Sun Life Financial Inc (SLF) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Sun Life Financial Q2 Results 2003 Analyst Conference Call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question and answer session. If anyone has any difficulties during the conference please press star, zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded.

I will now turn the conference over to Mr. Tom Reid, Vice President, Investor Relations. Please go ahead, sir.

Thank you, Operator. And good afternoon, everyone. I’d like to start by introducing the speakers on today’s call. We have Don Stewart, Chief Executive Officer of Sun Life Financial, Jim Prieur, President and Chief Operating Officer of Sun Life Financial, Paul Derksen, Executive Vice President and Chief Financial Officer, and Bob Astley, President of Sun Life Financial Canada. Also joining us on the phone this afternoon I’d like to welcome John Ballen, Chief Executive Officer of MFS.

And the slides to which the speakers will be referring are available on the Sun Life Financial web site. Just turning to slide two I would draw your attention to the cautionary language regarding forward-looking statements which form part of this afternoon’s remarks. This slide reviews the reasons why forward-looking statements can be rendered inaccurate by subsequent events. And with that, I’ll now turn things over to Don.

Thank you, Tom. And good afternoon. The results for the second quarter of 2003 reflect steady progress arising from significant strategic and operational initiatives over the past several quarters. Earnings of $366m were up $23m from the first quarter of 2003. EPS of 60 cents were up four cents from the first quarter. Improvement in earnings from Q1 came despite the significant appreciation of the Canadian dollar during the quarter, and the strengthening of the Canadian dollar against foreign currency reduced reported income by $13m or two cents per share. While the integration efforts in Canada are on pace for completion by the end of this year earnings momentum in SLF Canada continues to build. The financial performance was very strong in Q2, and worthy of particular note given the intensity of the integration efforts. Bob Astley will provide an update on integration progress later in the call. MFS benefiting from the improvement in the level of equity markets as well as positive net sales, also showed strong bottom line performance. Earnings at MFS were up 50% from the first quarter in Canadian dollars. And if we were to exclude the affect of the strengthening in the currency they were up 61% over first quarter. The affect of management actions taken in the quarter is reflected in the improved results of the U.S. Annuities Division. Having adjusted commissions and reduced the minimum quality crediting rates on new business we eliminated the loss on new business in the quarter. However, persistent low interest rates in the United States generally continued to impact profitability of the in force fixed annuity business. Improved results in the U.S. Individual and Group Divisions contributed to an improvement in the overall performance of Sun Life Financial U.S. The United Kingdom operations produced solid results again in Q2 reflecting ongoing benefits of our restructuring efforts. The capital position of Sun Life Financial continues to be very strong with MCCSR ratio at the end of the quarter 247%, up from 237% at the end of Q1. And Paul Derksen, our Chief Financial Officer, will now provide a detailed review of our performance.

Thank you, Don. Our first chart, on slide number four, shows our earnings relative to the S&P 500. The S&P 500 daily average was 938, up 9% from the first quarter but still down 12% from a year ago. Our average earnings were up 7% from the first quarter, and up 25% from a year ago. The following chart shows the daily average S&P 500 compared to earnings per share and return on equity. Last fall we provided you with an earnings indication, given an average S&P 500 of 1,000. We said at that time that our earnings would be in the $2.60-2.65 range, and we also said that our earnings per share would vary by seven cents for each 50-point movement in the S&P 500. To go through the math, this would get you to 62 cents this quarter. The lower U.S. dollar cost us two cents this quarter which brings us back to the 60 cents reported.

Underneath this, of course, the highly accretive acquisition of Clarica, and the very strong earnings growth at MFS offset the spread compression in fixed annuities. I might add that the impact of this spread compression will be mitigated by the end of the year. Our return on equity increased by a full percentage point to 10.3%, a result of increased earnings and share buybacks. On slide number six, premium and segregated fund deposits, these deposits were $5.3b in the quarter, down $200m from the first quarter. And this decrease is entirely due to currency of $200m. On the following slide you see our first year annualized premiums. They were individual premiums were $146m, up 49% from last year. Canada was up significantly because of the Clarica acquisition. U.S. sales were strong both in [boli] [ph] and other individual products, while Asia was slightly lower due to the SARS virus affecting business. Group life and health sales were stable with some very good business picked up in Canada which will be reflected in future quarters, and Bob will speak to this in a moment. Turning then to assets under management on slide number eight, assets under management have recovered somewhat but market growth of $22b. This growth was offset by the impact of a weaker U.S. dollars amounting to $23b. We had sales, net sales of $6b this quarter. Compared to a year ago market growth of $1b was more than offset by $27b as a result of the weaker U.S. current dollar. On slide number nine, MFS had net new sales of $3b this quarter, $1b from mutual funds, and $2b from managed funds. Market movements added $13b to assets under management. The MFS redemption rate is down to 22% for the quarter, that’s the average for the quarter, and in the months of June it was less than 20%, and that is down from almost 30% last year, and so the redemption rate is down significantly.

