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Sun Life Financial Inc. (NYSE:SLF)

Q2 2012 Earnings Call

August 9, 2012 10:00 AM ET

Executives

Philip Malek – VP, IR

Dean Connor – President and CEO

Colm Freyne – EVP and CFO

Robert Manning – Chairman and CEO, Sun Life Global Investments

Wes Thompson – President, Sun Life Financial U.S.

Kevin Dougherty – President, Sun Life Financial Asia

Steve Peacher – EVP and Chief Investment Officer

Claude Accum – EVP and Chief Risk Officer, Corporate Actuarial and Risk Management

Analysts

Gabriel Dechaine – Credit Suisse

Steve Theriault – Bank of America Merrill Lynch

Robert Sedran – CIBC

Michael Goldberg – Desjardins Securities

Peter Routledge – National Bank Financial

Joanne Smith – Scotia Capital

Doug Young – TD Securities

Tom MacKinnon – BMO Capital Markets

André Hardy – RBC Capital Markets

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to 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 the 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.

Philip Malek

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, Robert Manning, Chairman and CEO of MFS Investment Management will provide an update on MFS asset management business. Following the prepared remarks, we will have a question-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 forward-looking statements and non-IFRS financial measures, which form a part of this morning’s remark. 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.

Dean Connor

Thanks, Phil, and good morning, everyone. Yesterday Sun Life reported results for the second quarter of 2012 with operating income of C$59 million or C$0.10 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 C$379 million, an improvement over the C$357 million reported last quarter, reflecting a number of notable items, including higher levels of securities gains in the second quarter. Year-to-date, we have reported operating net income of C$786 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 C$25.1 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 C$496 billion from C$474 billion a year ago. MFS reported a very strong quarter with gross sales of U.S. C$19.7 billion, surpassing last quarter’s record level and strong net flows of C$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 C$51 million and institutional sales of C$828 million, bringing client AUM to C$5.3 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 continued 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 as strong execution in our new bancassurance 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’d 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’re 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’d like but we continue to see significant upside in our Asian income over the coming years.

As part of our Asian strategy, we’re expanding our footprints 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’ve now hired 17 experienced external sales leaders, which is our target for the year, and we’ve 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 Benefits 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 lineup 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 C$51.1 billion, up C$2 billion from a year ago, reflecting C$2.3 billion of net positive flows offset by C$300 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’s not just what you sell, but what you retain as well and the numbers show that we’re 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’re 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 C$18 million year-over-year to C$809 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 C$0.36 per common share, maintaining the same level as the previous quarter.

So, in conclusion, we’re executing well on our strategy. We’ve made great progress reshaping the business, completely ceasing sales of U.S. 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, U.S. Group and Voluntary Benefits and Asia, and we are 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.

Colm Freyne

Thank you, Dean, and good morning, everyone. Turning to slide five. Yesterday the company reported operating earnings of C$59 million or C$0.10 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 C$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 C$250 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 funds 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 six, 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 C$379 million. As you can see, the drop in equity markets resulted in a net after-tax impact of C$131 million. The equity impact includes a C$31 million impact from basis risk related to the underperformance of variable annuity investments versus the relevant hedging instruments in our U.S. 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 C$196 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 C$50 million in the third quarter and another C$50 million in the fourth quarter, for a total of C$100 million. Furthermore, we would expect our net income for the period from 2013 to 2015 to be reduced by approximately C$500 million in total.

Going forward, we will continue to reflect changes to the ultimate reinvestment rate as they are realize in each reporting period. And the impact of the changes will be reflected through the experienced 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 U.S., where we use stochastic modeling. The interest rate impacts just mentioned include our Sun Life U.S. business.

Finally, income in the second quarter included after-tax net gains of C$7 million from increases in the fair value of real estate classified as investment property.

Turning to slide seven. We have broken out other notable impacts to this quarter’s results. The impact of investing activity on insurance contract liabilities resulted in a benefit of C$97 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 C$4 million was driven by positive experience in our Canadian Group Benefits business, partially offset by unfavorable morbidity in our U.S. 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 experience this quarter of C$12 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 selection at the group level, and enhancements to our claims management processes.

