Sun Life Financial Inc (SLF) 2003 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. And thank you for standing by. Welcome to the Sun Life Financial Q4 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 hearing 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 on Thursday, January 29th, 2004 at 4:00 p.m. Eastern Time.

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, Sun Life Financial Canada.

The slides to which these speakers will be referring are available on the Sun Life Financial web site. And turning to slide two I’d 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 Stewart.

Thank you, Tom. And good afternoon.

The fourth quarter of 2003 marked the conclusion of a year in which significant operating challenges were met and overcome. Our strategic position has been measurably advanced through the completion of the Clarica integration. We made a significant new investment in the Canadian wealth management business through [CI] [ph]. And sales in our developing businesses in Asia have shown dramatic growth in the latter part of the year.

Operating earnings for the fourth quarter achieved a record level of 69 cents per share, up from operating EPS of 58 cents a year ago, an increase of 19 percent. Operating EPS for all of 2003 was $2.50, up about eight percent from the $2.32 reported for 2002. This result has been achieved in spite of spread compression in the United States fixed annuity business, the dramatic appreciation of the Canadian dollar against the U.S. dollar, and the continuation of unstable capital markets until late in the year. Add the fact that tremendous resources were engaged in completing the integration effort in Canada and the totality of the challenges the company faced is clear. In this context we consider the financial results for 2003 and, in particular, for Q4 to be entirely satisfactory.

Fourth quarter earnings were bolstered by another very strong performance in our Canadian business and strong operating results in MFS. Assets under management at MFS reached 140b U.S. dollars at yearend, up from 113b a year ago. I’ll comment further on MFS in a moment.

In Canada each group benefits, group retirement services, and retail delivered strong results with accretion from the Clarica transaction hitting 26 cents per share in 2003, well ahead of the 20 cents estimated when the transaction was announced in 2001. With the enormous challenge of integration now behind us the Canadian businesses are extremely well positioned for profitable growth. I will take this opportunity to commend Bob Astley and the entire Integration Team for a very successful effort. In a moment Bob will provide a final integration review.

In the United States our group and individual businesses produced solid financial results in both the quarter and year-to-date, with group sales in the fourth quarter up 53 percent from the same period in 2002.

In the Annuities Division while we continued to experience the affect of spread compression with rising level of the equity stock markets will help the recover of this business going forward.

The U.K. has continued to deliver the stable results we saw when we restructured that operation and closed it to new business.

Indonesia, we are very encouraged by the strong year-over-year sales growth in India and China, in particular. We look forward to commencing operations in Beijing in the second quarter of this year.

As a result of our continued financial strength and positive outlook for 2004 the Board of Directors has announced the 24 percent increase in the quarterly dividend to 21 cents per share. In addition, earlier this month we announced the continuation of the share repurchase program under our normal course issuer bid for 2004.

There has been considerable speculation in the press about discussions between MFS and the U.S. Securities & Exchange Commission, and other U.S. regulators. As we announced in our press release of December the 8th, 2003 the SEC staff have provided MFS with notice that they intend to recommend enforcement proceedings against MFS in connection with the potential implications of frequent trading in certain MFS mutual funds and MFS’ prospectus disclosure about that activity.

MFS, as we have said, has been cooperating fully with the regulators. That cooperation has included discussions about the terms of possible settlement with the regulators. Those discussions are confidential, and I am not at liberty to discuss the details. Our investigations to date confirm that MFS did not participate in any scheme to permit illegal late trading nor did any of its senior officers participate in any improper trading activity.

We take these matters very seriously. We’ve done our utmost to cooperate with regulators and we will continue to do so. Our focus is to resolve and to move forward. We have in MFS the strong company with a history of good performance and dedication to the creation of shareholder value. The interests of MFS customers and our overall reputation for integrity and adherence to the highest business standards are critical, and we will take all steps necessary to reinforce these core values.

That is all I am able to say about these sensitive matters at this time. We will communicate further with all stakeholders when we’re in a position to do so.

Paul Derksen will speak to the financial implications as part of his overall presentation. And with that, I’d like to turn the call over to our Chief Financial Officer, Paul.

Thank you, Don.

I will start on slide number four. Operating earnings per share increased to 69 cents this quarter, up 19 percent from a year ago and up six percent from the third quarter. After giving effect to the MFS related charge of $211m quarterly earnings were reduced to 34 cents. The reason for the strong increase in operating earnings per share is the successful acquisition and integration of Clarica as well as the market impact on MFS earnings. As you can see on this chart the S&P 500 daily average increased to 1,056 in the fourth quarter, up six percent from the third quarter and up 19 percent from a year ago. This along with the cost containment increased the MFS U.S. dollar earnings by 95 percent from a year ago.

Currency negatively affected earnings this quarter by six cents or $35m, 12 cents or $72m for the full year. It certainly underscores the strengths of Sun Life’s operations in their local markets.

