Sun Life Financial Inc (SLF) 2004 Q4 法說會逐字稿

(Operator instructions) Good afternoon, ladies and gentlemen. Welcome to the Sun Life Financial 2004 analysts conference call. I would like to remind everyone that this conference call is being recorded on Thursday, January 27, 2005 at 4:00 p.m. Eastern Time. And I will now turn the conference over to Mr. Tom Reed, Vice President, Investor Relations, please go ahead, sir.

Thank you, operator. Good afternoon, everyone. I'm going to start by introducing the members of the management team who are here 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 and Paul Derksen, Executive Vice President and Chief Financial Officer. And also available to answer questions on the call are Kevin Dougherty, President of Sun Life Financial Canada, Bob Salipante, President Sun Life Financial U.S. and Rob Manning, President and CEO of MFS. The slides to which the speakers will be referring are available on the Sun Life Financial website and turning to slide 2, I draw your attention to the cautionary language regarding forward-looking statements, which form part of this afternoon's remarks. This slide reviews the reasons why forward-looking statements could be rendered inaccurate by subsequent events. With that, I will now turn things over to Don.

Thank you, Tom and good afternoon, everyone. The fourth quarter of 2004 marked another solid quarter of financial performance for Sun Life Financial, and was the combination of a year of significant progress made against several clearly, articulated financial objectives. Operating earnings per share achieved a record 74 cents per share. Total EPS for 2004 was $2.91, up 16.4 percent over 2003. These results are particularly satisfying in view of the significant headwinds we continue to face from currency exchange rates, which reduced EPS by 3 cents in the quarter, and 8 cents per share, year to date. Return on equity was 12.1 percent in the quarter, continuing improvements seen over the first three quarters of 2004, in this important measure of profitability. A year ago, we established a target of improving ROE by 75 to 100 basis points per year. ROE for 2004 was 12 percent, up 140 basis points from 2003. Without the effect of changes in currency exchange rates, ROE would have been 12.5 percent or an increase of 190 basis points. We also established a goal at our November 16th investor day of last year, to buy back at least $375 million of stock by year-end. Our actual performance against this goal was to repurchase $383 million, representing 10.1 million shares or almost 1.7 percent of the amount outstanding at the beginning of the year.

During 2004, we increased the target payout ratio for shareholder dividends to a range of 25 to 35 percent. With the dividend increase announced today, up 9 percent to 24 cents per share, the payout ratio is over 32 percent. I'm very pleased to be able to report that the management team at Sun Life Financial has taken the action necessary to be able to deliver in all of its key financial commitments for the year, including EPS growth, ROE acceleration, share repurchase and dividend payout ratio.

Turning from the overall company to our U.S. business group results, Sun Life Financial U.S. had a very strong year-over-year improvement in net income, up 38 percent to $300 million in U.S. dollars. In the case of MFS, it was pleasing to see the overall positive net flows for the fourth quarter. Both of our U.S. business groups continue to work through ongoing regulatory and legal issues. For Sun Life Financial U.S., there is ongoing cooperation with authorities, conducting a number of regulatory investigations. For MFS, we continue to address the legal proceedings following on from last year's regulatory segments.

Our business unit results are also very good and bolstered our confidence in our opportunity achieve solid earnings growth going forward. Group life and health sales were up 47 percent over 2003 with our U.S. group operations achieving a record sales level in the year, increasing the in-force premiums in the business by 14 percent to $874 million U.S. dollars. Sales of individual life and health were up 30 percent over 2003 with Asia leading the growth. Each of India, China, Hong Kong, the Phillipines and Indonesia achieved double-digit sales growth with India continuing its tremendous momentum reported in previous quarters, up 173 percent over 2003 in local currency.

You will have seen earlier this week a press release confirming the continued market share progress made by Group Retirement Services in Canada as that business continued to expand its lead in this growing retirement savings channel. We are very pleased to announce the addition of the profit sharing planned business for the Canadian operations of Magna International, Inc. to the Group Retirement Services plan and group benefits business, we already administered. The significant business win is an endorsement of Sun Life Financial Canada's total benefit strategy, as we are now the sole provider of group life, health and retirement benefits for this important Canadian employer.

The tremendous toll on life and property resulting from the South Asian Tsunami has been in everyone's thoughts. I am extremely proud of the way our employees and advisors have responded to the calls for assistance. Sun Life Financial along with its employees and advisors has established a special campaign, and hopes jointly to raise $1.1 million to contribute to these relief efforts. We are well on our way to reaching this goal. I will now hand over to Paul Derksen for a detailed review of our performance. Paul?

Thank you, Don. As Don mentioned, earnings were very strong this quarter. 74 cents, earnings per share reported, with after giving effect to the strengthening of the Canadian dollar, which cost us 3 cents relative to Q3 and after the CI regulatory settlement, which cost us another two cents. For the year, earnings per share was up 16 percent, up 20 percent, excluding the currency movements. On my slide No. 4, we have used the average exchange rates for the year 2003. Using these exchange rates, our earnings per share in Q4 would have been 79 cents. You can see the impact of the currency on the previous quarters, as well.