In the U.S. business, the negative impact of C$16 million reflected unfavorable morbidity experience and long-term disability and stop-loss as compared to the prior quarter’s morbidity experience in our U.S. Group business. Long-term disability incidents 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 C$2 million relative to best estimates. You can see that lapse and other policy holder behavior experience was also not material to the results this quarter, with a net negative impact of C$6 million primarily from higher lapses on U.S. corporate and bank-owned life insurance contracts.

Higher project expenses resulted in a C$12 million negative impact to earnings. Again this quarter, elevated expenses due to the implementation of Solvency II initiatives in our UK operations was a 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 and other negative experience related to the variable annuity business resulted in a C$36 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 U.S. individual insurance business resulted in a reserve increase of C$45 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-sale securities in the quarter in the amount of C$40 million above what we would consider to be a more normal run rate of approximately C$25 million after-tax per 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 C$9 million after-tax.

Moving to slide eight, we provide details on our source of earnings for operating income. Profit of C$459 million represents a net decrease of C$12 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 impact of the reserve hedging methodology change implemented at the end of 2011.

New business strain of C$56 million was flat for the first quarter, and up by C$22 million versus prior-year, mainly due to the impact of lower interest rates on our segregated fund business in Canada, as well as higher sales in China. We experienced losses of C$436 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 C$76 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 policy holder behavior. Earnings on surplus of C$125 million were C$46 million higher than the second quarter of 2011, primarily due to the higher level of security gains described earlier and the positive impact of real estate revaluation partially offset by the excess financing costs.

Turning to slide nine and the results by business group. SLF Canada reported operating earnings of C$186 million, down from the C$218 million reported a year ago. The current quarter results reflect favorable morbidity experienced in Group Benefits, favorable mortality experience in individual insurance and investments, the favorable impact of investment activity on insurance contract liabilities, and higher net realized gains on available-for-sale securities. These items were partially offset by the unfavorable impact of declining interest rates in equity markets.

Our U.S. business reported an operating loss of C$187 million compared to income of C$110 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 experienced in the Employee Benefits Group. Operating earnings for MFS were C$68 million, down slightly from the C$70 million reported a year ago primarily due to higher operating expenses and costs associated with higher sales.

Operating income from our Asian operations was C$15 million, down from the C$30 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 U.K. operations reported operating income of C$52 million, compared to income of C$56 million in 2011. Expenses in the U.K. business remain elevated due to higher regulatory and project cost related to Solvency II, as described previously.

Corporate support, included under the corporate segment, reported an operating loss of C$75 million, compared to a loss of C$59 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 I will now turn the call over to Robert Manning.

Robert Manning

Thanks, Colm. I think we’re 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 spending on people, products, distribution and brand, because we’re in a unique position right now 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’ve 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 upfront 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 years two, three and four. But we have accelerated spend because we think we’re 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’s working extremely well, 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 the indices and we put MFS’s risk controls in process on top of all the portfolios and we’re 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 São Paulo, which will be a beachfront 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 C$250 million in seed capital. We have products that we’re building as we speak and those that we’re launching that are really focusing on quant both enhanced indexed 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’s 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’ve 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’re at number seven in net flows year-to-date in the industry, we’re number three in May and number four in June. And that’s happening at a time when our mix is very different than what the industry looks like. Our mix is now 70% equity products and 30% fixed income, and the 30% are credit products, 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’re going to have a performance problem and people are going to be surprised at the amount of money they lose. So, we’re not focusing on that, and we’re really focusing on to having balanced products that we think are right for our clients. Ten funds at MFS will sell over C$1 billion this year. And it’s 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 ten outside wholesalers and five inside wholesalers to support that infrastructure. We’re number three in their system. We became a preferred provider in January of 2010 and at that point in time, we had less than C$1 billion assets with Edward Jones and I’m happy to report as of today we’re at C$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’re 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 the 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’ll be going into 2013 with a platform that will have great strength in the Canadian market putting MSF’s products on their distribution platform.

We’re also adding sales people 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 C$12 billion business, but we can take other products to that market, like Emerging Market Equities, we’re in four finals this week as we speak and we’re very excited about that. There were 15 people in that office as we speak up and running and that’s a great beachfront for us in the Asian marketplace.