Turning to slide number five, this is also reflected in operating earnings. $417m, up 16 percent from a year ago, with return on equity at 11.8 percent, up 200 basis points from last year. This increase in ROEs after giving effect to the higher Canadian currency which reduced ROE by 30 basis points. And so we have a very positive increase in organic ROE growth driven by earnings and capital management.

Turning then to the business groups, on slide number six. Canada had a very good quarter with earnings up 20 percent from a year ago. The Clarica transaction was 26 cents accretive compared to a target of 20 cents. Return on equity is up 170 basis points, and the outlook is positive as the integration is complete and the organization is now focused on growth.

I do not have a separate slide on CI Mutual Fund, as CI issues its own financial statements. However, it is important to underscore that under [Bill Holland’s] [ph] leadership CI is now the second largest mutual fund group in Canada. The value of our investment in CI increased approximately by 50 percent to $1.5b over the last year or so.

Turning to slide number seven, group retirement services had excellent sales of $1b in 2003, and it’s now the largest [defined] [ph] contribution supplier in Canada. All customers have been converted to one system which positions the group well for growth in a consolidating market.

Turning to slide eight, individual sales are up from previous quarters, although down slightly from a year ago. The independent career advisors had a very strong sales finish this year, an increase in size by 43 members. This group, too, had completed the integration and is now well positioned to focus on product development and growth.

Group life and health, at the bottom of the page, had a successful year, and despite the integration which required the conversion of 2.2m plan members added a number of blue chip clients including IBM and RONA.

Turning then to the United States on slide number nine, in U.S. currency earnings are $68m, up six percent from a year ago. And the improved credit environment was offset by spread compression in the fixed annuity block. This quarter we maintained a level of [D&BB resource] [ph] despite the very strong improvement in equity markets. In other words, it could have released reserves and increased earnings by approximately $75m but we did not do so, and as a result the CTE increased to 80 percent. What this means is that any further increases in the equity market will positively affect our earnings, and that we are well positioned and will hedged for any declines in the market.

Turning to slide 10, on this chart you can see that the annuity sales recovered from the third quarter, particularly in fixed and index annuities. As you know, we are very much focused on profitable market share. And our new design of a number of annuity products have resulted in sales which are achieving target profitability on a risk adjusted basis.

Turning then to slide 11, individual life had a very successful year in 2003 with its core product sales up 18 percent from a year ago. Though these sales were somewhat lower, but the pipeline for 2004 looks quite encouraging.

On the bottom of the page, group life had an excellent fourth quarter, as well, with sales of $119m, up 53 percent from a year ago.

Slide 20, in U.S. currency MFS earnings increased, as I mentioned before, by 95 percent as the combination of improved equity market and cost containment greatly enhanced returns. As I mentioned before, we did take a charge for $211m this quarter to provide for the potential cost of regulatory and other actions related to market timing.

Slide 13, assets of MFS increased by $27b to $140b from a year ago, up 24 percent. Institutional business is up 51 percent, and domestic funds are up 15 percent. The composition of these changes are shown on the following page.

Slide 14. On the left-hand side of the page you can see that net new sales amounted to $800m this quarter. Mutual fund sales were negative 400m, and managed funds were positive by $1.2b. The mutual fund redemption rate is now down to 21.8 percent from almost 29 percent a year ago, representing an important improvement in the fundamentals.

On the right-hand side of the page you can see that the market improvements increased assets by $10.8b primarily in mutual funds.

Turning then to Asia, on slide 15. For the full year earnings in local currency were up 83 percent which, of course, was a significantly reduced by the impact of the strong Canadian currency. But it shows the funds, a very strong progress, the Asian operations are making in their local markets.

The reasons for the strong increase in earnings is business growth and improved productivity. You can see that revenues for the fourth quarter were down from a year ago due to a high level of single premium sales in the fourth quarter of 2002.

On the following page, sales and local currency were up 36 percent, showing continued growth in the region. Hong Kong sales are trending up. We now have 9,000 agents in India, and we expect to commence sales in Beijing in the second quarter.

Turning to the United Kingdom, slide 17, the U.K. continued to deliver a stable level of earnings at around 20m pounds per quarter, and a ROE in the 20 percent range. We continue to repatriate capital which amounted to 125m pounds in 2003.

The next slide shows productivity, slide 18. Our non-MFS expenses increased in the fourth quarter to 484m but are well below the fourth quarter of 2002. Our expense ratio increased somewhat, as well. There were a number of factors driving this, including the usual increase in fourth quarter expenses, a variety of smaller items offset by currency. We expect the expense ratios to decline in the first quarter reflecting continued cost containment program in the United States and in Canada.

On the right-hand side of the page, you can see MFS expenses continued to decline primarily due to exchange. The reduction in the expense ratio, as you can see on the slide, over the year has been an important contributor to earnings growth at MFS.

Turning then to asset quality, slide 19, gross impaired assets decreased by $106m from the third quarter, primarily as a result of the sale of some impaired assets. Net impaired assets reduced to 333m and to that 34 basis points of invested assets by the end of the year.