This very strong performance was the result of very good equity markets and favorable mortality.

On slide 5, you see this very positive trend also reflected in operating earnings. Annual earnings were up 14 percent and up 18 percent in constant dollars. Don mentioned ROE increased to 12.1 percent, and would have been 12.5 percent had the Canadian dollar remained constant.

With this, on slide 6, we have significantly exceeded our objectives. As you know, our medium-term objective is to increase earnings per share by 10 percent per year on a constant currency basis. This slide 6 shows you that earnings per share was up 19 percent in 2004 in constant currency with a 16 percent increase over two years, on an annual basis. These earnings were also of very high quality.

Slide No. 7 shows you the sources of earnings compared on a basis consistent with the new Aussie rules. The first line represents expected profit. You can see the increase in expected earnings is low, partially because of currency movements. On the line that follows, you can see the impact of new business or the reserve string. It cost us $117 million this year, $31 million more than in 2003. Experience gains reflecting the actual experience relative to our assumptions were $246 million. other words, our assumptions were conservative relative to the actual conditions in 2004 by the amount.

Despite these positive experience gains, we strengthened the assumptions in 2004 by $24 million. I should mention that $84 million of this occurred right in the fourth quarter so -- in the numbers for the fourth quarter.

The other items on the statement that you're familiar with, the conclusion from this is that our earnings are conservatively stated and reflect the conditions we encountered in '04.

I'll turn now to slide 8. Sometimes we do get questions on our top line growth. We always respond that we are focused on profitable sales and profitable market share, rather than just top line growth. We showed you the value of new business at investor day and have updated it here for the full year. Value of new business for 2004 is up 18 percent , and that is with MSF down from 2003. Excluding MSF, the insurance operations were up 48 percent. This is very much a result of our focus on profitable market share. Turning into the business groups on slide 9, Canada had a very good quarter with earnings growth of 13 percent. This was driven by favorable mortality experienced in the reinsurance and individual wealth lines and higher equity markets.

Revenues were down slightly from last year due to a shift in customer preference from the guarantee product, which is recorded as revenue to market-based product in mutual funds. ROE was 150 basis points higher from last year.

On slide 10, you can see individual wealth sales were up 19 percent from Q3, with improvements in both annuities and mutual fund products, up slightly from last year due to business mix. Individual life and health sales were up 30 percent from Q3, mostly on seasonality, but down slightly from 2003 primarily due to a repositioning of the wholesale channel, as we discussed on different occasions.

On slide 11, you can see the Group Retirement Services continues to do extremely well. It is ranked as the No. 1 of employer sponsored retirement plans in Canada. Market share continues to increase to 42 percent of the total group pension sales in Canada for the first nine months of '04. They continue to pull significant new business wins, and as Don mentioned, have recently been awarded the magna business. This makes Sun Life the sole supplier of group life, health and retirement benefits to Magna, which is a great benefit approach we've spoken to you on different occasions.

On slide 12, you can see the group benefits also had a good quarter, with business in had force up almost 6 percent from a year ago and sales up 7 percent. The team has written very good business in the fourth quarter, the benefits of which will be reflected in 2005.

Turning now to the United States on slide 13, earnings were up 12 percent from a year ago, mostly driven by improved credit experience and stronger equity market levels. Revenues were up $171 million, up 10 percent from a year ago, mostly from premium growth in the individual life and insurance businesses. ROE was up 140 basis points from a year ago. On slide 14, you can see that equity index annuities had an excellent quarter with sales up 64 percent from a year ago. The product is now ranked No. 3 in the United States. Fixed annuity sales continue to suffer from low interest rates and improving equity markets.

Variable annuity sales in Q4 were down from Q3, primarily due to the repositioning of the distribution force. Turning to slide 15, group, life and health business in force was up over 14 percent for the year and 2004 sales reached record levels. The group operation contains to grow with distribution network and opened four new sales offices in 2004. Individual life also had an excellent quarter, with sales up 33 percent from a year ago. Sales as you can see were off somewhat from the third quarter, when a particular large transaction took place.

Turning to slide 16, MFS earnings were up 12.5 percent from the third quarter, but flat year-over-year. The effects of market improvements were offset by higher expenses related to the write-offs of redundant facilities, Its cost MSF $10 million in the quarter.

On slide 17, you can see how assets under management are up 4 percent from a year ago, with increases of $15 billion due to market improvements, partially offset by net redemptions of $9 billion and the details of that are shown on the following slide, slide 18.

Strong Q4 sales of institutional products were partially offset by negative flows in mutual funds. However, mutual fund growth sales were up 27.6 percent from the third quarter of '04. Redemption rate was down to 23.7 percent from 24.6 percent in the third quarter continuing the positive trend. As you can see on the right hand side of the slide, market movements increased assets by 12.1 billion dollars this quarter.

