Sun Life Financial Inc (SLF) 2005 Q2 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Sun Life Financial second-quarter results 2005 analyst conference call. At this time all participants are in a listen-only mode. Following today's presentation instructions will be given for the question-and-answer session. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded today Thursday, July 28, 2005. And I would now like to turn the conference over to Mr. Tom Reid, Vice President of Investor Relations. Please go ahead, sir.

Thank you operator. Good afternoon everyone. I'd like to start by introducing the members of the management team present for today's call. Posting the call, we have Don Stewart, Chief Executive Officer of Sun Life Financial; Jim Prier, President and Chief Operating Officer of Sun Life Financial; and Paul Derksen, Executive Vice President and Chief Financial Officer. Also available to answer questions on the call today we have Kevin Dougherty, President of Sun Life Financial Canada; Bob Salipante, President Sun Life Financial U.S.; and Bob Pozen, the Chairman of MFS.

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

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

Thank you Tom and good afternoon. We're very pleased to reporting a strong set of results for the second quarter of 2005 in which key strategic financial and operating objectives of the Company were achieved.

Let me begin with our financial results. Through active capital management and most importantly strong growth in earnings, we've increased our return on equity a full 100 basis points to 13% in the quarter. This is at the high end of the 75 to 100 basis points range we have set as our medium-term goal. We continue to believe that organic ROE growth delivers value to shareholders and that will be an ongoing focus for Sun Life.

Earnings per share of $0.81 represent another high watermark. Improved results in the U.S. annuity business due in large part to improvements in the fixed annuity spreads as well as a rebound in Asian earnings drove the overall improvement. Solid performance on the asset side was also an important contributor to strong results. In the quarter we bought back an additional 6 million shares bringing the year-to-date total to nearly 10 million for CAN$379 million. This is excellent progress against our full year target of $500 million.

From an operational perspective, we continued to advance on many important initiatives during the quarter. In the United States we announced an aggressive target of reaching 75 annuity wholesalers by midyear and I'm pleased to report that we are at 77 currently having successfully recruited among the best wholesalers in the industry. As I said on our first-quarter conference call, we're looking for sales improvement over the second half of 2005 as it takes time for new wholesalers to come on stream.

At MFS, the trend in positive net sales has accelerated in the second quarter reaching US$3.5 billion. Net sales of retail mutual funds continue to improve in the quarter and institutional net flows were US$4.2 billion confirming the significant improvement in investment performance at MFS.

As many of you know on July 6, we announced an important acquisition in Hong Kong that will significantly advance our strategic position in that market and will also facilitate future expansion into Southeast China. Right now integration planning continues and we look forward to closing that transaction later in the quarter.

While we are very pleased with the financial results in the quarter, we're equally pleased with the fact that we have met a number of key commitments to shareholders. We've improved our ROE by a full percentage point. We've exceeded 10% EPS growth. We are well on pace to hit the $500 million share buybacks for the year, annuity distribution expansion is on track. And we have announced an acquisition that will be accretive to both ROE and earnings per share and most importantly should add to shareholder value. I look forward to reporting our continued progress on these fronts at the next quarter.

I will now hand over to Paul Derksen, our Chief Financial Officer. Paul.

Thank you, Don. As Don mentioned, earnings were very strong this quarter at $0.81; earnings were up 11%, up 16% in constant currency, well in excess of the guidance we have been providing of 10%.

Slide five, the chart shows that return on equity also significantly increased by 1% to 14%. We were very pleased with this increase which compares favorably to our target of 75 to 100 basis points for the full year. This positive trend is also reflected in earnings which were up 9% and 14% in constant dollars.

On slide six, you can see how we continued to write profitable business which is reflected in the value of new business. The VNB of non-MFS operations is up 40% which is a result on our focus on profitable market share. As you all know, it is easy to get high growth in premiums and deposits while sacrificing profitability. We believe that improved (technical difficulty) in the value of new business is the key indicator of future earnings growth.

Turning now to the business groups on slide seven, Canada had a very good quarter with earnings growth of 7%. It was driven by favorable credit experience and good claims experience, both in the individual and in the group lines. ROE was 100 basis points higher year-over-year.