Lastly, in terms of sovereign wealth, I think you all know that’s been a big target of ours. We’ve had great success this year. We have about C$18 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’re adding sales people in Korea. We just won our second mandate there. We have C$1.5 billion in assets in Korea. It’s 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’re going to be spending C$6 million extra this year as we roll that out in the second half of the year. We’ll do it in trade publications and direct into the intermediary channels and you’ll also see banner ads on Bloomberg TV, as well as on CNBC. So we’re 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.

Philip Malek

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) One moment please for our first question. Your first question on the line today comes from Gabriel Dechaine with Credit Suisse. Please go ahead.

Gabriel Dechaine – Credit Suisse

Good morning. Just first one on the timing of the group – U.S. 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 U.S. 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 SLA where the impact would be felt and I think that’s where you had your U.S. 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 on 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?

Colm Freyne

Gabriel, it’s Colm here. So I think that was a three-part question, so I’ll try and deal with the last part first, and then I’ll hand it over to Wes. I think the question you had for Wes was around the Group business in the U.S., what’s happening on pricing and what’s 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 the 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 of 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 they’re at and they have declined significantly. We have currently an ultimate reinvestment rate that’s at the higher level. You do see a progression there. But I would point out that the numbers that we’ve indicated for 2013 through 2015 do presuppose that interest rates stay at the very low levels that we saw at June. So, one can always have the view around whether the absolute likelihood of that to occur. But we thought it would be useful to provide that to investors.

On the assumptions changes more generally, we did point out that the economic scenario generator, which I think people would look at and say, well, for those businesses that are modeled sarcastically 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 anyway.

And the other I think important item that people have asked about is on variable annuity policy holder behavior. That’s 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 our own experience that we would be looking at a significant change to policy holder behavior. We do of course take a keen – have a keen eye on what’s 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.

Wes Thompson

Yeah. I would comment on the first component in terms of the results in our LTD business, and that is, as we look at the business, we’re 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 incidents 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 respect to a particular industry segment or geography. So it does not appear that there is 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’re also experiencing an average request for increase on renewal premiums on the mid-single digit range through mid-June and that’s with also consistent level of persistency that we’ve had over the last couple of years, which has been improved. And 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.

Gabriel Dechaine – Credit Suisse

Just a pause on that. You have not begun repricing. Because I’ve asked this question before, and it sounded like you had sort of repricing, but now you’re saying you haven’t? Maybe I’m misunderstanding?

Wes Thompson

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

Gabriel Dechaine – Credit Suisse

Okay. Different business. Okay.

Wes Thompson

Yeah.

Gabriel Dechaine – Credit Suisse

Thanks.

Colm Freyne

And Gabriel just to finalize, I think you had a question around AG38 and our individual life business in the U.S. is housed under Sun Life Assurance, AG38 would be one of the items that we would look at on an ongoing basis, but it’s not on our radar screen as having a major impact for us at this point. So no further update on that item.

Gabriel Dechaine – Credit Suisse

Thanks.

Operator

Your next question on the line comes from Steve Theriault with Bank of America Merrill Lynch. Please, go ahead.

Steve Theriault – Bank of America Merrill Lynch

Thanks very much. A couple questions. 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 in terms of guarantee levels? I saw that reference somewhere I think in the MD&A.

Kevin Dougherty

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

Steve Theriault – Bank of America Merrill Lynch

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

Kevin Dougherty

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.

Steve Theriault – Bank of America Merrill Lynch

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

Kevin Dougherty

Yeah, 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 so that we’re getting the returns we like. And we’ve got almost no strain at all, but 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.

Steve Theriault – Bank of America Merrill Lynch

Okay. 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?

Kevin Dougherty

We had good morbidity experience in Group Benefits in Q2. We’ve seen a sort of a gradual incline in morbidity in the Group business now for really 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.

Steve Theriault – Bank of America Merrill Lynch

Okay. Thanks for that. Second one for Steve Peacher. Steve, in the past you 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?

Steve Peacher

Sure, Steve. I would stay with the cash balance, 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 to 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’re 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 we’re taking in the quarter were taken and then reinvested in high-yield and securities. We have been moving incrementally into liquid asset more into liquid asset classes like privates where we can garner extra yields. So we’re looking at everything we can in this environment.