In terms of market share on slide 10, MFS continues to enjoy very good market share, retaining its number 10 position in the U.S. mutual funds. U.S. annuity sales, on slide number 11, gross annuity sales are roughly the same level as previous quarters with increases in variable annuities, and decreases in fixed and index sales. Total net sales were roughly the same as in the first quarter and much improved from previous quarters because of lower redemptions. That takes us then to the revenue slide on page number 12. Revenue was down 300m this quarter entirely due to a weaker U.S. currency, excluding which revenues were flat. If you exclude the impact of the Clarica acquisition market related revenues such as fee, investment, and annuity income were down from last year. And this is obviously because of market conditions. However, life and health premiums are up 15% and that is excluding Clarica, and excluding the impact of exchange. And this reflects the strong continued growth in the protection business. Turning then to expenses. In terms of expenses, core non-MFS expenses are higher than they were a year ago, particularly after giving affect to exchange. The reason for this is some additional severance and restructuring type expenses. Excluding these, costs are more in the $330m range as opposed to the $354m that you see there in the yellow portion of the bar, on the left-hand side of the page.

We do look for continued cost containment in 2003, as well as further reductions in the expense ratio. The Clarica integration is proceeding well, and is expected to meet its target this year. And Bob will speak to that in a moment. MFS expenses are lower, on the right-hand side of the page, primarily due to exchange but even after allowing for exchange the MFS expenses are down 9% from a year ago, or $21m down. The expense ratio improved as a result of these lower expenses and higher revenues at the same time. Turning then to asset quality on slide number 14, our provisions for losses were $38m, down from $40m in the first quarter, and $115m a year ago. This generally reflects improved credit conditions at Sun Life. On the following page gross impaired assets declined from $919m in the first quarter 2003 to $810m. The decrease was a result of the sale of some assets, improved credit outlook, and the lower U.S. dollar. After taking into account allowances, net impaired assets are now down to $408m or 41 basis points reflecting strong improvements in our asset quality. On the following page you can see that our capital continues to strengthen, as well. MCCSR grew to 247%. We have bought back 11.7m shares as of the end of June, and since that time we have bought back an additional 2m or so shares so that the total number of shares bought back to date is 14m. Shares outstanding has been reduced to 605m shares as of yesterday. This is an important part of our strategy. We are generating about $1.5b per year in earnings of which we pay a little over $400m in dividends, and require a $200m for business growth, which leaves us a significant amount to return to our shareholders either through dividends or through buybacks.

These increases for dividends by 21% in the first quarter to a 29% payout ratio, that is in addition to the $400m of buybacks to date. And we will continue to execute on this strategy. Turning then to the business groups. On slide 17. SLF Canada had a very strong quarter with earnings of $218m. Expense reductions, morbidity, and mortality improvements were the main reasons. Clarica was eight cents accretive this quarter, 11 cents year-to-date, and has proven to be an excellent acquisition. We expect to exceed our accretion targets of 20 cents in 2003. Turning then to the United States, SLF United States earnings also improved, and were up 26% in U.S. currency, 16% after taking into account the lower value to the U.S. dollar. Earnings grew in all businesses. We mentioned we do expect to mitigate the impact of fixed annuities spread compression by the end of the year. MFS, slide 19. It’s assets increased as a result of market improvement and strong net sales. This was partly offset by the weaker U.S. currency. On the right-hand side of the page you can see the significant up side in MFS earnings as a result of improved markets, and in U.S. dollars earnings, as Don pointed out, were up 61% from the first quarter which brought the ROE to 72%. Asian earnings were roughly the same as previous quarters with revenue down because of economic conditions resulting from the SARS circumstances. Otherwise, Asia is continuing to meet its near-term operational objectives. U.K. earnings were lower as a result of the sale of the group business, but return on equity is still in the high teens. We do expect the United Kingdom to continue to generate similar earnings and return on equity in the ensuing quarters. This concludes my part of the presentation. And Bob Astley will now give you an update on the Canadian integration.

