Sun Life Financial Inc (SLF) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to the Sun Life Financial 2005 first quarter conference call. (Operator instructions) 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’d like to start by introducing the members of the 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. And also available to answer questions 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. In addition, Bob Wilson, our VP and Chief Actuary will speak to our embedded value.

Just to remind you, the slides to which the speakers will be referring are available on the Sun Life Financial website and turning to slide 2, I will 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. Our results for the first quarter of 2005 got the year off to a solid start, with operating earnings of $0.77 per share, up $0.06 or 9 percent from the first quarter of 2004. Operating earnings of $458m also represent a high water mark up 8 percent from the same quarter one year ago.

At our last investor day in November of last year, we indicated that 10 percent earnings growth was achievable based on certain key assumptions. In particular, that growth objective was predicated on improving equity markets, higher medium-term interest rates in the United States and the U.S. Dollar/Canadian Dollar exchange rate comparable to the average for 2004. None of these economic factors were fully in our favor over the first quarter of 2005, so we are particularly pleased with the earnings growth under the circumstances.

Results are directly attributable to a continued focus on operational excellence across the organization. Typically throughout the enterprise we are building businesses which are able to compete more effectively in challenging economic conditions.

Return on equity in the quarter was 12.6 percent, up 60 basis points from Q1 2004 and well on our way to achieving the target of 75-100 basis points of improvement over 2005. The ROE improvement is attributable to both earnings growth and the resumption of our share buyback program in the first quarter. We repurchased 4.4m shares for CAD $173m in the quarter. We executed a significant financing during the quarter, issuing 400m of non-cumulative perpetual preferred shares on very favorable terms.

In Canada, sales during the crucial RRSP season were the highest in four years as our individual division made $687m in market-based sales, up 45 percent over the corresponding amount in Q1 2004. As Paul will refer to later, the entire Canadian business generated significant growth in total premiums and deposits in the quarter, up 19 percent over 1Q04. In addition to the highly successful RRSP sales, segregated fund deposits also benefited from excellent sales momentum. For example, in group retirement services, putting the retirement business that was awarded by Magna to Sun Life Financial in Q1, the business was very strong.

Sales of CI Mutual Funds were up 38 percent over Q1 of last year. [MacLean Button] continued to rank among the largest institutional asset managers in the country, taking in almost $1.5b during Q1. This growth is impressive and clearly demonstrates the need to measure more than premiums in order to reflect the growth momentum in our Canadian business, particularly when the overall business is moving in the direct of market-based products.

Earlier this month, the Group Retirement Services team in Canada launched the Milestone Funds, the first life cycle funds for employer-sponsored group retirement savings plans in Canada to feature a guaranteed unit value at maturity. This unique offering has generated a tremendous amount of client and media interest and will further bolster the competitive advantage we have achieved as the largest player in this growing market.

In the United States, the significant build out of our variable annuity wholesaling team continued and we now have a current count of 66 wholesalers on the Sun Life Financial Team. Well on our way to our target of 75 by mid-year. As Bob Salipante indicated in our January 27, 2005 Q4 conference call, we expect to see this deliver sales results in the second half of 2005.

The improvement in investment performance continues at MFS and is being increasingly recognized by both retailer and institutional investors. MFS achieved net fund flows of $700m in the first quarter, the second consecutive quarter of positive flows. I am delighted to see that MFS domestic mutual fund business showing positive sales for a number of days in April continuing the solidly improving trend for every single month of 2005.

In Asia, we received approval to commence operations in Hang Zhou, China and this will be our third city of operations. With that, I will now hand the call over to our Chief Financial Officer Paul Derksen, for a detailed review of our financial performance. Paul.

Thank you, Don. Earnings were very strong this quarter. Based on constant currency, EPS was up 13 percent, well in excess of the guidance we have been providing of 10 percent. The $0.77 reported was after giving effect to the strengthening of the Canadian dollar, which cost us $0.03 relative to the first quarter of last year.

Slide 5 shows that ROE also significantly increased to 12.6 percent. The increase in ROE of 60 basis points is very favorable compared to our target of 75 basis points for the full year. This positive trend is also reflected in operating earnings. Earnings were up 8 percent, 11 percent in constant dollars.

On Slide 6 you can see how we continue to write very profitable business which is reflected in the value of new business. The value from business of non-MFS operations is up 31 percent, which is a result of our intense focus on profitable sales. Value from the business is the key indicator of future profitability as opposed to broader, top line indicators and that is why we are reporting this measure on a quarterly basis.

Turning now to the business groups on slide 7, Canadian premiums and deposits were up an impressive 19 percent from a year ago, mainly driven by growth in segregated funds and a strong RRSP season. Group segregated fund deposits were up 63 percent from a year ago, partially due to the Magna sale. The strong RRSP season, as Don pointed out, increased the CI Mutual Funds sold through Clarica by 45 percent compared to a year ago. [MacLean Button] also continued to show impressive growth.