Slide eight, individual wealth (ph), the sales were up 28% from a year ago with improvements in both the annuities and mutual fund sales. They were lower than in the first quarter because of seasonal RSP sales in the first quarter. Life sales were roughly the same as a year ago but market share improved by a full percentage point.

Slide nine, group retirement services continues to do extremely well. It is ranked as the number one provider of employer responsive retirement plans in Canada with most recent market share at 32%. Sales are lower than they were less quarter which included the closing of the administration of the deferred profit-sharing plan for Magna Canadian operations. An important strategy for GRS is to retain an increasing portion of the funds that lead to the fine contribution plans as a result of retirement and other moves. Margins are significantly higher in these retained assets.

The retention of these assets was up 80% to $106 million this quarter representing 20% of the assets rollover. Our objective is to increase this retention to 40%.

Group assets on slide ten also had a good quarter with business in force up 7% from a year ago to reach $5 billion. We have written some very good business which will be recorded in the ensuing quarters. The lapse rates continue to be significantly below industry levels at 3.7% compared to 5.1% for the industry.

Slide 11. The U.S. had an excellent quarter. Improved spreads, the payoff of the hedging program and equity markets contributed. Individual life had slightly lower earnings because of reserves strengthening this quarter and the implementation of a UL hedge program in 2004.

Slide 12. Fixed annuity sales picked up this quarter. Variable annuity sales in the second quarter were slightly lower but market share is up in the second quarter.

Slide 13, individual life also had an excellent quarter with sales up 57% from a year ago with growth in both core and in BOLI/COLI type sales.

On slide 14, group life and health in-force business was up a significant 18% for the year. Sales this quarter were up from the first quarter and from a year ago on strengthened distributions.

Turning to slide 15, MFS earnings were up mainly from increased revenues on higher average net assets. Earnings are down slightly from the first quarter due to increased product expenses and legal costs.

Slide 16, assets are up 9% from a year ago to $150 billion with increases of $10.6 billion due to market improvements and net sales of 1.8 billion. Particularly institutional accounts have done very well and are up 24%.

On slide 17, this quarter net sales for MFS of $3.5 billion continued their positive trend with strong sales of institutional products partly offset by slightly negative flows in mutual funds. However mutual funds gross sales are up 18% from the second quarter of '04. A redemption rate was 21.7% down from 22.5% in the first quarter and 34% a year ago.

Asia on slide 18 continues to do well with a 13% increase in revenue or 20% in local current fee. Earnings were up from a year ago in the first quarter mainly due to the resolution of a tax issue in the Philippines and the benefit of lower unit expenses in Hong Kong.

Slight 19, Asia sales were flat year-over-year but up 8% in constant currency with growth in Hong Kong and Indonesia, offset by slower sales in the Philippines and China. Q2 sales were lower than in the first-quarter mostly due to seasonality of the sales in India.

Slide 20, asset quality continues to be very high and is improving. Gross impaired assets and corresponding allowances were down on improvements in the portfolio as well as the sale of certain impaired asset holdings. The ratio of net impaired asset to invested assets continues to decrease to 14 basis points from 19 basis points a year ago. Net credit recoveries this is quarter amounted to $15 million after tax.

Turning then to slide 21, we had a lot of activity in the capital management area. We repurchased approximately 6 million shares in the quarter for $218 million, or $379 million year-to-date compared to our $500 million objective for the year. We also issued $325 million of 4.8% preferred share and redeemed $150 million of 6.5% preferred shares. As a result of our continued earnings growth, the Board has approved an increase in our quarterly dividend to $0.25.5 (ph) per share, up 6% from the first quarter and up 16% year-to-date. At the same time, our MCCSR increased to 248% and our capital base continues to be very strong.

Slide 22 reflects the quality of our earnings. Expected profit was 366 million; currency reduced expected earnings by $21 million. New business stream was about the same as last year but experienced gains such as markets, mortality and morbidity were very positive. Assumption changes were the same as last year with earnings in surplus up measurably because of the improvements in the credit environment.

So in summary, we had an excellent quarter. The business is performing very well. We showed continued strong improvement in the value of new business, had excellent credit performance and strong experience gains resulting from solid underwriting and other practices. Our capital position continues to strengthen despite our $379 million of repurchases this year. The MCCSR is higher than it has been in recent times at 248%.

