Sun Life Financial Inc (SLF) 2012 Q2 法說會逐字稿

Good morning ladies and gentlemen and thank you for standing by. Welcome to the Sun Life Financial's Q2 2012 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 with instructions provided.

(Operator Instructions)

I will now turn the conference over to Phil Malek, Vice President of Investor Relations. Please go ahead Sir.

Thank you, John, and good morning everyone. Welcome to Sun Life Financial's earnings conference call for the second quarter of 2012. Our earnings release and the slides for today's call are available on the Investor Relations section of our website at sunlife.com.

We will begin today's presentation with an overview of our second-quarter results by Dean Connor, President and 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 presentation, Rob Manning, Chairman and CEO of MFS Investment Management will provide an update of MFS asset management business.

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 2, I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form a part of this morning's remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events.

And with that, I'll now turn things over to Dean.

Thanks, Phil, and good morning everyone. Yesterday, Sun Life reported results for the second quarter of 2012 with operating income of CAD59 million or CAD0.10 per share on a fully diluted basis. These results reflect global economic conditions affecting the industry, including low interest rates, and weak equity markets, and our results were generally in line with our published market sensitivities.

Operating income excluding the net impact of market factors was CAD379 million, an improvement over the CAD357 million reported last quarter, reflecting a number of notable items including higher levels of security gains in the second quarter. Year-to-date, we have reported operating income of CAD786 million, and operating ROE of 11.7%. Despite challenging conditions, we continue to make excellent strides in executing on our strategy, including strong sales growth in a number of key businesses while reducing total Company expenses.

Total adjusted premiums and deposits grew 21% year-over-year to CAD25.1 billion. Strong top-line growth continues to reflect momentum in asset management, particularly mutual fund sales at MFS. Sun Life's assets under management increased to CAD496 billion from CAD474 billion a year ago.

MFS reported a very strong quarter with growth sales of US $19.7 billion, surpassing last quarter's record level and strong net flows of US $4.2 billion. Robert Manning will provide a more detailed update on MFS later on the call. Sun Life Global Investments Canada continued its rapid expansion, with retail mutual fund sales of CAD51 million and institutional sales of CAD828 million, bringing client AUM to CAD5.3 billion. SLGI attracted 14% of the mutual fund sales of our Career Sales Force in Canada, up from 3% a year ago and 11% in the prior quarter.

Our insurance operations in Asia also continue to expand. Sales in the Philippines were up 74%, expanding on our number one market position, and reflecting both the successful integration of the Grepa Sun Life acquisition, as well strong execution in our new bank assurance partnership with Rizal Commercial Banking Corporation. Sales in China were up 35% and Sun Life Everbright Insurance marked its 10th anniversary during the quarter, now serving more than 8.5 million customers in 100 branches in China.

Sales declined in India where we continue to see the impact of regulatory change and this was a driver of the overall 3% decline in Asian sales in the quarter. Net sales in Asia are lumpier than we would like reflecting in part the fact that we operate in both mature markets like Hong Kong and the Philippines and immature markets like India, China, and Indonesia. On a year-to-date basis, we are pleased to see individual insurance sales up 15% in Asia over prior year.

Asia net income declined in the quarter primarily due to lower interest rates in Hong Kong. Again, net income is lumpier than we would like, but we continue to see significant upside in our Asian income over the coming years. As part of our Asian strategy we are expanding our footprint in the fast-growing ASEAN region.

During the quarter, we announced an agreement to create a joint venture life insurance company in Vietnam called PVI Sun Life insurance. Our partner, PVI Insurance is a leading property and casualty insurer in Vietnam with 95 regional offices, 25 branches, and our new business will combine Sun Life's product and risk capabilities with PVI's customer base and branch network for distribution. PVI Sun Life will start operations in the second half of 2012.

In the United States, we're hitting our key milestones in employee benefits and voluntary benefits. In voluntary, we have now hired 17 experienced external sales leaders, which is our target for the year and we have created an internal sales desk with five sales professionals. In June, we launched our first three products, customized for the voluntary market, and have further launches on track for the fall. Total sales in our Employee Benefits Group increased 13%, including more than 50% growth in voluntary benefit sales over the same period last year.

In Canada, individual life and health sales grew 7%. Over the past three years, we've increased our individual life and health sales by 44% and advanced our market share. And we've done that while repositioning the product shelf to meet return hurdles in a low interest rate environment, nearly tripling the VNB through better product mix, renegotiating reinsurance rates, and implementing price increases, including the further price increases for universal life and critical illness announced earlier this week. These changes continue to provide an attractive value proposition to our customers and on a basis that works for us in a low interest rate environment.

Individual wealth sales increased 5% in Canada compared to prior year due to strong segregated fund and payout annuity sales. Segregated fund sales were temporarily higher following our announcement in May to suspend GMWB sales in the third-party channel. This week, we announced further changes to our seg fund line-up that will provide competitive death benefit and maturity benefit features, a reduced GMWB payout for our Career Sales Force and an enhanced fund lineup including SLGI funds.

Group Retirement Services assets under administration finished the quarter at CAD51.1 billion, up CAD2 billion from a year ago reflecting CAD2.3 billion of net positive flows offset by CAD300 million of market movement. Switching to Group Benefits, according to the 2011 Fraser Group Universe Report, which was released in the second quarter, our Canadian Group Benefits business was ranked number one as measured by business in force, or BIF. The report also shows that our growth in BIF exceeded the market average in each of the past three years, reflecting not just strong sales, but strong client retention as well. In the Group Benefits business, it is not just what you sell, but what you retain as well, and the numbers show that we are leading the market in this regard in Canada.

