Sun Life Financial Inc (SLF) 2003 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Sun Life Financial Q3 Results 2003 Analyst Conference Call. (Operator instructions) 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, CEO of Sun Life Financial; Jim Prieur, President and COO of Sun Life Financial; Paul Derksen, EVP and CFO, and Bob Astley, President of Sun Life Financial Canada. Also joining us on the phone this afternoon I’d like to welcome John Ballen, CEO of MFS.

The slides to which these speakers will be referring are available on the Sun Life Financial website. Just turning to slide 2, I 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 could be rendered inaccurate by subsequent events. And with that, I’ll now turn things over to Don.

Thank you, Tom, and good afternoon everyone. I am pleased to report a very solid third quarter result in spite of mixed market conditions. Net income of $394m is up $28m from the second quarter. EPS of 65 cents were up 5 cents from the second quarter and up 8 cents, or 14 percent from the third quarter of 2002.

The financial performance at MFS continues to improve, with the combined effect of reduced costs and higher markets reflected in MFS’ results. Net sales of retail mutual funds in the third quarter were negative, however net sales of mutual funds in October month-to-date are much improved.

In addition, net sales of MFS managed funds, including variable annuities and institutional mandates were a very solid USD $1.2b in the quarter. All of this reflecting the diversification of MFS into a full line investment manager.

In Canada, the accretion attributable to the Clarica combination was 6 cents per share in the quarter, and 19 cents per share year to date. We are very confident that we will achieve our accretion target for 2003 of 20 cents per share. In spite of our intensive focus on the integration of Clarica and Sun Life, we were successful in winning the group retirement services business at Falconbridge as well as two other large, corporate customers recently. This is third party testimony to the success of our integration efforts, as well as providing an endorsement of our market-leading technology of the group business in Canada. Bob Astley will give a detailed update on integration later in the call.

In the United States, the financial performance in our annuities division improved in the quarter. We remain confident that management actions announced over the last couple of quarters, including lowering of commissions, minimum guaranteed interest rates and cost reduction efforts will continue to mitigate the effect of fixed annuity spread compression.

We were particularly pleased to work with CI Funds over the quarter on their acquisition of Assante, Snyergy and Skylar. After completion of these transactions, CI will be the second-largest mutual fund company in Canada by assets under management, and our 34 percent interest will allow us to participate in the earnings growth of the new CI.

In the quarter we repurchased 5m shares, bringing the September 30th year-to-date total to just over 16m. We also redeemed USD $122m of debt as part of our overall capital management program. Nonetheless, our capital position remains very strong with an MCCSR ratio of 242 percent as at September 30th, 2003.

Paul Derksen, our CFO, will now provide a detailed review of our performance. Paul.

Thank you, Don. Our first slide, slide 4, shows the history of our earnings compared to the daily average S&P 500. The S&P 500 averaged 1,000 this quarter, a significant improvement over previous quarters. As Don mentioned, earnings were $394m, up 12.6 percent from a year ago and up 7.6 percent from the previous quarter. Strong performance in our equity linked businesses as well as the success in integrating Clarica contributed to earnings this quarter.

Turning to slide 5, on this chart you can see how our EPS increased to 65 cents, up 14 percent from 57 cents a year ago, and up 8 percent from the second quarter. That is despite the drop in the value of the U.S. dollar which cost us $20m, or 3 cents, compared to last year. Excluding the impact of the weaker U.S. dollar, EPS actually would be up more like 19 percent.

Our return on equity also increased significantly by 150 basis points. A combination of market conditions, the value created by the purchase of Clarica and capital management contributed to this. We said that we would aim to increase a return on equity by 1 percent per year, and this year we are certainly exceeding that target. The lower U.S. dollar actually had the effect of reducing the ROE by almost 20 basis points. So the fundamentals of the business are very positive.

Turning then to top line growth, slide 6. First year annual individual and life and health premiums are up 26 from a year ago, with the U.S. up significantly to $89m; Asia up 14 percent and Canada more or less level as the incorporation of Clarica continues.

On the right-hand side of the page, group life and health sales were off somewhat, particularly due to lower activity in Canada. This is entirely a market issue as we are maintaining or improving our market share. The U.S. is off slightly as we continue to focus on profitable market share.

Slide 7, assets under management are about the same as last year and last quarter, compared to the third quarter of 2002 the lower U.S. dollar reduced our assets by $38b. Market improvements increased them by $32b and net sales, $10b.