Capital management, slide 20. In terms of shareholder return we bought back in 2003 $527m in share and paid $413m in common share dividend. This represents a total return of $940m to our shareholders, and it represents approximately 62 percent of our operating earnings of $1.5b. And our [NCCs] [ph] are increased from 230 percent in the fourth quarter of ’02 to approximately, and we’re still fine-tuning this number, 244 percent in the fourth quarter of ’03. So we managed our capital carefully for optimal shareholder return.

Looking forward then to 2004 we have renewed the normal course issue a bit, and have increased our dividend from 17 cents to 21 cents per quarter, representing a 24 percent increase. If you take our operating earnings of 2003 of $2.50 this represents a payout ratio of 34 percent, up from 29 percent last year. We will continue in 2004 to carefully optimize our shareholder return.

Turning then to my final slide, number 21, sources of earnings for 2003 compared to 2002. The first line shows the expected earnings of the inforce business in 2002 and 2003, and the way the schedule works is that the first line shows what’s expected, and the following three lines then speaks to the deviations from the expected amount. The expected earnings in 2003 were marginally, up marginally, because of the lower markets in 2002 setting a lower expectation for 2003.

New business stream, the line that’s called ‘new business gain or loss,’ represents new business stream, was slightly lower in 2003 because of an improved product design and profitability. Experience gain improved significantly to $96m in 2003 because in 2002 the market decline, cost of losses, which were not repeated in 2003.

Changes in assumptions show negative 96m. They were driven primarily by the increase in the CTE of the [DMBB] [ph] which I spoke to earlier, which amounted to about 75m, the DMBB, and the increases in the CTE of the [GMIB] [ph] which amounted to about 35m, for a total of about 110m, and that reduced the changes in assumption to a negative amount excluding which it would have been positive.

Here the lines are relatively straightforward. Earnings from surplus up slightly because of the improved investment returns this year. Taxes are running at a predictable rate. After that you can see the earnings and non-controllable interest. Non-controlling interest, it contains all operations, leading to operating earnings of $1,520b which is what reconciles with the numbers we showed you earlier on the presentation.

So this concludes my presentation. Bob Astley, President of SLF Canada will now give you an update on the Canadian integration.

Thank you, Paul. And good afternoon, everyone.

As you know, throughout 2003 our focus had been the integration of Clarica and Sun Life Financial in Canada. I’m pleased to tell you that integration has been a huge success. We announced the proposed combination in December of 2001. The deal closed in May 2002, and we immediately began the formidable challenge of implementing our integration plans. 18 months later we completed the largest integration in the Canadian insurance industry.

On slide 23 we posted excellent financial results along the way, and have benefited from the synergies of the integration, as evidenced by our outstanding share accretion, equal to seven cents a share in the final quarter of 2003, for a total of 26 cents for the year, well ahead of our target of 20 cents.

Turning to integration metrics on slide 24, one-time integration costs were within the provisions already booked. Our plan cost savings for 2004 are 270m, and we will meet or exceed that target.

In 18 months we converted almost $1m life insurance policies to a common system, 2,500 group clients representing more than 2.2 million plan members, and $10b of pension assets. More than 200,000 information technology days were devoted to integration. That’s equivalent to about 1,000 IT developers working fulltime for one year. These numbers tell the story of the scale of what we have done, but the real story of our integration is how we’re leveraging our size and scale to create a stronger platform for growth.

We are not simply a bigger version of the former Canadian operations of Sun Life Financial, nor are we just a bigger Clarica. We are the Sun Life Financial Canada that brings together the best of both organizations plus new capabilities.

Moving to slide 25, here are just a few examples of how the whole is greater than the sum of its parts. We have brought together complementary strengths in our investment business, significantly enhancing the scope and depth of our investment management capabilities.

Group retirement services has earned the number one position in the industry in terms of efficiency, with 1,715 plan members served per employee. Clients are increasingly interested in self-serve internet capabilities. Integrating group benefits and group retirement services platform has allowed for seamless access over the internet, providing us with a considerable lead over our competition. Our scale has enabled us to invest in this kind of advanced technology and positioned us to attract new business, as well as retain existing clients.

In retail we have developed a sustainable multi-channel sales model. We now have the size and capabilities to operate with separate brands, products, commission systems, and management, while supporting the different channels through one back office system and one support structure. Combining the retail business has reduced expenses. As an example, the administration unit costs for retail life insurance are 20 percent lower than last year’s.

During integration we strived diligently to ensure that we did not lose with business momentum. As you can see from slide 26, our proprietary retail sales power was greater at the end of integration than it was when the deal closed. On the customer service side, our customer satisfaction ranking by our top 40 Group Retirement Services national accounts increased from 7.4 out of 10 in 2002 to 8.4 in 2003, a huge achievement during the disruption of integration.

Looking beyond tier business accomplishments, we have good people from both organizations contributing to a new shared culture, the underpinning of this new organization. It is the dedication and commitment of our people that truly enables us to succeed.