Steve Theriault – Bank of America Merrill Lynch

And so, the impact of lengthening duration and switching into some liquid assets, that, I can map that back to the US$114 million pre-tax in the other notable items, pretty much entirely?

Colm Freyne

The US$114 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 at some attractive spreads and that reduced the duration mismatch in that segment and led to reserve release.

And then in the U.S., we had previously lengthened duration by buying government bonds with the expectation that we’d 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 were able to achieve higher spreads and that led to reserve release as well. So those were the two key factors behind that number.

Steve Theriault – Bank of America Merrill Lynch

Okay. Thanks for the time.

Operator

Your next question comes from Robert Sedran with CIBC. Please go ahead.

Robert Sedran – CIBC

Good morning. First, just a follow-up on a question I guess Gabriel asked it. 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 de-emphasized. But I’m curious to know which they might be.

Colm Freyne

Yeah, 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’re expected to be negative in this environment. But we don’t have a quantification, so it’s 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’s 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 U.S. 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 plusses 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’re not at a point where we’re signaling to you that there’s 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 say in the U.S., a discontinued business would be one that I know investors have an interest in and we commented on that. The economic scenario generator, 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’s not expected to have a significant impact on us. And that’s probably as much as I can really meaningful say at this point. We have signaled the interest rate tick downs to C$50 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.

Robert Sedran – CIBC

Okay. If I’m reading your page 21 of the supplementary correctly, I believe you down streamed about C$250 million in 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 down streamed if you needed it?

Colm Freyne

Yeah. So, we did downstream. You’re quite right. We invested $ C$250 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. I think we laid out that there are many types of actions that we would take as we managed through the volatile markets.

And again June 30, if you recall was a period of particular volatility, particularly in Europe where you had the euro zone issues around Greece in full flight. So we thought it was prudent to invest the C$250 million. We had the excess liquidity at the holding company. We still remain with a very solid level of cash at Sun Life Financial of C$800 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 C$500 million. So we still have a comfortable level above C$500 million.

Robert Sedran – CIBC

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

Colm Freyne

Yeah. No, 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’ve had strain of C$56 million for Q1 and Q2 and so that is at an elevated level.

We think we’ve got actions in place. Sales plans in place and management actions around re-pricing, et cetera that should see that come down. We think something more in the range of C$40 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.

Robert Sedran – CIBC

Great. Thank you.

Operator

Your next question on the line comes from Michael Goldberg with Desjardins Securities. Please go ahead.

Michael Goldberg – Desjardins Securities

Okay. Thank you. 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’s hypothetical, but what do you estimate is MFS breakeven level of assets under management?

Robert Manning

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 has left in the first and the second quarter. If you strip that out, our managed fund sales would have been positive of over C$2 billion, probably C$2.5 billion, C$2.7 billion. And then the second point, we haven’t run that number recently, but my guess would be around C$120 billion of assets. And we’re – where are we at the end of the quarter to...?

Colm Freyne

C$270 million something I think.

Robert Manning

I’m sorry. We’re C$278 million. The markets are up (inaudible).

Michael Goldberg – Desjardins Securities

My next question is – sorry. Okay.

Robert Manning

Michael, we’re having a little...

Michael Goldberg – Desjardins Securities

If rate remains very low as you warn for Q3 and Q4, is it reasonable to expect – can you hear me okay now?

Robert Manning

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

Operator

Sure. Thank you. Your next question on the line comes from Peter Routledge with National Bank Financial. Please go ahead.

Peter Routledge – National Bank Financial

Hi, there. Thanks. Just a question on the sales of Sun Life Global Investments within the proprietary distribution network. You’re at 15% I think share right now. This time next year what’s your target?

Colm Freyne

Well, I think we put out at Investor Day a target of 60% to 70% of our career sales force flows, so you can sort of extrapolate along that. I don’t think I can give you an exact number at this point in time.

Peter Routledge – National Bank Financial

60% to 70% of what, sorry?

Colm Freyne

Of our career sales force flows each year. So we see ourselves getting to about 60% to 70% by the end of 2015.

Peter Routledge – National Bank Financial

Great. And then...

Dean Connor

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 so very, very good take up at this early stage. Funds are performing really well. They’re 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.