Productivity and expense management is a focus for all of our businesses and I'm pleased to say we are on track to meet our expense targets by year-end. Productivity gains are being reinvested into growth and net of that, operating expenses still decreased by CAD18 million year-over-year to CAD809 million for the quarter. Sun Life continues to be a strong and well-capitalized Company, with a minimum continuing capital and surplus requirements ratio of 210% at Sun Life Assurance as of June 30, remaining well in excess of regulatory requirements. I'm pleased to announce that the Board of Directors of Sun Life Financial has approved a quarterly shareholder dividend of CAD0.36 per common share, maintaining the same level as the previous quarter.

So in conclusion, we are executing well on our strategy. We've made great progress reshaping the Business, completely ceasing sales of US life and variable annuities back in January. We've achieved a highly effective transformation of our Canadian individual life and health platform. We're delivering strong overall top-line growth across our four pillars -- asset management, Canada, US group and voluntary benefits, and Asia -- and we're managing expenses well. The balance sheet continues to be strong and we're pushing hard towards our 2015 goals.

And with that, I'll ask our CFO, Colm Freyne, to walk you through the financial results in more detail.

Thank you, Dean, and good morning everyone.

Turning to Slide 5. Yesterday, the Company reported operating earnings of CAD59 million, or CAD0.10 per share. Results in the quarter were impacted by the decline in both equity markets and interest rates and I will provide more detail on these impacts on the following slide. Also on this slide, you can see that our capital position remains strong. We ended the second quarter with a minimum continuing capital and surplus requirements ratio of 210% at Sun Life Assurance, down slightly from the first quarter. The drop in equity markets and interest rates during the quarter reduced the ratio by approximately 6 percentage points, consistent with our published capital sensitivities.

The proceeds of the 800 million subordinated debt issuance in the first quarter was invested by Sun Life Financial into Sun Life Assurance this quarter, along with an additional CAD250 million contribution, offsetting the impact of the subordinated debt redemption that took place at the end of June. Similar to last quarter, the impact of the IFRS conversion phase-in, again, used 1 percentage point and segregated fund capital usage caused by the aging of the in-force block used approximately 2 points this quarter. By the end of 2012, the IFRS phase-in will be complete, and the segregated fund capital usage will be significantly reduced, resulting in improved capital generation at Sun Life Assurance Company of Canada.

On Slide 6, operating net income excluding the impact of changes in interest rates, equity markets, and the fair value of real estate properties in the quarter was CAD379 million. As you can see, the drop in equity markets resulted in a net after-tax impact of CAD131 million. The equity impact includes a CAD31 million impact from basis risk related to the under-performance of variable annuity investment versus the relative hedging instruments in our US variable annuity business.

With respect to interest rates, the negative impact of declining rates was partly offset by the positive contribution from credit and swap spreads in the quarter, resulting in a net negative impact of CAD196 million. We have provided additional disclosure in the Management discussion and analysis on the impact of the low interest rate environment on our net income through 2015.

If current very low rates persist, there will be an unfavorable impact on our net income in the second half of 2012 of approximately CAD50 million in the third quarter and another CAD50 million in the fourth quarter, for a total of CAD100 million. Furthermore, we would expect our net income for the period from 2013 to 2015 to be reduced by approximately CAD500 million in total.

Going forward, we will continue to reflect changes to the ultimate reinvestment rate as they are realized in each reporting period. And the impact of the changes will be reflected through the experience gains or loss line in the source of earnings, similar to other market-based impacts. We remind you that we use a deterministic approach to interest rate modeling in our businesses other than Sun Life US where we use stochastic modeling. The interest rate impacts just mentioned include our Sun Life US business. Finally, income in the second quarter included after-tax net gains of CAD7 million from increases in the fair value of real estate, classified as investment property.

Turning to Slide 7, we have broken out other notable impact to this quarter's results. The impact of investing activity on insurance contract liabilities resulted in a benefit of CAD97 million. These gains came from extending the duration and increasing the yield on investments over what is assumed in the valuation of the liabilities.

The net favorable mortality and morbidity experience of CAD4 million was driven by positive experience in our Canadian Group Benefits business, partially offset by unfavorable morbidity in our US Employee Benefits group. The Canadian Group Benefits business saw a broad-based improvement in disability claims experience from the prior quarter, resulting in positive morbidity expense this quarter of CAD12 million after tax. In Q2, we saw the benefits of a number of Management actions, which have been underway over the last several quarters. These include pricing changes, refinements in risk selections of the group level, and enhancements to our claims management processes.

In the US business, the negative impact of CAD16 million reflected unfavorable morbidity experience in long-term disability and stop-loss, as compared to the prior quarter's morbidity experience in our US group business. Long-term disability incidence and terminations have been stable. However, the severity, our average reserve per notice increased this quarter, primarily due to an increase in the average level of benefits. We continue to monitor these results closely and I would note that this business can fluctuate from quarter to quarter.

As in recent periods, credit impacts were not a significant factor with a net gain of CAD2 million relative to best estimates. You can see that lapse and other policyholder behavior experience was also not material to the results this quarter with a net negative impact of CAD6 million, primarily from higher lapses on US, corporate and bank-owned life insurance contracts.

Higher project expenses resulted in a CAD12 million negative impact to earnings. Again, this quarter, elevated expenses due to the implementation of Solvency II initiatives in our UK operations was the main contributor to this experience. We expect these expenses to remain elevated through to the first half of 2013 as we implement in the first quarter of next year.

Model refinements, another negative experience related to the variable annuity business, resulted in a CAD36 million impact to earnings this quarter. This is mainly attributable to refinements to the model that combines individual contracts into representative groups for modeling purposes. A revision to mortality projections in our US individual insurance business resulted in a reserve increase of CAD45 million after-tax in the quarter. Changes to the mortality assumption implemented last year did not fully reflect the impact of the change in mortality projections and adjustments were identified this quarter. This is considered a non-recurring adjustment.

In recognition of the very low interest rate environment, we realized a higher level of gains on available for sales securities in the quarter in the amount of CAD40 million above what we would consider to be a more normal run rate of approximately CAD25 million after-tax per the quarter. Excess financing costs resulting from the overlap of interest payments on the subordinated debt issued in the first quarter of 2012, and the subordinated debt which was redeemed at the end of the second quarter resulted in a negative impact to earnings on surplus of CAD9 million after-tax.