Slide 8 shows that Canada had a good quarter in terms of earnings, which were up 7 percent. This was driven by favorable mortality experience in the individual wealth line, and a favorable credit experience. Return on equity was 110 basis points higher year-over-year.

On slide 9, you can see that individual wealth sales were up 45 percent from a year ago with improvements in both the annuities and mutual fund sales, the results of a very strong RRSP season.

Individual life and health sales were up from last year, mostly on growth in the wholesale channel, but down slightly from the fourth quarter because of the focus of the organization on the RRSP season and the resulting wealth sales.

Slide 10, group retirement services continues to do extremely well. It is ranked as the number one provider of employer-sponsored retirement plans in Canada, with market share of 32 percent. GRS continued to post significant new business wins, which includes the deferred profit sharing plans for Magna.

Slide 11, group benefits also had a good quarter with business in force up 5 percent from a year ago. It had written some very good business which will be recorded in the ensuing quarters.

Turning then to the United States, on slide 12, group and individual businesses also had a good quarter. Total earnings, however, were down from a year ago because we increased the reserve for GMDB by USD$22m, excluding which earnings would have been up significantly.

We maintain CTE at the maximum of 80 percent, giving us significant protection in down markets. So we are well-positioned in the United States from a reserve perspective for down markets, having strengthened two reserves this quarter. Revenues were off from a year ago, mostly due to the reduction in fixed annuity sales.

Slide 13, equity index annuities had a good quarter with the continuation of the positive net sales strength. The product is ranked number three in the United States. Fixed annuity sales continue to suffer from the impact of low interest rates. Variable annuity sales for the first quarter were up from the fourth quarter but down from a year ago, primarily due to the repositioning of the distribution source. This is an area of significant focus in the organization and we expect the repositioning of the distribution source to show very positive results in the later part of 2005.

Slide 14, group life and health in force business was up a significant 15 percent for the year. Sales this quarter were down from the fourth quarter for seasonal reasons. Individual life also had an excellent quarter with sales up 33 percent from the fourth quarter, mostly on strength of high net worth and COLI.

Slide 15, MFS earnings were up both from Q1 and Q4 2004. The effect of market improvements was partially offset by higher expenses related to the impact of the regulatory settlements in 2004.

Slide 16, assets are up slightly from a year ago with increases of $9.5b due to market improvements, partially offset by redemptions. Slide 17 shows the specifics. Net sales for MFS continued their positive trend, with strong sales of institutional products partly offset by negative flow to mutual funds. However, in the first quarter of ’05, mutual fund gross sales were up 16 percent from the fourth quarter of ’04. The redemption rate was 22.5 percent, down from 22.7 percent in the fourth quarter, continuing again this positive trend.

On Slide 18 you can see how MFS continues to be the eleventh largest mutual fund group in the United States. On slide 19 it goes into a little bit more detail with regard to fund performance. MFS has 81 percent of its funds ranked in the top half of the Lipper category for a one-year period and 75 percent in the five-year period as performance continues to improve.

Slide 20, Asia continues to do well with a 35 percent increase in revenue, or 47 percent in local currency. Earnings were off slightly from a year ago because of currency, and lower than Q4 for seasonal reasons. Slide 21, Asian sales increased 28 percent from a year ago and 33 percent in local currency. Hong Kong was up 39 percent, 60 percent in local currency, and India remains a significant growth contributor. As Don pointed out, approvals have been obtained to enter another city in China and to sell group insurance in China as well.

In the corporate segment, for which we don’t have a slide, there were a number of items which I want to highlight. We recorded a $53m foreign exchange gain on the repatriation of £250m from the United Kingdom. This was fully offset by the write-down of some software, a provision for regulatory matters in the United States, and the market impact on discontinued reinsurance.

We also saw some tax issues, which were reflected in the segment. However, our total tax rate of the organization of around 20 percent this quarter is very much sustainable. This compares to the first quarter of 2004 which showed negative earnings due to a variety of smaller items.

Slide 22, asset quality continues to be very high and is improving. Gross impaired assets and corresponding allowances in the first quarter of ’05 were down, on general improvements in the portfolio as well as the sale of certain impaired assets. The ratio of non-impaired assets to invested assets continues to decrease to 15 basis points from 23 basis points a year ago.

Slide 23, the reorganization of our corporate structure was successfully completed in January of ’05. As a result of this, our MCCSR increased to 247 percent. This restructuring gives us further flexibility of our capital, allows us to increase our leverage and S&P, the rating agency, gave the senior debt rating of the holding company a positive outlook when we announced this transaction.

