Sun Life Financial Inc (SLF) 2004 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Sun Life Financial Q1 Results 2004 Analysts 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, April 29th, 2004, at 4:00 p.m. Eastern Time.

And 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'm going to start by introducing the members of the management team present for today's call.

Hosting the call, we have Don Stewart, Chief Executive Officer of Sun Life Financial, Jim Prieur, President and Chief Operating Officer of Sun Life Financial, and Paul Derksen, Executive Vice President and Chief Financial Officer. Bob Wilson, our appointed actuary, will present on embedded value. Also available to answer questions are Bob Astley, President, Sun Life Financial Canada, Bob Salipante, President, Sun Life Financial U.S. Claude Accum, Chief Actuary in the U.S., and Rob Manning, who is Chief Executive Officer, President and Chief Investment Officer at MFS.

The slides to which the speakers will be referring are available on the Sun Life Financial Web site. And turning to slide two, I would draw your attention to the cautionary language regarding forward-looking statements, which form part of this afternoon's remarks. This slide reviews the reasons why forward-looking statements could be rendered inaccurate by subsequent events.

And with that introduction, I'll now turn things over to Don Stewart.

Thank you, Tom, and good afternoon. This quarter is our first opportunity to report financial results after the completion of the Clarica integration. And Canadian results confirm the operational success of the transaction.

Earnings in Canada are up 33 percent over the first quarter of 2003, with improved equity and credit markets and higher earnings from CI contributing to the increase. Although individual insurance sales in Canada continue to be lower than we would like, the overall sales story is very strong. Our independent career advisors were extremely successful in selling CI funds. In fact, net sales through the ICA represented 30 percent of net sales across the entire CI complex, achieving the highest level since 1999, and reinforcing the power of our strategic partnership with the second largest mutual fund company in Canada.

The dramatic improvement in Canada contributed to a 24 percent increase in total operating earnings from the same quarter a year ago, hitting a record of CN$425m. Operating earnings per share at 71 cents were also a record. Operating return on equity improved by 270 basis points over Q1 of '03, as we continue to deliver on our promise of increasing ROE by 75 to 100 basis points per year.

Turning to the United States, stronger equity markets contributed to a significant improvement in the annuities business, driving U.S. division earnings up more than 100 percent in U.S. dollars terms and raising ROE to 10 percent.

At MFS, operating earnings in U.S. dollars were up 94 percent from the first quarter of '03. Assets under management finished the quarter at US$142b, as higher equity markets and positive variable annuity and international fund flows offset net redemptions in retail mutual funds.

At MFS, we have moved quickly and decisively to take the initiative in developing pro-shareholder practices, that is fund shareholder practices, under a new leadership team. We've implemented meaningful industry-leading reforms designed to strengthen fund governance and tighten business practices. These have been very well received within the U.S. mutual fund industry. We've ended the use of soft dollars and instituted measures to discourage rapid trading.

Morningstar, our leading mutual fund rating company in the United States and Canada has upgraded its opinion of MFS, in particular, citing recent reform initiatives.

I note that as we previously disclosed, Sun Life Financial and its U.S. affiliates are cooperating with the SEC in its ongoing industry-wide investigations into market timing related issues and directed brokerage and revenue-sharing arrangements with distributors.

I turn now to Asia. Rapid growth in sales continued through the first quarter. Sales in India for the 12 months ending March 31, 2004, were 191 percent higher than the same period a year ago. And in China, I'm delighted that we've begun active business in the capital city of Beijing.

We're seeing strong improvement in financial performance across all of our businesses.

And I'll now hand over to Paul Derksen to provide you with a more in-depth look at the results. Paul.

Thank you, Don. As Don mentioned, we had a record quarter with very strong earnings, return on equity and sales growth. Our first slide, slide number four, shows you our earnings per share, compared to daily average S&P 500. The S&P 500 was up 31 percent from a year ago, which was reflected in our earnings.

Our operating earnings, at 71 cents per share, were up 27 percent, relative to the 56 cents we earned in the first quarter of '03. They were up 2 cents from the fourth quarter. The MFS settlement cost us 10 cents this quarter.

On the following slide, the chart shows us how our operating earnings have been trending positively each quarter over the last year. They are up 24 percent, slightly less than our earnings per share because of share buybacks in 2003.

Operating return on equity is up to 12 percent, from 9.3 percent last year, up 270 basis points. Our plan is to continue to increase return on equity by 75 to 100 basis points per year on an organic basis and we are clearly exceeding that target.

On slide six, turning then to the business groups, Canada had a record quarter with earnings at CN$245m, up 33 percent year over year. We had a very strong RSP season. As Don mentioned, Canada's funds sales made up 30 percent of CI sales, underscoring the importance of the partnership between Sun Life and CI.