Turning then to MFS, net fund sales on slide 8. On the left-hand side you see fund sales, MFS net sales showed net redemptions of $800m for the quarter. The third quarter often experiences seasonal slowness in the mutual funds. In addition, concerns raised in the media regarding mutual funds may have affected net sales as well. We believe that this is specific to the third quarter because in the fourth quarter MFS experienced much improved sales results. On the right-hand side of the page you can see assets grew by $2.3b this quarter as a result of market improvements.

Slide 9, you can see that MFS maintained it’s market ranking as the number 10 mutual fund in the United States, with $71b of long-term assets under management and positive flows for the year.

Slide 10, turning to annuity sales. They were a net redemption of $65m, primarily in fixed annuities. Customers have shifted their preference to variable annuities as the equity markets have improved. In fixed annuities, we are very much focusing on profitable market share through the management of our commission levels and creditor rates.

Gross variable annuities sales were up 28 percent from a year ago. We had some very good sales momentum, particularly towards the end of the quarter as a result of new product launches earlier this year. We expect continued strong sales in the fourth quarter.

Slide 11, revenue at $5.3b is down from a year ago, primarily due to lower U.S. dollar, which cost $400m of the decline, and the remainder is fixed annuities. You can see in fee income $707m of that decline, $76m is currency representing a positive increase from last year after giving effect to the currency. Investment income was up, life and health premiums are up and annuity premiums are down, as I mentioned, because of fixed annuities.

On slide 12 you can see that we are continuing to make good progress with regard to productivity. Non-MFS expenses on the left-hand side of the page are down $7m from a year ago. Exchange is an important reason for that, but even excluding exchange, our expenses are up only 3 percent from a year ago. Our productivity has improved significantly with our expense ratio down to about 17 percent from close to 19 percent a year ago.

On the right-hand side of the page, similarly in MFS, the lower U.S. dollar had an impact on our expenses, but excluding the currency differences, expenses were up 3 percent. Sales were up significantly more and as a result, the expense ratio dropped to 46.7 percent, the lowest they have been in quite some time.

Turning then to asset quality, our credit status is improving with losses of $20m this quarter compared to $128m a year ago, and $38m in the previous quarter. This is also reinforced on slide 14, where you can see that our impaired assets decreased to $806m this quarter from $810m in the second quarter and almost a billion dollars at the end of 2002. We believe we are well provided for these assets, and I might add that we employed a conservative definition of impaired assets. Many of the names on the list are actually current on their payments.

Turning then to our capital position, on the left-hand side you see our debt to total capital ratio which was reduced as a result of the buyback of debt of $165m this quarter and the ratio now stands at 21.4 percent, down from 22.6 percent a year ago.

The MCCSR was reduced to 242 percent, partly because of the debt buyback I just referred to, and partly because of share repurchases. For the quarter, we repurchased 5m shares. Year to date we have repurchased 16.5m shares for $471m.

On slide 16, SLF Canada earnings were strong at $206m, up 19 percent from a year ago as the Clarica transaction is exceeding expectations and it is turning into a very successful acquisition. Earnings were $10m lower than last quarter because of a special item in the second quarter. We look for continued growth in earnings from Canada as the integration proceeds.

In the United States, on slide 17, we had earnings of $97m, of which approximately $20m is non-recurring because of various reserve changes. But excluding this item, earnings were still strong despite the weaker U.S. dollar, a reflection of improvements in the equity markets, asset quality and a reduction in expenses in the United States. In addition, I might add, that the new fixed annuity business written is achieving target profitability.

Slide 18, MFS assets were up $4b compared to a year ago, despite the impact of the currency which reduced the asset level in Canadian dollars by $27b. Sales were $6.5b and market improvements contributed $24b from a year ago. On the right-hand side of this slide you can see that earnings were up to $49m from $42m last quarter and $39m a year ago.

The weaker U.S. currency reduced earnings by $6m, excluding which earnings are up 41 percent from a year ago. This is clearly indicating the earnings power of MFS under good market conditions.

Asia, on slide 19. Asia earnings continue to improve as the profits from the more mature operations are reinvested in India and China. As Don mentioned, we just received a license to open in Beijing and we will continue to invest in the region.

In the United Kingdom, earnings were $63m, primarily due to a settlement with the tax authorities which meant an increased earnings by approximately $15m. Excluding this, earnings are in the $40m plus range, which is quite sustainable.