Thanks, Paul. And good afternoon, everyone. Today I will provide you with an update on our integration efforts, and then comment on our business performance in the second quarter. Finally, I’ll also talk briefly about our focus beyond integration and towards building our growth platform. First, let’s look at integration. As Paul noted earlier, and as shown here on slide 24, integration efforts remain on track. We delivered accretion equal to eight cents a share in the second quarter which is ahead of the five cents a share previously projected, and also ahead of the five cents a share contribution made in the first quarter of this year. The monthly savings run rate at the end of June was $17.3m. Using this run rate to project savings for all of 2003 we have achieved approximately 79% of our 270m savings target for 2004. Progress continues on reducing the number of permanent positions and integration costs remain under control. As I did in the previous quarterly call, I now would like to report back to you on how we measured up against some key integration milestones. As slide 25 shows, we have reached all of those key milestones. One significant achievement was the Canadian investment business unit’s completion of all planned systems conversions, leaving only one remaining. At the same time, Group Retirement Services continues to progress well, with seven of the top 10 high profile clients, and more than $5b of assets under administration now converted, taking us well past the halfway mark. Group Benefits conversions are also going well, and client feedback has been positive.

Slide 26 shows key milestones for the third quarter, and again, I’ll be reporting to you on how we did in the next call. Now I’ll turn to our business performance in the second quarter. As slide 27 shows, the number of independent career advisers was essentially flat during the latest quarter. Slide 28 shows that retail life and health sales were up 27% compared to the first quarter, but 14% below second quarter 2002. However, we are seeing improving trends in life and health sales, particularly in June and July. And this [augers] well, going forward. We continue to build our wholesale channel by strengthening senior management, preparing product updates, and offering additional professional development opportunities to our advisors. We are optimistic that we are heading in the right direction. Group benefits achieved outstanding performance, posted positive net sales, and expects to exceed growth plans in 2003. During the quarter group benefits was awarded the health, dental, catastrophic, and healthcare spending benefits business of IBM Canada Limited. We have not yet recorded this sale as it will be effective in January 2004. This new business complement Sun Life Financial’s role as the incumbent provider for IBM Canada’s Group Life Insurance benefits, as well as its group retirement services. Our goal is to leverage the potential of our integrated group benefits and group retirement services solutions to maximize service delivery to IBM employees. Winning this new business in a very competitive environment speaks well for the strong partnership we have developed with IBM who recognized Sun Life Financial’s industry leading technological capabilities.

Customer retention continues to be very good in both group benefits and group retirement services. While we are relentlessly focused on completing the integration we are increasingly looking to innovative practices that will serve as a basis for business expansion in 2004 and beyond. While the foundation of our operational excellence is based on the training, skill, and knowledge of our people this is being augmented by the introduction of rapid technological changes. These changes are improving service levels for both our customers and our advisers, expanding product choices, and creating new ways for the customers to obtain the insurance and investment solutions they require. We have dealt with all of the legacy issues around our technology platform. We are affecting a complete conversion to single processing platforms for each business function, because we believe that coexisting parallel systems diminish productivity and limit future flexibility. Many other organizations have not yet taken this fundamental step with their integration efforts. One example of how all this comes together is evident in a web based platform that we are rolling out to advisers which redefines our service model. The Adviser Business Center is designed for the way advisers work by making it extremely easy to use, permitting them to focus more on sales, and less on transaction processing.

I’ll be speaking to you more about other 2004 business opportunities as we move through the second half of this year. In the meantime, we continue to meet our integration timelines and synergy targets as we enter the home stretch. Our financial results are excellent. Our sales momentum is building, both excellent signs for the future. Thank you. And now I’ll turn it back to Tom.

Thank you, Bob. Before we start with the q and a portion of our call, I’d like to emphasize that we want to offer the opportunity to ask questions to as many people as possible. So toward that end we’d ask that you ask only one follow-up question after an initial question, so that’s two in total. And should you have any additional questions we invite you to rejoin the queue. So with that, Operator, I’d ask that you please poll the callers for questions.

(Caller Instructions.) Your first question comes from Steve Cauley from TD Newscrest.

Hi, guys. Are we going to see sources of earnings from you any time soon?