Items driving the earnings increase over the first quarter of '03 include the benefit of the Clarica integration, improved equity and credit markets and increases in CI earnings. As a result of all that, ROE grew by 280 basis points to 13.5 percent.

Slide seven, as I mentioned, retail in Canada had excellent sales results during the RSP season. Wealth management sales at $744m were up 42 percent from a year ago. With the sales force focusing on wealth products, total individual sales were off 10 percent year over year, while health products were up 25 percent.

Slide eight, defined contribution plan assets, have grown significantly and are up 25 percent year over year. Earnings are up 21 percent, as GRS continues to be the number one provider of defined contribution plans in Canada.

Slide nine, group life and health had an excellent sales quarter as well, $97m compared to $66m a year ago. During the quarter, we closed some very high value accounts and the business in force has continued to grow, is up 6 percent from '03.

Turning then to the United States, the U.S. also had a very strong earnings compared to a year ago. Income and return on equity doubled from the first quarter of '03, as increased annuity earnings offset lower individual and group results. Strong equity and improved credit markets contributed positively.

On slide 11, annuity sales improved significantly this quarter, with net sales of $147m, 2.5 times last year's levels. Strong sales of the indexed annuity products and improvement in variable annuity sales offset reduced fixed annuity sales. And this is primarily a reflection of customers' preference for equity products.

We are very pleased with the progress made in the annuity business, as we are now selling the product at our target margins on a risk-adjusted basis.

U.S. individual life also had a very positive first quarter, with sales double of what they were last year and individual sales up 82 percent from the fourth quarter. Improvements came primarily from high net worth products.

Earnings were off somewhat this quarter because reserves were strengthened to reflect the prospective impact of the current interest rates on the profitability of the UL products.

Group life and health sales amounted to $30m after a very strong fourth quarter. Business in force is up 15 percent from a year ago, to $756m.

MFS, on slide 13, its earnings were up 94 percent from last year, as the daily S&P average 500 increased by 31 percent. This, of course, excludes the regulatory-related charge of CN$59m taken in the quarter.

Operating margins were roughly the same as previous quarters, that is before specific expense items of US$22m. And I will speak to those expense items in a moment.

The reduced fees, due to the regulatory settlement, as well as the expense items I just mentioned affected Sun Life's after-tax earnings by Can$12m this quarter. The recurring impact of these items will amount to approximately $7m per quarter going forward.

Turning then to assets under management, MFS assets at $142b. Assets were up 27 percent from last year, with institutional assets up 54 percent. The slide that follows gives you some more detail on the specific flows.

Slide 15 basically speaks for itself. You've seen it in previous quarters. You can see that the flows are off marginally, as the market movements of $3b were positive for a net increase of $2b this quarter.

I will speak next about Asia where operationally, we're making very, very good progress. And indeed, if you ignore the currency movement - it is on slide 16 - if you ignore the currency movements, Asia had a very good quarter, with revenues up 15 percent and earnings up 29 percent. If you include the strengthening of the Canadian dollar, revenue and earnings were flat with last year.

This is also reflected in sales, on slide 17. Asian annual life premiums are up 82 percent from 2003, and that's in Canadian dollars. They are more than double what they were last year in local currency. Very strong growth in India, as Don referred to, and Hong Kong were the main drivers of the sales growth.

U.K. had another very good quarter, on slide 18, with earnings of 19m pounds and a return on equity in the 19 to 20 percent range. Persistency of the block is around 98 percent, pointing continuing high return on equity from this business.

Slide 19, turning then to productivity, on the left-hand of the page, you see non-MFS expenses. They are down from 2003, partially due to currency. Excluding currency, expenses were up a modest 2.5 percent from 2003.

The expense ratio continues to decline, to 17.5 percent, thereby indicating continued productivity improvements.

On the right-hand side, you see MFS expenses increasing to $231m. Specific expenses associated with people, legal and soft dollar replacement costs cost MFS $22m this quarter, as I mentioned before.

Turning then to slide 20, the credit quality for assets was greatly enhanced this quarter. Gross impaired assets were reduced by $356m from the first quarter in 2003, and by $136m from the fourth quarter.

Over $100m of impaired bonds were either sold or restructured during the quarter. The market value of the impaired assets is now more than $100m in excess of book value. Our net impaired asset ratio has shrunk to 23 basis points, further underscoring the quality of our portfolio.

Slide 21, our capital base continued to strengthen this quarter as well. The MCCSR ratio increased to 241 percent, from 230 in the first quarter of last year and 238 percent fourth quarter of '03. Our debt-to-capital ratio decreased to 21 percent.

A convergency of factors, including the anticipated change in the [off c] capital rules is providing us with the great opportunity to further optimize our capital. This is a rather complex exercise in which we need to work with a number of regulators, rating agencies and tax authorities to obtain approvals and advanced rulings.

We hope to be able to make an announcement before the end of the year and see the impact of this in 2005.