I will wrap up with slide 27. There are three large players emerging in the Canadian insurance market. We are the first to move forward as a combined organization, with sustainable scale in every business. Simply put, we are energized and well positioned in every aspect of our business. We’re completely focused on meeting customers’ needs in new and innovative ways, and are earning new business as a result.

We are a Canadian market leader, and a vital part of Sun Life Financial’s worldwide operations. We’re in a great position as we head into 2004. And now I’ll turn it back over to Tom Reid.

Thank you Bob. Before we start with the question-and-answer portion of our call, I would like to emphasize that we want to offer the opportunity to ask questions to as many people as possible. Therefore, I would ask that you refrain from asking three and four questions at a time. Should you have additional questions, please feel free to rejoin the queue. And we’ll make every effort to answer all questions. With that Operator, I would ask that you please poll the callers for their questions.

Thank you sir. One moment please for your first question. The first question comes from Timothy Lazaris, JMP Securities. Please go ahead.

Hi. Thank you. Can you hear me?

Yes Tim.

Okay. My question has to do just with MFS. And I am trying to reconcile two numbers. And hopefully you can help me out with this. But on your slide 13 you show assets – I am talking year over year now – of being up about $27b. Is that correct?

Yes.

And then on the next slide – actually, rather than me go through this whole – could you tell me how the $27b breaks down between market and net sales? And then I am also trying to reconcile for something that’s on – that was spoken out at the Salmon, Smith, Barney conference, that said that net inflows were $4.2b in the year. I am just trying to tie all these numbers together.

Tim, I think if you add the numbers on slide 14, in aggregate you get market movement of about $23b, and the net sales of about $4.2b. And it’s – yeah, it’s in the commentary on the slide, on slide 13.

What might be misleading is that you have five quarters on slide 13. And you should only take the last four for that to work.

Oh, okay. And then is it safe to say that, as far as the net flow, because I am looking at something that said that it was published on your Web site – that institutional net flows made up the vast majority of the net flows in the year? And, if so, could you comment on how institutions might, or what their reaction is to, I guess, the current investigation, as it relates to MFS?

Well, you can see the institutional flows in the charts. And we don’t need to – you can add them up if you like, and compare them to the mutual fund flows. I think they’re self-explanatory. I think the behavior of the institutional –

Our team at MFS has been, obviously, in close touch with their clients throughout this time. And they’ve been getting a lot of support in terms of the interaction between MFS and its clients. And this, as I was at some pains to express, is a matter where there has been speculation.

There has not been a public statement on the final resolution of the issue. And I think that’s the point at which we will be able to speak more clearly to the relationships with all of the stakeholders involved. But I think it’s fair to say there is continuing dialogue between MFS and its institutional clients. And there has been significant inflows from institutional business in January.

Okay. I know we’re not allowed to ask a lot of questions. But just theoretically, if you’re adding quite a bit of new institutional business, is it safe to say that gross fees over the average assets at MFS are coming down as a result of institutional fees being lower than retail mutual fund fees?

Well, let me answer the question this way Tim. From a profitability perspective, while the field fees may be lower, the expenses are lower as well. The last incidence is less. And so if we look at it from a present value future business perspective, the mutual funds and the institutional business, profitability is very close.

Okay. Thanks very much.

The next question comes from Tom Mackinnon, Scotia Capital. Please go ahead.

Yeah. Thanks very much. My question has to do with the – maybe Bob Astley can answer it – with respect to Canadian individual insurance. It had a nice up-tick in the fourth quarter in the sales. If you can comment on, I think what you end up getting is probably a better up-tick in the ICA channel than any other channels. Can you comment on sustained ability of this up-tick in sales, the challenges you see going forward, what kind of products you’re putting out, and maybe just a few comments on the Canadian individual insurance marketplace.

Surely Tom. It’s Bob Astley speaking. First of all, the sales in the fourth quarter were very gratifying, as it shows on the chart. And it was mentioned that the ICA had a very strong sales campaign in the fourth quarter. That momentum is continuing. There were no sort of extraneous factors that drove that result in the fourth quarter.

As we’ve said before, particularly with the ICA, there is a fair bit of seasonal variation. But I would also say that we have re-priced all of our products to the level that we believe is sustainable. And, in particular, in February of 2003, we had to raise prices on one of the key universal life products. I believe I have spoken about that in previous calls.

So, as we look forward, we’re feeling very confident about our run rate and about the productivity of the proprietary sales force in particular, which reached a new high in the fourth quarter.

Can you give an approximate breakdown in terms of what you sell in terms of QL or term or whole life? And then just a few other comments on what you see in the insurance marketplace in Canada now.

Tom, I don’t have those figures right at my fingertips. And I would hesitate to try to pull them out of my memory bank, and get them wrong. But perhaps we could get back to you after the call on that particular split. I would say, in respect to the insurance market, that we do see under-pricing in segments of the universal life market, which we have – where we have taken a position that is very much focused on profitability. So, rather than trying to be a price leader, we have in fact seen some sales depart that otherwise would have been made. But our sales our profitable. And that’s the position we’ll continue to play.