We repurchased 4.4m shares for $173m and issued $400m of perpetual preferred shares. Slide 24 reflects the quality of our earnings. Expected profit is up $15m. New business gained more than doubled from $31m in 2004 to $66m in 2005 reflecting our conservative actuarial assumption. Experience gains and assumption changes were in the aggregate, about the same as they were last year. Earnings on surplus are up $41m because of improved investment returns.

On slide 25, in summary, we had an excellent quarter with earnings in constant currency up 13 percent and an ROE increase of 60 basis points. This compares favorably to our target for the year of 10 percent growth in earnings, and 75 basis points ROE increase. Our focus on profitable sales continues to drive value through business growth, which is up 31 percent if you exclude MFS. This is certain to drive earnings in future years.

As we look forward, these results are fully consistent with the targets set for earnings and ROE growth in 2005 which we announced at the investor day in November of ’04. This concludes my comments and Bob Wilson, our Chief Actuary, will now review embedded value with you.

Thank you, Paul. Turning to slide 27, we created a significant amount of embedded value during 2004. Our embedded value per share at December 31, 2004 increased by 15 percent before capital transactions and currency, and 10 percent after share buybacks and dividends amounting to $832m.

The value of new business increased by 18 percent to $684m on a constant currency basis. Excluding MFS, the increase was significantly higher, as Paul has pointed out earlier. As usual, we asked [Towers Parent] to sign off on our methodologies and assumptions, which they did after reviewing our work.

Turning to slide 28, the return on in force business in 2004 increased embedded value by $1.6b. The expected return of $1.2b was up from $1.1b in 2003. Experience variations increased embedded value by $279m vs. an increase of $272m in 2003 and changes in assumptions led to an increase of $156m during the year.

The appreciation of the Canadian dollar against the U.S. dollar over the year reduced the embedded value by $574m while changes in the risk discount rate resulting from decreases in interest rates during 2004 increased the embedded value by $210m. Embedded value for MFS increased $1.5b Canadian, despite the rise of the Canadian dollar.

Dividends and share repurchases mentioned earlier reduced embedded value by $832m. We have provided more detailed assumptions and sensitivities in the remaining slides, which I will not cover at this time but will be happy to answer questions. I will now pass back to Tom Reed.

Thank you, Bob. Operator, I think we are now ready to start with the question and answer portion of our call, so I would ask that you please poll the callers for any questions.

Your first question comes from Jim Bantus from Credit Suisse First Boston.

Hi, good afternoon. Two quick questions. One with respect to the wholesale sales force getting to 75 individuals. Can you give a little bit more color with respect to the type of production in terms of sales per wholesaler, where you would like to get to and if you compare it to competitors, how many wholesalers would they have? Sales per agent relative to what the old sales force had as well. Then I have another question.

Bob Salipante here. What we are doing with this recruiting and a key part of the reason that we made the change we did back in November in that we let a good number of these people go is we wanted to recruit an experienced wholesaling force. We have been able to do that over the past couple of quarters. We are recruiting people who have the track record, experience and who have a minimum of $50m of production in their current organization. So $50m would be our target, obviously we are short of that at this point.

But as you may know, this is a process of repetition. As we bring these people on board, they come up to speed on our program and they go out into the field. Their goal is to hit the total broker community every 45 to 60 days. We think it takes three or four trips for the broker to get reacquainted with the Sun Life story and for sales to begin to flow.

The last quarter, I gave an indication of the production we were getting on a same-store basis. These were the wholesalers who had been on board through this transition period and in the fourth quarter vs. the third quarter that production was up 16 percent; in the first quarter vs. the fourth quarter last year that is up 21 percent. So I think that gives you an indication that with the new management team on board and the Sun Life Financial distributors program is working. We are recruiting the kind of people that we are after and from really, very good firms.

We are shooting for 75 wholesalers this year, 90 next year. That should put us in the top tier of wholesaler count. It takes about 90 to be in the top tier group, and by that I mean the top ten.

Thanks very much Bob, that was very helpful. The second question I was going to ask to Paul with respect to provisions for credit losses. You had actually a big swing year-over-year of about $30m, a big recovery coming in this quarter. Can you give a little bit of color with respect to the sectors and really what happened this quarter?

Yes, Jim. There was no particular large transaction that took place, it is a series of lower quality assets that we sold, particularly in Canada but in the U.S. as well. We were [concerned with the terms that they provided] for those, so as soon as we sold those we had to release the reserves. I would say looking forward, we continue to be conservatively providing for our assets and so while we don’t expect a $20m before-tax credit to continue every quarter, we expect the provisions to be quite [inaudible] for the ensuing quarters.

Great, thanks Paul.

Your next question comes from Brad Smith from Merrill Lynch.