Slide 22, sources of ergs, is shown on that chart. You can see the expected profits up from 2003. The new business strain was the same last year, at around $75m. Experience gains resulted primarily from improvements in the equity markets and generally strong insurance results. Assumption change is positive, resulting from positive mortality. And earnings and surplus are up 9 percent because of market conditions as well.

The tax rate is roughly the same as it was last year, 23 percent, leading to our operating earnings of 425m.

In summary, I'd say that we had a record quarter, both financially and operationally. Strong organic earnings growth in the U.S., Canada and MFS, very positive sales growth in the organization, and finally, the outlook continues to be positive, with gradually increasing interest rates benefiting Sun Life going forward.

This concludes my presentation. And Bob Wilson, our appointed actuary, will now take you through our embedded value analysis.

Thank you, Paul. Turning to slide 24, Sun Life Financial's embedded value at December 31, 2003, increased to $16.4b, from $14.2b in 2002, before capital transactions and currency changes. This embedded value includes $1.4b for the embedded value of MFS.

The value of new business written during 2003 increased to $700m, from $634m in 2002, on a constant currency basis, due to strong value of new business growth in the protection businesses of the Company. The strengthening in the Canadian dollar reduced embedded value by $1.8b.

Turning to slide 25, the return on in-force business in 2003 increased embedded value by $1.5b. The expected return of $1.1b was up from $974m in 2002.

Stock market experience increased embedded value by $434m in 2003, versus a decline caused by stock of $924m in 2002.

Other variances and assumptions changes netted to a very small amount.

Capital transactions decreased embedded value in 2003, by $1.4b. These transactions included the share buybacks during the year and the effects of the acquisition of more shares in CI mutual funds.

We have provided, in the other slides, more detailed assumptions and sensitivities, but I will not cover those at this time.

I will now pass the presentation back to Tom Reid.

Thanks, Bob. Operator, I think we're now ready to start with the Q&A portion of our call. So I'd ask you to please poll the callers for questions at this time.

Thank you, sir. One moment, please, for your first question.

Your first question comes from Jamie Keating from RBC. Please go ahead.

Good afternoon, everyone. Nice quarter. I have a couple of quick questions. One is I got a little confused on the MFS expenses, which flipped up. And I apologize for that. I think I'm hearing $22m as the highlighted number of what Paul pointed out. Could you just go over that again as to the recurring, non-recurring portions, if I interpreted that right, for ?

Another question is, well, related to the U.S. reserve strengthening and the linkages to the higher interest rates, could you describe a little more about what the impact of those reserves strengthening were and how it correlates to the rates more specifically? I'm just--I'm curious on a dollar amount, obviously.

Thanks.

With regards to the MFS expenses, the U.S. dollar expenses were $22m this quarter. Of course, the--and then some of those were one time. Others were repeating, but they weren't there the full quarter. And so it's a whole mishmash of elements. Then, of course, you have to take the ownership of Sun Life, of MFS, you have to go through compensation arrangements, you have to assess the tax impact of the U.S./Canadian currency conversion, et cetera. And so if you--the best way to look at it is to say that the recurring impact of all that on Sun Life's earnings is $7m per quarter and was $12m in the first quarter.

With regards to the--I'll speak generally to the interest rate question and Bob, perhaps, could speak more specifically to UL. You asked about the sensitivity of interest rates, I guess. It was a positive thing for Sun Life, as I mentioned. And when we go through our earnings sensitivities, a parallel move in the interest rate of 1 percent should improve our earnings by about 20 cents per year, earnings per share. So as I mentioned, the gradually improving interest rates have a very positive impact on our bottom line.

And Bob Salipante, perhaps you can speak to the UL element of the question.

Yeah. The reserve strengthening that was noted is in the VA line and it relates to adjusting reserves, strengthening reserves for the fixed buckets in the VA product line.

Since you brought it up, I assumed it was a reasonably material amount. Can you give us a ballpark number?

Yeah. It's a modest adjustment.

Jamie, we didn't disclose the number, but it's a small number, immaterial.

Okay. Thanks, Tom.

Your next question comes from Steve Cawley from TD Newcrest. Please go ahead.

Questions for Bob Salipante. You--I think it was mentioned that you're now hitting target margins on a risk-adjusted basis on your fixed annuity book. Can you share with us what that means exactly in terms of numbers? And maybe you can relate that to ROE.

In terms of new business, that's true. And as was mentioned on the last call, that's 170 to 200 BP (or use "basis points"), depending on the product line. Fixed-annuity ROEs at that level are perhaps 10 or 11 percent. We still suffer, of course, Steve, from spread compression on the fixed-annuity in-force block. And didn't change materially from the last quarter. We're probably 50 BP off our target there.

