Sun Life Financial Inc (SLF) 2003 Q1 法說會逐字稿

Thank you for standing by. Welcome to the Sun Life Financial first quarter results for 2003 analyst conference call. At this time all participants are in listen-only mode. Following the presentation, we will conduct a question and answer session. If anyone has any difficulties hearing the conference, please press star followed by zero for operator assistance at any time.

I would like to remind everyone that this conference call is being recorded and will now turn the conference over to Mr. Tom Reid, Vice-President, Investor Relations. Please go ahead.

Thank you, operator and good morning everyone.

I'd like apologize for the slight delay this morning. We just had a fire alarm at 150 King Street but everything is fine so we're going to carry on.

I'd like to start by introducing the speakers on today's call. We have Donald Stewart, Chief Executive Officer of Sun Life Financial; we have Jim Prieur, President and Chief Operating Officer; Paul Derkson, Executive Vice-President and Chief Financial Officer; Bob Astley, President, Sun Life Financial Canada; Bob Wilson, Vice-President and Actuary, and Claude Accum (ph), Vice-President. Also joining on the phone this morning I would like to welcome John Ballon, the Chief Executive Officer of MFS.

The slides to which the speakers will be referring are available on the Sun Life Financial website.

Turning in particular to slide two, I draw your attention to the cautionary language regarding forward-looking statements which form part of this morning's remarks. This slide reviews the reasons why certain forward-looking statements could be rendered inaccurate by subsequent events and with that, I'll now turn things over to Don.

Thank you, Tom, and good morning everyone.

The results for the first quarter of 2003 reflect both the significant benefits we are realizing from the integration of Clarica's (ph)operations in Canada as well as the challenges we face from the depressed equity markets and low interest rates in the United States.

Earnings of $343 million were up $87 million over the first quarter of 2002. In Canada, we continued to make good progress on the integration of the operations of Sun Life Financial and Clarica while maintaining very strong operating results. We have delivered on our financial commitment with respect to the Clarica transaction with earnings per-share accretion of five cents in the first quarter on track for our 2003 target of 20 cents per-share.

Overall EPS of 56 cents was down three cents from the first quarter of 2002 and down two cents from 58 cents in the fourth quarter of 2002 as declines in U.S. equity markets and persistent low interest rates reduced the earnings contribution from the U.S. annuities division and MFS.

The S&P 500 daily average for the first quarter was 861, down 24% from Q1 a year ago.

As interest rates earned in the fixed annuity business have fallen closer to the minimum policy rates mandated by state regulation, it has become increasingly difficult for the U.S. fixed annuity industry to earn targeted spreads. At Sun Life Financial we've introduced several initiatives, including reduced commission levels on new business, new product pricing and cost reductions to readdress the profitability of this business.

Sun Life Financial continues to enjoy a very strong capital position with an MCCSR ratio at the end of the quarter of 237% well up from 193% 12 months ago.

In February when we released our year-end results, we announced a 21% increase in the quarterly dividend as well as the initiation of a normal course issue bid authorizing the repurchase of approximately up to 30 million shares. Over the quarter outstanding shares were reduced by a net 5 million.

Finally, as announced in February, I am very pleased to welcome Bob Salapante (ph) as President of Sun Life Financial U.S., and I look forward to Bob's contribution to our growth strategy.

I'll now pass it over to Paul Derkson, our Chief Financial Officer, to take you through a detailed review of our Q1 performance. Paul.

Thank you, Don. Because of the number of presenters day I will run more quickly through my presentation slides that you have seen on previous occasions.

The first slide on slide four shows the earnings relative to the average S&P 500. Despite difficult equity markets or earnings trend positively with a slight offset this quarter. This quarter a combination of equity and fixed income markets had negative effect on our earning.

Equity markets are down 24% from a year ago and down 3% from the fourth quarter. Offsetting the affect of this market was the acquisition of Clarica which as Don pointed out contributed five cents and well on its way to achieve its target of 20 cents for the year.

Turning to slide number five, this chart shows earnings per-share and return on equity relative to the S&P 500 trending. Last fall I told you that the anticipated making into $2.60 range in 2003. That was based on the assumption that the S&P 500 averaged the same in 2003 as it did in 2002 for a level of about 1000. You also noted that for each 50-point shift in the S&P 500, our EPS would change by seven cents. If you go through the math and allow for a billing of earnings throughout the year, this would have resulted in EPS of approximately 58 cents or so in the first quarter. The reason that we're off two cents from that level is primarily because of the margin pressure in the fixed annuity book.

Going forward, we believe that the sensitivity to the equity markets will be as anticipated. And that the impact of the spread compression on the fixed annuity book will be very much mitigated by the end of the year.

Turning to slide number six, premiums and sects (ph) on deposits are up over the first quarter of 2002 and the main reason is the acquisition of Clarica. Excluding the acquisition, the premiums are up slightly while the sector fund deposits are down because the market conditions.