On slide 19, you can see how this positive sales trend is reflected, as well. (inaudible ) have improved significant, in the last few quarters, partly driven by improved fund performance and institutional sales.

Slide 20 shows you how MSF continues to be a very strong competitor in the U.S. mutual funds market. It is among the top 10 in the U.S. equity, international equity, tax-free fixed income, taxable fixed income and it's the 11th largest of the U.S. mutual fund managers. On slide 11, you can see how MSF has significantly improved it's fund performance in 2004. 82 percent of the funds were ranked deliver the top half for one year performance periods and 77 percent in the top half over a three-year period. This up from 54 percent and 72 percent, respectively, last year.

On slide 22, turning into Asia, it had a great quarter, as well, with earnings up 38 percent. In local currency it was up 53 percent. Revenues increased by 41 percent. The earnings improvements, generally, reflect higher sales, improved investment income and stronger equity markets, as well as benefits realized from expense management.

Return on equity is up 530 basis points from a year ago.

On slide 23, you can see how Asian sales increased 45 percent from a year ago, as all operations showed double-digit increases. Distribution in Asia was strengthened with the Phillipines, Hong Kong and Indonesia, all having significant increases in the number of agents as you can see on the slide.

Slide 24 shows that our asset quality continues to be very high and is improving. Gross impaired assets and corresponding allowances in Q4 were down on general improvements in the portfolio, as well as the sale of certain impaired assets. The ratio of net impaired assets to invested assets was almost cut in half compared to a year ago and decreased from 34 basis points to 18 basis points.

Turning now to capital on slide 25. Our MCCSR is quite strong and is estimated to be not -- not to change much from the third quarter. We haven't got the precise numbers just yet because of the timing in the cycle, but we expect it to be roughly the same as in the third quarter. This is despite the $250 million of debt redemptions and over $200 million of share repurchases, Don pointed out we repurchased 5 million shares for the quarter, 10 million for the year.

At the last analyst call, we reviewed the capital restructuring project. Subsequent to that, S&P gave the holding company senior debt rating a positive outlook with a possible upgrade, thereby endorsing the restructuring we announced in the third quarter. We implemented this restructuring on January 4 of this year.

As you know, we review our dividends twice a year and this quarter, the board increased the payout by 2 cents to 24 cents or 9 percent increase, to a 33 percent payout ratio. That is after a 29 percent increase in 2004. So, in conclusion, then, we had a very strong year with earnings per share, $2.91, up 16 percent, up 20 percent excluding the currency movement. Canada, the U.S. and Asia all showed double-digit earnings increases. The value of new business of the insurance operations was up 48 percent, underscoring our focus on profitable market share growth. On the capital side, we repurchased $383 million of stock, an increase our dividends by 29 percent in '04 and another 9 percent this quarter. So, this concludes my overview. Tom?

Thanks very much, Paul.

Operator, we are now ready to start with the question and answer portion.

Thank you sir. One moment please. Your first question is from Collin Divine from Smith Barney. Please, go ahead, sir.

Good afternoon, gentlemen. In going through the numbers, Don, it strikes me that the one business, that I guess from our perspective seems to be underperforming, as you're trying to get to the next level, really is the United States and we'll put MSF aside for right now as it's turning itself around. The question for you, plain and simple, is can you do that with what you've got organically? Is it going to take a deal to get this really going to the next level? And also within your variable annuity business, you know, I've heard the talk of realigning the distribution and all of that, but I think the bottom line is Sun has slipped from being amongst the top five or six writers in the industry, to I think, now it's challenged to be in the top 20, right as you head into the fourth quarter. And once again, can you get that market share back?

I'll give you my overview of this, and we'll take supplementaries in the room for the specifics, Colin. Specifically on the organic growth of the existing businesses, we think we're doing very well on a steady basis on the group life and health front. And I noticed specifics of that were absent from your question, so, I will come to the annuity, but let me also say that in the individual life, our high-end position in that marketplace continues to do very well on a very focused basis. So, we feel that the two businesses, the group insurance and the individual life can carry on both on an organic basis, although the right kind of deal could be an asset to both businesses and particularly in the group, where we've been most actively looking. Turning to the annuity business, the fixed business, of course, has -- had a significant challenges with the spread compression of recent times and interest rates at a nominal level are still on the low side for that business to be attractive. On the variable business, we are going through a distribution reorganization and I think that will take more than one quarter to show results. So, we can't really speak to that, I believe, adequately over three months but we're in the middle of essentially raising the game there, and I think we'll see some results from that at the next quarter. If you stand back and attempt to address your question from an overall point of view, can we get back to some of the higher rankings., We certainly think we can improve our rankings. How far we can take it without a deal, we think we can improve it reasonably significantly from its existing base on an organic basis. A deal is always a possibility in that business, because there are economies of scale and you're very well aware of these in other carriers that have allowed your market share.But we think present course, where we're reworking the distribution, we've got new product, will take a little time to get traction, will carry us forward. For the longer haul, we remain active in the marketplace at looking at possibilities, but we're committed to making sure that we're price-disciplined. And that means that there are a number of opportunities we will not go forward with will pass on. So, I hope that rather broad answer is responsive to your rather broad question, Colin, and I invite my colleagues if they have anything supplementary they'd like say?