Moving to Slide 8, we provide details on our source of earnings for operating income. Expected profit of CAD459 million represents a net decrease of CAD12 million from a year ago. This decrease was primarily due to lower earnings at MFS and the updating of our expected benefits ratios in the Employee Benefits Group to reflect recent experience as described last quarter, partially offset by the positive aspect of the reserve hedging methodology change implemented at the end of 2011.

New business strain of CAD56 million was flat to the first quarter and up by CAD22 million versus prior year, mainly due to the impact of lower interest rates on our segregated fund business in Canada as well higher sales in China. The experience losses up CAD436 million primarily reflect the negative impact from equity markets and interest rates described previously. Assumption changes and Management actions previously mentioned resulted in reserve increases totaling CAD76 million on a pre-tax basis.

Looking ahead to the third quarter, we cannot at this time provide an overall estimate of the impact of all assumption changes that are expected to be made in the quarter. There are a number of positive and negative impacts that together are expected to be negative. We do not anticipate a significant impact in Q3 from assumption changes related to our economic scenario generator or from variable annuity policyholder behavior. Earnings on surplus of CAD125 million were CAD46 million higher than the second quarter of 2011, primarily due to the higher level of security gains described earlier and the positive impact the real estate revaluation, partially offset by the excess financing costs.

Turn to Slide 9 and the results by business groups. SLF Canada reported operating earnings of CAD186 million, down from the CAD218 million reported a year ago. The current quarter results reflect favorable morbidity experience in Group Benefits; favorable mortality experience in individual insurance and investments; a favorable impact of investment activity on insurance contract liabilities; and higher net realized gains on available for-sales securities. These items were partially offset by the unfavorable impact of declining interest rates and equity markets.

Our US business reported an operating loss of CAD187 million compared to income of CAD110 million reported a year ago. Results include the unfavorable impact of equity markets and interest rates. The negative impacts of the revision to insurance contract liabilities related to individual insurance, mortality projections, and unfavorable morbidity experience in the Employee Benefits Group.

Operating earnings for MFS were CAD68 billion, down slightly from the CAD70 million reported a year ago, primarily due to higher operating expenses and costs associated with higher sales. Operating income from our Asian operations was CAD15 million, down from the CAD30 million reported in the first quarter of 2011 due to higher new business strain arising from the rapid growth of sales in China and the impact of lower interest rates in Hong Kong.

Our UK operations reported operating income of CAD52 million compared income of CAD56 million in 2011. Expenses in the UK business remain elevated due to higher regulatory and project costs related to Solvency II as described previously. Corporate support included under the corporate segment reported an operating loss of CAD75 million compared to a loss of CAD59 million a year ago. The increased loss relative to the second quarter of 2011 reflects higher losses from the run-off reinsurance business and non-recurring gains from foreign exchange recorded a year ago.

And now I will turn the call over to Rob Manning.

Thanks, Colm. I think we are on Slide 11. I thought what I would do is give you all an update on the strategic positioning of the Firm as it relates to what we talked about at the Investor Day.

We continue to accelerate on people, products, distribution, and brand because we are in a unique position where our investment performance is very positively positioned versus the industry. What has happened, because I know you all think about the margin at MFS, is that we have had quite a significant uptick in gross sales at the Firm this year, running up over 30%. And just like in the life insurance industry, when you pay the premium up front for when you book a sale, it has a short term drag on the margin, which is a good thing though because you gain it all back in year two, three, and four. But we have accelerated spend because we think we are in a great position to gain market share and I thought I would just step you through some of the things that we are doing.

To begin with, on the investment platform, as you all know, we took over McLean Budden in the fourth quarter of last year. And I'm happy to announce that the analyst and PM teams as well as trading has been fully integrated into MFS and it is working extremely well. We -- year-to-date, and since inception, all of our Canadian equity portfolios which had been struggling are all 300 to 400 basis points ahead of their indices. And we put MFS's risk controls and process on top of all of the portfolios and we are very excited about the platform and opportunity as it will provide, we think, a great place, being the fourth largest pension market in the world for us to grow in North America.

We also opened up our Hong Kong office and we have an analyst there as well. And, in the fall, we will have two people in Sao Paulo, which will be a beach front for us in Latin America. We do have a research office in Mexico City, but we will pretty much have built out the global research platform and put ourselves in a great position to continue to launch products that the global marketplace will want.

In that regard, we have about CAD250 million in seed capital. We have products that we are building as we speak and those that we are launching that are really focusing on quantity -- both enhanced and depth as well as global tactical asset allocation. We're launching regional and concentrated high alpha strategies, as well as alternative hedged strategies and global credit. And we think that the product suite that we have will allow us to continue to grow capacity at the Firm and be able to scale up, which will bring great benefits in the future.

In terms of our retail business, this has been the big surprise for us this year. We had been waiting for equities to turn in the retail marketplace and that has begun to happen although it is happening at a slow rate. But the 12-month growth rate for the mutual fund industry is 1.1% and we're growing at 11.7%.

We have picked up 100 basis points in market share year-over-year and we now capture about 4.5% of all mutual fund sales in the United States. And in fact, we are number seven in net flows year-to-date industry. We were number three in May and number four in June.

And that is happening at a time when our mix is different than what the industry looks like. Our mix is now 70% equity products and 30% fixed income. And the 30% are credit product, which we believe are the right products for clients to be buying. As I mentioned, we do believe there is a bond bubble that the federal government is keeping interest rates artificially suppressed. And we think that if you sell clients interest rate-sensitive bond portfolios, at some point here in the future, they are going to have a performance problem and people are going to be surprised at the amount of money they lose. So we are not focusing on that and we are really focusing on having balanced products that we think are right for our clients.