Peter Routledge – National Bank Financial

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

Dean Connor

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

Peter Routledge – National Bank Financial

Right. 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 EPS? At what point will we notice it? Will it be 2013 or 2014?

Dean Connor

Yeah. I’ll kick this over to Colm to give you the kind of the big picture on it. Thanks.

Colm Freyne

Yeah. So I think, Peter, it’s 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’s 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’ll be moving to a breakeven position and then we’ll start to turn to profitability and it’ll be more noticeable on the EPS line.

Peter Routledge – National Bank Financial

Okay.

Dean Connor

The other place it’ll show up is inside other products where we can now use our own funds like segregated funds or other kind of retirement solutions. It just improves the economics of the whole block.

Peter Routledge – National Bank Financial

Yeah. Okay. Thank you for that. Just a quick question on the economic scenario generator, you gave a C$500 million round number for potential interest rate hits in 2013 through 2015 which I appreciate. Is there an implicit assumption that you change your economic scenario generator parameters in that number in the U.S. obviously?

Colm Freyne

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

Claude Accum

It’s Claude Accum here. The C$500 million includes provision for both deterministic tick-downs in Canada, deterministic tick-downs in Asia and consideration of the impact it would have on the economic scenario generator in the U.S. So, of the C$500 million, perhaps about C$60 million relates to U.S. as stochastic impacts.

Peter Routledge – National Bank Financial

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

Operator

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

Joanne Smith – Scotia Capital

Yes. Just on the C$500 million and in addition to the C$50 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 hedged benefits and costs? And if it does, does it incorporate an assumption that hedge costs are going to increase? That’s my first question.

Claude Accum

It’s Claude Accum here. There’s no particular assumptions about hedge costs are going to increase using a standard ESG, which is used in historical volatility with an appropriate pad, so no change on that dimension.

Joanne Smith – Scotia Capital

Okay. And then just going back to the U.S., the group benefits business and their 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?

Wes Thompson

Joanne, this is Wes Thompson. In terms of the study that we’re 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 to what our competitors are doing in terms of pricing actions. They’ll vary by region by type of business and so forth.

Joanne Smith – Scotia Capital

Okay. Thank you.

Operator

Your next question on the line comes from Doug Young with TD Securities. Please go ahead.

Doug Young – TD Securities

Hi. Good morning. Just a quick question. Back to the Q3 assumption changes, I guess, 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’re anticipating from the interest rates which is C$50 million, is the impact still expected to be negative? I guess that’s my first part of my question.

The second is, are we supposed to read into this that could you’ve given us disclosure in the past when you think something significant is coming down the pipe? So are we to read into this that you’re not giving a number 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.

Colm Freyne

Yeah. So Doug, I think you’ve touched on a couple of pretty important points. The C$50 million is outside of the comment around the overall assumption changes. So the C$50 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’ve 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 on the other hand, we’re not signaling to you that there’s some very substantial amount and we just want you to be aware of that. We’re just not at that point yet. And we’ll have to continue our work and we’ll complete that in the third quarter.

Doug Young – TD Securities

Okay. The second question is, around the interest rates, the URR you’re going to be making these changes on a quarterly basis. Can you disclose where your URR assumptions are today? What’s implied under the economic scenario generator in the U.S.? That would be helpful.

Claude Accum

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 to the U.S. stochastic generator, today they are around about – lined-up at the same level. So they’re quite comparable when you look forward.

Doug Young – TD Securities

Okay. Thank you. And sorry, Phil, I’m going to sneak a third one in here. But in Asia, excluding the noise, earnings were down and obviously you’ve got – you set out 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 some color around this would be helpful? Thank you.

Dean Connor

Doug, it’s Dean. I’ll answer that one. As I said in the remarks, the results are relatively lumpy in Asia, given the mix of mature and less mature businesses. The 2015 targets we set at Investor Day are decidedly ambitious. And I think investors have echoed that point. But we describe 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 prog in sales in the Philippines where we’re making great progress and Indonesia. And then a third element would be, as we think about China and the – 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 us 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 those levers.

Doug Young – TD Securities

Okay. Thank you.

Operator

Your next question comes from Tom MacKinnon with BMO Capital Markets. Please go ahead.