Yes, Colin, Bob Salipante here. I'd like to do an update on where we are with the V.A. wholesale repositioning. We hired Kevin Hart in the third quarter. He previously built wholesale -- successful wholesale teams at Sun America Scandia. We've launched our newest product at the end of the third quarter. After 90 days of evaluation, Kevin dismissed on mass a significant number of wholesalers, looking to upgrade to more experienced staff. He has been recruiting a number of new regional sales managers. We will seven in total across the U.S. and the various segments of the business. These individuals are coming to us from companies like Pac life, Access, Sun America, so forth. These regional managers are recruiting wholesalers Our expectation by mid- year is to be at approximately 70 experienced wholesalers. We're looking for significant prior experience, minimum production of $50 million per territory, previously , and we're able to recruit people like that again, organizations like Met, Sun America, Axa are choosing to join us at this time. I think this is significant effort. It takes time. One indicator, I think, of our ability to gain traction, as Don has said, is if you are going to do a same-store analysis, that is 24 territories where we have the same wholesaler in place, Q4 over Q3, we're up 16 percent over that period in those same stores. I think that's indicative of our ability to make the strategy work. We have not lost any shelf space. Our product is competitive. We've got the risk management skills to your letter to compete in this business, dynamic hedging, that is. High service levels as evaluated by distribution. Capital strength, a strong team. We're missing the wholesale piece and we're building that out.

I guess, Bob, I'd come back with, you know, in the 16 percent comment, I don't think that actually stacks up all that well against some of your competitors, to be honest, when we look at companies like Lincoln, and some of the others offering these benefits, Met, let alone Hartford is in a league of its own. I've put up some much more impressive sales. And are we really looking with Sun that this is going to be a fix through '05 and maybe it's in '06 that things really start to get going? Because, while you may be haven't lost the shelf space agreements, I would challenge you that you certainly lost your share of mind space in the brokers selling your products.

You know, I think the relationship, Colin, that we have enjoyed -- you know, I've been here almost two years now. What's impress ed me is the strengths of the relationships that we do have with distribution. That's part of the historical relationship with MFS and I think those relationships are still strong. That's my assessment. We're recruiting people in it that know how to sell this product. People that have at a minimum of $50 million in production in the territory. They know the brokers, they're attracted to our story. We think that we are a growth story in this - this business is and that's why they're joining us. I think we can get some traction. We get this team in place in the second quarter, I think in the second half of the year, you will see us get some traction.

And my last follow-up for Don, if we look at manualized -- Dominic certainly made the decision there that he didn't have a strong enough brand down here in the U.S. and went with Hancock in rebranding his products. Is MFS a strong enough brand to carry Sun in the U.S.? Or do you feel you need to do something different?

Well, Colin, we believe in 'our existing direction. We've always said we're looking on the opportunities but continuing to build on the existing organic direction, and we don't ever want to take our eye off that particular ball. As Bob pointed out, the relationships that we enjoy and a lot of these derive through MFS, have been strong. 2004 was a difficult year for relationships, we pointed out the significant turn-around in investment performance at MFS, and we believe that will pay dividends both directly for MFS and also for its brand. So, it's our view that what we've got does work. We need to continue to build it. If the right opportunity came along, we are in the market. We look hard at everything that comes along, but we're focused on making sure that what we've got keeps on a building and growing, and we do think that MFS is a great brand.

Thanks, Don. I think that turn-around in MFS, or the start of it we've seen this quarter is great news. Thanks, bye.

Thank you.

Your next question comes from Dan Johnson from Citadel. Please go ahead.

Thanks. Colin already asked most of what I was going to ask, so, let's turn to the fixed annuity business in the U.S. Can you talk about where your spreads are right now? And where you are relative to minimum crediting rates in the existing book of business? Thank you.

Yeah, Bob Salipante. Spreads at about -- on the enforce about 130. We're still about 50 off our targets. On new business, we are at target, which is 178 to 200 bips, slightly under thirty percent of the book, is at the floor.

In the -- and the -- can you just remind me of where the aggregate book spread was in the last two quarters?

It's just ticked up a bit. Largely as a result of improvement in credit, we've seen it pick up you know, several bips. 5, 10, bips, maybe. Also, as we begin to shift to equity annuity sales, that helps improve the spread. We have a superior spread on EIA over the -- over the core fixed annuity product.

Where do you have that running right about now?

A spread on -- on EIA would be in the 200 bip range.

Great, thank you very much.

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

Hi, first question, are we at a new earnings level for Asia here or is this a blip of some sort?