10 funds at MFS will sell over $1 billion this year, and it is very well diversified -- it's domestic equity, international and global equity, credit products as well as our asset allocation, which includes target date and target risk funds. Lastly, on our investment side on retail, Edward Jones has been an incredible partnership for us. We are adding 10 outside wholesalers and 5 inside wholesalers to support that infrastructure.

We are number three in their system. We became a preferred provider in January of 2010. And at that point in time we had less than $1 billion assets with Edward Jones, and I'm happy to report as of today we are at $8 billion. And that partnership, as I mentioned, is working extremely well and we think going out many years it's really going to help us grow our mutual fund business. And Edward Jones is now our largest selling intermediary in that business.

In terms of our institutional platform, Canada was a real missing link for MFS. If you looked at all of the large institutional pools of capital, it was the one area that we were missing, so to have McLean Budden join the MFS family, is something that we are very, very excited about. We obviously had to restructure that business and I think you probably all saw that we sold the private client business to CIBC this past week. That is the last piece of the puzzle for us in terms of getting the platform to be priced with products that we want on it.

And we're very excited that even though our managed funds flows have been hurt in the first couple of quarters because of repositioning of McLean Budden, we think as the year progresses that will level out and we will be going into 2013 with a platform that will have great strength in the Canadian market putting MFS's products on their distribution platform. We are also adding salespeople in the developed markets like Germany and Switzerland and trying to make sure that we stay concentrated on where the larger institutional pools of capital are.

Lastly, in terms of our institutional business, we did buy out our distribution partner in Australia, BNP. We had exclusive arrangements with them which no longer exist. So we have a CAD12 billion business but we can take other products to that market like emerging market equities. We are in four finals this week as we speak and we are very excited about that.

There are 15 people in that office as we speak up and running. And, that's a great beach front for us in the Asian marketplace.

Lastly, in terms of sovereign wealth, I think you all know that has been a big target of ours. We have had great success this year. We have about CAD18 billion of assets with sovereign wealth.

We think we will crack the top 10 when the data comes out at the end of the year, and we are adding salespeople in Korea. We just won our second mandate there. We have CAD1.5 billion in assets in Korea. It is a great market.

The two other sovereign wealth funds, one which is the government, the other is the postal service, have us in RFPs as we speak and we think having people on the ground there will give us a launching pad to grow in the future. And we continue to invest in our brand. We launched our new brand. We are going to be spending CAD6 million extra this year as we roll that out in the second half of the year. We will do it in trade publications, in direct -- into the intermediary channels, and you will also see banner ads on Bloomberg TV, as well as on CNBC.

So, we are on a roll. We just need to put our heads down, continue to do a great job for our clients. And, year-to-date, the performance here at the Firm has held up relatively well and we're very excited about what the future holds. So, I'm going to stop there and turn it back to Phil.

Thanks, Rob. We'd like to ensure that all of our participants have an opportunity to ask questions on today's call, so I'd ask each of you to please limit yourselves to one or two questions, and then to re-key with any additional questions. With that, I'll now ask John to please poll the participants for their questions.

Gabriel Dechaine, Credit Suisse.

Just first one on the timing of the US group insurance repricing. Can you remind me how long that's going to take, where you are now, and when we should expect to see an uptick in earnings, as an offset to some of the morbidity issues there? The second one is on AG 38. One of your peers put out some earnings this morning and highlighted that the capital requirements in the US could go up for their no-lapse guarantee business in-force.

I was wondering if you have any color you can provide there, and if that would be an SLA where the impact would be felt, because I think that's where you house your US Individual Insurance business? And then just can you confirm what you were saying about the Q3 actuarial assumption review, very modest impact? You really touched upon the VA lapse and the economic scenario generator, but there are other elements to that review, so I'm assuming there might be some other items that could be negative or positive?

Gabriel, it's Colm here. So that was a three-part question, so I will try and deal with the last part first and then I will hand it over to Wes. I think the question you had for Wes was around the Group business in the US, what is happening on pricing, and what is happening around morbidity. But on the last piece around the assumption review, and what we've signaled is that -- as we always do in the third quarter, we go through the very extensive review of very many items, and that process is well in-hand, but it's not at a point where we can aggregate all of the various items and determine an impact, a quantification, and provide it to you.

What I did point out was that a couple of notable items, certainly the interest rate impacts of the ultimate reinvestment rate, we believe is important. That is, as we know, a fairly mechanical process in that as time moves forward with rates where there at in decline, and as they have declined significantly, we have currently an ultimate reinvestment rate that's at a higher level. You do see a progression there.

But I would point out that the numbers that we have indicated for 2013 through '15 do presuppose that interest rates stay at the very low levels that we saw at June. So one can always have a view around whether -- the absolute likelihood of that to occur, but we thought it would be useful to provide that to investors. On the assumption changes more generally, we did point out that the economic scenario generator, which I think people would look out and say, well, for those businesses that are models stochastically, and where that would have an impact, that that must be something that would be a concern, and if you recall, when we implemented our economic scenario generator update in 2009, we did take a substantial charge, so we've been running on this basis for some time. We don't expect the impact of that update in the third quarter to be significant in any way.

And the other important item that people have asked about is on variable annuity policyholder behavior. That is an area that we have our own experience with that. We don't have a very large block, as Keith Gubbay, our Chief Actuary has pointed out in the past. But nonetheless, our experience to date would not suggest that, based on own experience, that we would be looking at a significant change to policyholder behavior. We do, of course, have a keen eye on what is happening with other sources of data around that, and peer-reviews and the like, but at this stage, we don't have a concern that we would have a significant update on that.

With that, I'd perhaps hand over to Wes.

Yes, I'll comment on the first component in terms of the results in our LTD business and that is, as we look at the Business, we are satisfied where the notification rates are, which is the number of notices that we would see per 1,000 covered lives. And that is down. And incidence rates are also quite stable. What we are seeing, though, is an increase in the average reserve per notice, otherwise severity. What we are not seeing, though, is anything unique with respects to a particular industries segment or geography. So it does not appear that there's an issue with any specific piece of our block of business.