Our very strong growth in the value of new business along with our focused and accretive acquisition in Hong Kong sets the stage for continued improvement in earnings and return on equity going forward.

This concludes my presentation. And now I will turn it over to Tom Reid.

Thank you, Paul. Operator, we are now ready to start with the Q&A portion of our call. So I would ask that you would please poll the callers for questions.

(OPERATOR INSTRUCTIONS) Steve Cawley, TD Newcrest.

Paul, I hate to do this every quarter but I just can't help myself. You reported $0.81. And I count here credit reversals, gains from a hedging program, easier tax benefits and I think a variable annuity reserve released as four potential positive items that would have been included in that $0.81. The only offset that I see is individual reserves in the U.S. side where they had to be bolstered. This question can surely be long so maybe I'll try to keep short. Is $0.81 a sustainable level of earnings for Sun Life?

Thank you for asking that question, Steve. Let me just go through some of these points. First of all from the tax issue in the Philippines, we mentioned because it is an important number relative to the Asia numbers but not important to the overall organization. If you look at our tax rate at 23%, it's actually higher than the previous quarters because in other segments of businesses we had some accruals. The tax rate as a result in fact is a little higher than what I would like to be.

In terms of the hedging, the hedging for the year-to-date is actually flat. The amount for the quarter was in the mid single digits and year-to-date its flat. So it does not have a significant impact on your earnings for this year.

We had some reserve strengthening in the individual block in the United States. But I would say that credit has certainly helped this quarter. We had $15 million as I said after tax of positive credit reserve releases there. And that certainly helped our earnings. But I'd say that positive credit performance, excellent underwriting, mortality and morbidity, the help we are getting from the markets makes the $0.81 reflect the occurrences of this quarter.

So I'm quite comfortable to say that the $0.81 in the aggregate reflects the events that occurred this quarter.

That occurred this quarter that might not re-materialize next quarter?

Well I think from a credit perspective, which is the one item I'd focus on, its ourselves like everybody else in the industry and the insurance industry as well as the banking industry is experiencing credits conditions that are better than they had been in a long time and one day they are going to turn. And it's anybody's guess to the extent they will turn. I would say that our portfolio position or the quality of our portfolio is very strong relative to the industry. You can do your own analysis of net nonperforming ratios and so on.

So I think that within whatever the trend is going to be, we are going to be well positioned to deal with it even if things start getting a little tougher going forward.

On the variable annuity side, I believe last quarter you had quite a lot of room by the end of the quarter to maneuver. Your CTE level was quite generous. Was there any releases as it related to the variable annuity? And if there wasn't, what is the CTE level at right now?

The CTE is at 80. In fact, the market improved slightly from last quarter into this quarter and they were some small adjustments to it but nothing that hits the materiality limit.

So nothing material there, okay. I have got one last one for Don. I'm hoping for either a yes or a no answer. I will give it a shot. The MFS, great franchise, lots of intrinsic value. Would you be willing to leverage the intrinsic value of MFS if an interesting acquisition opportunity occurred?

I doubt if you are going to get a yes or a no. I think the answer to the question in general is that we work very closely with MFS and as Paul pointed out, a very good quarter. And if an opportunity came up that would add value to MFS and add value to Sun Life overall, we would certainly look closely at it.

Is MFS prepared for let's say -- having its shares publicly traded? Is management do you think capably -- has the change gone over very well there and everything is off and ready to go to be a publicly traded company?

We have tremendous confidence in the MFS management who are well represented here at the table. And I think the MFS management demonstrated its excellence in the first-class turnaround that has taken place both as I alluded to earlier in investment performance and also in the net flows which correlate well with the investment performance. I think MFS management will work closely with Sun Life and whatever we see the future.

Thanks, Don.

Jim Bantis, Credit Suisse First Boston.

Good afternoon. A question regarding the annuity sales with respect to the U.S. operations. I do appreciate that when a turnover of the wholesale network occurs that there would be some time before a ramp up in sales presents itself. And I'm just kind of surprised that the level of redemptions continues to expand quarter-over-quarter. And just perhaps you can give us a little bit of color and guidance in terms of how the operations are undertaking with respect to the change in wholesalers?