Okay. Thanks very much. I will re-queue.

The next question comes from Mario Mendonca, CIBC. Please go ahead.

Just a quick follow-up for Bob. The $42m on page eight, isn’t that mostly car business? Isn’t that the only thing that’s kind of selling right now?

No. In fact, we have discontinued the sale of car business. We do know that car business has enjoyed somewhat of a resurgence.

For another company. Yeah.

For one or two other companies. But we have ceased the sale of car business, because ultimately we believe that it is not in the shareholders’ interest to sell that business.

So we’re talking about some pretty decent margin non-car business then? All that – the whole $42m?

That’s correct.

Yeah, that’s good to hear. The questions that I am a little more interested in is first, a quick question about 1035 exchange. I am not sure if Jim is in the room, if Jim you can talk to this. But 1035 exchanges are gaining a little bit more attention again. I am curious as to how important it was to your variable annuity sales growth in say 2000 and 2001.

Gee, once again, I don’t have those fingers at my fingertips Mario. It’s Jim Prieur answering the question. In 1035 exchanges, I think in 2001, in the industry generally, we’re sort of concentrated among those companies who were the first to offer the bonus products. And so many of those companies, you would have found that well over half of their sales would have been 1035 exchanges.

In the case of a company like Sun Life, it’s been around 50%, depending upon the year, and whether or not you’re introducing new product features. 1035 exchanges are not necessarily bad. Someone who buys an annuity should be buying it for decades. And you would expect that that person would, over the course of those decades, switch products from time to time, to buy products that have features that suit their circumstances.

Just a final thing. Of all your managed accounts or managed AUM within MFS, do you have any sense for how much of that is government or state money versus corporate?

I can’t give you – it’s Don Stewart Mario. I can’t give you a precise quantification of that. But I can say that the majority of the institutional business is not government/state. So we’re not in the same position as perhaps one or two other examples where, as you correctly know, that money is sometimes more volatile. So that’s not as strong a feature.

So we can say less than 50%. That’s honest and fair.

I would believe that’s correct. Yes.

Thank you.

The next question comes from Steve Cawley, T.D. Newcrest. Please go ahead.

A question for Bob Salipan. Bob, could you talk about the fixed annuity market? And as well, while you’re at it, it looks as if you had some pretty good sales on the annuities front. Could you talk about that a little bit?

Very funny Steve. Jim, do you want to answer that?

Yeah Steve. It’s Jim Prieur. Bob’s not here today. So I will take the question. With respect to the fixed annuity business, the sales were up significantly from the third quarter. But they’re very much in recovery mode from the time that we took the actions that we took at the end of the second quarter, which, if you will recall, where we cut the commissions, cut expenses, and made sure that the product was profitable.

So the sales were up. But they were up from a fairly low level. And within the fixed annuity market – and conditions haven’t changed very much in the last quarter. Sales were a little bit stronger for us, as I mentioned. And we continue to be very focused on making sure that the business is profitable on a marginal basis.

What happened with indexed annuities in the quarter?

Sun Life introduced new equity indexed annuities in the last half of Q4. And, in fact, we’ll be introducing some new equity indexed products in about a month. So there is some new product introductions coming along. Similarly, in the variable annuity business, we’ve also introduced – we’re in the process of introducing some new products, with a new funds line-up. And that product introduction will be in about three weeks from today.

Can you compare the margins between the indexed annuities and the fixed annuities on new sales right now?

You tend to look at the businesses very differently. Equity indexed annuity returns, if you look at return on capital, fall somewhere between variable annuity marginal sales and fixed annuity sales. So fixed annuity sales returns on capital would be around 11%. Variable annuity sales would be north of 15%. And equity indexed annuities would fall right between those two.

What was the spreads on the fixed annuities in the quarter?

The spread on new sales ranges from 170 to 200 basis points, depending upon the specific product that you’re talking about. And we’ve been effectively able to pick up that kind of spread on new business.

Thanks Jim.

You’re welcome.

The next question comes from [Chin Shan Soy], UBS. Please go ahead.

Hi. Just a follow-up question on the spreads. You spoke on new sales getting 170 to 200 basis points. Can you talk on the existing book of business, where the spreads are right now? Because – and where it is compared to say the previous quarter?

Sure. When you look at the spreads versus the previous quarter, there hasn’t been much improvement. Basically we have been expecting, and perhaps hoping might be a better word, that as new business comes on at a more attractive spread, the spread on the entire book will improve ever-so-slightly, quarter by quarter.

But between Q3 and Q4 there is essentially very little difference in the spread. We are still very much weighed down by the fact that we have a significant block of the fixed annuity business, which is at the minimum guaranteed rate, and locked in there. So when you look at it on an annualized basis, we’re about 50 basis points away from where we should be on an annualized basis in terms of spreads on the entire block of fixed annuities.