Tom MacKinnon – BMO Capital Markets

Yeah, thanks very much. A lot of the questions have been answered, but just to follow-up with respect to U.S. 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’s up to 17 and that’s your target. 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 kind of get this kind of growth in sales that you’ve outlined for us at your Investor Day with respect to the U.S. benefits and voluntary businesses?

Wes Thompson

Well, this is Wes again. I think if you look at the traditional group business across the board, what you’ll find is it’s not accurate to annualize based on the Q1 and Q2. So as a baseline, that’s 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’re actually feeling very good about where we are based on that. So that’s one factor.

The second is that we are tracking very well with respect 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’re 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.

Tom MacKinnon – BMO Capital Markets

And with respect to the voluntary, I think you’re at 31 so far in the first half 2012 sales. You’ve got a 115 target for 2012. I don’t know if this is quite a seasonal, but even if – you’re still shy even if we kind of annualize the second quarter. So you’re still like about 20% shy if we annualize the second quarter. Is it just a new product offering that’s going to build this up?

Wes Thompson

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.

Tom MacKinnon – BMO Capital Markets

Okay. Thanks for those comments.

Operator

Your next question on the line comes from Andre Hardy with RBC Capital Markets. Please go ahead.

André Hardy – RBC Capital Markets

Thank you. If I could take you to page 22 of the sup pack, first question is on the impact of new business in the U.S. which remains quite negative. And I’m just curious where that’s coming from given that the sales of individual insurance and variable annuities have understandably gone way down?

Secondly, the moves and expected profit, it was surprisingly large in Canada positively and surprisingly large in the U.S. negatively, in spite of the business reshuffling you’ve done. So I was just wondering if you could give us a bit of color on what drove that year-over-year?

Wes Thompson

Well, I’ll take the first part of your question. This is Wes. So the new business strain that we see in the U.S. has dramatically decreased obviously with the exit on the individual side of the business with exit from individual life and annuities. In the group business, we have historically had strain because we expensed the acquisition and distribution costs upfront 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 – impact in two years in the U.S. One is the investment that we are making in the voluntary distribution is coming through in the first half of 2012. We do expect that to reduce as we progress during the course of the year.

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.

Colm Freyne

And Andre, it’s Colm here. 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 we think about the aggregate level of expected profit last year, it averaged out at around C$440 million, this quarter it’s up to C$459 million. So it is up and we think that’s sustainable.

The point I think around the results in Canada versus the U.S., Canada is benefiting from the hedge and reserves methodology change we made at the end of last year. And then the U.S. is a little more complicated. It was a topic we discussed last quarter around the methodology on employee benefits group where the expected profits in the prior year had been higher and then 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 think that’s 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.

André Hardy – RBC Capital Markets

Thank you.

Operator

Your next question on the line comes from Michael Goldberg with Desjardins Securities. Please go ahead.

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. Will I be correct in saying that the redemptions at McLean Budden were about C$3 billion? And was that all this quarter? And is there going to be anymore? Or is that all that you expect?

Wes Thompson

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

Robert Manning

Hello?

Wes Thompson

Hi, Rob.

Robert Manning

Can you hear me?

Wes Thompson

Yes, we can hear you.

Robert Manning

Okay. So the redemptions at McLean Budden last quarter were C$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’ll be stable and be able to grow in 2013.

Michael Goldberg – Desjardins Securities

Okay. 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?

Colm Freyne

Yeah. So, Michael, I think good point around the inventory of available-for-sale assets and the inventory of gains that we might be able to harvest there; we have taken additional gains in the quarter like the one just ended where interest rates declined. I think we looked at that pretty carefully.

We do have unrealized gains of around C$400 million on the portfolio that would be available. But, we do look at that pretty carefully as to when we trigger those and it’s not necessarily the case that we would trigger those in Q3, for example, because of the interest rate tick down, the C$50 million that we’ve disclosed. We do act pretty carefully around that and it’s something we consider all the time.

Michael Goldberg – Desjardins Securities

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

Colm Freyne

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?

Steve Peacher

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

Michael Goldberg – Desjardins Securities

Okay. Thank you.

Operator

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

Philip G. Malek, Vice President-Investor Relations

Thank you, John. 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.

Operator

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

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