If, like Paul said, you had these--if we get a 1 percent parallel move in the rates upwards, obviously, the competitive situation, you can't really guesstimate, but by how much could you see the fixed annuity business go up in terms of ROE if we got a 100 basis point increase in rates?

Steve, the comment that I made, the 1 percent being 20 cents for the Company, takes into account the total organization with co-variances and so on. So I don't want to specifically speak to each individual product line.

Okay.

Twenty cents speaks for the overall--in the past, we've commented on the equity--the movement in our earnings, based on the equity movements. And they have proven to be very--quite accurate.

What are the ROEs on the equity indexed products, the new sales that you're getting right now?

About 15 percent.

Oh that's great. Question for Don Stewart. Don, you've got a 241 percent MCCSR. Sounds as if you'll be able to optimize your capital position further at some point this year, heading into 2005. You bought back $8m worth of shares in the quarter and I'm wondering why not more.

Well, we continue to look at the various alternatives. You do recall that we raised our dividend in Q1 quite significantly over the 2003 level. And we continue to look at the three alternatives of use of excess capital, which, of course, are raising dividends and we've got a significantly higher dividend across the year. A question of buybacks is an ongoing consideration always and the question of value-adding acquisitions and so we interplay these three, depending on all of the conditions, all of the time, Steve.

What do you see there in terms of value-adding acquisitions? Are you seeing a market that's ripe with them? Are there any--is there anything of interest out there for you? We've been thinking about a--we've been looking for a group acquisition in the U.S. for some time now and nothing's materialized.

Well, of course, in the public domain, the fact that nothing's materialized doesn't mean that we haven't been actively considering a number of situations, which in fact's been the case. We've been looking at deals as they come along and we analyze them. We are very disciplined in that particular--looking at that particular market. And the target deal, as we've said before, is in the US$200/300m range or perhaps a little higher, depending on the fit with our business. And we've been active. We will remain disciplined and it will depend on what the market does.

Okay. I'll re-queue. Thank you.

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

Thanks very much. My question relates to the individual life market in Canada. I was just sort of struck in these slides. I believe, Paul, it was you that mentioned that there was a focus on retail wealth and that partly contributed to the decline in the individual life sales in Canada. And then we looked at the next chart and sales in the U.S. were up substantially in the individual life. I'm just wondering if there's some other sort of insight you can offer us in the--between these two markets. Is there something happening in the competitive market in Canada that's causing this compression of the sales?

And maybe the same sort of comment on the group markets, if we could just get an update on how they're performing in Canada.

Well, Brad, I would say that in the individual market, between the U.S. and Canada, there is very little overlap. So what happens in Canada doesn't really affect what happens in the U.S. so it's probably best if the individuals speak to their own markets. I might ask Bob Astley to speak to Canada.

Okay.

Sure. Thank you, Paul. It's Bob Astley speaking. The individual insurance sales in Canada were off about 8 to 10 percent in the first quarter. That was partly due to some seasonal factor that you will have seen from the charts. The first quarter is usually a relatively weak quarter for insurance sales, relative to other quarters.

But also, the wholesale channel was down from the previous year. You may recall that we re-priced one of the important products, the level cost of insurance, Universal Life, in the early part of 2003. So we're feeling the effects of that in the first quarter of 2004. Sales through the ICA channel were about flat for insurance and as Paul mentioned, very strong on the retail wealth side.

Okay. Great. Thanks very much.

Your next question comes from Mario Mendonca from CIBC World Markets. Please go ahead.

Good afternoon. Paul, a question about your guidance to that ROE and how ROE can improve or should improve 75 basis points to 100 basis points a year, on an organic basis. I'm not entirely sure what that means, when you speak to ROE on an organic basis. What are you excluding in that context?

What I mean by 75 to 100 basis points in organic basis is that the equity markets go up at 7 percent per year. There are no acquisitions, there's no capital restructuring, there are no transactions. So just the basic business performance. On top of that, of course, there are opportunities to do acquisitions, as Don pointed out, and the capital restructuring that I've been referring to in the past.

Does it--it doesn't--sorry. It doesn't include--I'm sorry. You would include buybacks in that though. You--when you say excluding certain things, you're not saying that the ROE can improve 75 to 100 basis points without doing buybacks?

There is some level of buyback in there, but not--certainly not the maximum amount of buyback.

Can you share with us what the level would be?

Oh, I haven't got that specific number, the calculation in front of me here, but it's a modest level.

Modest level of buybacks to capture the 75 basis points?

Yeah.

On to the indexed annuities for a moment--and this is certainly not to belabor the point, but there was a time when Company indicated that the indexed annuities weren't entirely appropriate for Sun Life, either from a capital perspective--and I think I recall comments about sort of the risk profile of indexed annuities maybe not being appropriate for Sun Life.

Has something changed in terms of the nature of those products or something else, maybe the competitive environment that's caused Sun Life to revisit that?