Thanks, Steve. Actually, as you know, we do report source of earnings. We do so twice a year at the same time of issue of the embedded value report. And in addition to that, we list any material special items on a quarterly basis. We’ve been doing that quarterly. We didn’t have any this quarter. We detail full income statements, assets under management, and capital by line of business. And so we’re putting a whole lot of information out. The next quarter we tend to show sources of earnings as well, and we’ll certainly consider doing that on ensuing quarters, as well.

And so we should start seeing it more on a quarterly basis? Or are you still saying every half year? Sorry.

Well, we’re currently are showing with every half year, but we will take that under consideration for future quarters.

And so no major changes of assumptions this quarter?

We had no major change, no major special items this quarter.

Okay, and I guess with the strong improvement in markets that we’ve seen there would have been some very strong experience gains in certain business lines?

Well, you know, the – if you’re speaking to the [sectron] [ph] guarantees we did not release any sectron guarantee reserves this quarter, but obviously, under these markets we’re over-reserved. We probably have 20m or so in excess reserve sitting there.

20m?

20m, yes, but we didn’t release any. I might just comment on the quarter in general in terms of the numbers. We had, the 60 cents we believe reflects sustainable earnings for the company this quarter. As I mentioned, we had no special items. Canada, no material special items. Canada earnings were probably about $10m or so high, which is a combination of factors, mortality, morbidity, and the impact of, you know, of low expenses on reserves. But then the U.S. and other geographies had lower earnings because their expenses were slightly higher. And so I’d say they more or less offset to make the 60 cents a, you know, a balance view of the franchise earnings for the quarter.

Thanks, very much.

Your next question comes from [John Ruecastle] [ph] from [B&O Burns] [ph].

Thank you. Just following up on the previous question. I noticed in the footnote nine in your interim consolidated financial statements, you actually do have your changes in actuarial liability?

Yes, we started disclosing that this quarter.

Yeah, so that’s great. And it looks like there have been some changes in your estimates, but it looks like about 6m. How much is in this quarter versus the first quarter?

I think that most of that, yeah, most of that is this quarter. We had some, you know, changes in models and such but none of which affected the bottom line net, net.

Okay, great. And maybe, you could just give me an idea, or Don, what your target MCCSR is over time? And I guess what, you know, what are your priorities with – you sort of touched on, what are your priorities with your excess capital?

Yeah, our minimum MCCSR is in the 200% range. We’ve obviously done much better over the last six months. Remember about a year ago our MCCSR in September I believe was closer to 200%, and so we’ve made huge – we’ve generated a lot of capital in the last nine months. Our objective is to, you know, continue to buyback the way we have over the last little while, and utilize any additional capital for small targeted acquisitions if we run across any that we’re interested in. And we will consider our dividend rate again in the first quarter of ’03 as we do annually, sorry, first quarter of ’04 that is.

Great, thank you.

Your next question comes from Timothy Lazarus from [Griffits McBurney] [ph].

Hi, thank you. I also noted that there was a $38m impairment pretax on some invested assets. Could you provide us with the after-tax impact of that, and some disclosure on what that is?

I’m not sure where you got the $38m?

It’s in the Outlook Section of the press release, there’s a $38m provision.

Yes, so $38m pretax, and so after-tax that’s roughly …

28.5.

25, 26.

And what does it specifically relate to?

There are several, but it’s primarily in the airline industry, specifically in Canada, and it was with respect to Air Canada, and in the United States assorted provisions on some of the airline bonds are held there.

Is it any more specific to Keyport than it is to Canada?

No.

Okay, thank you.

Your next question comes from [David Merkel] [ph] of [Holt Capital] [ph]. Your line is open, Mr. Merkel, please go ahead.

David Merkel, Holt Capital. What’s your target ROE for your U.S. operations? Is it where you want it to be?

Well, obviously, it isn’t anywhere near where we want it to be. The earnings from the U.S. were very disappointing in the first quarter. They’ve come back somewhat this quarter, but we’re aiming for significant ROE improvement over the next couple of years.

Okay, do you have a target for it?

Over the next two or three years we plan to get back to double digits at least.

Okay. My other question was just going to be interest rates have risen about a percent, maybe a percent and a quarter since the close of the quarter, at least here in the United States. How is that going to affect both your earnings going forward and your embedded value?