One additional point that I would make is that we are in the process of finalizing our annual rate study and we do expect to increase rates on new business going forward. We are also experiencing an average request for increase on renewal premiums in the mid-single digit range through mid-June. And that's with also a consistent level of persistency that we have had over the last couple of years, which has been improved. And the one other comment I would make is we're very pleased with the results, as Dean pointed out, with respect to our sales through the first half of the year. Our core group business sales are up 13%, and our voluntary sales through the first half of the year are up over 40%. So, feeling good about sales overall and, generally, I would say very good about the Business.

Just to pause on that. You have not begun repricing? Because I was under the impression -- I've asked this question before and it sounded like you had started repricing, but now you're saying you haven't, and maybe I'm misunderstanding?

Last year we did take a price increase, last fall in our STD block. And as I said, we do an annual rate study on LTD. And this year the study is pointing to an increase in LTD rates that we will be implementing going forward.

Okay. Different business.

Yes.

Thanks.

And Gabriel, just to finalize, you had a question around AG 38. And our Individual Life business in the US is housed under Sun Life Assurance. AG 38 would be one of the items that we would look at on an ongoing basis, but it is not our radar screen as having a major impact for us at this point. So, no further update on that item.

Thanks.

Steve Theriault, Bank of America Merrill Lynch.

Couple of question. First, I'd like to hear from Kevin on the decision to exit the sale of segments from the wholesale channel. So things like, why one channel and not the other? How much of your seg fund sales have come through the wholesale channel? And what changes are you making specifically with your ongoing offering terms of guarantee levels? I saw that reference somewhere, I think in the MD&A.

Sure, Steve. So actually what we did in Q2 was to suspend the offering of our seg fund product in the third-party channels and continued it in our Career Sales Force. We are actually in the process, we announced on Monday, of re-launching a seg fund product for the third-party channels without the GMWB feature.

And the difference is GMWB not a product line that we want to emphasize, but it is an important offering for our Career Sales Force. And they need to be able to have it on their product shelf so that is why we are manufacturing it for them. For third-party channels, they have a lot of choice. And so, we can take the position to back out of that product and put our emphasis on what we call the investment class and the estate class products.

And how much of the sales were coming through the wholesale?

About 60% of our sales come through wholesale on the seg fund business. And over time, we would see that as an important channel for the non-GMWB type seg funds. And so that's being launched August 24.

So we should really view this as a suspension and not an exit, is what I'm hearing from you, I think?

Yes actually. Exactly. And really part of our product mix strategy. As Dean mentioned, on the protection side, we've done a lot of work to try to improve our product mix and the pricing, and so that we're getting the returns we like. And we've got almost no strain at all, well actually virtually no strain, on our Individual Protection line of business now. And, similarly, we're making similar moves on the wealth side and we would see seg funds as important other than GMWB, and GMWB as important as part of the product line-up for our Career Sales Force, but not an area of emphasis there either.

While I have you here, morbidity experience had been an issue in Group Benefits. I don't think I saw that referenced this quarter. Was that not an issue here?

We had good morbidity experience in Group Benefits in Q2. We've seen a gradual incline in morbidity in the Group Business now for maybe the last 18 months, and a bit of a spike in Q1. But that's returned to more normal levels in Q2. And in the meantime, we have been implementing various pricing strategies and risk selection strategies to make sure the block is well-positioned for these times. And so, we actually recovered what we lost in Q1, in Q2, and met plan in Q2 for our morbidity in Canadian Group.

Okay, thanks for that. Second one for Steve Peacher. Steve, in the past you've talked about the potential to take cash balances down and increasing allocations to private placements. It looks like you took advantage of some yield enhancement opportunities this quarter. Can you walk us through that a little bit and speak to the runway you think you have over the next few quarters or years? And I didn't see cash balances move much and in the near-term, I think that's for obvious reasons, but can you remind us where you think you can take that down to over the next year or two?

Sure, Steve. I would say with the cash balances, that's something that we're spending a lot of time on. There are a lot of complicated cash needs throughout the Company, and so we have to be thoughtful about that analysis but I do think, I'm reluctant put a number on it, but I do think that there is the ability to take cash balances down further over time and to the extent we can do that, we'll pick up some incremental yield, obviously, as we are able to invest anything we can free up. So that's an ongoing analysis and I'm just reluctant at this point to put any numbers on it.

In terms of -- we have been incrementally looking to, in this yield environment, at ways to add yield to the portfolio. Some of the gains that were taken in the quarter were taken and then reinvested in higher yielding securities. We have been moving incrementally into illiquid assets, more into illiquid asset classes like privates where we can garner extra yields. So, we are looking at everything we can in this environment.

And so the impact of lengthening duration and switching into some illiquid assets, that I can map that back to the CAD114 million pre-tax in the other notable items pretty much entirely?

The CAD114 million impact of investing activity on insurance contract liabilities really comes from two main items. One in Canada, there was a purchase of some long-duration bonds that were high-quality long duration bonds that had some attractive spreads and that reduced the duration mismatch in that segment and led to reserve release.

And then in the US, we had previously lengthened duration by buying government bonds with the expectation that we would be rolling those bonds into corporates over time. And we had made some assumptions in the reserves about the spreads we would achieve and in fact, given market movements, we are able to achieve higher spreads. And that led to reserve release, as well. So those are the two key factors behind that number.

Okay. Thanks for the time.

Robert Sedran, CIBC.

First, just a follow-up on a question Gabriel asked. You mentioned, Colm, a couple of things that are not going to be factors in the Q3 assumption review. Can you tell us what is going to be the source of the pain? What business line or what geography? I presume it's businesses that have been deemphasized, but I'm curious to know which they might be.