Yes, thanks very much. I was wondering if we could just talk a little bit about the domestic sales environment. Very strong fund sales for segregated and otherwise. I was just wondering if we might get a little more detail on what contributed to that? Was it product innovation, or change in the [shelf]? Were there any competitive aspects out there that created an opportunity for the group, or were there any changes in the sales organization compensation, et cetera?

Thanks, Brad, it is Kevin Doughtery speaking. A number of factors would be driving the environment, but really I think the productivity focus in the sales force in particular is taking hold. We’ve made some adjustments in compensation, the underlying products, the CI Funds in particular are very, very attractive to the market. All of those things come together to create very, very strong sales.

Kevin, if my statistics are correct here, the mutual funds gross sales were only up about 8 percent in the quarter year-over-year, your numbers were well in advance of that. Is that reflecting really market share expansion for you?

Yes, I think we are selling not just the CI Funds but other funds as well. Can you give me that question again, just a little bit more detail?

I am just trying to get a sense for your market share, and the only statistics that I have is the mutual funds gross sales. I don’t know what the segregated funds sales profile was, but I guess my question to you is, do you feel that focus on productivity is in fact translating now into market share gains in the domestic mutual funds and the domestic seg fund and/or the domestic seg fund business.

Okay, thank you for that question. So overall, mutual fund sales are up only 8 percent but we’ve got really a lot of distribution power coming online and that is what you are seeing here, just very, very strong sales in the Clarica sales force channel.

I think it speaks about the great sales we are getting with CI. CI is a well-run organization with great products. I think the technology has been well-developed now, the wholesalers and the agents work extremely well together, and it is a very smooth operation which is reflected in the sales.

So you are pretty confident this trend, this relative market share trend, can continue?

Yes, what you are seeing there is reflective of the underlying distribution power that we put into place.

Perfect. Thanks so much.

Your next question comes from Jamie Keating; RBC Capital Markets.

Thanks, everyone. I have a couple of specific – on this slide 24, we are reviewing sources of earnings here. I am curious, it is reflected as good performance and I don’t necessarily deny it, but I do point out that if I am reading it right, we are getting a lot of benefit here from MFS settlements, the $62m, which without that I am not quite sure it is as big a corp. Am I looking at that too plainly and missing something on that?

We normally report on an operating earnings basis, but using the [Oshay] model for [inaudible]. We go back to reported earnings. And so the 365 is actually lower, in ’04, it is lower than the [inaudible] so you don’t have quite [inaudible] if you want to look at it from an operating earnings perspective.

I should pick that up and I can get a more generous version. Okay, that is helpful.

Okay.

Can I also, it is sort of a double-barreled addendum to what Brad was digging into. One question, I am curious about his point here on mutual fund sales, do you in here report the net flows? I may be seeing it and I just don’t know it.

We don’t report the net sales, Jamie, but we can tell you that the Clarica sales force in the quarter represented about 32 percent of the net sales in CI. I don’t have the CI total sales at hand. I can get you that offline and post it on the website.

Okay, that’s helpful. So that might be one proxy to try and get a handle on how you are doing, because it is – the industry didn’t do net/net very well.

Well just to give you an indication too, sales generated was about 20 percent of the gross sales but 32 percent of the net sales and that obviously reflects the fact that the redemption rate in the Clarica sales force is a lot lower than you would find across the rest of the generic mutual fund market place.

Excellent. One last quick question if I may. I just want to zero in a bit on the Magna contract. I am just curious if we can get any specifics about influence that the Magna contract had on the seg fund flows in the quarter, and maybe some comment about how that layers in over time to the extent it does. I don’t understand how these contracts work, I am just curious as to what the margins look like and the seasonality and so on.

Okay, it is Kevin Doughtery speaking. Flows from that contract were around $420m, the total value of the contract was about $700m, which represented the retention of existing business as well as the new business that we brought in as part of the contract. This is one of the largest [DC] pension plans in Canada and one of the watched employers in Canada, very progressive. So overall, a very, very big win for GIS.

Can I just broadly, is the margin on this product front-end, back-end loaded? Or is it pretty steady? How does it look?

It is a level three type of contract.

Excellent. Okay, thanks a lot.

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

Thanks. First question for Paul, just looking at the capital page, and I note there has been a pretty big drop in required capital. I assume that part of that is currency, I assume that would be offset and it sort of reflects the drop in capital available. Can you talk a little bit about, it looks like assets default and market risks are down, interest rate risk. Can you talk a bit about that?

Well it is primarily, John, restructuring that I spoke to on the slides. Our MCCSR is up significantly, the required capital is down, and that is because we moved to normalize the assets over to Sun Life Financial Corp, which is outside of the Sun Life Insurance.

Okay, that makes sense. Okay. Sorry. Missed that part. And the new sales gain at $66m, what built that up to be in Canada? Is that right, and where are you seeing it? Is that on the UL product you are selling? It seems like a big number, I am just trying to figure out where it is coming from.