Steve, it's Paul. The -- Asia had strong earnings this quarter. They were -- I I don't expect it to continue every quarter at this level. It has its ups and downs, but I do look for continued, on an annual basis, continued significant improvements in air force base from the annual base where we're starting from.

Okay. One for Bob, you've got $3.7 billion in capital, in the annuities business and I suspect the majority of that is in the fixed annuities block. I believe, the maturity of that book, you'll see it run off, I think -- was it 2 1/2 years now, before that runs off? That book.

That book runs off over a longer period than that. Certainly a good bit of it will run off over the next 36 months.

Over the next 36 months. I guess for Don, is it your anticipation, if a good portion of that capital comes back to the Company, to keep it in the U.S.? Or where would you be deploying that capital?

The business is -- is where we're seeing our fastest growth , but because of the configuration, the capital demands in Asia are mostly such that the business is self-sustaining and broadly speaking. We made a small acquisition in Q4 in the mutual fund business in India, but it wasn't material in capital terms. Because of that, we do see that we are likely to continue to deploy capital in the United States. And in reference to the earlier question, the right fit of business against our existing business could give us some reasonably significant economies of scale, at least potentially, if the right fit is there and I see us keeping that capital in the United States, Steve.

Do you want to quantify how much of that 3.7 is coming up in in the next 36 months?

I don't think we are in a position to do that right at this time, no.

One last quick one, Paul, I know there's always pluses and minuses every quarter. In the U.K. this quarter, there seems to have been a positive tax effect this quarter to the tune of $43 million. The thing that was concerning is that the revenues really fell off. Is there just a plus and minus there? And is the profitability going to continue to be in around the 40 to $50 million per quarter there?

The U.K. is generating profits at 20 million pounds per quarter and saying this year, they had a -- they had a -- some settlements with the U.K. inland revenue this quarter. At the same time, they had some reserve strengthening so net-net it didn't make a whole lot of difference to the bottom line. I'd say , broadly speaking, our tax rate has been coming down over the last couple of years, which has been a focus with the organization, to increase the amount of the keep and factor tax rate on a sustainable basis. Now it's in the very low 20s. 20, 21, 22 percent range. Although we do get some settlements like you see on the U.K. this particular quarter.

But that was offset largely, basically.

Yes, very much. As I mentioned before, we had an $84 million reserve strength in this quarter. And throughout the organization, so, I'd say that the net-net, within a few months of earnings per share, that you have -- that you showed this quarter, reflects the recurring earnings, giving what we had in the fourth quarter.

Thanks a lot.

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

Thanks very much. Two quick questions, just -- to wrap on the U.S. discussion we had, I was wondering if somebody might just clarify what the targeted ROE objective would be for that division? And secondly, with respect to the reinsurance, I note that there was a fairly strong contribution to earnings in the quarter. I'm wondering if that was a one-time situation or if there is -- you know, if we should be anticipating continued accelerated earnings out of your reinsurance block?

I will speak to the reinsurance piece, Brad. The reinsurance, we have excellent mortality this quarter, quite straight forward. You will see in the quarter we had very positive experience gains in the sources of earnings and that's where it really came from. The targeted ROE for the U.S. is in to the double digits and growing over time. So, we're looking for continued improvements in ROE going forward.

Does the U.S. have the same capability that hit your consolidated ROE, Paul? You know, in the mid double-digit range? I mean you're in the double-digit range.

They had a very good quarter. They have the capability certainly over time to show that they will get to, in the mid-teens , over time. But it's -- it's not going to be there as quickly as other parts of the business.

Okay, terrific, thanks very much.

Your next question comes from Michael Goldberg from Desjariais Securities. Go ahead.

Thanks a lot, hello, everyone. The 48 percent increase in VMB, excluding MFS, is certainly a very good impressive number. Can you give us some idea of where this growth came from, on some kind of segmented basis between Canada, U.S. or Asia? Was there anything unusual in there, in terms of either volume or margin? How sustainable is it? And finally, what are the chances of recovery in MSF and VMB?

Thank you, Michael, we thought you'd be interested in the VMB chart. The increases in the insurance business are across the board. As I mentioned before, I -- we're very much focused on VMB. The organization is incensed to increase its VMB, (inaudible) as opposed to top-line revenue growth. And so every business is very much focused on a quarterly basis to their plans, and presents their results to Don and the management team, to -- to identify further opportunities to increase, you know, profitable sales. I'd say that the trend is very high in Asia, of course, Asia is doing extraordinarily well, of course. But in Canada and the U.S., VMB is growing at double-digit rates. With regards to the MFS, the MFS VMB is entirely related to the volume of its business. We expect that with the strong performance, the performance in the -- of the funds and the actions, the management team has tan, that sales in their VMB will start picking up again in '05.

Can you give us some idea, actually, of what portion of that VMB is accounted for by Asia? Because, you know, we know that it takes a long time for earnings to emerge and this would seem to be a better metric of how successful you're actually doing in terms of adding value?

Michael, we haven't disclosed that number yet.

You have a perfect opportunity now.