Yeah. Bob Salipante. If you roll back the clocks a year, we were selling a lot of book value annuity, very difficult situation for us, and attracted a lot of capital. What we've done is affected a switch to EIA, if you will. It attracts less capital under Canadian accounting and we think it's an excellent product in this environment, right. Because fixed rates are low. It gives the consumer an opportunity to participate in the equity markets and the perception is that they could be heading north.

So we find that there's a strong demand for that product at the point in time. So strategically, it was a big shift for us and it's part of why we've got the annuity business, we think, heading in the right direction.

There are so few U.S. insurers that play in that market. I mean, it's--you would agree that it's a relatively small market, compared to every other type of annuity. And when asked, often you hear things about just the risk profile of these equity-indexed annuities. How do you see it? Perhaps maybe you could describe what the risk profile of the equity-indexed annuities are.

It's unclear to me what you mean by risk profile. From the standpoint of return on equity, it's very solid for us at this point in time. Again, from the consumer standpoint, we think it's a product very suited to the capital markets as they exist today. We distribute them through channels where we're confident there's a suitable sale. We see it as part of the value of the Keyport deal for Sun Life.

I guess what I mean is what could go wrong? On a variable annuity, we know what can go wrong there. On a fixed annuity, we certainly know what could go wrong there. Presumably, something can go wrong on an equity-indexed annuity or you couldn't earn a 15 percent return on it.

Yeah. And we do dynamically hedge these products. They are--at least our products are pretty straightforward in their construction. We've just launched a new product, in fact, that's very straightforward and--but we've been hedging these from the start and that hedging program is quite solid.

In effect, we buy a hedge that's very, very similar in structure to that which we sell in the product, the option that we sell in the product.

And just finally, very rapid changes in interest rates, particularly an increase in interest rates, is the dynamic hedging program equipped to cope with them?

The--this is Claude Accum speaking. The dynamic hedging is mainly - on the EIA - is mainly to hedge the equity risk. It does not have a significant dynamic interest rate risk and so we can use traditional instruments there.

Okay. And then if I could just sort of finally finish up with--Paul, the reference you made to 20 cents improvement in earnings from a 100 percent--or sorry--a 1 percent increase or parallel move in the yield curve, there are some that believe that that may not happen. Could you just give us a sense for--what I'm suggesting is it's not symmetrical. It's probably asymmetrical. What would it be on the way down?

It's quite asymmetrical, but as you know, we have a pretty tight risk management process whereby we measure, on a regular basis, the sensitivity or book-to-interest rates and put hedges in place when we feel that the movement is outside the boundaries. And so on the downside, the negative, a parallel move 1 percent down, the cost would be about 10 cents a share. So it's quite asymmetrical, but the downside is less, impact is less than the upside.

Thank you very much.

And I might add that's also reflected in most of our hedging approach. On the upside, we have significant opportunities on the equity markets, but on the downside, we have hedged to--we've mitigated through hedges significantly the impact of the equity markets on the embedded options that we have.

Okay. Thank you so much.

Your next question comes from Tom MacKinnon from Scotia Capital. Please go ahead.

Yes, thanks very much. My questions have to do with the source of earnings that you presented on page 22 in the slides. First of all, the assumption changes. We've got $34m here and I don't think we really talked about any other kind of reserve adjustments other than something modest in the six buckets associated with the Company's U.S. variable annuity business. What is all the--what's in the $34m in assumption changes here and will that--in your opinion, would that be occurring going forward?

And then I have a follow-up with respect to the experience gain and loss as well.

Yeah. So let me go through that. I think in balance what you'll find is that the 71 cents we reported this quarter is a conservative reflection of the sustainable earnings power of the organization, with some pluses and minuses in different pockets.

With regards to the experience gains, that is obviously good news. It basically means that the actuarial consumptions that we're using in our calculations are conservative, relative to the world as it existed in the first quarter. And the experience gains resulted primarily from the impact to the equity markets on the annuity business in the U.S. and the investment performance throughout your organization.

The assumption changes were also spread through the organization and the biggest component was mortality improvements, some of that in Canada. But there were no really big chunks, significant chunks anywhere in the organization. And if you offset that with the higher expenses of MFS, 71 cents, certainly a conservative reflection of what the organization can earn in a quarter like this.

The improvement in the credit, you talk about improving credit markets throughout a lot of the press release. And I know that specific allowances are down almost $50m, just from the end of the year. How much of any improvement in credit is in this $100m that you would kind of classify as a reduction in allowances or anything like that?

Well, the provisions, I think, were $9m this quarter. And I go by memory now, I think its $30m or so a year ago or $40m a year ago. So it's down $30m from a year. And that obviously found its way into the bottom line.

Oh, okay. Yeah. And I guess then the impact just in the quarter would be taking the $9m versus the number--

Yeah, we have all the details--

The end of the year last year? Oh, okay.