Well, with respect to the earnings, the – Sun Life unlike many of our competitors, our pricing on the fixed annuities is much more responsive to interest rates than most of our competitors. And after the first quarter we took some actions in the fixed annuity business, cutting commission rates, excuse me, and cutting the credited rates. But because we run a matched book we’ve actually be increasing the rates on our fixed annuity business going forward, and so it’s going to help to mitigate the problems that we’ve been having in the fixed annuity line. In fact, now with the rising rates, because of our responsiveness to rates we’re actually one of the more competitive fixed annuity players again in the marketplace, and we’re earning our spread, our targeted spread. With respect to embedded value, that’s a slightly more complex question. And I’ll pass you over to Bob Wilson.

The embedded value, the interest rates although they’re up about 100 points in the U.S., they were down 100 points earlier, and so they’re about not that far off where we started the year at. I don’t expect that it will have a material affect on the embedded value. If anything it will be slightly beneficial because of the interest compression on Keyport won’t be as extreme.

Thank you.

Your next question comes from [Alena Mitopolski] [ph] from [Digital Bank Securities] [ph]. Please go ahead.

Yes, hi. [Max Lichin] [ph], again. It’s fixed annuity spread. If you wanted 140 basis points, is it, you said, your earnings, your targeted strength now, what is it in basis points? And also, you said the impact of that compression will be mitigated by the end of the year. Is it because the yield curve is steepening? Or because of the measures that you’ve been taking, commissions rate cut, and lowering credit rates?

Thank you for the question. With respect to the fixed annuity target spread it varies by product, but it ranges from 180 to about 200 basis points. I mean roughly. And with respect to the impact on spread compression some of the management actions are mitigating the impact of the spread compression, both the lowering of the commission rates and making sure that the new products have got lower minimum interest credited rates in it. And thirdly, the cost cutting that we have done within the annuity business, since the beginning of the year 65 positions have been eliminated in our U.S. business.

65 positions. Thank you.

Your next question comes from [Mario Mendoca] [ph] from CIBC. Please go ahead.

Good afternoon, everyone. Jim, a question for you. You indicated that Sun Life is able to increase crediting rates in this environment. And it’s a little different from what I am hearing elsewhere. It strikes me that Canadian GAAP, or perhaps just maybe not, just differences in GAAP across the two countries would cause such a difference in actual behavior. Could you help me understand what it is about Canadian GAAP that allows the company to behave in a way that’s just different from your U.S. competitors?

That’s a good question, Mario. And the answer simply is that Canadian GAAP forces you to respond more quickly to market moves in interest rates because, you know, effectively the reserves are always being looked at again on a market value basis. And similarly, it really encourages you to run a matched book. Which means that when interest rates go up you’re not long, your liabilities, and therefore you’re able to reprice more easily. And so I think that we were one of the first companies to be cutting commissions and following the rates down more quickly. And similarly, when rates start to rise we can be one of the first companies to recognize that in our pricing. But we’re not alone in doing this, but many American companies appear to lag the capital markets.

When you say ‘when rates rise you’re not long to liability,’ could you clarify that for me?

Sure. The assets and liabilities in the fixed annuity business are matched, and it’s frequently the case if you speak to many of our competitors when they talk at industry conferences they talk about being mismatched and being long, their assets are longer than their liabilities.

Right, sorry, that’s how I understood them, as well. The assets are longer dated?

Right.

In the U.S. So when rates rise their assets actually decline by more than their liabilities?

Precisely, they decline. And so there’s a tendency if you’re in a business where you’re not marking everything to market, and being more sensitive to the matching, there’s a tendency to use the average credited rate on the assets and therefore, you don’t respond quickly when rates rise or fall.

And so in summary, it’s really this enormous present value exercise that we do in Canada that really is the distinction?

Yes.

Got it. Thank you.

You have a follow-up question from Steve Cauley from TD Newscrest, please go ahead.

That was quick. Just I wanted to get some sort of idea, number one, on if you’re saying that you’re going to eliminate the spread compression that you’re feeling right now do you have any sort of estimate of what that is costing you on the bottom line?

You know, we’ve done some numbers, Steve, on it. You know, basically, when you look at the U.S. Annuity Division as a whole we had a number of things that contributed and some things that detracted from earnings in the quarter. The – about 30% of the fixed annuity book is now at the minimum credited rate. And these are the older contracts. And the contracts, this is a business where the average duration is about three years. And so the contracts will roll over in time. And so that was a negative impact. The positive impact was we had some improvement in fee income from our variable annuities, and another positive was, of course, you’ll recall in the last quarter, when you compare it to last quarter, we actually had present valued some losses on new business which cost us about $7.5m. And the fourth thing was some of the severance costs were actually put into the Annuity Division, and so we had, you know, pluses and minuses, and those were the principal ones during the quarter.