I should add that in the corporate section, for which I don’t have a slide, we had a series of events such as the debt buyback which I referred to earlier, some reserve strengthening and other transactions which reduced earnings by $30m this quarter. So if you add up the $30m negative in the corporate area to the $15m positive I mentioned to the United Kingdom as a result of the tax settlement, the $20m positive in the United States and some other smaller items, the earnings for the quarter in the aggregate represent a quality recurring earnings of the organization.

My last slide, I have attached a statement of source of earnings for the first half of 2003, and I will just go through that line by line. The expected profit is increased in 2003 to $896m, which is a result of the Clarica acquisition, offset by the impact of equity market conditions on assets and earnings. We continue to report net business strain of $144m but less so than last year, because of product mix changes.

Experienced losses amount to $17m, which is primarily due to currency drop, the lower U.S. dollar of $50m, excluding which we would have had positive experience gains. The change of assumptions added $38m this quarter, reflecting expense and mortality risk reductions. This compares to $94m all of 2002, so it is actually on an annualized basis less than it was last year, and reflects close to 100 changes in individual assumptions throughout the actuarial portfolio.

Surplus is up as a result of the Clarica acquisition. The tax rate is in the low 20’s, the 23 percent, 24 percent, is really a sustainable rate at that level. All of that leads to operating earnings, as you can see at the bottom, $709m, up 23 percent from a year ago which is precisely what we reported for the first six months. This concludes my presentation, and Bob Astley, president of SLF Canada will now update you on the progress made in Canada.

Thanks, Paul, and good afternoon everyone. Starting with slide 23, I will be providing comments on the integration progress which is nearing successful completion, along with an update on our third quarter business performance. I will wrap up with some thoughts about maintaining momentum in the fourth quarter.

Slide 24 shows the key metrics relating to the integration effort. As mentioned earlier, we delivered accretion equal to 6 cents a share in this quarter for a total of 19 cents year to date, compared to our target of 20 cents for the entire year.

The monthly savings run rate at the end of September was $17.9m. Using this run rate to project savings for all of 2003, we have achieved over 80 percent of our $270m target for 2004. Progress is on target for the reduction of permanent positions and integration costs remain on plan. And as noted earlier, integration is on track to wind up at year end.

Now let’s review how we measured up against some key integration milestones. On slide 25, note that we have reached all of the key milestones set out for the third quarter. We are particularly pleased that the Canadian investment business unit has completed its integration ahead of schedule, under budget and with additional synergy savings.

Plans to convert Clarica Universal Life policies to a new platform and to issue all retail life products on a single system have been completed. At the same time, both group retirement services and group benefits are on page to complete their clients and plan sponsor conversion. Group retirement services, for example, have completed 92 percent of client conversion, representing over $8.5b of assets under administration.

In addition, 77 percent of systems conversion projects have now been completed, with the balance of work currently underway. Slide 26 shows key milestones for the fourth quarter. At our year end call I will provide a summary report of all of our key integration achievements.

Now, if you’ll turn to slide 27 we will review third quarter business performance. As Paul Derksen noted, net income of $206m for the quarter is up 19 percent compared to the corresponding quarter a year ago, while capital dedicated to the business is down 1 percent. Accordingly, return on equity improved strongly from 9.9 percent to 12.0 percent.

Moving on to slide 28, the results in retail life and health sales were satisfactory, when taking into account the effects of seasonal patterns and the decision we’ve made to place one of our products on a more profitable footing.

On slide 29 we note group benefits experienced positive net sales once again this quarter, as they have since the beginning of integration. They are on track to exceed growth plans for 2003. Customer retention is solid and we have received positive feedback from recent client surveys.

During the quarter, group benefits and group retirement services jointly received the ITX award for IT leadership for our integrated web site for plan members. As Don Stewart mentioned, group retirement services were awarded the savings and profit sharing plan for Canadian-based employees of Falconbridge Limited. This agreement covering 2,500 employees and representing over $280m in U.S. under administration becomes effective November 30th. And, in a recent survey, one of our top 3 clients rated their satisfaction with conversion has an 11 out of 10.

To conclude on slide 30, we approached the last quarter of this year with great optimism. We met integration milestones each and every quarter, on track to reach cost targets, and with the finish line in sight, we will complete our integration on time.

Despite experiencing a year of unprecedented change, we have worked together to build the business and integration milestones, an effort that has required total dedication and commitment. We are proud to announce for a second consecutive year Sun Life Financial has been named as one of Canada’s Top 100 employers.