The continuing scene is that the protection business is doing quite well with the wealth management business suffering the impact of the market and, indeed, if you look at it from this perspective, the equity link business now produced 12% of our earnings, down from close to 50% a few years ago. The relative attractiveness of the protection business has made the Clarica acquisition quite timely.

Turn to go slide seven, first year and premiums on track with previous quarters. They're lower than they were in the fourth quarter of '04 -- than the fourth quarter primarily due to seasonal factors.

Turn to go slide eight, assets under management decreased to 337 billion from 361 billion in the fourth quarter. The main reason was currency movements of 17 billion and market adjustments of 6 billion while sales added 4.5 billion for the quarter.

Slide number nine, the left-hand side you see MFS sales, they were 1.3 billion, relatively strong quarter with net mutual fund sales and positive territory. Redemptions are now down into the 25% range from close to 30% in '02 which is a measurable improvement. You can see on the right-hand side that the market movement reduced the value of the funds by 2.4 billion by the end of the quarter.

Slide number ten shows you that MFS is still the number ten ranked mutual fund in the United States with positive net flows only $5 billion below Janice.

Slide 11, gross annuity sales stabilized at the billion dollars level with sales up some. Net sales were positive primarily because of fewer fixed and variable annuity redemption. Stronger growth and fixed annuity is primarily because of customer fixed income product as opposed to the equity product.

Slide 12, revenue was 5.8 billion compared to 5.4 billion a year ago. Excluding acquisitions in this position, life and health premiums have held up quite well. They're in fact up 8% from a year ago while the market related revenue such as fee and investment income is down as our annuity premiums. While underscoring this scene the protection business is doing well with the markets related businesses being down.

Turning to productivity on slide 13, you see the non-MFS expenses on the left-hand side excluding the acquisitions and dispositions are up 5% from a year ago and down from previous quarters which is mostly seasonal. The expense ratio has improved significantly with the Clarica acquisition and is now 17.7%.

We are continuing to focus on cost containment and expect to see the impact of expenses as we proceed. MFS expenses continue to decrease, expense ratios up somewhat because of the impact of market conditions on revenue.

Turning to slide 14, our capital and capital ratios continue to improve, MCC is 237% well ahead of previous quarters. During the quarter, we purchased 4.2 million shares at an average price of $27.80. We cancelled 3 million shares and we issued 2.1 million shares to buy an additional small stake in CI. A net reduction of 5.1 million shares. The net impact of this on the year will be approximately two cents per-share.

Turning now to the business groups, SFL Canada on slide 15, Sun Life Financial Canada continues to do well with earning of 184 million compare to the anticipated level of about 180. Group reinsurance and wealth management businesses did very well, as I mentioned, Clarica is five cents accretive is expected to meet or exceed its 20-cent targets for the year.

Turning then to the United States, slide number 16, United States came in at 54 million which was lower than anticipated. There were a number of reasons for this and they include the lower equity markets, reducing variable annuity earnings, net compression in the fixed annuities, increased bond provisions and higher mortality and morbidity. We've If instituted corrective action to mitigate the impact on future quarters.

Slide 17 shows you the details on the S&P 500 puts. I will not go through every line. You have seen this chart before. I just wanted to update you in that the bottom line impact of this on the quarter are year-to-date was 190 million since the inception.

Turning then to the following slide on MFS, number 18, this chart shows the NFS assets under management and earnings compared to the S&P 500. Assets under management are 165 billion down from 178 billion in the fourth quarter. The main reason for this is the effect of the currency and other market movement as sales were quite positive by a billion and a half.

Earnings are 28 million because of a decline in the equity markets, fewer fee date and currency we expect MFS to earn in the $30 million range over the next quarters.

Turning then to slide 19, Sun Life Asia made $7 million. As we mentioned before Asia is reinvesting its earnings in developing operations and its meeting its operating targets.

Turning to slide 20, Uday (ph) had a good quarter exceeding its target. After the restructuring and with the sale of the various businesses, the outsourcing of the back office, many -- we now have 44 people managing the closed block down from about 2000 a couple of years ago.

This concludes my presentation. And Bob Astley, the President of Sun Life Canada will now update you on the Clarica integration.

Thank you, Paul. Good morning, everyone. I would like to provide you with an update on our progress both in our integration efforts and in our business performance. First let's look at integration. As noted earlier, our integration efforts are on track and we delivered accretion equal to five cents a share in the first quarter.

The monthly savings run rate at the end of March was 16.2 million, up from 13 million at the end of December, 2002. Using the run rate at the end of March to project savings for all of 2003, we have achieved approximately 74% of our 270 million target for 2004.

Progress on reducing the number of permanent positions continues on plans. At the same time, total integration costs continue to be under control.

I told you in the last quarterly call that I would report back to you on how we matched up against a number of important integration milestones. As you can see from slide 24, we have reached all of those milestones. A major achievement was the conversion of more than 500,000 additional Sun Life retail policies to a common system. This is a significant achievement because it provides increased administration efficiency and positions us for future growth.