Yeah. We have all the details in the supplementary information.

And I mean, are we safe to assume we're going to continue to get mortality improvements that get reflected in terms of actuarial reserve releases in Canada going forward or what should we do on that 34?

Well, I think experience gains are always a good indication--

No. This was the assumption change.

I understand.

Yeah.

But the experience gains are often a lead indicator of what might happen to assumption changes. In other words, if the world keeps improving the way it shows there, eventually the assumptions will change. But at this point in time, we're comfortable where the assumptions are and I wouldn't assume any changes going forward.

Okay. And what percentage of the earnings in the U.S. wealth management segment is actually related to the equity-indexed annuity business? Does the Company have that internally segmented?

We have significant segmentation, obviously, in each product line, but we have limited our disclosure to the ones that you see in the supplementary information.

Okay. And then one more question on the buyback. You were--I think you only did about 60 percent of your buyback last time and you haven't done much with the new buyback that you started. Were you able to buy back up to the 5 percent last time? There wasn't any--your capital position, I would assume--safe to assume that you had the capability of buying back up to 5 percent last time. Is that correct?

Yeah. We--

Okay.

Actually--last year, we bought over--last year, in '03, we bought over $500m back, which was not--

But you could have done the whole 5 percent buyback?

We had the ability, the authority to do more, yeah.

And I'm just curious as--the propensity for the Company to continue to buy back stock going forward. I'm only relating the fact that if the stock issue for the Clarica deal was at around 34, I'm just trying--was there anything internal that the Company had said, well, we're not going to buy back stock up to the maximum percentage last time?

And how--I know the question's been asked before, but I'm just trying to get--we're going to get any kind of significant--re-deployment of capital effectively have to be through an acquisition or a dividend or a buyback here. And I'm just wondering to what extent is the Company really going to go full steam ahead in terms of going up to the max in a buyback.

Yeah. Well, we typically don't announce the size of our buyback going forward.

Yeah, okay.

And so, as Don pointed out, it all depends on the circumstances. We have a number of alternatives to do with our capital. In the first quarter, we decided not to buy any. In the second quarter, I guess we'll tell you about it in July.

Okay. Thanks then, Paul.

Your next question comes from Timothy Lazaris from GMP. Please go ahead.

Thanks very much. Two questions. Could someone direct me? I'm looking at slide 15. Is the "net new sales" of managed funds in the quarter, is that the institutional net sales for the quarter? That's my first question.

The MFS sales. Yes, they are.

It combines various products lines from our subdivided annuity business to institutional accounts to institutional trusts that we sell through different distribution channels.

The large sort of pensions and those that might have left as a result of the situation in MFS did not? There wasn't any sort of mass exodus out of the institutional pension side?

No.

In fact, you had positive net sales?

If you combine all of those products that I mentioned, yes.

Okay. And specifically, on sort of pensions, large pension funds, was it negative? Did you have more redemptions--excuse me--than those that were publicly stated?

During the quarter, we had a slight outflow, but it was not significant.

Okay. Great. And then secondly, Paul, I think someone disclosed or stated in the embedded value discussion perhaps a comment on what the embedded value for MFS was. Has that number been quantified and if so, can you direct me to where that is?

One point four billion. And I can't remember what it was last year, but it is down from last year, most of that being currency, obviously, with a large drop in the U.S. dollar.

Okay. Thank you very much.

Your next question comes from [Michael Kolber] [ph] from [Deja Bank] [ph] Securities. Please go ahead.

Thanks a lot. A few questions. First of all, in 2002, you absorbed $3.3b of dilution to your embedded value with much of it attributable to Clarica. And you paid the premium for the future VNB you felt that Clarica could produce. So what can you tell us now about the validity of the premium that you paid from the extra VNB that you feel has been produced since the time you acquired Clarica and maybe looking forward?

Let me just make a broad statement and then perhaps Bob Wilson can fill in where I leave off. When we made the presentation last year, we demonstrated to you that the combination of synergies and earnings that were not reflected in the embedded value at the end of '02, more than offset--so if you combined the embedded value and add the value of the synergies, et cetera, the total was in excess of what the purchase price of Clarica was at the time. And so--and over time, indeed, you'll find that working its way into our embedded value calculation.

Bob, there's anything you can add to that?

Not really. The worth of the purchase of Clarica is determined every year as we have to go through an exercise to justify, accounting wise, the existence of the goodwill. But once you've integrated the companies, separating out that which is Clarica, that which is Sun Life in an integrated whole becomes impossible. And as well, you have to add in, as you saw in the first quarter, the Clarica ICA has made a tremendous difference to the sales of CI, which, of course, we pick up through our ownership in CI. So the Clarica acquisition looks like a great success so far.