I think around this topic of the items that are in the process for the third quarter, there are just, as you will recall from previous discussions, there are very many items, and some of them are negative, some of them are positive. And we believe that in aggregate they are expected to be negative in this environment, but we don't have a quantification. So it is not as though I can say, well there are three big items that make up a negative and all of the other items, it won't be possible to overcome that.

So it is just a very comprehensive process and clearly, with the kind of economic backdrop that we have today, where interest rates are low, unemployment is at elevated levels in the US, and equity markets are volatile, some of the areas where in the past we might have had a bit more confidence that some of the pluses would offset the negatives and it might be a less eventful Q3, we wouldn't have that degree of confidence in this type of an environment. So that's why we have the cautionary language that we expect them to be negative.

But we are not at a point where we are signaling to you that there is a big negative. We just, at this point, don't have an amount that we can share with you. And we wanted to provide you with that context. The reason we focused on a couple of items, in particular, is that I know they've come up for discussion in the past, variable annuity policyholder behavior, and particularly in an area, in a business, which as you quite rightly said in the US, discontinued business, would be one that I know investors have an interest in, and we commented on that. The economic scenario generator, and again, given the volatility in the markets, given the addition of periods of low interest rates, one might assume that could have a significant impact and we wanted to update you on that particular item to advise that it is not expected to have a significant impact on us.

And that's probably as much as I can really meaningfully say at this point. We have signaled the interest-rate tick downs, the CAD50 million. We have a practice of providing you with information proactively, when we have information of this nature to share with you but I don't think it will come as a surprise that in this type of an environment, given the scale of the annual review that takes place, that we would be breaking to the negative overall when we do the updates.

Okay. If I'm reading your page 21 of the supplementary correctly, I believe you downstreamed about CAD250 million capital into the Operating company this quarter. Am I correct, first off? And why did you do it? And then thirdly, how much unencumbered liquidity would you still have at the Holding company level that could be downstreamed if you needed?

Yes. So, we did downstream. You are quite right. We invested CAD250 million, and it is on the exhibit that you mentioned. And, if you recall, when we spoke previously on the call, we talked about the types of actions that we might take. We laid out that there were many types of actions that we would take as we managed through the volatile markets. And again, June 30, if you recall, was a particularly -- period of particular volatility, particularly in Europe, where you had the eurozone issues around Greece in full flight.

So we thought it was prudent to invest the CAD250 million. We have the excess liquidity at the Holding company. We still remain with a very solid level of cash at Sun Life Financial, CAD800 million. We don't have a minimum there, Rob, that we would say we need to be at. But we would certainly want to be on a normal basis above CAD500 million. So, we still have a comfortable level above CAD500 million.

Okay. And just one last quick question. I know there's a lot product repositioning and repricing going on. There's obviously lots of work ongoing, but strain overall was flat quarter-over-quarter. If was up year-on-year. If rates don't help, where should strain trend with all the work that's going on? Can we see strain cut in half from current levels in 2013 or is it really rate dependent at this point?

It's a great point. Because clearly, as we work hard on product repositioning and Kevin mentioned some of that, and product pricing and Wes mentioned some of that, and sales activities, and Dean alluded to sales activities and volumes in Asia, for example. We're taking action in lots of areas, but of course the major headwind around low interest rates does press back against that. And we have had strain of CAD56 million for Q1 and Q2 so that is at an elevated level.

We think we've got actions in place -- sales plans in place, management actions around repricing, et cetera, that should see that come down. We think something more in the range of CAD40 million per quarter might be more the number you should be thinking about for Q3 and Q4, but of course that comes with the usual caveats about sales volumes, et cetera.

Great. Thank you.

Michael Goldberg, Desjardins Securities.

Two related questions for Rob. First of all, what accounts for the diverging trend of mutual fund net sales versus managed fund net redemptions in the quarter? And, I know it is hypothetical, but what do you estimate is MFS breakeven level of assets under management?

Sure. The difference between mutual funds and managed accounts are the redemptions at McLean Budden. We've lost about 25% of the assets since we bought the business. The bulk of that, as I mentioned, had left in the first and the second quarter. If you strip that out, our managed fund sales would have been positive of over $2 billion. Probably $2.5 billion, $2.7 billion. And then the second point, we haven't run that number recently, but my guess would be around $120 billion of assets. And where were we at the end of the quarter?

$270 billion something, I think?

I'm sorry, we're $278 billion, markets are up from--

My next question, -- okay.

Michael are having a little bit of--

Rates remain very low as you won for Q3 and Q4(inaudible). Is it reasonable to expect, can you hear me okay now?

Yes. Michael, we are having a little bit of trouble hearing you. You're breaking up a bit. Operator, perhaps we could move to the next caller and then come back to Michael, please?

Peter Routledge, National Bank Financial.

Just a question on the sales of Sun Life Global Investments within the proprietary distribution network. You're at 15% share right now. This time next year, what is your target?

Well I think we put out at Investor Day a target of 60% to 70% of our Career Sales Force flow. So, you can extrapolate along there. I don't think I can give you an exact number at this point.

60% to 70% of what, sorry?

Of our Career Sales Force flows each year. So, we see ourselves getting to about 60% to 70% by the end of 2015.

2015. Great. And then --

We've had very, very good early success. We're still building out funds and the platform. And still a lot of these funds don't even have track records yet. And so you've got to look through them. And very, very good take up at this early stage. Funds are performing really well. They are all above median in their first year. And we've got well over half the Sales Force using SLGI funds at this point in time.

I presume some of the funds are going to go to MFS, and other of the management fees will flow through to your group.

That's right. And MFS has got a very prominent place on the platform.

Assuming you hit your sales targets for the next few years, at what point does the incremental contribution from distributing and managing the money in-house, does that start to impact the EPS? At what point will we notice it? Will it be 2013 or 2014?

Maybe I will kick this over to Colm and give you the big picture on it. Thanks.