Both group benefits and group retirement services conversions continue to progress well and reach the 11% goal we have established for the first quarter. The new flexible benefits program has been rolled out to all employees and with the exception of pension benefits which we will address in the fall we have essentially harmonized the benefits program.

Slide 25 shows a number of key milestones for the second quarter. I will be reporting to you on how we did in the next quarterly call.

Let's turn now to business performance in the first quarter. Profitability was very strong, especially in group benefits and business momentum was acceptable even in the face of volatile equity markets and other uncertainties such as the war in Iraq and on-going concerns about the health of major world economies.

Retail distribution integration remains a critical part of our overall strategy and while we are satisfied with our progress, the first quarter wasn't without its difficulties.

The independent career advisor channel as seen on slide 26 recorded its first reduction in its still forth power in nearly three years. The total number of managers and advisers fell by 86, 4130. That was primarily due to more stringent licensing rules for new advisers that took affect on January 1st. This is going to be a temporary interruption we believe.

Slide number 27 shows that retail life and health sales activity in the first quarter was below a year earlier reflecting the generally weak business conditions and a distraction of integration. Group benefits achieved solid growth sales and positive net sales. Group retirement services sales were soft in line with general market conditions. Customer retention was excellent for both business line.

As I said earlier, integration is a key focus. Much has been achieved. Much more still needs to be done. We are building a strong platform for future growth, particularly in the IT area where more than 50% of all activity has been completed. A significant accomplishment by all people involved.

I remain confident in our ability to meet integration time lines and synergy targets and I'm extremely proud of the outstanding effort and contribution being made by all employees. Thank you and I'll now turn it over to Claude Accum.

Thank you, Bob, and good morning everyone.

We have a lot of good investment information to share with you. On slide 31, we see that the asset portfolio of 100 billion is conservatively invested at 91% in cash and fixed income. Modest 7% is held in direct real estate and stock. The largest asset plant is 71 billion of bonds, a good part of which is government for guarantees and is 96% investment rate.

The next largest asset plant is 15 billion of mortgages, a good part of which is insured. The whole portfolio, market value accedes book. Our net impaired ratio at 0.48% is quite comfortable for us and we have a healthy 422 million of allowances for credit losses behind us, plus a further 1.7 billion built into the actuary liabilities or perspective credit events.

On slide 32, only 4% of assets are direct stock. 70% of which is held for the prior count and about 600 million has no down-side risk because they are synthetic using equity calls options. Similarly, only 3% of assets are real estate of which 70% is held for the prior counts and 12% is company-occupied head office buildings.

Quality of the 15 billion mortgage portfolio is very high, the low 0.21% net impaired ratio and with delinquency ratio at or below industry metrics.

On slide 33, we review our largest asset plant, 71 billion of bonds. Our strategy is one of controlled risk taking in order to earn an appropriate risk adjusted on bond. We focus on the middle credit, A to triple B which are our core underwriting strength and we stay away from high-yields and other people's residuals. We have significant scale and expertise in private and, in fact, are one of the largest private bond underwriters in Canada .

In order to manage risk, core anchor of about 30% Triple A is held a lower investment grade percentage is actively managed to be at or below industry metrics and is currently 3.9%. Average credit risk of the portfolio is actively managed to remain between A, low, and triple B high and we maintain a highly diversified portfolio of over 1500 names with the top ten names adding to less than 3.2% of assets.

On slide 34, we show you some of the new details we have included in the analyst numerical package. Here we see the makeup of the impaired bond by sector. Key observations are, the gross impaired have reduced from 815 million at December to 787 million at March. The gross value is already 80 million below par as a result of mark in Key Port and Clarica to market on closing and this reduces the allowances that would otherwise be required.

On the communication row on the right tallow we see we have 122 million of gross impaired telecom at December where the net recovery ratio was low at 28%. In the quarter, we sold both WorldCom and AT&T Canada for above caring value. That is reducing the communication impaired to 22 million and also causing the specific allowances to reduce by about 82 million to 6 million.

At the same time, the transportation gross impaired has increased from 154 million to 236 million due to the addiction of Air Canada and American Airlines. And the airlines overall has been marked down to about 66% of gross book value. We can see that overall the new impaired have a higher recovery ratio than the telecom sold and thus the quality of the impaired is improving.

Very importantly, we will classify a bond as impaired long before it goes into technical or monetary default and, in fact, 80% of the impaired bonds you see here are current on the interest and principle payments. Adding in mortgages and sectorial (ph) allowances, total net impaired is 497 million with 0.48% of assets which is a comfortable level.

On slide 35, we illustrate our credit trend. On the top left we see that the quarterly provisions were charges to the P&L for credit losses are down markedly and the almost back to our normal run rate. On the bottom left we see that specific allowances are falling, mostly from the sale of AT&T Canada and WorldCom just discussed. And while the chart also shows sectorial allowances are slightly down, a more correct description is that they are mostly flat as decline is largely currency.