And then secondly, maybe how July trends are given that you are now at number 75 in terms of wholesalers?

Bob Salipante here. We had a target of getting the 75 people by the end of Q2. We are at 77 now. So we added 55 new wholesalers in the first half of the year. These new hires averaged 14 years of industry experience as Don alluded to earlier and had approximately 50 million of annual average production in their prior roles. A rule of thumb is that it is three or six calls for these wholesalers to go with their brokers to begin to impact behavior. Our product is competitive and we are seeing signs of progress. Our estimate is that our market share was up something like 20 bips and the quarter. So if we keep putting one foot in front of the other I think we will see progress.

The 77 wholesalers puts us on a par with about the number ten share player. One more indicator of progress is that we've got 1000 new producers out there placing VA business with us. I don't think the issue is on redemptions. If you look at the supplement and you look back over several quarters, just the number in there is within the band. We think in the second half of the year as I've been saying for the last two or three quarters that you will see us begin to rebound.

When you think of the second half or early '06, when do you think you can actually get to positive net sales as a reasonable target base?

My target is to see us there in the fourth quarter of this year. We've got the summer to deal with and a lot of brokers on holiday. They come back in the fall I think we will have been out there telling our story, continuing to build some momentum. I'd like to be in that ballpark in Q4.

Great. Just my last question regarding MFS. Very strong management and net sales this quarter at 4.2 billion. And I'm wondering if you could give as a little bit of color of how many institutions made up that flows? Was there one particular institution that was the bulk of it? Any color there would be helpful as well. Thank you.

We did have one large CDO which was about $1 billion but the rest of the institutional accounts are pretty well diversified anywhere from 50 million to 200 million. So I think except for that one CDO, everything else is pretty well spread around.

I guess it's fair to say just from looking at it from a Canadian perspective, is the MFS branding back to its former luster? It has been fully restored at this point, do you think?

This is Bob Pozen from MFS. Yes, we are definitely back to our former luster, if that is the correct word. And I think all of the regulatory issues are way behind us. No one has really talked about them for at least the last nine months.

Great, thank you.

Jamie Keating, RBC Capital Markets.

Thanks so much. Good afternoon. Congratulations on getting good numbers out there. I would second Steve Cawley's suggestion though as getting some more detail on some of these ups and downs, although I can appreciate perhaps not quite relevant perhaps in the aggregate. Certainly helpful to give us some confidence around the sustainability. One of the things that is a challenge for us, Paul, is trying to understand some of the buckets. If you to look at the annuity business for example, the profitability looks to me like it has surged here. I'd love to just get a little help in reconciling how sustainable that annuity division profitability looks?

Again, there's a hedge key (ph) in there I guess. And maybe it will be offset by something in the division next quarter, but it certainly would be helpful.

Thank you, Jamie, for the question. I can imagine that the question is in many people's minds. We don't give out guidance on earnings for each particular business group and a forecast on them. I'd say though --

I don't want guidance. I just want a reconciliation of what we've got in the package, that's all.

So the U.S. business is indeed a little higher than you've seen in previous quarters but Canada is a little lower, the MFS could be higher as well. Actually the UK business was a little bit lower. So I'd say that in the aggregate the $0.81 I am quite comfortable with. It is in a large organization with many moving parts. As it turned out, the annuity business had some positives in terms of the spreads, the hedge, a number of other smaller items.

But I'd say in the aggregate the $0.81 is right on spot. (multiple speakers) earnings pattern up 19% in constant currency last year; up 14% for the first time for this year; and 16% at the second quarter. I'd say that the volatility of earnings in the aggregate you see a steady improvement whereas the individual parts, the individual business groups move around a little bit from time to time. We are on a very solid pattern.

One of the things you mentioned was one that I wanted drill into a bit if possible. I'm trying to understand the mathematics on the annuity spreads here. I don't have the size of the portfolio in front of me. Maybe you can help me there. But when I look at the amount of gross sales relative to what I thought the portfolio was, I have trouble understanding how there can be a monumental change or a material change in the spread. Can you walk me a bit through how that is working through?