Yes so, Peter, it is going to take a couple of years before we see it come through clearly. But we feel that we are creating substantial value here. And this is a classic example where building the longer-term value is going to reduce in some expense over the first couple of years.

And as Kevin says, it is better to measure it really as we think out to our 2015 objectives. An initiative of this sort is going to be a very important part of the platform for Canada, thinking out to 2015. But over the next couple of years, we will moving to a breakeven position and then we will start to turn to profitability and it will be more noticeable on the EPS line.

And Peter, the other place it will show is inside other products where we can now use our own funds. Like, segregated funds or other retirement solutions. It just improves the economics of the whole block.

Okay. Thank you for that. Just a quick question on the economic scenario generator. You gave a CAD500 million round number for potential interest rate hits in 2013 through 2015, which I appreciate. Is there an implicit assumption that you changed your economics scenario generator parameters in that number in the US, obviously?

Colm here. I'm going to ask Claude Accum, our Chief Risk Officer to comment on that.

It's Claude Accum. The CAD500 million includes a provision for both deterministic tick downs in Canada, and a deterministic tick downs in Asia, and consideration of the impact it would have on the economic scenario generator in the US. So, of the CAD500 million, perhaps about CAD60 million relates to US as stochastic impacts.

Okay. That's very helpful. Thank you. That's it.

Joanne Smith, Scotia Capital.

Yes, just on the CAD500 million, and in addition to the CAD50 million in each of the last two quarters of 2012, I was wondering if you could let us know if that estimate makes any assumptions concerning any hedge benefits and costs? And, if it does, does it incorporate an assumption that hedge costs are going to increase? That's my first question.

It's Claude Accum here. There's no particular assumptions about hedge costs are going to increase. It is using our standard ESG, which is use historical volatility with an appropriate pad. So no change on that dimension.

Okay. And then just going back to the US Group Benefits business and long-term disability book. Where are you in terms of pricing versus your competition? I'm just trying to get an estimate as to what kind of price increases you're looking for?

So -- Joanne, this is Wes Thompson. In terms of the study that we are doing, we're in the process of finalizing. But we would expect to be mid to high single-digit as we go out into the Q3, Q4 area. I can't speak what our competitors are doing, in terms of pricing actions. They will vary by region, by type of business, and so forth.

Okay. Thank you.

Doug Young, TD Securities.

Just a quick question. Back to the Q3 assumption changes. Colm or Keith or Claude, I'm not sure who can answer this, but related -- if you were to back out the negative impact that you are anticipating from the interest rates which is CAD50 million, is the impact still expected to be negative? That's my first part of my question. The second is, are we supposed to read into this that -- because you have given us disclosure in the past when you think something significant is coming down the pipe. So are we to read to into this, that you're not giving a number is that you don't think it's overly material, or is it simply that you just don't have a good handle on the numbers yet because some of the studies that could have a material impact just haven't come through? And I've got a follow-up.

Yes, so Doug, you've touched on a couple of pretty important points. The CAD50 million is outside of the comment around the overall assumption changes. So the CAD50 million is more mechanical. We can see that, it's coming at us. And then as I say, we've got the other process underway.

And we're very mindful of our obligations to shareholders around disclosing items where we would have a good read on something that was material. And we do take every effort to provide you with that. And this is simply a case where we have got a lot of moving parts and some of them will be positive, some will be negative. So I won't repeat everything I said earlier. But I think you could expect that it will break to the negative.

But, we -- on the other hand, we are not signaling to you that there's some very substantial amount and we just want you to be aware of that. We are just not at that point yet. And we will have to continue our work and we will complete that in the [third] quarter.

Okay. The second question is, around the interest rates, the URR, you are going to be making these changes on a quarterly basis, can you disclose where your URR assumptions are today and what is implied under the economic scenario generator in the US? That would be helpful.

Yes, so the current URR is about 3.6%. And when we look forward to tick downs in Q3, Q4, it's another 10 bps in Q3, perhaps another 10 bps in Q4. When we look at those levels of URR and compare it to the US stochastic generator, today they round about lined up at the same level. So they are quite comparable when you look forward.

Okay. And sorry, Phil, I am going to sneak a third one in here. But, in Asia, excluding the noise, earnings were down and, obviously you've set a 2015 target. It's just tough for me to see how you're going to get from A to B. And so, is there anything else in this quarter or in the results that are going to fall away over the near term, or can you give us some color around this would be helpful? Thank you.

Doug, it's Dean. I will answer that one. As I said in the remarks, the results are relatively lumpy Asia, given the mix of mature and less mature businesses. The 2015 targets we said at Investor Day are decidedly ambitious, and I think investors have echoed that point. But we described those as ambitious. And some of the big levers that we are working on that we see will get us there include expense gaps in China and India that are sizable and, which, one aspect of the expense gap we can manage, i.e., the expense side, the other side which is the allowables that come through sales, obviously requires sales execution. But, that's one element. And, of course, that's a work in progress and that will take a number of quarters to come through.

The other elements that are driving us, will drive us towards our 2015 targets include progress in sales in the Philippines, where we are making great progress, and Indonesia. And then a third element would be, as we think about China and particularly the sales and the product mix in the bank assurance channel, working with our partners to improve the profitability of those products as we go forward. So, there are a number of levers that we are working on that we see as driving towards our 2015 goals. And I appreciate this particular quarter doesn't look like we're getting closer to those goals, but we remain committed and are working hard on pulling all of those levers.

Okay. Thank you.

Tom MacKinnon, BMO Capital Markets.

A lot of the questions have been answered but just a follow-up with respect to US benefits and voluntary and looking at the sales growth. I think you said you had sales team of 14 at the end of the first quarter and now it is up to 17 and that's your target. If I look at -- if I annualize the sales you've got in the second quarter, you're still going to be short, 35% short of what your 2012 sales target is. So, just help me think through how you're going to get this growth in sales that you've outlined for us at your Investor Day with respect to the US Benefit and Voluntary businesses.