It is both in the U.S. and in Canada. It is the individual product in the United States as well as in Canada.

There is no one product that it is associated with the most?

There is nothing in particular that stands out, no John.

Okay. And I guess Bob Salipante, I will ask you the standard question. Are you getting the targeted spreads on the fixed annuities that you are selling?

New sales, yes. We are still well off our target, John, on the in force, obviously things haven’t changed dramatically from the last quarter on that account.

But you are still getting 170-200 basis points on the new business?

We are.

Okay, thank you.

Your next question comes from Michael Goldberg from Desjardins Securities. Please go ahead with your question.

Thanks. There seems to be a number of semi-irregular items and I just wanted to zero in on some of them. Starting with the GMDB reserve, it was my understanding that [inaudible] to begin the quarter, and markets weren’t off all that much and you have a relatively low on-balance sheet exposure to equities. Can you just maybe clarify? It was $22m.

Michael, you broke up a little bit in the middle so let me answer the question, if I miss something let me know. The closing market in December, the S&P was 1212 and I think the end of this quarter was 1180-something and so there was quite a substantial drop quarter end to quarter end.

The reserves, we maintain the [TTA] so we kept a maximum reserve percentage, the TTA percentage that is allowed, and then the rest of it is just math. We go through the exposure and this is the number that pops out.

Great. Now in addition to that, I guess there was the resolution of taxes, $16m, offsetting that reserve. Then you had the release of the credit reserves. How much of the $20m release of credit reserves would have flowed through to the shareholder level?

The full $20m would flow through to the shareholder level.

Okay, and are there any other items for –

It is really $14m after tax.

Are there any other items that I have missed?

I think if you add the $6m in taxes, as I have pointed out, and the allocation between segments, and you exit the 20 percent of tax rate that was shown this quarter based on the business mix you had this quarter, it is very sustainable. But I would say, if you wanted me to summarize the quarter and the special items, I think that with excellent credit experience across the organization reflecting in the negative provisions, with very favorable mortality that you’ve seen. You’ve had some of these reserves strengthening in the U.S. so all in all I would say that the quarter reflects what the circumstances were during the period.

Okay. Just turning now to the embedded value data, the expected return on the in-force, greater than the discount rate that you’ve used in the past and that you are using now. And in fact, I guess the return on excess capital would be even lower. I am wondering why the expected return on in-force is as high as it was.

Michael, I am not sure we are entirely following your question here. You are addressing the gain in the in-force business, the expected growth of $1.2b? Is that what you are referring to? Or are you talking about the – is that what you are referring to?

Yes it is.

You are wondering why it is high as it is?

Yes.

I would like it to be higher, actually.

I am sure you do.

This is simply a reflection, I would say, of the assumptions and the business that we have written over the last [months]. We expect to get criticized for not having top line growth, but we are very disciplined about writing profitable business that results in higher value new business and also higher expected gain on the in-force business.

Okay, maybe I should follow-up on that with Bob Wilson, but I did have another question there. Of the $279m [inaudible] gains, how much would have been due to equities, credit and other variables?

The majority of that number is equities and I don’t have the exact number here but I think Bob actually does.

Yes, most of that is actually equities, Michael, because the market was up fairly strongly last year. I don’t have the complete breakdown here, I’ve got it in my office but not here.

I guess we can follow-up on that. Also, this year was there any impact from marking debt capital to market?

The minimum amount it was around $10m, summarized in [inaudible].

Great. And also on the information that you provide on VNB now, you are showing a trailing 12 month data and I just wondered, what does the trailing 12 month data actually say about the first quarter trend alone? Would it be possible for you to provide actual quarterly value of new business over the periods that you are discussing?

Well Michael, the fourth, the last quarter in a sequence is typically an estimate, we haven’t always run all the details on that, trying new business metrics. So we decided to provide a little bit of a broader perspective and run the last 12 months. Over time, eventually we will go to discrete quarterly reporting but I don’t think we are prepared to do that at this time.

Having noted that, I think the first quarter is up significantly as well. We had a great first quarter in terms of new business estimate, anyway, and I think the numbers will prove that out as we continue to refer to this on a quarterly basis.

Does it reflect, say in line with what it was for the year previous or is there an acceleration or a slowing? I know it is just an estimate.

It is directionally consistent. So it is in the same range.

Michael, we are going to have to move on.

All right, thanks a lot.

Thank you.

Your next question comes from Mario Mendonca; Denuity Capital Markets.

Good afternoon, everyone. I wanted to talk a little bit about the Canadian retail business. Quite a bit of companies earnings [inaudible] fairly important advent. It is becoming a little harder to understand what is going on in that business because there are a number of businesses in our retail insurance, Worth Management, CI, a lot of corporate has been pulled out. It has changed quite a bit over the last little while.