On slide 36, we illustrate that the average credit risk of the portfolio is managed and overall show a stable trend line tracking close to an A low bond credit with mortgages included. Without mortgages, the average credit risk is closer to an A middle credit. We also show that we take slightly more credit risk in the U.S. for the credit markets are deeper and less credit risk in the U.K. where the corporate credit markets are thinner and that the U.S. shows an improvement in average credit risk despite the downward migration of credit in that market.

In summary on slide 37, the portfolio is conservative at 91% cash and fixed income with modest stock exposure. We are rigorously disciplined in our bond credit risk taking and the portfolio is high quality at 96% investment grade. We stick to the middle credit A to triple B for spread and we stay away from high yield or junk.

The overall credit risk profile is actively managed and stable at an A low credit. 80% of our bonds are current on interest and principle and managers are not compelled to sell impaired bond if the portfolio is within the risk parameters.

With 1500 names we are extremely well diversify. The mortgages are high-quality, mostly commercial and with a 0.21% net impaired ratio.

And we have a healthy 422 million of allowances for credit losses behind us, plus a further 1.7 billion built into the actual liabilities for perspective credit events.

I shall now hand it over to the next speaker which is Bob Wilson.

Thank you.

Turning to slide 39, imbedded value highlights, summary financials imbedded value at December 31st, 2002, was 14.2 billion which includes 1.7 billion of imbedded value for MFS. The value of new business was 634 million, an increase of 122 million from 2001.

Clarica has been included in the value of new business for a full year to provide a better indication of the value of new business going forward. We have not included any value for new business for CI. Once again, killen (ph) house parren (ph) have confirmed that the methods and assumptions used to determined the embedded value on December 31st of 2002 are reasonable.

Turn to go slide 40, the expected return of 947 million was up from 2001 primarily due to the Key Port acquisition. The expected return was reduced by 956 million as a result of adverse stock market returns and by 407 million primarily due to credit losses. The decline in imbedded value per-share is due to the fact that the imbedded value of Clarica does not reflect the value of new business more have we included the value of expense energies.

Going to slide 41, this slide simply provides a brief summary of the economic assumptions used in the calculation.

Slide 42 provides you with the sensitivity of the results the changes in the discount rate.

Turn to go slide 43 and the analysis of earnings by source, the analysis is done excluding special items because we felt that this was the most appropriate measure for 2002. The expected profit on the enforce business of Sun Life was 1.84 billion. This includes Clarica from the date of acquisition and Key Port for the full year. This amount is calculated based upon the stock market growth rates that were used as the basis for the 2002 plan. During 2002, the strain on new business amounted to 278 million as opposed to 292 million last year. Experience gains resulted in a loss of 253 million.

These experience losses occurred mainly in Sun Life Financial U.S. and MFS. They are dominated by the effects of the 24% drop in the Standard and Poor's 500 in the last year which accounts for 200 million of the total. Changes in actuary assumptions added 94 million pre-tax to income. These gains were the result of about 100 different assumption changes but are largely driven by expense assumption decreases in all regions. Mortality improvement in life insurance as well as adjustments to the U.K. annuities.

I will now pass back to Tom for his wrap up.

Thank you, Bob.

Before we start with the question and answer portion of our call, I want to emphasize that we want to offer the opportunity to ask questions to as many people as possible. And to that end I'd ask that you ask only one follow-up question to an initial question. If you have additional questions, you -- I would invite you to rejoin the queue and with that I would ask the operator to poll our callers for any questions.

Thank you. Ladies and gentlemen, we ask if possible, please do not use a speakerphone but instead pick up your handset when asking a question. Thank you. One moment, please, for your first question.

Your first question comes from Carlin DeVine (ph) from Salomon Smith Barney. Please go ahead.

Good morning, gentleman. My question today is going to center on the U.S. annuity business and there is a couple of parts to it.

I wonder if perhaps you could expand on your comments about margin pressures and if that is the case why are you ramping up the fixed annuity sales which was really in the bank channel is the most competitive one out there.

I also appreciate if you could recap for us the difference in commission rates you're paying on your equity index products versus the variable and why there may not be any sort of dac (ph) recoverability there and then any general comments on competitive trends for your VA (ph) business since you -- you're looking at the negative flaws you're continuing to lose traction.

Thank you, Carlin. It's Jim Prieur speaking.

I'll take a step back then and talk about the entire annuity division. The annuity division in the U.S. was responsible for the bulk of the decline in Sun Life Financial about 70% of the decline and comparing Q1 03 with Q1 02 half of the decline in annuity earnings arose from the variable annuity business and the other half occurred in the fixed annuity block.

In variable annuities, while the put and summary insurance hedged most of the risk that arises from GMBD and DAC, the overall revenue declined significantly with the decline in the stock market. So fee revenue on this business declined by 18 million or about 23% year-over-year.

In fixed annuities, there has been on-going spread compression as an increasing proportion of the block hit the minimum credited rate. In addition, because of course we use Canadian accounting there were some recognition that some of the business that was sold in the first quarter was sold at a loss using the full cost and that -- that happened because management actions to rectify the situation couldn't take immediate effect and we wanted to continue our position in the business for a period of time. And the present value of that loss, 7.5 million, was recognized in the first quarter.