Well, this is Wes, again. I think if you look at the traditional Group business across the board, what you'll find is it is not accurate to annualize based on a Q1 and Q2. So, as a baseline that is probably inaccurate because, a significant percentage of the sales come in Q4. In our case, sometimes in the area of 50% of the annual sales will come in Q4. So we are actually feeling very good about where we are based on that. So that is one factor.

The second is that we are tracking very well with respects to where we want to be on our voluntary growth. And that is a big part of our growth plan, not only in 2012, but 2013. And so those sales professionals that Dean highlighted in his comments are now in the field working very closely with our network of over 160 employee benefit reps. And so they are aligned by region with those reps working closely to really now bring these new offerings to the market. And we are seeing that impact in the first half of the year, but I expect to see a much more significant impact in the second half and then going into 2013.

And with respect to the voluntary, I think you're at [CAD31 million] so far in the first half of 2012 sales. You've got [CAD115 million] target for 2012. I don't know if this is quite a seasonal, but you are still shy even if we annualized the second quarter. So, you're still about 20% shy if we annualize the second quarter. Is it just a new product offering that is going to build this up?

Again, what we would expect is a much stronger level of voluntary sales. It tracks with the core business. So, the comment I would make, again, about a significant percentage of the sales coming in Q4 would be consistent for our core Group business and voluntary.

Okay. Thanks for those comments.

Andre Hardy, RBC Capital Markets.

If I could take you to page 22 of the sub-pack. First question is on the impact of new business in the US, which remains quite negative. And I'm curious where that's coming from, given that the sales of individual insurance and variable annuities have understandably gone way down. Secondly, the moves in expected profit, it was surprisingly large in Canada, positively, and surprisingly large in the US, negatively, in spite of the business reshuffling you've done. So I was just wondering if you give us a bit of color on what drove that year-over-year?

Well, I will take the first part of your question. This is Wes. So the new business strain that we see in the US has dramatically decreased, obviously, with the exit on the Individual side of the business -- with the exit from Individual Life and Annuities. In the group business, we have historically had strain because we expensed the acquisition and distribution costs up front due to the short-term nature of the contracts. So these acquisition costs are reported as strain.

So what you're seeing in the short-term is strain impacted in two areas in the US. One is the investment that we are making in the voluntary distribution is coming through in the first quarter -- excuse me, the first half of 2012. We do expect that to reduce as we progress during the course of the year. And the other area that is reflected in the first half is lower volumes in our International business where we are seeing the trends for volume increase and we would expect that increase to pick up in Q3 and Q4. So, over time, over the next several years, we would expect that new business strain in our Group business as a percentage of sales to remain relatively flat and be consistent with what we've seen historically.

And, Andre, it's Colm, if I could answer the question about the overall level of expected profit and some of the migration you see year-over-year and between the business groups. And I think one way we would look at this is if you think about the aggregate level of expected profit last year. It averaged out at around CAD440 million. This quarter is a CAD459 million. So it is up and we think that's sustainable. The point around the results in Canada versus the US, Canada is benefiting from the hedge and reserves methodology change we made at the end of last year.

And then the US is a little more complicated. It was a topic we discussed last quarter around the methodology on Employee Benefits Group, where the expected profit in the prior year had been higher than the loss ratios that were achieved were actually worse relative to expected. And we saw that come through expected, and we revised that. So it reduced the expected and had an offset in the actual experience and that was a benefit. I figure that is more of a geography issue. So I think when you normalize for those items, you do see an overall increase year-over-year and I think importantly, it's a level that we think is a reasonable level to think of an aggregate going forward.

Thank you.

Michael Goldberg, Desjardins Securities.

Okay. Thank you. And sorry for my problem with my phone. Just to clarify my question about the mutual funds or the managed funds at MFS earlier. Would I be correct in saying that redemptions at McLean Budden were about [$3 billion] and was that all this quarter? And is there going to be any more? Or is that all that you expect?

Rob, are you still in the line? Would you be able to answer that?

Hello? Can you hear me?

Yes we can hear you.

Okay. So the redemption at McLean Budden last quarter were $2.5 billion. It was about the same in the first quarter and we think that that will tail off for the rest of the year. We're hoping by the end of this calendar year that we will be stable and be able to grow in 2013.

And the other question I was going to ask, was if rates remain very low, as you warned for Q3 and Q4, is it reasonable to expect some offsetting yield enhancement and available-for-sale gains to continue?

Yes. So, Michael. Good point around the inventory of available-for-sale assets and the inventory of gains that we might be able harvest there. We have taken additional gains in the quarter like the one just ended where interest rates declined. I think we look at that pretty carefully. We do have unrealized gains of about CAD400 million on the portfolio that would be available, but we do look that at that pretty carefully as to when we trigger those, and it's not necessarily case that we would trigger those in Q3 for example, because of the interest rate tick down, the CAD50 million that we've disclosed. We do act pretty carefully around that, and it's something we consider all the time.

And, yield enhancement? Could that be a potential offset also?

Yes and I think Steve mentioned that. We certainly are looking to enhance yields. We have a good pipeline and private fixed income -- that's an area of strength for the Firm. So, to the extent that we have those types of assets available and we can do that within our credit capacity, we would certainly look at doing that. Steve, you might want to add to that?

One comment I would add is that we're certainly looking anywhere we can for yield enhancement opportunities. We've mentioned privates a couple of times, we're looking at cash balances, as I mentioned. I would say that one thing we are not doing is looking to simply increase the credit risk across the balance sheet. And so I think that is worth noting. So I just wanted to make that point.

Okay. Thank you.

Mr. Malek, we have no further questions at this time. Please continue.

Thank you, John. And I'd like to thank all the participants on our call today. And if there are any additional questions, we will be available after the call. Should you wish to listen to a rebroadcast, it will be available on our website later today. And with that, I'll say thank you and good day.

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may now disconnect your lines.