And where is it in terms of absolute levels?

Well, it does vary, depending upon product. So that’s something we could share with you later. But I don’t have that right in front of me.

Okay. And just a follow up question on the variable annuity market in the U.S. You spoke just now about new fund line-ups, and new products you introduced. Can you speak a little bit about the, like what sort of living or death benefits they are being offered together, your products?

Sure. The Sun Life product has got a GMWB/GMAB product feature in the products. And on the new sales, about 30% of our business is going into those features. That’s something I think that is very important. And it’s the thing that people are looking at when they look at product innovation in the variable annuity market.

One of the interesting phenomenon in the marketplace in the last little while has been that a number of the competitors have started to increase the price of those features. I note that Hartford came out with a price increase recently for their GMWB. And Pac Life, which had been very aggressive in the GMAB business, has also come out with a price increase recently.

Okay. Thank you.

Your next question comes from [Jim Badges], Credit Suisse First Boston. Please go ahead.

Hi. Good afternoon. Two quick questions. Could you give us an update in terms of the sales trends on MFS in the month of January? And secondly, in terms of the MCCSR ratio – and I know you paid back almost two-thirds of your capital this quarter – could you give us a sense of your level of excess capital? And [inaudible] ideal capital ratio that you focus on?

It’s Don Stewart speaking. I’ll speak to the first part of the question on MFS sales trends. As we indicated, in January the institutional business was positive. And I am not really able to give you very detailed information at this juncture, other than to say that if you look at the pattern that prevailed over 2003, that is approximately the pattern that’s revealing itself in the first month or the period to date in January of this year. And the institutional business is a fair bit ahead of the retail business.

Jim, in terms of the – it’s Paul Derksen – the MCCSR ratio, the lowest we’ve seen recently is 200, with the acquisition of the combination with Clarica. We wouldn’t like to go much below that at all. And that’s sort of stretching it. And I would like to have a little bit of a cushion above that on a regular basis, until we have some room to reduce it over time, if we decided to do that.

Paul, but the plan would be – it is to return capital similar to what you have done in this past year, somewhere in the range of two-thirds?

Well, we’ve made no specific commitment to that. I mean the market conditions in ’04 may be different from ’03. But I think we’ve proven clearly in ’03 that we are dedicated to optimizing our capital positioning relative to where the markets are. And we’ll certainly continue that strategy in ’04.

Great. Thanks very much.

The next question comes from Brad Smith, Merrill Lynch. Please go ahead.

Thanks very much. I am not sure who would want to answer this question. But I think Jim, you gave us some return on capital information. For the annuity business. And what I was actually hoping to get was something regarding your own returns on capital in those businesses, and perhaps the return on the U.S. life component as well, within the last 12 trailing four quarters, or whatever you have handy.

Sure Brad. It’s Jim Prieur. What I was giving you was the marginal return on capital, based on the pricing that we’re currently enjoying. When you actually look at the annuities business, you can split it into two pieces. And in the variable annuity business, we’ve essentially been around break-even for the last four quarters.

Variable. Okay.

Yeah. In the variable. So the earnings that you see on the annuities line is essentially all from the fixed side of the business. The – as Paul mentioned, the variable annuity business could have released reserves in Q4. But the reserves are now being – they are now at a much higher level. And I think Paul mentioned that, like for the GMDB, the CTE level is about 80, instead of being about 66. With respect to life insurance, the return on capital has been around 20%.

Okay. And is that – can you break that down between your individual and your group life in the U.S.? Or is it - ?

Oh, I’m sorry, that was the individual life business?

Individual. Okay, great.

And the group business has been north of 15%.

Okay. Thank you Jim.

You’re welcome.

The next question comes from Michael Goldberg, Desjardins Securities. Please go ahead. Hello? Mr. Goldberg?

Yes.

Please go ahead.

Yes. Thank you. You have indicated in the past, your objective of increasing your return on equity by about 1% annually over the next few years. And I am wondering if we should be looking, because of the steady increase in operating ROE during the year, should we be looking at the 11.8% in the fourth quarter as the base that you would be hoping to work off of, as opposed to the annual ROE?

Michael it’s, as we said before, we’d like to get to 15%, back to 15%, doing at around a percentage point or so a year. We certainly made lots of progress in the last year, both as a result of earnings increases and the capital management. We will continue to focus on that. And, indeed, we’d certainly like to continue the progress in ’04. I would be disappointed if ROE didn’t continue to increase on a regular basis in ’04.

Thanks.

The next question comes from John Hall, Prudential Equity Group. Please go ahead.

Thanks very much. I have a couple questions. The first one has to do with MFS. It seemed as if the earnings growth sequentially from the third and fourth quarter trailed the average assets under management growth. I was wondering if you would comment on that. Also, comment on where all the expenses associated with the investigation are showing up.