And so there’s really, there’s just too many moving parts for you to give me a precise number?

That’s right. And so we think that as the -- you know, it depends on the [elapse] [ph] rates moving forward, Steve, how quickly the elapse, how quickly the portfolio turns over, as it turns over in a good interest rate environment we have an opportunity to reprice. And so you’ve got a number of moving parts there.

Okay. Just gear us over to MFS, I was surprised to see the jump in earnings relative to where the average assets under management were in. I can see that expenses are reasonably well controlled, but just wondering was there any sort of one-time revenue item such as a redemption penalty of size?

There were no one-time redemption or one-time events in the MFS numbers, at all, Steve.

And so it’s purely looking at expenses, and is it that average assets under management are in more lucrative MER assets, or is there something that I am missing there?

I think what you’re seeing with MFS is they’ve got expenses quite severely over the last number of years, they’re getting to the point that when markets improve expenses lag the improvements in market. And so you get a much of the additional revenue drops straight to the bottom line. And that’s where you see the affect of that.

And so there’s a 7m decrease in Canadian dollars in expenses, yet the bottom line increased by how much?

Yeah, as I mentioned in my comments, some of that was exchange, and so the – from a year ago I said the expenses were down 9%. John Ballen is on the line, as well. John, do you have any additional color to put on this?

No, I think, Paul, you mentioned it. We’re still year-over-year expenses are down and yet the revenues are up. And so you see the, you know, the positive leverage in both directions. And, you know, given where the market is today that’s what you should expect for the future quarters, markets all where they are.

You don’t expect, John, that you – you expect your expenses to stay pretty flat?

I think we’re probably fairly close to an inflection point in that we’re looking at more opportunities to grow revenues. And so I think the big diminishment in year-over-year expenses after you roll through 2003, what we’re speaking to is 2004, and you’re not going to see the same decreases. And so, you know, hopefully we can keep 2004 relatively flat. But we are looking for opportunities to spend money to get revenues in the door.

Thanks.

Your next question comes from [Collin Devine] [ph] from Smith Barney. Please go ahead.

Good afternoon, gentlemen. Two questions. One with respect to Keyport which has obviously had its difficulties, again, continued investment losses. I was wondering if you could talk about how comfortable you are with the recovery of the goodwill value you are carrying there? And then, secondly, if you could discuss whether Sun is writing or will be rolling out in any of the guaranteed living benefit variable annuity features here in the U.S.?

Thanks, Collin. In terms of goodwill I commented the last conference call on other opportunities, that the Keyport goodwill requires no adjustment. We actually conducted a formal process of value in the goodwill on the books of Keyport Life Insurance Company in the United States this quarter, and it’s for the purpose of filing U.S. statements. And we concluded that the goodwill is properly valued. The reason for this is that we typically bought Keyport at a very good price. If you recall, you know, the option was [failed] option, their stock went up a dollar on that particular day, and we bought it for a very good price. And the market value of Keyport is still in excess of book value. And so we’re quite comfortable to say that no adjustment to goodwill is required. Jim, do you want to speak?

Collin, with respect to living benefits, we actually have introduced a living benefit rider. It’s a combination GMAD, GMWB, and that was introduced in late May. Our variable annuity sales were up 23% quarter-over-quarter. And in fact, sales in June were much stronger than the sales in May, and the sales in the first three weeks of July have been stronger still. And so we’re quite hopeful that the – we’re going to have more improvement in variable annuity sales, partly as a result of adding the living benefits rider.

What sort of reserves are you holding for these things? They carry a considerable market exposure.

They do, and they – what we’ve done is they’ve formed part of our risk management plan, and are taken into account when we look at our exposure to market levels.

Okay, in terms – I’ll ask the question again – in terms of the amount of the reserve or capital you’re putting up to support this product when you’re pricing it, could you give me some idea of what that is? And also, are you using any reinsurance to hedge away the risk?

We’re not using any reinsurance to hedge away the risk. I haven’t got the figure in front of me with respect to the amount of capital that we put aside with respect to this. It does form part of our overall hedging, and we do charge an extra 40 basis points for the feature.