Asia is growing at a good rate from a low base.

Okay. And I had another question. There is several references in your comments to outstanding legal and regulatory issues and I'm just wondering, is this just boiler plate, or is there more to it than that now? Has there been any change since the last time you commented on these issues?

Let me take that, Michael. We believe it's important to continue to disclose and describe the ongoing business confronting the business, particularly in the United States , on the legal and regulatory front. You may recall a year ago, okay, there was some publicity around settlements made at that time, where I particularly noted one suggestion that we might have been more forcesome. So, I think in every quarter we've been careful to provide disclosure on what is descriptive of an ongoing environment. I think at this stage, we don't see a significant change in our position over the quarter, but we feel it's important to remind people that we operate in an environment where there are many things going on in the regulatory and legal front and I would refer you to -- our official disclosure, as the press release does, to provide more specific information.

Okay. And -- and just going back for a second to the VMB. It's on a -- an equivalent currency basis and I'm just wondering if -- if you put it on a -- an actual exchange rate basis, what would the 681 have been in 2004? Or alternatively, looking at it compared -- you know, looking at three years, you had originally reported 2003 as $700 million, on a constant currency basis against 2002. What would the 2004 be on a constant currency basis against 2002?

Right, Michael, what I can tell you is that the embedded value and VMB are all done on an annual basis, on a constant currency basis, that's how we report it. I don't have all the numbers here and depending on what happens to the currency, you know, you get a different number. Obviously if you include the currency, the growth rate would be less than portrayed here, you know, on an actual dollar basis, but I think it's important to identify it this way ,to show the strength of the operations as they operate in their particular local markets and that's why we show it this way.

I understand. Okay. Thanks.

Your next question comes from Timothy Lazaris from T&P securities. Please go ahead.

Thanks, I've got two questions. The first one is with respect to management's thinking and philosophy, if you will, about buybacks. You're one of the few Canadian life insurance companies that has been aggressively buying back their Stock. I wonder what the sort much internal strategy is, if you will. You know, is it opportunistic? Is it set in terms of how much you're going buy during the year? Or is it, you know, driven by how much improvement has on ROE? That's my first question. The second question is specific to Canada. I know at the last analyst conference, there was discussion about re-entering or re-establishing relationships with MGAs and I wonder if there's been any feedback or points of reference that you can comment on on there?

Timothy, I will take the buyback part of the question. And I -- I'd say that we're in a great I position, actually, where not only do we have a significant number of excess capital, that we're generating excess capital at a rate of a billion dollars a year, and thirdly, that we have -- through this restructuring, the opportunity to significant leverage the business if there's an opportunity to spent capital. So, we can do actually both. We can look after shareholders and increase dividends as we've done this quarter. There's a lot of investors who would like to see a high dividend rate, so we increased it by 9 percent this year and 29 percent last year. It's buybacks, we're active in the market to buyback and still keep sufficient power dry to go on the offense if there's an acquisition opportunity. With regards to what dry sets in particular, I think you have to -- okay, real buyback, more or less, depending on the prices in the market, if the stock is low like it was about a year and a half ago, we bought back very aggressively. We scale it back a little bit, but we will be in the market going forward, regardless of -- of the price. And so the precise metrics within each one of these categories in the cut-off fronts, I'd rather not go through on this call, but you will see us in the market on a regular basis. --

Paul, have you got a target buy back this year in terms of dollars?

We said at the analyst day, if you recall that our target was $500 million for '05.

Okay. Thank you.

We haven't changed that at this stage. Kevin will now speak to the wholesale --

Hi, Tim, it's Kevin Dougherty speaking. As you know, we had basically exited wholesale through Q4 of last year. And -- and announced November 16 that we'd be re-entering . So we're in the early stages of doing that. In Q3, our sales were about $0.9 million, so, you know we had a basically exited. Q4, they'd be up just under $2 million , and probably the best measure of what, you know, sort of forward-looking is the amount of business we have in the pipeline or applied for in Q4, which was up from 2.7 in Q3 to about 4.7 in Q4. So, we're starting to see the interest. We brought onstream about 7 MGAs last year, and as you probably recall, we repriced the insurance UL product at the end of October. In terms of building the team, we brought mark on stream, Mark Detora on stream at the beginning of September, head of underwriting for wholesale. In mid-November, brought in Pat, who is very well known in the business. And last week we announced the hiring of David Gray, will be heading up the sales channel.

Thank you very much.

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

Yes, thank you very much, good afternoon, everyone. Question on the sales force. The Clarica sales force on page 12 of the supplement, looks like it fallen off 5 percent quarter-over-quarter and 6 percent year-over-year. If you could elaborate on what's happening on there? What are your plans -- What are you plans with the sales force --

Tom, we can't hear you very well at all. Can you speak --

Is that better?

That's better.