Also in the fixed annuity business of course we have credit losses with the assets that are offsetting the fix annuities and that amounted to about 13 million.

So what we've done is we've reduced commissions by 200 basis points and that move is already been made with effect from April 1st. We're also gaining approval to lower minimum guaranteed rates on new products and we'll be ready in 45 states by June 1st. And we're making a concerted effort to push market value adjusted annuities in lieu of the more common SPDA's.

We've also Don mentioned we were cutting expenses. Management has identified 15 million U.S. in expense cuts to be done and those will be done this year. So the -- we haven't ramp-upped up the sales. The sales have continued and in fact I suspect that as many of our competitors struggle with the decision to cut commissions some of them will come to that decision later than we do and our sales may suffer in the next quarter.

With respect to the difference in commissions between the equity indexed annuities and the fixed annuities, that is really a reflection of the different distribution systems where equity indexed annuities are sold more through Independent Financial planners than through banks.

And I think I have touched on -- oh, on the competitive nature of the market. If you look at most prices for fixed annuities, you'll find that the vast majority of companies are actually at 3% which for most companies would be the guaranteed minimum in the old products.

Okay, a quick follow-up. When you did the Canada life deal, you know, and we're looking at your ROE, the decline is to that. You know, Bob Astley getting the job done in Canada it would strike me you're not earning given your cost of capitals today in the U.S. and that is as much if not more of a problem, what can be done to get that turned around?

Carlin, I agree the business challenges in the United States are significant. I think Jim just outlined a number of measures that we're taking to address these. These are the principal measures but I would like to assure you we're looking at the business across all fronts. You would also have noted the volatility that went against us on the mortality front in Q1 which sometimes happens and served to exacerbate the lower profitability in the United States. It would be our expectation that the two protection businesses, the individual life insurance, the group insurance business, would resume a more normal level of profitability going forward and, therefore, give you a slightly different overall picture. But I would like to assure you that we are addressing the situation across all fronts, June nearly hit the highlights.

Thank you.

Your next question comes from Al Cappra (ph) from Putnam. Go ahead.

Good morning. It sounds like you're still sticking with the earnings guidance of 260 to 265. Is it a question of having confidence that you can turn around the spread pressures in pretty short manner or, you know, is there something else in the business that is offsetting these pressures whether it be in the Canadian operations or the U.K. operations that's giving you this reconfirmed confidence in your numbers?

With regards to our earnings guidance, we provided the formula that said 260 plus or minus seven cents for each fifth point move in the 50-point move in the market. It is adjustable, I think. Secondly I got the impact of the fixed annuities, we wouldn't hope to have it mostly mitt debated by the end of the year. That doesn't mean that it won't in the meantime have some impact on our earning. I would say without having a great deal of quantification, I would say that would impact your earnings by a couple of cents or so per quarter until we get to the end of the year.

Okay. And if you could just expand on the comments in the annuity line. Maybe I missed it but I wasn't sure if you gave us the investment spreads on the annuity block. I think it was 160 basis points in the fourth quarter. And what percentage is now at the state energy minimum rates?

Al, it is Jim Prieur. The affect of the spread compression has worked out to about 20 basis points in annual spread and the -- at this point in time about 27% of the block is at the minimum rate.

Okay. Thanks very much.

Your next question comes from Brad Smith (ph)of Merrill Lynch. Please go ahead.

Thank you very much. I had two questions with respect to the one respect with respect to the U.S. annuity business and that was a comment on the matching of your assets and liabilities in that business. I guess what I'm saying is there any risk that you would see the -- your margins compress faster if rates were to drop significantly from here?

The other question was for John Ballon (ph). John, I noticed in February an March there was a witnessed of to and fro in February and outflow in March, I was wondering if you could explain what was happening there and give us a little update what your net flows look like in April?

Brad, I'll take the first one about the matching of assets of liabilities in the fixed annuity business. We're essentially matched I guess the best scenario for us is to -- is that interest rates rise slowly over time going out to the future.

Great. Thank you.

Yes, in terms of the February and March flows, you're going to have transfers between equity products and money markets that will swing around the monthly flows that are picked up by the various services that basically estimate looking in from the outside. We don't provide those numbers.

As for April, April did see a significant pickup from the first quarter saying that April is generally a very good month given that it's the beginning of the second quarter, a good number of 401-K findings as well as IRA funding happens in April. I think May will be more telling in terms of whether the up-tick we have seen in the first quarter continues throughout the rest of the year. Obviously good markets that we've seen over the last couple of months is a pretty good precursor.

Thank you.

Our next question comes from Michael Goldberg (ph) from Deutsche Bank Securities. Please go ahead.

Thanks. I have a question about imbedded value to start off with. And in particular in your breakdown of imbedded value you show a net -- sort of a combined number for acquisitions and dispositions, including taking into account the shares issue to purchase Clarica. My question is, what was the actual diluteive affect of Clarica on imbedded value and what do you estimate is the present value of future synergies with Clarica? I have a number of other questions about the imbedded value but I'll probably deal with those off-line.