Okay. And can you talk about--actually, in the 700m of VNB for the year, can you talk about the growth and wealth versus protection and margins maybe in the two lines?

We have historically not disclosed that. We can take a look at it for future times.

Okay. And maybe give us some direction on the trends in the first quarter.

In terms of value of new business?

Yeah.

First quarter was very positive. It was up well in excess of 20 percent and closer to 30 percent, actually. And so we're quite pleased with the progress that we made.

Okay. One other one. Where did your CTE levels stand at quarter end and given the strength in markets, was there any release of reserves in the first quarter?

In terms of the guaranteed minimum death benefit, the ending markets were roughly the same as the opening markets. The S&P 500 moved by a percent or so. So the impact--there was really no impact on our bottom line from that. We're still at CTE 80.

Okay. That's great. Thanks a lot.

Thank you.

Your next question comes from John Reucassel from BMO. Please go ahead.

Thank you. I guess it's a question for Don. And I just--trying to understand a bit more on the buyback and whatnot. And I guess in your press release, you're quoted saying that the Canadian platform provides the organization with financial flexibility to grow and prosper internationally. And combine that with the lack of buyback in the quarter. Are you--are we supposed to read into this that the pendulum has swung away from buybacks to more favoring acquisitions? Is that correct or am I reading too much into it?

I don't think, John, I can do any better than to repeat the ongoing [price] if you will, of dividends, buyback and value-adding acquisitions is something that we just continue to measure against each other. I wouldn't draw any conclusions about forthcoming acquisitions because of the inherent uncertainty of any transaction. So I would counsel you not to draw that conclusion. We're in the market and we would do something if it made sense and if it doesn't make sense, we will continue to look at our return to shareholder options on an ongoing quarter-by-quarter basis.

Okay. And I guess then, are you looking in any other areas outside of the group life and health in the U.S.?

Yes, we do. Our primary focus is the United States market and historically, in the last 12, 18 months, as you know, we have tended to emphasize our search for opportunities in the group lines, but we do look further afield we have a specifically strong individual life insurance business, but we look for opportunities to add to that, if they came along. It would probably be in VUL, as opposed to UL, but it's a good example of possibilities outside the group life and health bases.

Okay. And would the size of the transactions be in the 200 to 300 - maybe a little bit higher than that - million dollars? Is that U.S.?

That has been where we've been looking. And if something slightly larger came along, we would certainly make a hard look at it because it would be quite difficult to pass up something that was, let's say, US$600m, if it was a very good fit. So fit and terms are the key. And we're in a better position today than we were a year ago because we've completed our integration and are therefore able to focus more on opportunities elsewhere. But again, I would repeat my other caution. We look at each opportunity, we remain disciplined and we look at our alternatives, dividend and shareholder buyback.

Okay. And one final question for Bob Astley. The career channel--a little modest leakage here. Can you just give an update on where that stands and what happened and where you think things are going to go over the next year or so?

Sure, John. First thing I would note is that if we looked at the end of the first quarter 2004, it's actually very, very close to where we began the integration journey from at the end of the second quarter 2002. And I'm actually quite proud of that, that through some of the inevitable disruption of an integration, that we were able to continue to maintain that level of sales power.

Specifically in the first quarter of this year, there are some typical seasonal patterns that, again, make the first quarter a little less positive from a recruiting point of view. I can say that retention of existing advisors was right on our expectations from our normal patterns so there's no concern there. And I do expect to get back on a growth track in the second quarters and beyond.

And I know there's been a--has there anyone been to replace--I know there's been a senior management change there. Is there any new hires to take over?

We're still looking at that situation. The business is operating very well and there's nothing to report at this time.

Okay. Thank you.

Your next question comes from Steve Boland from GMP Securities. Please go ahead.

Oh, good afternoon. Just a quick question on the competitive landscape now in Canada with the individual life businesses and the group businesses. Are you seeing any price softening in either of those businesses or a particular segment of those two businesses? Thanks.

It's Bob Astley speaking again. In the retail insurance market, we've seen for the past few quarters quite a tough competitive environment pricing wise and we have chosen to maintain our discipline on the price side as we saw it and have suffered, to some extent, on the sales front as a result.

At this moment, we don't see any immediate relief in that, but looking ahead, we'll keep a very close eye on it and determine how to react.

Is that in the term or the more traditional long-term products?

I would say more in the traditional long-term products, the different versions of Universal Life, in particular.

On the group insurance side, it really does vary from case to case, but overall, I'd say the market is behaving in quite a normal and rational pattern.

Okay. Thank you.

You have a follow-up question from Steve Cawley from TD Newcrest.

Hi there. On the MFS, can you give us any sense of what April's been like? I was actually pretty happy with the level of redemptions in the last quarter. I was wondering--I think in the press release, you noted that you had won a $1b institutional mandate. Was wondering if you could give us any more color than that.