What I wanted to understand is what is happening on the premium side? Premiums have been declining a fair bit over the last little while, and the only types of premiums that could be in there would be individual life premiums or fixed annuity premiums. We can see from the presentation that fixed annuity premiums must be doing well, I mean we saw it on the individual wealth management side on the presentation, which really only leaves individual life.

I really need to tie that in with comments made about changes in the compensation structure for Clarica’s agents, because it would suggest to me that retention might be the issue. First of all, do I understand that right? There are a lot of moving parts here, so I may not. Can you describe it to me?

It is Kevin Doughtery speaking. Thanks, Mario. Yes, as we developed our plans for the individual insurance business, as you know we are investing quite a lot in individual distribution. In general, our business retention through the Clarica sales force is the highest in the industry. I would say we are in the early stages of really driving that particular line. What you will see is as we continue to focus on productivity with the Clarica sales force, build up our reach in wholesale, that will start to move much more than it has in the past.

But am I right in suggesting that retention for that particular part of the distribution force is down?

No, I don’t believe so.

What –

As a matter of fact, if you said the previous quarters, we have let bottom quartile performers go, that is why the number is down, but the average productivity is up significantly and we are in the process of actually putting an indicator together which we will hopefully show you next quarter that shows you the productivity increase of the sales force on a per person and in the aggregate basis. You will see that it will be significantly improving over time.

I am actually not talking about sales right now, I am talking about retention. Sales, that is great, we can certainly see that. But premium, in-force premium is a really good measure of everything, sales and retention, and perhaps you can just explain why those in-force premiums in that business are declining?

Mario, it is Kevin speaking. So in-force premiums would be up slightly over last year. I think about 1 percent. What you will see as we unfold our strategy will be continued focus on that particular line, as well as the deposits that we have talked about.

We are seeing, Mario, is that it is not up as much as we would like them to be but they are certainly not down as you are suggesting to us, so perhaps you are looking at it from a different perspective.

Page 8 of your supplement.

I am happy to sit down with you after this if you have –

Well Paul, it is important just to make the point clear here. On page 8 of your supplement you show that your premiums go from $600m last quarter, 1Q04 to $565m. That is not a 1 percent increase. I think I know how to read the supplement.

Right.

It is down.

Well I was looking at a different page in the supplement. We have many ways of breaking this down, and I would be happy to sit down with you to go through it in a little bit more detail to make sure that we understand.

Mario, just to be clear, there has been no decline in the retention level within the business generated by our Clarica sales force. That continues to be what we believe to be the highest in the industry. So what you are seeing is the combination of the business written by the Clarica sales force and some legacy business that would have included business written through the wholesale channels when Sun Life used to be in there, and so you are seeing perhaps just the dip before we generate the recovery in sales as we continue the reentry into the wholesale channels in Canada.

Tom, that made it perfectly clear. It’s got to be the legacy business, that’s the only reason why it could be down. Thanks for explaining that. One final thing. Page 28 of the presentation, we see that changes in assumptions and methodologies added $156m to the embedded value. We also see that the change in the discount rate added $210m. Those two changes, changes in assumptions and changes in discount rate, tend to have an even greater impact on value-added by new business. There is sort of exponential impact when you look at how those changes affect the value of the business.

What I would like to understand is, I don’t see any 10 percent increase in the value of your business year-over-year. How might that work if we sort of negated the effects of the changes in assumptions and the change in the discount rate?

The changes in assumptions, some of those don’t have any impact on value of new business because they are in places where we don’t even sell new business, and one of those is the U.K. where the change in assumption was actually a change in assumption related to the reserving on the U.K. statutory basis as opposed to a Canadian basis. So it is really just a release of effectively locked in capital caused by the change in assumptions in the U.K.

It is not in the slides. We do have the numbers for the 1 percent change in the discount rate as to the value of new business, I just don’t have it with me at the present time.

Would it be safe to say that the value of new business probably was up in single digits, given how important the change in the discount rate is?

No.

No?

It is actually the only place where we changed the discount rate was actually in Canada, and a lot of the value of new business, as you might expect, has been coming from Canada. There is a lot – yes, the Canadian number would have changed, the rest of the operations we do not change the interest rates, so the increases there would be the same because nothing actually happened.

So that 18 percent number still makes a lot of sense then?

Yes.

Thank you very much.

Your next question comes from Tom MacKinnon from Scotia Capital.

Thanks, good afternoon. Most of my questions have been answered, but I have a couple of others here. One is on the equity index annuity marketplace, I noticed that the sales were down 8 percent year-over-year and down sequentially. As well, [Jeff Pilot] seeing some deceleration of sales as well, and Ameris is seeing some acceleration of sales on a sequential basis. So maybe you can comment on the index annuity marketplace. What, in your opinion, has been contributing to the slowdown in sales, albeit from a fairly good 2004? What is your outlook on this marketplace going forward? And I have a follow-up.