Thank you, Michael. It is Bob Wilson. The entire change in the per-share imbedded value from 26 down to basically 23 results from Clarica and so you can call it three dollars a share for diluted affect on imbedded value of Clarica.

As to the affect of the synergies, we have been talking about synergies of $270 million per year in expenses and that doesn't include revenue synergies and other synergies. It would depend where that occurs and when that occurs. One will still show up in value of new businesses as opposed to showing up in the value of the enforce because of the flat of the 270 between acquisition and maintenance.

We haven't actually calculated a value for what we expect that to do, but in terms of worth of the company, the value of synergies and the value of new business from Clarica will, we believe, very much more than make up the three dollars drop in the imbedded value.

If I can underscore Bob's point, you know at the time of the acquisition of Clarica, we went through the math and we are exceeding actually the plan that we laid out. At that time we would generate imbedded value 1 billion more than the purchase price and so we're very much on track, we believe, to achieve that over time.

So if I get what you're saying, Paul, you feel that there was $1 billion roughly of extra value over and above what you paid for Clarica?

Yes, and we believe that it will be showing up in the calculations over the next number of years. As you know, as you well know, the imbedded value calculation do not include the value of synergies or the value of new business and that is why the service -- the amount goes -- the number goes down. But if you add these items, we have -- we're very comfortable with the transaction from an imbedded value perspective.

And I have one other question I guess I'm allowed as a follow-up, it looks like the puts averaged about five or six cents to earnings in the first quarter. Could you give us what the impact of equities was negatively excluding the impact of the puts in the quarter?

The best way to articulate this is to say that our equity contribution from the equity linked businesses is about 12% of earnings which is down significantly from previous quarters. I don't have a -- I can get the details for you. We have this information quarterly so we can go through the math and get it for you if you're interested. I just don't have it quite handy here.

Okay, thanks.

Your next question comes from Tom McKenun (ph)from Scotia Capital. Please go ahead.

Thanks very much. Good morning. Paul, on this 12% of earnings that is associated with equity markets, MFS had 28 and you say that CI contribution of 14 gives 42 which is -

On the 12% of earnings contribution from equity market or equity linked business, MFS had 28 and the CI contribution of 14 brings 42 which is actually 12% of the earnings. Are we to assume then that the variable annuity earnings net of the cost of the put and the McLean Budden (ph) are zero? What are the two others from those equity related pieces and I have one follow up question.

Okay, the contribution from the McLean Budden is slightly positive. We can get you the details. I don't have it with me but it is a few organizations -- the impact is little and the variable annuities, more or less it makes very little money for us.

Was it zero or negative in the quarter or close to that? Net to the cost of the put?

Very close to zero, I can get you the number but it's very close to zero.

Okay, thanks. Also in the press release you talk about increased bond provisions of 30 pre-tax of 38 million and what was the after-tax impact on the shareholder account of that and what was it related to -- specifically to? It was in the outlook section of the news release.

Hi, Tom, Claude Accum here.

The 38 million was all specifics -- and all bonds. It is essentially all airlines so it's 38 million of airlines in Air Canada, American and United airlines and I'll hand it over to someone else to talk about about the assets.

Almost all of that was related to the shareholder.

And what was the after-tax?

Ball park 25 million, Tom.

Okay, thank you very much.

Your next question comes from Cata Ivenova (ph) from RBC Capitol Markets. Please go ahead.

Yes, thank you very much and good morning. I just wanted to clarify one of the things that I notice in the press release is that there was a gain on the sale of the U.K. group business and I'm wondering if you could quantify that for us pre-tax and after-tax?

Okay, thank you, Cata. As you noticed we had no special items. No material special items this quarter.

An organization like this we always have some moving price and we'll just go through that. We had a small gain on the sale of the group business which was split between the number of pieces of the business, some in the U.K. and some in corporate of around ten, 11 million. We had special increases in the provisions -- the losses -- lost provisions, I should say, of about 17 and to that that is a negative to the 10 million was a positive. We also had some reinsurance that added up to 10 sum million dollars earnings and we had some reserve strengthening offsetting that so net, I would say that the 30 -- the amount would be the 56 cents that is displayed is consistent with our franchise earnings for this quarter.

Okay. Thanks for that. And secondly, It looks like the expense ratio did go up this quarter and it looks like margin are lower. I'm just wondering if you can give us a feel as to what extent that relates to expenses becoming quite sticky at this level and to what extent that relates to a shift in the business mix between retailing and institutional?

A couple of items. First is in terms of the expense ratio, clearly the revenue hit has an impact on that. A large part of the expenses are related to distribution and we saw a pickup in sales in the first quarter and so that offset some of the cost gains that were otherwise in the organization. You are correct that in terms of a headcount in cost savings we were going from about 3000 people to a little over 2400 people, there is a reasonable number of people who are in the investment area who are in the sales area and who basically provide necessary services that you really can't cut without seriously impinging on the area of MFS. That is probably in the range of 1200 people. As you continue to reduce headcount it does get tougher and tougher as you start to get to those core people that are a part and parcel of franchise.