Okay, thank you.

You have a follow-up question from Timothy Lazarus from Griffits McBurney.

Hi, thanks. Two quick ones. First of all, could you give us the number of the actual number of representatives, sales reps that you have in Canada for the end of the quarter? And secondly, Paul, the charts continue to show the comparisons to the quarters and the S&P. should we take from that, you know, that Sun Life is more of a beta stock than it is interest sensitive? Is it more equity sensitive than it is interest sensitive?

Well, when we went public about three years ago close to 50% of earnings came from equity linked businesses. Now it’s slightly in excess of 15%. It’s a lot less interest or equity sensitive than it used to be, but you see from the MFS results that it still has a fair amount of it there. In terms of interest sensitivity, I think it has sort of – we have mitigated that, and so I would say that, you know, we’re trying to run a risk management process which covers us substantially again, and protects us from the significant moves in the marketplace. And I think we’ve been relatively successful doing that, given the movement in the equity and interest rates markets and the limited impact on our bottom line.

This is Bob Astley speaking, Collin. The number of advisers and managers within the independent career advisory system in Canada is disclosed on page 15 of the supplement, and that number is 4,111 at the end of the quarter.

Thanks, Bob.

Your next question comes from Mario Mendoca from CIBC.

Thank you very much. With respect to the interest rate environment, we heard from [Manu Life] [ph] earlier the rates would stay at this level indefinitely without any material impact on the companies reserving assumptions, and we heard from [industrial lines] not long ago that there could be some issues with long-term interest rates or low long-term interest rates with respect to just reinvestment rates. Sun Life, anything you can offer us in that regard? And perhaps, when you answer the question, could you address specifically your exposure to the [Term to 100] products?

Mario, I think that’s a good question. I’d say that we have sidestepped the Term to 100 product very much over the last number of years because we didn’t like the interest rate exposure. And as a result, we believe that interest rates can stay at this level for a long time, and we don’t expect any impact on our bottom line from that.

And just to follow-up, is the distinction then between Manu Life, Sun Life on one hand, and maybe industrial line, it’s just maybe the importance of you out being just a lesser issue for Sun Life than it would be for industrial line specifically? Or is that a question you’d rather not answer?

It’s Bob Astley. The profile of new business for each of those companies that you mentioned would vary somewhat depending on the competitiveness of the products. But also, very much depending on the distributors, and what their own preferences are. And so the profile for Sun Life Financial would be somewhat different because the Clarica branded independent career advisers sell very significantly in the mid market, as well as the high net worth market. And there there’d be a significantly higher proportion of term insurance sold, for example. But overall, I would say the types of business wouldn’t vary dramatically. If there were one distinction it would be that Sun Life Financial will, is selling more health insurance related product, and we’ve been very successful at those in the past several quarters. That would include critical illness, insurance, long-term care insurance, and personal health insurance.

Mario, I might add to that, from a risk management perspective we measure earnings at risk both from equity market and interest rate shifts. And so life product, actually, we have a full inventory of embedded assumptions in different products, and we shop those on a regular basis, and then we obviously decide – and we hedge where we don’t like the outcome, and we price the cost of those hedges and the products. And so we carefully select the kinds of products that we choose to be exposed to.

And my second question, my follow-up here, really relates to the competitive environment in Canada. Again, we heard from industrial lines, and things becoming rather competitive, particularly in [Canada Life] in Canada. Is it just fair to say that with Canada Life being acquired by Great West Life and all of the uncertainty that that entails, and with your own integration, in an effort to keep agents and in an effort to not lose market share we’re seeing companies reduce pricing, perhaps increase commission levels just to maintain where they’re at? And that’s impacting companies that are not involved in acquisitions? So is that a fair comment?

It’s Bob Astley again. First of all, I would say that our focus is very much on profitable business, and so we do not engage in price wars. And don’t sell on the basis of a low priced value proposition. And that would be particularly true within the ICA distribution channel. There will always be from time to time some competitors who aim to find short-term market share gains by pricing action. We will resist being part of that. There are some significant pricing pressures on some of the term insurance market segments right now which we are currently not responding to, but will remain in the competitive league but will not be a price leader.

But am I right, is this all about, you know, Canada Life maintaining agents and market share, amidst all of the uncertainty?

It’s a bit difficult to know exactly what the strategy is of any competitor, and particularly, the Great West Life Canada Life combination, at this time. I think we’ll just have to keep a close eye on that environment.