We are well-positioned to move into 2004 and to have the heavy lifting of integration behind us, just as others are beginning to plan for theirs. We now turn our sights and our energies to optimizing our integrated companies. I have to admit, it feels great. So I look forward to speaking with you at the year end call. Thank you, and I will now turn it back to Tom Reid.

Thank you, Bob. Before we start with the question and answer portion of our call, I would like to emphasis 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 only ask one follow-up question after your initial question, so that would make for two in total. Should you have any additional questions, we invite you to rejoin the queue. So with that, operator, I would ask that you please poll the callers for questions.

Thank you. (Operator instructions) Your first question comes from Jamie Keating from RBC. Please go ahead.

Operator, we can’t hear Jamie, if he’s asking a question currently.

It will be one moment, please. The next question comes from Steve Cauley of TD Newscrest. Please go ahead.

Operator, we are not hearing anything from Steve Cauley either. Is there a problem?

It will just be one moment. The next question comes from John Hall of Prudential. Please go ahead.

Thank you. My first question has to do with MFS and the situation in the U.S. and mutual fund industry. Could you talk about how MFS is positioned, whether there are any timing issues for them?

Operator, we’ll get John Ballen to answer that, please.

Sure. You know, we have policies at MFS. We reject hundreds of trades even prior to the current events that we feel might be detrimental to the shareholders, and that is our policy.

Okay. Paul, I have a quick question about the experienced loss in the quarter from the sources of earnings.

Okay. Yes, John?

I was wondering if you could just tell us what the gain would have been, ex-currency.

The currency amounted to $50m, so the gain would be $33m.

Thank you very much.

Our next question comes from Jamie Keating of RBC. Please go ahead, sir.

Thanks very much, can you hear me now?

Yes.

Terrific. I was just hoping, I don’t want to ask the same question, I want to circle back to the $20m reserve change in the U.S. operation and just get a little more color about that. I was curious if you could, Paul, perhaps reconcile some of your ins and outs there just to give us an idea of how, in the end analysis we are roughly even?

Sorry, which analysis are you referring to?

I guess on slide 17 you alluded to some of the reserve changes influencing non-recurring, a non-recurring reserve change. And I think broadly speaking, in proposing that with Fx but I’m not sure, some other one-time items that the net impact was roughly zero. I was just wondering if you could share the reconciliation with us.

What I said was we had about $30m negative in the corporate area, related to things like the debt buyback, which we paid a premium for; reserve strengthening and some other transactions. That was the negative. We had a positive of $15m in the United Kingdom which is primarily related with the specific settlement with the tax authorities which enabled us to free up some reserves there; and, the $20m in the United States is primarily a result of a continuous review of reserves and assumptions related to reserves, which freed up $20m. So in the aggregate, there are some other smaller ones as well, which I won’t go into detail, they don’t really stand out. So in the aggregate within a reasonable range the earnings represent quality recurring earnings for Sun Life.

That’s helpful Paul, thanks. I was wondering if I could just follow up on generally your foreign exchange adjustment influences, and I don’t know whether there is a way to get more of a comprehensive view of this. Specifically, for example, on slide 10 you alluded to the adjustment benefit that you would show if you’d been reporting in local currency your variable annuity sales, and I think you indicated the growth rate would have been 28 percent or higher.

Now the question is simply, Paul, would it be possible to somehow follow up with going through a number of the sales and revenue line items with local currency, to understand what the underlying volumes are, or if it is already disclosed I apologize, I wonder if you could just refer me to it.

Slide 10 actually, that is a good point. Slide 10 I didn’t really comment on the currency there because it happens to be in U.S. dollars, but in terms of all the other items, perhaps in the supplementary, if you have specific questions on line items I would be happy to provide it to you.

That’s great, I will just follow up with Tom or with you Paul, that’s fine.

Our next question comes from Steve Cauley from TD Bank. Please go ahead, sir.

I have a follow up. Paul, it’s just back to that reconciliation where things net to basically zero. Can you say on the corporate side, you mentioned reserve strengthening. Can you mention how much that reserve strengthening was, and to what it pertained to?

We have a number of discontinued businesses in the corporate area. We had the, in addition to the debt buyback, of course -- I don’t have each individual item broken out specifically, but the debt buyback was roughly $14m then we had reserve strengthening and then we had some other transactions which added in the aggregate to about 30, but I don’t have the specific numbers at hand.