Tom, it has, I think for the last several quarters, been the fastest growing segment of the U.S. annuity market. I think the value proposition makes sense, given where the capital markets are. Our product is a little long in the tooth at this stage and the competition has intensified. We’ve got a new product slated to come in the second quarter of this year which will re-establish our competitiveness. We have excellent access to distribution there and in fact look to extend our distribution.

Thanks. I can’t believe we have gone this far without talking about the buyback, but 175m purchased in the first quarter, a little extrapolation suggests we are going to be ahead of our $500m “guidance”. Can you comment on that, Paul?

Yes, Tom. We haven’t changed our guidance for the year and we haven’t really decided any more or any less. It is still our target. We will update you next quarter if that changes.

Any updates on the thoughts on an acquisition outlook or anything regarding that? It seems like some of the organic growth being put in place is taking some traction? Maybe, Don, you can elaborate on that.

Sure, I don’t think I have much to add to what I said on the last call on January 27th. We continue to look at what is out there and we are active and there is nothing to report. That is basically the story.

You used to talk always, Don, about like a $500m-$1b max. Are there other things out there that could be larger that you might want to look at? Do you feel you need that scale in certain areas?

I think our primary emphasis is in doing the right deal and getting value in the transaction, Tom. We’ve indicated that the price range was, as you stated, in the $500m or somewhat above that, but of course deals don’t come along in specific price ranges, they come along rather unevenly so we would look at each deal, if it made sense aligning with the existing business, then that is just where we are at the moment.

Okay, thank you.

Your next question comes from Timothy Lazaris from T&P Securities.

Thanks. I have two quick housekeeping ones, and then a follow-up question. I am just looking at my most recent notes, I guess from last quarter, and there was some sensitivity work Paul that you provided us with respect to a 1 percent increase in interest rates across the yield curve for a year, and a 50 point increase in the S&P equally for on year in terms of – I think it was $0.20 for the interest rate and $0.09 a share for the S&P. Are those still consistent and have you tried to do any type of sensitivity to those recently?

Tim, they fluctuate from time to time. The S&P is roughly the same, the interest rates are somewhat less, but it changes on a regular basis as the portfolio and the A line positions get adjusted. But it is directionally correct.

Is it materially less in terms of the interest rate, the $0.20 number?

It could be 25 percent less.

Okay. And just lastly, I think Paul you mentioned the target ROE objective is to increase by 75 basis points a year, and clearly you are ahead of that in terms of your first quarter. How much of that ROE improvement in the quarter had to do with the way you’ve restructured your company or any, if you will?

It didn’t change the total capital at Celeste levels, so it would have not had anything to do with restructuring this quarter.

Okay, and just follow-up, do the leverage ratio right now, being close to I guess 21 percent, what is the company’s target leverage that you feel comfortable with.

That is the leverage ratio, SLA I guess you are referring to. We would be comfortable to increase that quite significantly depending on circumstances in our ordinary course, 25 percent plus, but if you see the right opportunity we can leverage, we will be beyond that.

And the right opportunity being?

Some sort of acquisition.

An acquisition that already has a higher leverage?

Yes.

Okay, thanks very much, guys.

Your next question comes from Eric Bird from Lehman Brothers.

Thank you. Good afternoon to everyone. A few questions, first of all earlier there was a reference to strong mutual fund sales in Canada. Where would you point me to in the financial supplement and the statistical supplement to reference those strong sales?

It would be in deposits, right?

Eric, for starters you would see it in the slides, okay?

I’d prefer it – if you could – I would really prefer to work with the financial supplement.

Go to slide, page 6. You see there the premiums deposits by business group.

Absolutely, CI Mutual Funds. Okay. Second, with respect to the special items, I know that there is a lot going on, the $20m odd charge for the GMDB in the United States, taxes related to U.K. and so forth. Where would we see, again in the financial supplement if we could work with this document, where would we see the release of credit reserves? Could you refer me to a specific page and line item? Where would that be?

Sure it is on the page 18. So go to the bottom of page 18, $20m at the bottom left.

Very good. So are you saying Paul, essentially – did you say before in answer to Michael’s question, I just want to clarify that sort of net-net, when one considers all of the unusual items – maybe that is not the right characterization – but all of the items that you have identified: Britain, the write-off for software, GMDB, tax credit and so forth, that net-net they netted approximately to zero and that the level of earnings was – do you see what I am saying? Asking now?

What I said was a lot of these items have occurred in the quarter, in other words we had a good quarter, partially because of profit and credit experience. And so we are benefiting, the organization is benefiting from the very strong credit performance that we had. If the markets were to turn, it would have an impact on our earnings bottom line, obviously.