Okay. With regards to the expenses on the investigation, those are being run through the income statement. So we had additional expenses in Q4 as a result of that. With regards to the percentage of assets, I am not sure exactly what you – I mean the assets are not – didn’t go up by 95% in Q4. I think you have to look at it on a longer term. It’s hard to look at it on a quarter by quarter basis. And so if you look at it on an annual basis, I think the profitability has clearly enhanced in excess of the asset growth.

But any incremental expenses would have been on the MFS income statement in the fourth quarter?

That’s correct. Absolutely. Their expenses were higher than we would have otherwise expected.

Okay. And could you provide a rationale as to why you didn’t release any of the GMIB or GMBD reserves?

It’s part of our approach to hedging and anticipating the movements in the marketplace. I think it’s very much supported by the actuarial science, which calls for when the market increases, higher reserves, and, based on a mean reversion basis, that if the markets get higher, you get higher reserves. If the markets go lower, you can go a little – reduce your CPE. This is very much combined with our hedging strategy, where we have a basket of puts underneath it, to ensure that we continue to create shareholder value.

And finally, with the charge that you announced and put out to the public, can you comment at all in terms of the components?

As you know, we have not reached a settlement with the regulatory authorities. What we have provided to you is a testament, based on what we know. When we have the settlement, we will give you the full breakdown at that time.

Thank you.

The next question comes from John Reucassel, BMO Nesbit Burns. Please go ahead.

Thank you. Just a clarification. The CTE, you’re at 80. And you talked about the $75m reserve released. Is that – are you telling me if you take that down to CTE 66, what Jim Prieur said, is that the $75m in release you were talking about?

Yeah. There was no reserve released. And the way to think about it is that we didn’t change the reserve. So we left the reserves where they were, even though the markets went up. And so what moved was the CTE, as opposed to the reserve. So the CTE went from sixty-some to 80.

Okay. I guess what I am asking Paul is, if you had to take – the $75m, if you had released it, what would that have taken your CTE down to?

Had we left the CTE in the mid-60s, where we were in the third quarter, the earnings would have increased by $75m after-tax.

Got you. Okay. Great. And just the last question is, can you give us a quantum on the MFS legal expenses in the quarter? I think some of us here are struggling with – the sequential growth in earnings from MFS looked a little light versus Q3, given the market. And we’re just trying to understand, once this is behind you, what the margins will look like. So do you know how much they were in the quarter, on a pre or after tax basis?

I don’t have that information right here. But we can look it up and provide it to the people who are interested.

Okay. Thanks Paul.

You have a follow-up question from Tom Mackinnon, Scotia Capital. Go ahead.

Yeah Paul, I guess with the likelihood of the market continuing to go up, that you’re going to stick to the 80, and then release anything in excess. Is that safe to say? I think that’s kind of what the CIA says, it’s going to max the balance sheet for – the balance sheet CPEs are? Am I correct in that?

That’s correct. So on the up side, we’ve had to – you’ll see some of that hitting the bottom line. On the down side, we can – we have this hedging program I spoke to earlier, and follow-up reserves to ensure that we continue to create shareholder value.

And I don’t know – I think there was a question asked about what your excess capital position is right now. Everybody defines excess capital as being different things. But in the supplemental on page 16, none of the MCE CSR specifics are provided. Can you give us - ? I mean we just got a 244 ratio. Do we have any ideas of available and required here? Do you want us to try to figure any of these things out ourselves?

No. We’ll provide you that information. It’s just that part of the year in process. We want to make sure. We have to go through a number of different hoops. And we didn’t have it available for this call. But as soon as we have it, we’ll make it available to you.

Okay. Thanks very much.

Okay.

You have a follow-up question from Mario Mendonca, CIBC. Please go ahead.

It was asked and answered. Thank you very much.

You have a follow-up question from Timothy Lazaris, JMP Securities. Please go ahead.

Thank you Paul. Has your ownership in MFS changed at all in the quarter? And the reason for the question is you show $49m of operating earnings in the quarter, and then $37m attributed to Sun Life. And I am trying to figure that out.

It didn’t change in the quarter at all. So I am not sure – the follow-up part of the question I didn’t quite get. The ownership percentage didn’t change.

Tim, the $37m is in U.S. dollars.

Yeah. Okay. I got it. Thank you.

What we’ve done actually, to provide clarity on the earnings patterns of the different business groups, we have stated both MFS and U.S. businesses in U.S. dollars, and then translated it to Canadian currency afterwards, because it’s getting too complicated to try to, in every line, assess what the currency impact is. So that’s – it might be a little bit confusing at first. But it just helps in the analysis going forward.

So just, as a refresher, the ownership is still around in the low 90s?

That’s correct. It hasn’t changed at all.

Thank you.

You have a follow-up question from Steve Cawley, T.D. Newcrest. Please go ahead.

A question in regards to MFS. The numbers that you provide on the income statement for MFS are commissions and other expenses. Could you tell us roughly what percentage of MFS’ expenses are variable versus fixed? And then follow up with that, and comment on whether or not – I know that MFS has done quite a bit in terms of re-trenching and cutting costs. Is there still that flexibility to cut costs?