Let me ask this another way, Paul. Why should I consider this reserve strengthening to be one time? Because they are discontinued businesses that for sure will go away?

Steve, what we do on a regular basis is review our actuarial reserves and we adjust them based on the experience that we have. That is a quarterly issue, every quarter we go and do that, so every quarter we will have some pluses and minuses in the different areas. What I try to do is focus on the franchise fundamentals. In other words, what drives our earnings. I comment on those areas that happen to have a result of actuarial adjustments which do not really go to the basic quality of the business. So those items I have identified for you so you can come to your conclusion in terms of the earnings for the quarter.

Maybe we can take this offline, because really, I can see the $14m. I can see that. I can’t see the other $16m in that negative $30m corporate. Maybe if you could add some further details afterward that would be great. And then, the $20m reserve in the U.S. business, you were mentioning there as well there was continuous review of reserves and assumptions.

To some extent, reductions that we are experiencing there, which had the impact of reducing reserve requirements and again, that is a positive that we will consider to be specifically not recurring on a quarterly basis, so we have some positive and negative adjustments that I just summarized for you.

And my one question is for Bob or for Barry Trollier if he happens to be on the line. You mentioned, Bob, that the Canadian individual sales, that you were putting a specific product on a more profitable footing, I think was your quote. Can you talk about that, and maybe in general why individual insurance sales are falling and I think -- I don’t have the number on the top of my head, but I think you went to 4,092 agents, just down a little bit in the quarter. What are you doing to get the individual insurance sales moving again, and are all these losses maybe specifically, are they in the wholesale network and what can you do to be a wholesale presence.

It’s Bob Astley, Steve. Thanks for that question. With respect to insurance sales, the first comment I would make is that the specific product I cited is the level cost Universal Life, level cost of insurance, Universal Life. That was a product that we re-priced in the first quarter of the year because it wasn’t meeting our profit hurdles and that has had a dampening effect on sales throughout the balance of the year. I would say that we have some concerns that the industry is not pricing that particular important product adequately, and we are determined to put ours on a sound footing.

In terms of the sales performance in total, some of the shortfall has resulted from a conscious decision not to serve certain parts of the channel that we found uneconomic to serve, going back to the beginning of integration. I will say that within our independent career advisor channel, that’s the Clarica branded channel, that sales over the third quarter were just about right on a plan and showing good momentum through the summer and we continue to see that momentum carrying through into the fourth quarter.

So our emphasis really has been on profitable sales, all the way through with good margin. And I will say too that in the first half of 2004, we will be returning to product development to ensure that we have an up-to-date lineup out there.

And that’s specific to the wholesale side?

It’s had much more of an impact on the wholesale side, absolutely. On the second question, concerning the number of advisors, Steve, I would note that compared to mid-2002 we are actually about flat, so while we’ve seen some modest decline in the year 2003 during all of the integration changes, we are now seeing a momentum beginning to improve and looking for modest gains in the quarters ahead. Our plan is for a return to positive growth in 2004.

Thanks, Bob.

Our next question comes from Brad Smith from Merrill Lynch.

Thanks. My question relates to the U.S. fixed annuity sales that are down quite a bit in the quarter. I think you mentioned that there was a consumer preference shift towards variable. I was wondering if you could, I guess the issue that was kind of raising my specter here was the fact that we recently had credited rate changes in the state legislation that I would have thought would have improved the profitability of the product, and yet the sales are falling off.

I guess one way to maybe help put that in perspective would be to talk in terms of your market share in that particular market.

Thank you, Brad. It’s Jim Prieur speaking. The fixed annuity sales were down quite a bit, a large part of this is due to the fact that we’ve been much more disciplined on our pricing. In the marketplace in general fixed annuity sales have come off in the last quarter and that’s broadly true in the market, but we are undoubtedly losing market share. We don’t have any recent market share numbers, they tend to come out well after the end of the quarter, but we would anticipate that our market share would have dropped fairly significantly. The new minimum credited rates of course are in the product, but the fact that we are being more disciplined, of course, means that while the new business is profitable it isn’t as large as we would have liked.

Jim, is that having any permanent impact on your relationships in your distribution? I guess one of your largest distributors is just being unfurled in a merger the other day. Want to talk about that a little bit?

Well that’s right, Suite Bank is one of our larger customers, fortunately so is Bank of America so we are quite pleased that they are combining. A major part of our fixed annuity sales are sole through IFMG. IFMG continues to have a very strong relationship with a whole series of banks in the American market and they are continuing to do very well. What they are doing is they are selling other people’s products, where some of our competitors aren’t quite as disciplined as we are with respect to spreads.