Okay. The Clarica sales force has fallen off 5 percent quarter-over-quarter -- or sequentially and then year-over-year it's fallen 6 percent. So, this is the first time I think we've seen the Clarica sales force significantly below 4,000 agents. I'm wondering, as you try to launch your way into the wholesale channel are you -- are you doing so at the -- at -- what's happening with this channel while you're trying to do that? I've got a few follow-ups, as well.

Well, Kevin will respond this question.

Thanks, Tom, it's Kevin Dougherty again. We signalled that investor day that our focus going forward with the Clarica sales force would be on productivity and top line growth as opposed to the number of bodies in the system. So, part of that has been moving nonproductive advisors out of the system and focusing our management team on productive advisors, which is a better mix of sales and expense . So over the course of Q4, we terminated a number of what we call level zero advisors, basically advisors who are zero on production or no prospect of being productive, in our view over time. If you look at other metrics inside the channel that we look at to manage it, for example, a number of level three advisors, which are, you know, sort of the -- the -- that's where things start to be very productive. I It remained at 1600. If you go to what we call our level 5, on a 7-level system, we're up over 100 advisors on that metric. So, as we look at it, productivity is up about 8 percent on life, about 25 percent on wealth and -- and looking ahead, we'll continue to focus that way.

I'm not sure how you measure the productivity because year-over-year the sales are, in fact, down, so, I'm not sure how the product -- maybe you can elaborate how the productivity can improve 8 percent, but the sales drops.

If you dig into the sales numbers you will see that year-over-year, life sales are up over 3 percent, but if you dig into that, critical illness is up 23. Long-term care 13. And our wealth sales are -- are up about, well, 17 percent in Q4, 15 percent year-over-year. So, what you're seeing here is a little bit of a shift of business but year-over-year, quite a bit of improvement in productivity.

So, even though the sales totals from the slide on 1042, from the wholesale and -- from the wholesale and Clarica sales force 42 versus 39 or even 39 from the Clarica sales forces and 38 for this quarter, I'm to assume that there's a better mix of business in this and that's why the productivity in your opinion is better?

That's right, and you're also seeing the difference in wholesale between Q4 of last year and Q4 -- I'm sorry, Q4 of '03 -- and Q4 of --

Yeah, I was only just quoting the Clarica sales force. Follow-up question, when you said you had 2.7 in the pipeline at Q3 in the wholesale channel, but only one fall into fourth quarter. Does it take a few quarters for the pipeline to roll in? Or is it just what happens in the pipeline doesn't necessarily transpire into sales in the next quarter?

Yeah, I think it's -- it's a good forward-looking statistic. It does take time for he's applications to turn into business and many times it, you know, takes as much as 60 days to underwrite an account. So, that's what you're seeing there.

Okay, and one quick question on MFS, on slide 20, we used to show the -- what the actual rank was of these four funds. I wondered if you tell me what the rank is for these for funds. And-you used to say what the operating funds were for MFS in U.S. dollars, if you could follow up with them, as well.

Okay. Let me just turn to slide 10. Yeah, the -- as it turns out, Tom, this is information that we -- we shouldn't have disclosed it in the past.

Okay.

So, it's not as if we're trying to hide it. It's just as the information -- if you go back to the rules, we're not allowed to disclose, based on the arrangements that we had. But broadly speaking our position hasn't changed materially in that group at all.

Okay, and the operating expenses at MSF in the quarter --

As I mentioned -- as I mentioned -- as I mentioned, it had a $10 million special charge for the closing of some facilities U.S. and that sort of drove their expenses.

But what was the total number, sorry?

$10 million, U.S.

The total operating expenses in MFS were $10 million?

I'm sorry, okay, I thought you meant the charge. I don't have that here. I can get it to you.

Okay, that's great. Okay, thanks very much.

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

Thank you. Just, sorry, Paul, just want to confirm, the U.S. $10 million charge at MSF, that's a pretax number?

That's correct.

Okay, so what would earnings in in U.S. dollars have been after tax, can we just use the MSF tax rate?

Yeah, about the I -- I -- you know, what you have to do is you have to apply the intent of compensation to tax rate and percentage ownership. I mean, it's a much stronger calculation than that and so I'd say rather than going through that exercise, I'd accept what I said earlier, that this quarter's earnings are reflecting what they based during quarter.

Okay. Just another clarification, thank you for the sources of earnings. Are you going on do this quarterly and break it out by segment? Or just get sort of the consolidated annually --

We have done it quarterly in the past, as you know, we've shown a quarterly -- just used your own format as opposed to the Aussie one. We will be disclosing the breakdown by business group later on, I think it's this quarter or next quarter, can't imagine exactly what the timetable is, but to do it on a quarterly basis remains to be seen.

Okay. Okay. And just back to the -- the individual life sales in Canada. I guess just are you comfortable with the level of sales? Are you disappointed in the level of sales this quarter? It seems a little disappointing to me. You know, why or why not? Maybe you could just shed some light on that and us an update on pricing in the universal life?