Thank you.

You have a follow-up question from Steve Cauley from TD Newscrest.

Bob, just to follow-up with the size of the sales force, we’ve been seeing amongst the banks that the full service brokerage forces have been losing some of their agent bases, and they’ve been saying it’s primarily amongst, say they’re the least productive agents who just don’t have the portfolio in place to keep on going in a difficult market environment. Can you provide a little bit of color in terms of the losses that you’ve experienced amongst your salespeople? Are you losing any of your top people?

We’ve got – we have very little attrition amongst our top salespeople. Steve, I would point out, too, that compared to one year ago our ICA channel is actually larger.

Yes.

And so while there is some quarterly volatility, pluses and minuses, and I mentioned in the last quarterly call that the new licensing requirements in the common law provinces have held us back a bit. Still year-over-year we’re up, and our larger producers are continuing to be quite successful. One statistic I might give that I’ve been pleased about, and that is that the productivity per adviser this quarter compared to the comparable quarter one year ago is at a 98% level despite all of the changes that have been required to be coped with by those advisers. And so that’s a very strong indication that the system continues to work.

And Don, maybe one question for you. On the U.S. side we keep working on – a bit of a stumble there, and we’ve seen quite a few management changes in the U.S. I think it’s over the last three to six months. Has that stalled any of your efforts to seek out acquisitions in the U.S.? And as well, when you look forward for that U.S. business, when it matures say somewhere down the road, how will it be differently positioned from where it is today? Like what is the long-term vision of that U.S. business?

Well, Steve, as you know, we’ve been continuing to look at line of business acquisitions in the United States. More specifically, in the group insurance side. And that continues to be a focus on a behind the scenes basis. If we look at the U.S. business in the longer haul the three main lines of business we presently have, obviously, capital markets have to improve for the full benefit to flow-through on the payable annuity side. Where we would see ourselves as aspiring to a skill position in the annuities overall because we believe the fundamentals of the demographics will play out in the longer haul. And, indeed, recent erosion of capital markets has cost baby boomers potentially several years of savings. In the group business we very much would like to build it to a larger and more skilled competitor probably in the niches it’s in, but possibly one adjunct, but it would remain recognizable. It’s presently depending on the line of business, you know, somewhere in the [teens] and we’d like to see a top 10 position in the U.S. group market for ongoing viability. Individual life business, we like our niche there, we’re quite well down in the overall ranks, but we believe we have a viable position, the ROE is excellent and the specialty skills that we bring to the high end market continue to play out very well. We’re going to continue to build the business offshore which flows in through the United States.

And so I don’t see a fundamental shift in the lines of business presence, you know, we are focused, and we’re looking to strengthen and grow them, and therefore, something recognizable that is a higher ranking player than it is today but is in primarily these principal lines.

Are there any opportunities out there? Has there been a change in [M&A] opportunities, let’s say in the last six months?

Well, there’s a fair amount of discussion going on about the larger opportunities which I’m not going to address in this conversation. But you probably are attuned to the speculation. As far as the specific lines of business that I was discussing a few moments ago, opportunities, we continue to see these flowing past the carriers either increase their focus or in the case of one or two of the foreign players, and exit specific lines of business as part of a response to the pressures that have been on the Europeans in particular. And so we do see a deal stream. I’m not sure it’s fundamentally changed over the last six months in reality, as opposed to speculation.

Thanks very much.

You have a follow-up from Alena Mitopolski from Digital Bank Securities.

Yes, just a quick question. Your 2003 EPS target, is it still the same at between $2.60 and $2.65?

We are, as we mentioned before, we gave a bit of a scenario which said that the S&P 1,000, would be between $2.60 and $2.65, and for each 50-point movement in the market you can adjust that by seven cents. In addition to that, we’ve had some impact from currency, and I can’t tell you what the currency is going to do over the rest of the year. But other than that I think we’re progressing reasonably well against that scenario that we laid-out.

Okay, thanks a lot.

Mr. Reid, there are no further questions at this time. Please continue.

Okay, thank you very much, Operator. And I’d like to thank all of our participants on the call today. If there are any additional questions we’ll be available on the call, after the call, excuse me, on the IR line. And should you wish to listen to a rebroadcast it’ll be available from our web site shortly after 6:00 p.m. this evening. And with that, I’ll say thanks, and have a good night.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and please disconnect your lines.