Great. Just as a follow up, I was wondering, with the integration of Clarica, Bob Astley, coming to an end, can you just update us where you are at with your provisions for that integration in the costs? Will you be flat on that account at the end of this?

Yes, it’s Bob Astley speaking. We expect to meet our integration cost budget so there will be no overrun, there will be no under run either. So we’ve managed our operations to operate within that budget.

Thanks very much, Bob.

Our next question comes from John Ruecastle from BMO Nesbitt Burns.

Thank you, and I apologize, I had some technical problems on my side if these questions have been asked. Can you talk a bit about your debt to cap and your MCCSR. Is that the holding company level or is that down at the operating company level?

That’s at the holding company level.

So those are at the top. And the change in ownership at MFS, did I read it right that management bought 1.9 percent more of the business?

That’s correct.

And so where does the ownership now stand, and was there a dilution gain in the quarter at all?

93 percent. And the impact of that is all part of the corporate adjustments that I was referring to earlier.

Okay, and the magnitude, it was not material?

It’s in there somewhere, I don’t remember the number, it is part of that accumulation of issues.

Okay, thank you.

Our next question comes from Tom McKinnon; Scotia Capital.

Thanks. A lot of the questions have been answered, largely due to the reserve changes in the various segments. But I like the source of earnings analysis here, but I can’t seem -- that’s as of the second quarter, as of the first half of the year. I don’t know why it doesn’t reconcile in -- I think you have to go back to the second quarter. It looks like on that one there is only change in actual reserves. It shows six strengthening and let we have 38 releasing coming out of the source of earnings analysis.

Maybe you can look into why those two things don’t reconcile? I think I am looking at the source of earnings slide on slide 21 and then if you look at note 9 in the consolidated, those two aren’t necessarily talking to each other right now, and I am wondering if you’ve got currency things embedded in there or whatnot. Perhaps you can look into that, or is there anybody able to answer that one up front now?

Tom, it’s Tom Reid. In the note to the financial statements it’s summarizing only assumption changes that are kind of actuarial in their evasion, whereas in the sources of earnings you could have an assumption change that was not actuarially driven. An example would be in the second quarter, we would have had an $8m charge related to CI’s changing of its policy with respect to stock-based compensation. So that would have flowed through the sources of earnings as an assumption change, but it would not show up in that note to the financial statements.

Okay, so that looks like the 38 would really be a negative 6 if it was strictly on actuarial assumption changes then, is that right? Then the other 44 is just a bunch of other stuff that isn’t actuarial assumption changes. Am I talking to that one right?

I think -- I don’t have all the numbers in front of me Tom, I think probably we can take it offline, but generally they are not comparable because they are not based on entirely the same information. There is significant overlap, but it is not an identical analysis when you are comparing the assumption changes.

Well just as a note then, going forward when you do this thing if you could have one line in that source of earnings that actually hits bang on to what goes on in the consolidated financials note 9, and then you could have another one that kind of picks up the excess and then we can see what -- and then, all these other assumption changes that happened, this 20, this 15, this 30, those were all actuarial assumption changes, is that correct? They weren’t other assumption changes that are non-actuarial in nature?

They are in the third quarter, not in the first six months, so you wouldn’t be able to tie those in to the sources of earnings anyway. But I liked your suggestion, we will take a look at seeing how we can reconcile some of those points, so it becomes easier to understand for you next time.

Okay, thanks very much.

Our next question comes from Timothy Lazarus from Griffits McBurney.

Hi, thanks. I would like to ask a question about MFS. I am looking at slide 18, and I guess if you can use these terms, from the trough of $28m worth of earnings to sort of where we are right now at $49m worth of earnings. I think you mentioned that there was $6m negative to the earnings in the quarter due to the Canadian dollar strengthening. That would make you about $55m this quarter on a normal currency basis. That’s a dramatic increase in earnings from MFS.

I am wondering how we can get a sense of what the sensitivity for MFS’ earnings are, relative to the S&P or relative to something else, because I get the impression that it is a very fixed cost organization and therefore the leverage on the upside is going to be quite high. I wondered if someone could just help me with that.

Well Timothy, there are two drivers of the earning changes. One is the market I referred to, and the other one is a point that we also refer to during this call, which is the percentage ownership. So you need to take a look at those. In the aggregate, as we said last year, for every 50 points change in the average S&P 500 you will have a 7 cent change in the EPS.