Bob will give you an update on that.

Bob Salipante here. I think what is driving that, as Paul mentioned we had strong credit in investment income performance in the quarter. But what also is going on is that four or five years ago Keyport wrote a lot of multiyear guaranteed business. So as those multiyear rate guaranteed contracts renew, we have the opportunity to reset the crediting rate. So this produces a near-term lift in spread since we estimate the average liability duration to resetting contracts to extend beyond maturity date. We're duration matched. The summer out about a year or so -- the bonds will mature associated with these contracts. When those bonds do mature, the ultimate impact on spreads will be known since only then will we ascertain the reinvestment rate associated with that cash flow.

As we have indicated several times in the past, gradually increasing interest rates would favor us.

Was that impact higher this quarter than last quarter, Bob?

It was because we're getting into this period of time which runs for a couple of years where large chunks of that Keyport block come up for a reset. So that is why you are seeing some chunky lift in the spread.

Those numbers would they be captured in these sales figures we see or is that a different set of activity?

No, they wouldn't because this is business that was written in the past. So when you get to --

So that explains it then. So the sales numbers don't help me get there? This is something that is rolling over within the portfolio that I can't see?

This is in force that is coming to maturity which gives us the opportunity to reset crediting rates which we are doing.

I think I understand. Last quick question if I may for Paul just on credit recoveries. Could you just help us understand which divisions they are applied to? I believe it says they are applied to the U.S. or the Canadian individual? Just proportionately?

And in some of the information that I've seen from the analysts, they sort of picked up the wrong member but let me just lead you do that. On page 18 of the supplementary information we show $29 million of the credit recoveries. Eight of which apply to policyholders. So 21 million of the 29 applies to the shareholders but it's pretax. After-tax it's 15 million. Of the %15 million, 12 applies to Canada and three to the United States.

Excellent. Thank you very much, gentlemen.

John Reucassel, BMO Nesbitt Burns.

Just a question for Don. I just want to get back to this MFS issue. It seems like there has been a pretty dramatic shift in your view how to grow in the strategic options available to MFS. Is that a fair characterization? Why has this come about or is this just not as dramatic as I think it is?

I think it is not as dramatic as you think it is.

What is driving this to -- is there particular reasons to look at strategic partners like what is -- is it just you can't see your way organically to get back to the top 10 or top five that you have to entertain other ways?

I think I indicated if we have a little more precision around I said was a willingness to assess a range of situations that would add value as opposed to a new commitment to strike out in a brand-new direction. We will always be willing to look at any situation that would add value to MFS. Perhaps what has changed is the environment. There is more movement in the business investment management generally than there perhaps there has been in some time. And you are well aware that in the past, there have been a number of reports of transactions that have taken place in this space. And so that is just more consideration as to how one might best move forward.

We've always been willing to look at a situation that would add value and that isn't necessarily called for any specific transaction. It is just whatever would improve the situation of MFS competitively and for the shareholders is on the table at all times. I don't think very much has changed.

Okay. Just looking forward, is -- could you come to the same conclusion at some point for the annuities operation or is that too hard to draw that line? Is it just unique within the Sun Life Group? Can I draw that line to look at the annuity business as something similar to what is happening in MFS?

I don't think that it is a reasonable or a very logical next step. We've always said that we look at all of our businesses on a constant basis to see how we can best improve them and in some instances organic growth is the best way forward and other instances a transaction will work. But you can't order transactions to happen. You are you are a function of what is available on the marketplace and we've got pretty disciplined and stringent criteria as to what a transaction will have to surmount before we consummate a transaction.

I think all of our businesses are in that particular -- have to satisfy that particular set of criteria on an ongoing basis. I don't see our annuity business as been something we'd single out at this juncture for special focus or special treatment or not. I happen to focus on the investment management business as having been the subject of some activity in the environment. I think that is manifest.

Two last quick questions. You mentioned there was $1 billion in CDO at MFS. Is that included in the net sales figure for MFS?

Yes, that is included in the institutional.

So that would be viewed as kind of more of one-off issue?

No, we've actually been doing CDOs pretty regularly over the last few years. And we are very likely to do another one before the end of the year.