Well, first in regards to the level of sales, you know, our goal would be to continue to focus on productivity in the Clarica sales force and try to keep -- continue to increase that. It's typically been growing in the 3 to 4 percent a year. Layered on top of that would be the sales that we will be getting through the wholesale channel and 2005. And our goal is still to achieve about $25 million, so, that would emerge gradually through the year, you know, something like $4 million first quarter, 6 second quarter, 8, 10, that sort of thing. That's our goal. And the combined effect of those two would be about a 20 percent year-over-year increase in our sales volume. In regards to the universal life, as you know, we repriced it to get into the range of number three or number four in terms of overall price. We are seeing the market response just the same. We don't want to put price pressure on the market. The feedback we've had from brokers is, you know, the Sunlight brand is very, very strong and preferable to many of the smaller companies and a good alternative to the majors on -- in certificate situations. So, we'll continue to stay with that.

Sorry, just -- just to be clear, the markets responded, that means everyone else has lowered their prices? Is that what you're trying to say?

No, I'm sorry, the -- the response from brokers has been to begin to include us in, you know, in these quotations.

Okay, thank you.

Operator, we will take two more questions.

No problem, sir.

Thank you.

Your next question comes from Merrill Mendonca. Please go ahead.

Good afternoon, everyone. Paul, just a very quick question to clean up. You suggested in if your opening comments that you expected EPS to grow at 10 percent on a constant currency basis. Maybe you could let us know what the start point for the word constant is? Is it the average sustained rate in 2004? The ending exchange rate?

Well, Mario, The way I think most people do this, is that depending on which term you compare the increase over, you use the base the first year in that term as your base. So, if you take a year comparison, you take your one year as a base. If you got a three year comparison, you take the first year and the three year as the base. If you do quarter over quarter comparison, you take ( inaudible) you take three at the base. Thats sort of the convention of the we- we have adopted, and it seems to be working well.

How - maybe Im not sure. Maybe I didnt explain my question properly. Im referring to your guidance of 10 percent EPS growth? When you referred to 10 percent EPS growth on a constant currency basis. Is the currency the starting point? Is it the average exchange rate in 2004 or the ending exchange rate 2004?

To the extent that we speak, a 10 percent increase '05 over '04, we would take the average of '05 over the average of '04. Again, being '04 being the base year.

The average of '04? It would suggest then, given how much the exchange rate, the Canadian dollar has strengthened, it seems to me like the guidance really isnt for 10 percent growth then. But something that may be slightly smaller?

It all depends what your exchange rate assumption is for '05.

I see. Thats a fair comment. With respect the sources of earnings disclosure, you indicated that it met Ossie standards. What I was trying to understand there was Ossie was fairly clear on materiality, and in providing this disclosure, you must have been using some kind of consolidated materiality. Can I take it, because there really wasnt much in disclosure on individual changes and assumptions, or releases of bulk or discretionary reserves, can I take it to mean that there were no changes, in excess of consolidated materiality in meeting those criteria?

Well Paul, do you want to speak to that?

Mario, I think your-- your conclusion is correct. There were no individual changes in assumption which were material from Sun Life material standpoint.

Thats exactly what I was asking. How about changes in bulk or discretionary reserves?

You need to talk to some other company. We dont have bulk reserves here.

Thats exactly what I was getting at. Thank you very much. And a final question. The final question really relates to the individual life sales in the U.S. The AXXX sales, sorry no, with AXXX in the U.S. it would appear that life insurance companies are feeling somewhat challenged in selling individual life, as it relates to having to re-insure some of their sales right now. I guess what I'm really struggling with is how the Canadian insures. May life and Sun Life are doing so well at selling individual life in the U. S. Just in the context of the challenges the U.S. insurers are facing, is AXXX essentially unleveled the playing field in the Canadian insurers?

This is Bob Salipante. You know Im not sure about the level of playing field part. We evaluate AXXX to maybe have a 1 percentage impact on our pricing ROE. So, we dont see that as being significant. As you say, the reinsurance capacity is down , so our ability to write a given amount on a single life is down. But we have a strong set of skills in the high end of the market, and we're finding plenty of opportunity there. Our core sales and individual were strong in the fourth quarter. Really building momentum over the course of the year. It remains to be seen how it plays out, however, the impact on the 1 percentage point on ROE.

And have you adjusted your price accordingly?

At this point, we haven't.

I see. So new business is now being written at a slightly lower ROE even. On a Canadian capital -- regulatory capital basis and a U.S. regulatory capital basis. Is that a fair statement?

I would say its a very modest difference at this point.

I see.

Your last question comes from Michael Goldberg from Desjardins Securities. Please go ahead sir.

Thanks, my other question was answered.

Would you like to take one more question sir?

No, I think we're at time operator. So I thank you very much. And I'd like to thank all the participants on the call today. If there are any additional questions, we'll be available after the call, and if you would like to listen to the rebroadcast ,it will be available on the website just after 6 o'clock tonight. So with that Ill say thank you and good evening. Ladies and gentlemen. that concludes the conference call for today. Thank you for participating.