If you look actually at what we said at our analyst day last year, we said we’d make around 260 if the S&P 500 would be averaging at around 1,000 a day. And indeed, this quarter we are right on that track. In fact, we are overachieving it a little bit if you take into account the exchange. So the 7 cents in the aggregate for each 50 points is a metric that seems to hold quite well.

I apologize, I didn’t understand the difference in the ownership. Does Sun Life own more or less of MFS, and how much now?

The MFS management is purchasing more shares as they exercise stock options from time to time, and that event -- there is a cycle here. From time to time we sell, from time to time they buy, so different quarters we have different ownership percentages, and in order to understand these earnings, you need to take a look at what the difference is in the ownership percentage for Sun Life.

So Sun Life currently owns how much Paul, please?

93 percent currently.

You own 93 percent of MFS this quarter.

That’s correct.

Up from what last quarter?

I don’t know what it was last quarter -- 95 percent last quarter.

Okay, thank you.

Our next question comes from Juka Liepanin from KBW. Please go ahead, sir.

Good afternoon. In terms of acquisitions going forward, what would be your preferences both by types of businesses and geography?

It’s Don Stewart speaking. We are generally looking at the United States and we are looking, at least by current standards of $47b, we are looking at relatively strong acquisitions of the bolt on type typically. A number of group insurance opportunities are coming away and the range is in the $200m to $300m maybe a little more than that, USD $400m typically, a cash type acquisitions, that is where much of our focus has been. We would look at other opportunities and do look at other opportunities as they come up, but primarily it’s the United States, mostly group insurance and smaller bolt on type of acquisitions has been the focus.

Our next question comes from Michael Goldberg from Desjarlais Securities. Please go ahead, sir.

Thanks. You’ve talked about a wide variety of sales trends for the different products and territories that you have. To put it on a common denominator, can you characterize for us or quantify the trend in year-to-date value of new business?

And also, last year you had for the full year $956m of equity experienced losses. Equities are up considerably since then. If markets remain level to year end, would you expect to be in a gain or loss position, and by how much? Thanks.

Michael, with regard to your first part of the question, you’ve heard Jim Prieur and Bob Astley speak to the profitable market share that we are all aiming for. We prefer to lose market share but have profitable business. We prefer to make market share, obviously, but profitable market share is the key, and that is reflected in our value of new business as well. If you look at our value of new business this quarter, it is up around 28 percent from where we were a year ago, reflecting the focus on profitability.

In terms of the embedded value, the amount of adjustments you would get as a result of the equity markets, we haven’t calculated -- I don’t have the number, quite frankly, in my pocket although I will tell you, given that markets are up the embedded value should be improving as a result of that quite significantly, although I would hate to guesstimate what the number would be at this stage.

Okay, now when you say that your value of new business is up 28 percent year over year, there is I guess a portion of that is Clarica. Do you have any idea, like year to date, what that value of new business would be up?

Actually the number that I was quoting to you was the quarter, so the third quarter over third quarter. Year to date I don’t have that on me right now, although I can -- I don’t have that on me.

Okay, we can get back to that offline.

Our next question comes from Mario Mendoca from CIBC World Markets.

Good evening everyone. I think it might be worthwhile to revisit MFS. In the quarter we saw net outflows, I guess about $2b or so. $1.6 -- that was in Canadian dollars, or -- I forget. No, that was U.S. dollars. Let’s refer specifically to September where we saw all funds net outflows of about $1.6b U.S. It was the highest month since I’ve been looking at these charts and these statistics. John, John Ballen that is, can you talk about what happened specifically in September and the reason why I am particularly interested is, because the industry as a whole actually hung in okay in September. Just seems that Sun Life’s market share of net outflows, or contribution to that outflow increase rather significantly. Is there anything interesting going on there?

Sure, thanks Mario. It’s John Ballen. The first thing I would mention is you are looking at outside estimates of what our net sales are, and they can vary fairly materially from the actual results. We did have, as you said, negative flows, so the direction is certainly correct. The third quarter is seasonally soft in terms of sales. That certainly is one factor. There was a lot of media reports regarding mutual funds, that certainly I am sure impacted both the sales and redemptions.

Finally, it tends to be a pretty lumpy business and that is why we don’t disclose the monthly results. As well, we had pretty good money market redemptions as did the industry, the industry had about $31b of net redemptions for the industry, I think 45 or so was out of money markets.