April, if you break out the business by its various components, the area where we continue to focus on, particularly from a performance point of view, is in our large cap growth equity performance stream. We have had redemptions in that category throughout the whole year and that continued throughout April.

And pretty much what I'm spending most of my time on from the investment side is shoring up that team and making sure that we turn performance around because, as you know, that's a very large category in the mutual fund industry.

The rest of the business has remained relatively stable and I think it's a testament to MFS' franchise and the relationship that we have with our shareholders and clients. And the business seems to have--one of the things is life after settlement's a lot better than before. And we've been out on road shows meeting with clients and shareholders and the business seems to be holding in relatively well. And we're being judged in our investment performance, which is exactly what we want.

Your predecessor was pretty excited about the prospects in Europe, specifically the U.K. How is that going?

Institutionally, we've won three accounts in the last three weeks. And we believe we have tremendous momentum there. We're coming off a small base relative to our U.S. institutional business, but we are optimistic that we can continue to grow that and make headway. And so we are optimistic, we do have an investment team that has ten analysts in that office and we have a staff of marketing people that go after both retail as well as institutional, but we are investing in that area from a resource point of view because we think there's upside.

And one more for Bob Astley. Bob, of the 27m of sales on the individual life side in Q1, what percentage of those are coming from your captive distribution channel?

Steve, I don't have those figures right precisely at hand, but doing some sort of quick memory work, I think it would be close to 90 percent.

So, in effect, your initiatives to try to get more independent agents selling your products seem to be falling short?

As I mentioned earlier, Steve, we have taken a very disciplined approach on the pricing side and we've paid some of the price for that in terms of sales. We'll continue to monitor the market and do what makes sense there.

Okay. In the call at three o'clock this afternoon, one of your predecessors said that the pricing environment on the group side was becoming completely irrational and that they weren't going to play that game. How would you characterize the group pricing market right now?

Well, as I said on one of the earlier questions, while we've seen on specific cases some pricing that we didn't think we could match, overall, we're winning a decent share of new business. Our block of business is growing nicely. Our retention of business is quite strong. So I wouldn't characterize the pricing environment in that way. I will say though that we will continue to be a disciplined player and not chase share just for the sake of boxcar growth numbers.

Thanks, Bob.

Operator, I think we have time for just two more questions.

Thank you, sir. We have a question here from a Jamie Keating from RBC. Please go ahead.

You better ask for two more. I'm covered. Thanks. Question asked and answered.

Your next question comes from Mario Mendonca from CIBC World Markets. Please go ahead.

Very briefly, the individual life market. We've heard now for a few quarters from several--well, virtually everyone, that the individual life market is pretty competitive. This quarter, were there any new entrants, new companies that you felt were being perhaps overly competitive for the first time?

This is Bob Astley speaking again. No, I wouldn't say so. It does vary from quarter to quarter as to who is particularly competitive, particularly in the wholesale or independent broker channel, but essentially, it's the same group of competitors that we've seen.

One of the characteristics of the market is that overall, sales are not growing very much and so there is a fair bit of jockeying for position quarter to quarter.

Just to finish up, the higher interest rate environment in Canada net a positive for UL sales in your mind?

Yes.

Thank you very much.

Your last question comes from [Ginger Soann] [ph] from UBS. Please go ahead.

Hi. Question on the credit allowances. On page 19 of the supplement, the impact on U.S. by segment, there was, like, a drop of 28m. I was just wondering which line did that hit in the U.S. segment?

Okay. Give us a minute to look it up.

Yep.

Be just a moment.

And then I also have a follow-up after that.

This is Bob Salipante. It would be primarily annuities.

Annuities line?

That's correct. And it's proportional to the scale of the business.

Okay. And the second question is that also on the same page, there is a line that says additional allowances for losses included in actuarial liabilities. And I had a question regarding the change between Q3 and Q4. It was a fairly substantial 400m, or about 300m plus change. Does that hit earnings when there is a change there, under experience of gains and losses or maybe actuarial assumption changes?

It's Bob Wilson. That actual resulted primarily from a change in methodology in how we calculated the numbers. It did not actually result in any change in the actuarial liabilities. It was what we were picking up to include in that line in--

Okay. So it--

Between Q3 and Q4.

It doesn't impact the income statement?

No, it did not.

So you're saying that within the actuarial liabilities, there was a sort of re-segmentation?

It was a reclassification of an element of the actuarial liabilities and it was primarily Canada.

Okay. Okay. That's helpful. Thank you.

Okay.

Mr. Reid, there are no questions. Please continue.

Thanks. Thanks very much, operator. I'd like to thank all of our participants on the call today. And if there are any additional questions, we'll be available after the call. And if you'd like to listen to the rebroadcast, it will be available from our Web site just after 6:00 p.m. this evening.

And with that, I'll say thank you very much and goodnight.

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