And in terms of the business mix?

The business mix has shifted slightly more towards institutional. You know, margins and institutional do have the capability of being similar over the long-term of margins in their retail. We're not there yet in terms of having the scale to approve that to you, but the cost distribution and institutional is far less than the cost distribution in retail and that is how you get the margins similar. You can find a lot of institutional firms that are very high margin because they spend very little on distribution.

Thing you very much.

Your next question comes from Steve Colly (ph) from TD (ph). Please go ahead. Mr. Colly, are you there?

an you remind me, guys, how much book -- how much goodwill there is related to Key Port in the balance sheet right now?

I think it is -- we'll get you the exact number. I presume you wanted me to talk to the Key Port goodwill?

Yes, when do you test the quality of the goodwill?

You as you know the purchase of Key Port was based on a 91 of factors. Firstly, the integration cost synergies, they have been exceeded by $10 million and running well over $50 million so they have gone quite well. The IFNT sales organization has actively distributed some life in MFS products and proprietary sales are up 70% in 2002. So that part of it has gone very well, too. There is a variable annuity block which is meeting expectations, but the spread compression in the fixed annuity block that has reduced profitability. A number of states have now reduced to minimum rates and other states are expected to reduce to minimum rates. And as you heard from Don and Jim, we are taking other actions to enhance profitability. We have looked at goodwill and at this time we don't see any requirement to adjust the goodwill. We conduct an annual formal review of our goodwill, do it in the second half of the year and we plan to do that this year as well. But as I said, based on what I know, I see no requirements to adjust our goodwill.

Anything at all to the credit charges that there have been?

Yes. That is correct.

Another question, you mention this is a -- back to another question I think Cata (ph) asked, (inaudible) 10 million.

You broke up there, didn't quite get you. Something about 10 million.

The reinsurance gain, what does that amount to?

There was some rescience (ph) in the U.K. that amounted to 10-K and if you put all the smaller parts together and they amount to 56 cents and it reflects franchise earnings.

The 94 million in 2002 on the sources of earnings that came up from changes of assumptions, is that (audio out).

As you know what we do we give you the special items in every quarter and so what we do is go through a great deal of analysis, list special items, show them to our audit committee, show them to our board, show them to you on the similar basis. The sources of earnings that are shown here is after excluding these special items so the 94 million is what is left over. As Bob pointed out, the 94 million pre-tax or the 60 some million after-tax is made up over 100 items, they're all quite small. So that sort of proves the point that we are quite diligent in showing you the special items on a quarterly basis an gives you lots of transparency on that.

If I'm modeling on these earnings should I expect zero in 2003.

You never assume zero in assumptions because typically the actuaries are (audio out) I don't know what will happen in '03 but normally they are positive and they have been historically last year it was 140.

Shouldn't that flow through the experience game plan?

Well, let me ask Bob Wilson to answer the question as to what should go through what line?

Steve, a lot of the changes, for example, the changes on mortality in life insurance, the CRA up until this year dictated that the expected assumptions were your mortality would not include mortality improvement. Mortality tends to improve so every year we have had changes in the mortality assumption on the underlying insurance business which have been positive. No reason for that not to continue.

So that is what the 94 million is mostly made up of? I know you said one hop items but --

That is one of the items. Just giving you an example why it would -- it wouldn't necessarily be zero.

Lot of the changes last year we have been very diligent on trying to keep expenses controlled and running the business so the unit costs increase so that has made up the difference and just about every territory there have been changes in expense assumptions which have been favorable. Some of these are because of synergies, for example, with Key Port and a lot of them just are because the business in Asia, for example, is growing. The unit costs keep going down. In the U.K. because we outsourced and as we have outsourced the expenses are going down and continuing to go down. That reflects itself back to a change in the assumption.

Where does the S&P put profitability flow through this statement?

The S&P put flows through on earnings on operations.

Steve, we lost you there.

Steve, the experiences gains and losses.

He has disconnected. Your next question comes from Merrill Mendosa (ph).

Good morning, everyone. A question again about the annuities in the U.S. and fixed annuities. Jim you referred to or Paul perhaps you referred to getting that under control or fixing the spread compression issue by year-end. Because the spread compression issue is entirely on the enforce book, not a book that you can obviously re-price more than 3% than the statutory contract minimums, how do you envision removing the spread compression issue by year-end? Is it solely through cost cutting?

Thanks for the question. New products that are coming out and that will be introducing ready to go with -- on June 1st in 45 states will have rates that are going to be lower than 3%. So basically what is going to happen is that on new business, we'll be allowed to credit rates that are going to be lower. The difficulty is how much of that that are you going to be able to sale in the marketplace. Similarly the economic of the new business is much better because the commission rate is very much lower. So on spread compression, what you have is a number of different factors working and you've got -- you've got the new business which is going to be more profitable. You've got some of the old business coming up for reset which will end up getting reset at the minimum credited rate in the contract which, you know, typically will be around 3%. So you've got the interaction between those two. And then we've got the cost cutting coming in and this is mix and of course we also work -- we're conservative in the first quarter by recognizing the present value of some of the spread compression by taking in the 7.5 million as a hit in the first quarter in that line.