Is Sun Life implicated in anyway in those issues that we are hearing about in the U.S. for other large mutual fund companies? Has Sun Life been implicated in any way?

Sun Life or MFS?

Sorry, MFS.

We are, obviously, regulated by lots of agencies and respond to lots of requests. We don’t really report on the status of any reviews that may or may not be going on.

I will just ask this in another way. Have all the requests for information just been of a standard nature? I mean, there are two types of mutual fund companies, we are sort of breaking up into two camps. There are a couple that are very seriously implicated and others that it is just part of the routine of getting everyone to provide information. Which of those two camps does Sun Life fall into?

I think our policies, as I said before, are in the best interests of the shareholders. We haven’t found exceptions to those policies, I think that’s what they are interested in, and obviously we continue to monitor them. If it is going to be an industry-wide sort of thing and in general we adopt industry practices, obviously we would get involved in one factor or another, but we are adhering to our practice and our policies.

John, did you observe any significant market timing withdrawals late in September?

You know, when people withdraw, and this could have been a factor in our numbers, we obviously monitor and police, and my guess is that we could have had some redemptions from investors who may have wanted to violate our policies in the future and rather than get caught in the future, leave before that happened, so that could have been a factor in the numbers. Obviously if they had already violated the policies, we would have already caught them and done something about it, so that would have been -- investors that were in there that not yet had violated any policies.

Okay, and October. What I understood is that October has improved significantly. Maybe you can give us a better flavor for what that means.

Sure, we’ve had flat sales in October.

Okay. And if I can move on to fixed annuities for a moment, Jim you had articulated on previous calls that when rates are moving up a little bit in the U.S. that Canadian insurers might be at an advantage because of our tight asset liability matching, we can actually move our crediting rates up a little sooner than the U.S. insurers that usually do it on a portfolio basis. This quarter felt like one of those quarters. Why do you figure Sun Life is losing market share in an environment like this?

Thank you for the question, Mario. It’s Jim Prieur. It’s basically, I think we’ve been much more disciplined than many of our competitors, and while rates moved up I think rates hit a low in mid-June, they haven’t moved up all that much, they came back off a little bit, you know, they’ve been bouncing around. And if you are very disciplined, then from time to time we’ve been close to being very competitive, but we have been very disciplined throughout this process.

It was a very good point that Paul made about the $20m change in reserves in the annuities line, because we wouldn’t want people to think that the run rate of earnings that you see in Q3 is sustainable. It was very much influenced by the reserve change.

Okay, and then a final question for Paul. Paul, you made a point that the ROE would have been 20 basis points higher had it not been for currency. While I can appreciate the negative impact it has on the earnings, my sense has always been and the math tells me that because the equity, the denominator to that calculation has declined so significantly because of the appreciation of the Canadian dollar, that in fact ROE has benefited by the change in the value of the dollar, not hurt. Do you disagree with that?

Yes, I disagree with that Mario, and indeed that would work if the CTE, the currency translation account and the -- so the ending balance, if you like, moved linearly with the average balance for the quarter. So earnings are based on the specific daily average for the quarter whereas the balance sheet is based on a quarter end number, and so you know, as the math works the positioning of the dollar at the end of the quarter has an impact on the denominator, and the numbers that I just mentioned to you are based on specific calculations in terms of earnings and capital impact as a result of the currency this quarter.

Okay, and when you say down 20 basis points, you are referring to comparing it to Q203 or Q302?

Q302.

Got it. Thank you very much.

Our next question is a follow up from Jamie Keating; RBC.

Actually, yet again Mario covered my questions. I am all set, thanks.

Our next question is also a follow up from Brad Smith from Merrill Lynch.

Paul Derksen, you mentioned that we needed to keep an eye on the ownership level at MFS with respect to interpreting the earnings there. I just wanted to confirm, are there any dilution gains or losses being recognized as the ownership level is changing? Because effectively in the quarter you have sold 2 percent of your interest to the managers.

Some of those transactions are also summarized in the corporate section. I don’t have the numbers with me, but that is one of the number of issues that went through there.

Okay, great. Thank you.

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

Thank you very much, Operator and I would like to thank all of our participants on the call today. If there are any additional questions we will be available after the call on our investor relations line. Should you wish to listen to our rebroadcast it will be available from our website shortly after 6 pm this evening. So with that I will say thank you and good night.

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