Steve, I’d say I don’t have, obviously, right with me the variable/fixed breakdown of those expenses. But we can look that up and have a discussion on it afterwards. I think MFS has done an outstanding job of reducing expenses over the last number of years. And, indeed, it is much harder now to reduce expenses than it was two or three years ago. And so while I am sure they haven’t run out of room yet, it is getting increasingly difficult to make a material reduction in expenses.

Okay. A follow up as well with Bob Astley. Bob, you were hinting on your section that you were saying that there was the potential of surpassing the original synergy expectations. This quarter, then, wouldn’t represent, in terms of your expenses or your expense ratio, the best that you can do?

This is Bob Astley responding Steve. No. In fact, the fourth quarter had some non-recurring items contained in it, which we regard as certainly not part of the ongoing pattern. When I said that we would meet or exceed our synergy targets for 2004 and beyond, I would certainly stand behind that statement. But I don’t want to leave the misimpression that we have all kinds of extra room above that, because that wouldn’t be a correct impression.

Okay. What were those one-time type items that you were mentioning? Was it in regards to employment? What was it in regards?

There were a number of small things that were really not related to ongoing operations, such as writing off some capitalized software from many quarters earlier, that sort of thing.

Did it amount to a big number?

They were meaningful dollars Steve. I can’t recall the precise number. I don’t have the precise number in front of me. But if one looked at the pattern, you could see that the fourth quarter was sort of out of pattern from the three previous ones.

Thanks Bob.

You have a follow-up question from Michael Goldberg, Desjardins Securities. Please go ahead.

Thanks. Looking at the sources of earnings that you’ve provided, and the experienced gains and losses, what is the assumption, on average, of equity market appreciation that was built in for each of the two years? And what assumption are you using now for 2004? And, if in fact you were – the markets were to appreciate by the amount that you are assuming, what level of those reserves that we’ve been talking about do you think you might be able to release in 2004?

Okay. That’s a lot of questions Michael that are quite detailed. But Bob Wilson is with us here. And we’ll test his memory to see if he can help you out with some of these answers.

In 2002 Michael, the assumption for stock market growth for North America, which is the big one that matters, was 8%. And I believe 2003 was about the same. I think it was actually about 7%. 2004 plan – I’ll pass that to someone who worked on the plan.

Yeah. We don’t have the plan number here.

Well let’s suppose it’s still 7% again. What would 7% capital appreciation lead to in terms of release of those reserves, if you were holding at a CTE 80?

I don’t think we – that’s quite a calculation to do on the fly here.

I can’t do it in my head Michael. I mean at some point, if the market goes up enough, and over, and over a brief enough period of time, you get down to where you can’t release any more reserve, because you’re limited by account value minus [DAC] [ph] on the CIA standards.

So it is not just a linear calculation. There is all kinds of elements to it, that are not intuitive. It’s hard to draw intuitive conclusions from that.

Okay. Maybe you could get back to me or something. Okay. We’ll take a look at a way to answer that question, in a way that’s helpful to you.

One way that might be – to think of it Michael, is what did the S&P go up in the fourth quarter, where it went up by basically 10%, a little over 10. That would have been a $75m reduction. If it goes up by another 10, one guesses that the amount might be $75m.

Okay.

That’s a guess that is subject to a lot of modeling and such to make sure that it works.

Right. Well, maybe if you can do a little bit of back of the envelope, you might be able to get back to us, even with some rough idea of what that might amount to.

Okay. Yeah, we will do that Michael.

Thanks a lot.

Operator, I think we just have time for one more call.

Thank you. The last question comes from John Hall, Prudential Equity Group. Please go ahead.

Thanks. I just have another question in terms of clarification on the variable annuity CTE 80. You said that if the market goes up from here, you release. If the market goes down from here, would you also then add to reserves to keep it at 80?

Do you want to speak to that Bob?

The level of CTE that we pick will depend upon the level of the market. In general we consider that if the market is incredibly low, for example when the market was – in August of 2002, when the market was at a level that it hadn’t seen in quite some time, that we would have a very low CTE. With the rapid run up in the market in the fourth quarter, we felt that perhaps the market was getting a little ahead of itself. So we increased the CTE. So the CTE can be expected to drift down as the market drifts down.

With the change in accounting that came in with regards to derivatives and hedging instruments in 2004, the hedges will be at market going forward. So there will be movement, no matter which way, in our hedges as well, that complicate the income result, so that the income gains if the market goes up will be tempered. And the income hits as the market goes down will also be tempered.

Okay, great.

Thank you. Operator, I think that’s it.

Thank you sir. Please proceed with your closing remarks.

Thank you very much. I’d like to thank everybody who participated on the call today. If there are any additional questions, we will be available after the call. And should you wish to listen to a rebroadcast, it will be available from our Web site I think just after 6:00 p.m. this evening. And with that, I will say thank you and good night.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating.

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