Also, we mitigate the impact of the spread compression, not fully offset it. We hope by the end of the year the impact and the net impact of other stuff going on if you like will be significantly mitigated.

We need new business, better spreads to help generate a blended spread than is higher than what we're seeing currently?

Remember, this is a very short business in the U.S. In duration terms, the duration of the portfolio is around two years, a little bit less than two years.

One final -- my follow-up to this is more with respect to new business, is the company -- do you fine that the company is capable of competing with some of the U.S. players and I'm specifically referring to some of the U.S. guys that are selling significantly increasing their sales of fixed bucket or variable annuities with a large fixed bucket with some rather high short-term guaranteed rates. That is a business the company is competing in?

Merl, it is Jim again. We certainly recognize some value -- we sell annuities where we have a fixed and a variable product together in the same product. We're basically not offering -- we have closed all of our buckets between one and six years because they're effectively not profitable. What we are doing in the variable annuity business is we are in the middle of introducing a new product line and this goes to Colin's question earlier about market share and the variable annuity business. We are coming out with a version of a living benefit which we believe is conservatively less risky than the rest of the market and we feel this will lead to a pickup in sales which we'll probably start to see this quarter and we'll see more completely because we'll have a full quarter in the third quarter.

Is this a GMWB?

GMWB/AB.

Thank you.

We have a follow-up question from Brad Smith (ph) with Merrill Lynch. Please go ahead.

Yes, thank you. This is a question for Bob Wilson. Bob, can you just talk a little bit about how you handle reinsurance gains when you are taking -- you were talking about mortality, when you're take can mortality risk out of your reserves through reinsurance. Is that flowing through experience gains in your SOE and can you just talk a little bit about the volumes that you have been doing in the first quarter of this year versus last year?

Volumes of what, Brad?

Of reinsurance.

The only reinsurance deals that we consummated were the two deals mentioned in the U.K. They did have an income affect but were done for capital reason in the U.K. We reinsured about half of our term insurance business enforce in the United Kingdom and we reinsured about a fix of our annuities and those were primarily done because of U.K. capital requirements that are more onerous than Canada's and they produced as Paul mentioned about $10 million of income on an after-tax basis. We take into consideration when we're doing the valuations, we substitute our rates of mortality that we have in for the fees that we will have to pay to the re-insurer. We're no longer on the risk. We take into account the credit worthiness of the re-insurer because at some point the re-insurer might go under and the business might come back to us. But we have a standard and a policy in place as to the quality of re-insurers that we will deal with and they're all top-rated insurance companies. So, Bob, the 10 million that we were talking about in this quarter that would be past through the experience gains and losses lines in your SOE?

Yes, it would.

Thank you.

Operator, we have time for one more question. We're coming to the 9:15 cutoff.

Okay, one moment, please. The next question comes from Nick Solille (ph) from Ben Moore. Please go ahead.

Thank you. I'm trying to breakdown between Clarica impact and the organic growth on the imbedded value. Firstly on the new business written and secondly on the sources of earnings on the expected profit and enforce operations. Is it possible to get a breakdown of what portion it was from Clarica and what portion was from organic growth?

On the volume of new business on the slide we mentioned that of the 122 million of growth that -- in value of new business, that if there was no Clarica then the value of new business would have gone up 7% from last year. Value of new business for Clarica was a little lower than we expect going forward during the year because of the team integration problems with the field force in the second quarter. The effect of Clarica on the imbedded value itself is an increase in the imbedded value of $3 billion. I can't remember what the next part of your question was, sorry.

On the sources of earnings, just to get the breakdown for the expected profit on enforce

operations being --

Okay, that I actually do not have at the present time. We can see if we can -- we should be able to get that but I don't have it with me.

Okay, I appreciate that.

I might add that in terms of the variable business, all the similar consistent with the things that I have laid out before, the protection business is actually in 2002 made significant progress, Asia, U.S., Canada, everybody is well ahead of where we were last year. It was because of a lower volume of MFS that offset some of that -- the directional very, very positive movement. And so we are quite pleased with the value the new business generated by the protection part of the business.

Just one other comment.

The fact that we have not included any value of new business for CI and having rolled diverse-Co into CI an Missouri Mt. of business that would have shown up in CI as new business is now in the work of CI so we understate the value of new business quite considerably by not including CI in the calculation.

Okay, thank you. Operator, we have reached our 9:15 cutoff time. I would like to thank all our participants on the call today. If you have any additional questions we'll be available after the call on the IR line and should you wish to listen to our rebroadcast it is going to be available shortly after 10 on our website. And with that I thank you and have a good day.

I ladies and gentlemen, this ends our conference call for today. We thank you for participating and ask that you disconnect your