enrollment force, and how long will it take before you get to the point where you are actually generating a meaningful amount of voluntary sales?

I think, Mario, that you have to look at the starting point. So we have a base of capability already. And approximately 25% of our annual sales are driven through that voluntary capability that we have in-house today, so within our very extensive distribution force, we have capabilities across the U.S. We have a product capability in existence

What we are doing is really accelerating our focus, and increasing our focus, in that particular market because we do have that baseline of capability already. And, in fact, not only do we have that here but we have capabilities that have been built out in Canada that we have looked at that we can clearly leverage as we invest in this business. We are planning to make a fairly sizable investment over the next five years, and we believe that in doing, so given our current capabilities we can be more of a leading providers.

Its about a $20 billion market, about a third of the buyer group business is in the voluntary space. Hard to quantify because not everyone counts the same. But clearly the area of growth, as you think about the continued shifting of responsibility for benefits from employers to employees, and the implication in the U.S. of the emerging Health Care Reform and it's potential impact accelerating that even further.

Wes, I think the business case for it makes a lot of sense. No one would really quarrel with that. I guess what I'm getting at, is it possible that in the near term, and let's call that the next 12 to 18 months, there could be periods where expense levels look really lumpy and maybe unusually high because of this push in voluntary.

I don't think you will see that on a relative basis to where we have been. One of the strategies I have employed since coming to Sun Life has been to reinvest in savings that we have achieved in exiting other lines of business', so we have exited a number of businesses that are not sustainable going from fixed annuities, index fixed annuities, NLG last year which was a significant expense to us. You are seeing alot of that go to the bottom line. We have also taken some of that already. We have begun that investment, so this announcement isn't the gun going off, it is really an evolution of the work that we have been doing. So no, I would not expect that you will see any significant jump relative to where we have been, or any sort of lumpiness in that regard.

Thanks, Wes.

Your next question comes from Colin Devine of Citi.

Two questions, and I will target Wes since he's the man of the hour. With respect to the new long-term care product, maybe it would be helpful if you can compare that to money guard, that you had at your former firm in terms of how it works and what the risk exposure is. I know I would find that very helpful. And secondly with respect to terminal life guarantee.

I was wondering if someone there could give us some sense of the level of reserves you are holding for the block, on a Canadian IFRS GAAP basis, and how those relate to US A triple x stat reserves.

Let me maybe quickly run through a few bullet points around Sun Care, our link benefit product. I think the first thing to consider is that it is a single premium product, so that reduces the net amount of risk for both mortality and morbidity and raises the level of affluence of the target client. The second, the single premium nature does allow for immediate investment of premiums so it has a muting obviously on reinvestment risk. Third, the acceleration of the life insurance proceeds really doesn't expose the Company to significant LTC morbidity risk, as we will generally play that life insurance benefit in any event. And then I think the product structure with the limitations that I said before, in terms of duration of the LTC coverage, over and above the life insurance benefit to a specific number of years, typically in the industry it's around four to six years, and the life insurance death benefit typically must be exhausted and works that way with our product, before any benefits are paid through that long term care extension.

So the picture that I'm painting here is the product that we are launching is fairly comparable to what is in the market place today and the risk profile we feel very good about. We are going to go fairly aggressively with our wholesaling force with that product in terms of the opportunity to grow that marketplace, but we also will manage it relative to the environment that we are in long-term. We are also looking at a couple of strategic partnerships that will be a real plus for us in that area.

So you're saying the key distinction, as with Money Guard, is the advancement of the death benefit, so alot of the underwriting risk that you are taking here is mortality versus the morbidity which has been a problem for some very large companies.

That is correct.

Have you had any problems getting approval for this. I know in New York State, it took a while to convince with Money Guard, how's that going.

We are approved in 40 states, and you are right, it will take a bit longer in states like New York, but we are working through the responses to some of those other states at this point. We don't expect approval in New York this year.

Colm here, just back to your question of the A triple x reserves and clearly of course they are higher than under Canadian GAAP, we have funding solutions in place obviously for our A triple x reserves, with the fact that we are no longer in that market segment there will be no new business coming on that would require additional funding and we have the funding sources that will take us out over the lifetime of the product as those A triple x reserves grow. So that's all in place.

Are you saying you have something in place that will fund up to the level of the A triple x if you need it. Let's say the A triple x reserve requirement turned out to be how that product plays out. Does that mean that you would hold sufficient reserves for that today, or would that mean you might have to increase reserves in the future. And roughly, because IFRS is also new for all of us, can you give us some sense of what the difference is between the Canadian GAAP reserve and the A triple x.

So let me start with the IFRS, the IFRS changes to the accounting did not impact the reserves. So as you know that is going to come through phase two, which is a way out there. Nothing has changed or occurred since the start of this year relative to our A triple x reserve. That was really my response earlier, to say relative to last quarter, year end, nothing has changed, we continue to operate with respect to the reserves and there really is no new developments on that front to share with you.

Let's talk later because I don't think I really got the question answered. Thank you.

Luke, this is Phil Malek, I think we have time for one more question.

Excellent, your next call comes from the line of Darko Mihelic with Cormark Securities.

Hi. Thank you for allowing me to ask some questions. I will be real quick, income taxes, Colm, if you could just talk about the benefit that you received in the quarter and whether or not a 20% tax rate is still appropriate to think about for Sun on a go forward basis. With respect to strain, on the second question, it sounds like you are expecting strain to decline even further. So maybe you could talk about strain as a percentage of sales, in other words, are you at your target mix right now, and if you were to achieve your target mix, what would strain look like as a percentage of life and health sales. Then finally any color on earnings and surplus over and above what you talked about would be helpful. Thank you.

You had a couple of points there. On taxes, clearly at a tax rate of 13%, we are below the range where we have commented on previously of 18% to 22% and when we adjust for the various items that I noted in my remarks, we would see those adjustments as being in the range of approximately $20 million, so that would bring you up to just under the low end of our range. We would say that that is a place given the pretax income and the mix of business we had in the quarter, is a reasonable place to be at the very low end of that range. As you know in the Federal election that we had in Canada recently, lower tax rates that had been previously proposed will now continue, and in the UK budget recently, we saw a change in corporate rates being proposed. So there are some developments on the corporate tax rates that are beneficial, so we will take that into account as we think about our range going forward.

I would say that the rate we are at is below the low end of our range, but in the current environment with the mix and pretax we would be comfortable at the low end of the range. On the point around strain, I think what we were really commenting on is that it is a lower level of strain this quarter, but by it's very nature, strain is going to be impacted by sales volumes, and as Keith mentioned in response to an earlier question, there is seasonality in terms of activities and Kevin also mentioned seasonality in terms of some sales activities that occur. So you can expect some variation on strain, but the trend should be year-over-year should be beneficial and you had a final comment on the level of earnings on surplus.

Earnings on surplus was higher a year ago, currently at around $80 million, we would say that is a reasonable sort of level to think about, also reflects I think the more challenging environment that we are in today with lower levels of interest and interest earning on surplus assets as we invested at these lower rates, will obviously be a head wind relative to that. So, I think that is where I would leave you with on the surplus.

Thanks very much.

This concludes the question and answer session.

Thank you Luke, we are now out of time for today's call. I would like to thank all of the participants on today's call, and if there are any additional questions, we will be available afterword. If you would like to listen to the rebroadcast it will be available later this afternoon. Thank you and good day.