Okay, final question is to Bob. Bob, I certainly heard your opening remarks about the hiring of wholesalers and their experience level and seniority as measured by the size of your book and so forth, but your net sales remain negative. I am trying to reconcile your optimism and your favorable commentary about the state of the annuity business. I am looking on page 5 of the supplement with the fact that pretty much across all three product categories it looks like, sales were down and indeed are at some of their lowest levels in a while.

Eric, the focus is on building that variable annuity sales ramp, net sales are a function of gross sales and redemptions. Redemptions are going to be pretty much, if you look on the right side of that schedule 5 you will see that the redemptions have been pretty much constant over time. We expect that to continue. So the challenge is to grow the top line and we’ve made a significant investment.

I believe, as has been indicated, we will gain traction. We’ve got strong product, as a result of the historical relationship with MFS we have excellent access to distribution, we have tremendous shelf space. You know, just back if you recall at the investor day thing, I talked about our private label strategy. Just this week we launched a private label variable annuity within Bank of America and the Bank of America retail market share approximates that of the entire market in Canada.

So I think our strategy, as we put one foot in front of the other is working and the objective, while those redemptions remain at a constant level over time is to grow that top line, work our way into a net positive position and then move on from there.

Thank you.

Your next question comes from Steve Cawley from T.D. Newcrest.

One quick technical one. If you hadn’t bolstered your GMDB reserves, what would the CTE level have fallen to?

That is a good question. I am not sure that we have that specific answer, but Bob is – it is quite a complex complication. Bob, do you have any estimate of that at the top of your head?

At a guess I would think it would be 75.

So given the weakness that we have seen in the equity markets, order to date, can you give me a sense of what CTE level that you would be comfortable with on a moving forward basis, or do you feel that you are always going to have to stay at 80?

If the quarter ended tomorrow and the market is where it is, we would be still at CTE 80.

Is that right?

Yes. If you had a specific formula, if you had the specific metric that we have depending on where the market is, that would be considered, depending on circumstances, to move the CTE there. So it is fairly formula driven, it is very formula driven.

It doesn’t sound like something I can calculate.

Well, it takes a lot of actuaries to calculate that here.

Don, one for you, and I am sure you’ve heard this before but I’ve got to ask it. You must look at several of your businesses and you say to yourself, well Canada is now at 15 percent ROE, and the MFS has obviously got a great ROE and U.K. generates reasonable ROEs for a run-off business, and you’ve got a U.S. business that is still plodding along here, an 8.3 percent ROE.

There are many steps that are being taken right now, like rejuvenating the sales force on the variable annuity side, and to try to bring those ROEs up, and if interest rates go up well that will help your spreads as well. Did you give yourselves any sort of time limit, any sort of period of time over which that you have to get this into double digit range, and if you don’t that this point in time you have to do something a little bit more dramatic?

Steve, let me try and address your interesting question. Obviously they are very focused on building value and we are doing that as Bob alluded to earlier. We’ve been quite successful in the equity index annuity field, and we’ve got new product coming out. So to look at the annuity business and aggregate it, and you have to look component by component and recognize the reality that there is an embedded in force there that is locked in at interest spreads that will take some considerable time to work through. That is a mathematical fact.

And it is not indicative of the value we are building around it. So I think you need to segment the business rather than just aggregate the ROE on it, because the fixed business is locked into existing spreads and the industry is going to encounter ongoing headwinds if nominal rates of interest at the longer end of the United States don’t rise somewhat from the present levels. This isn’t just about our book of fixed annuity business, this is about all guarantees of any long-term intermediation business, and really the business to get back on its feet in total needs to see higher nominal rates than where we are at the moment.

You are not necessarily seeing that with the clarity that you focus your laser-like clarity on our fixed annuity business because, of course, life insurance business is proved across the book of business both by ourselves and by the industry. But that is the reality of what is happening, that if you were to isolate large blocks of historical intermediation business and look at their ROE, it would not look very attractive at this point, but to add value going forward, you simply have to add value on top of it and eventually it will roll over if interest rates rise to the levels that we believe are necessary for this business to sustain itself. And I mean this business in terms of the total life insurance and fixed annuity business, and therefore it doesn’t make sense to be running for the hills because you can’t escape the present mathematics.

Operator, we are done. It is 5:00. Can we end the call now?

Yes, please continue.

Thank you. I would like to thank all of our participants on the call today. If there are any additional questions, we will be available after the call. Should you wish to listen to the rebroadcast it will be available from our website shortly after 6:00 pm tonight.

Also just add that we’ve received a number of requests to expand the history provided for recent changes made to the statistical supplement, so tomorrow we are going to forward additional updates so everybody will have eight full quarters of history on the new segmentation basis.

With that, I will say thank you and good night.

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