Last for Paul. I guess if you say you have -- you are almost close to parted at 500 million in buyback, that leaves you with a current price of 2.7 million shares left to buy back. Capital position is still very good. What is the appetite to continue to buy back the stock or are you happy to stick with your $500 million target?

We have the $500 million target. We haven't actually provided any different guidance on a different number. But you know our stock while it has performed well, the multiple is still well below some of our competitors. And so we would be interested to be in the market on a continuous basis.

Thank you.

Brad Smith, Merrill Lynch.

Thanks very much. A question Don I guess for you, or perhaps Bob. It was encouraging regulatory situation at MFS and I was just wondering with respect to the annuity operations I guess there is still sort of ongoing scrutiny in that variable business. And I'm seeing now some signals that it may be spilling or wanting to spill over into the equity index side of the business. I'm just wondering if you could give us some perspective as to where you stand with effective exposures on the sellings practices sides in those annuity businesses?

Let me break your question in two pieces. One is the current investigations and other stuff may be coming and I'm going to ask Bob to speak to that with regard to the equity index annuity in a minute. But in terms of the existing discussions he has had with the SEC, we've made excellent progress on that this quarter. We're quite pleased with that. We still have some issues outstanding. And so as a result, we have not modified the amount of the accrued in the first quarter. But we certainly look forward to update you on this matter in the third quarter call. And Bob will talk about the circumstances surrounding the equity index annuity.

With respect to the equity index and annuity there are no regulatory inquiries at this time. There is discussion in the U.S. market with respect to those. From a life perspective, our commitment is to having the best sales practices in this sector and providing solid value proposition to our customers.

Bob, I guess what really what I'm asking is have you done an audit of review; is it something that you are constantly doing? And are you comfortable with the situation if there does end up being regulatory scrutiny coming?

There have been some pieces out there from rating agencies in terms of best practices in that area. We have benchmarked our practices against those very completely. We have pre-sale, point-of-sale and post-sale practices in EIA business that was implemented over the course of the last couple of years that I think are quite rigorous. Ours is a nonregistered product that the talk in the market is that may go to a registered format and that would have considerable implications on distribution strategy at that point. We are not to that point and it remains to be seen how it plays out.

Great. Just a last question on the credit provisioning side. I was just curious I guess on the actuarial side, I've seen the credit default reserve rise a little bit more than I guess I would have expected in the quarter. I was just wondering is the actuarial side taking into consideration the accounting provision release?

It's an amount that has to do with our mix of business. Bob, do you have any specifics on that?

Nothing changed in the actuarial provisioning. The assumptions with regard to each class of credit has stayed the same. Some of the bonds that have backed up liabilities have themselves changed in terms of quality because of investment mix issues. And as well, the business itself is bigger. And as a result, the provisions for credit themselves are bigger. They haven't moved very much.

I was looking -- I saw maybe 8 to $10 million more credit provision than the movement in the investment account. I was just wondering if you -- I mean when you do those actuarial calculations, do you not take into consideration what is being affected on the accounting side of the equation?

We do. The fact that if you had a bond, for example, that was in arrears which would be rated fairly lowly, it would have a -- and we sell it which actually happened this quarter -- to the extent that those bonds were backing liabilities, we would actually release the actuarial provision for those bonds. So that it would actually work in the same direction has happened this quarter because we actually did release a bunch of provisions when we sold the bonds and we took a gain on those bonds because we have written down further than what we sold them for.

But there is nothing magic happening in this at this point in time. It is just purely a case of the assets actually backing the liabilities and the growth in the liabilities themselves that have caused the change in the amount backing liabilities.

Thanks very much.

Timothy Lazaris, GMP Securities.

Hi, thanks. I've got two questions. One is a more general question for Paul and then I will ask maybe Don about the second. These first has to do with interest rate sensitivities, Paul. I think the last time we spoke we talked about a sustained period of low interest rates and how that can be negative to a company like an insurer, like Sun Life. And you talked I think about the company putting on a hedging program to avoid that risk or somehow mitigate that risk.

Has that program remained and could you just comment on the size of it and how it has impacted the quarter if that all?

And then secondly, I believe the three-year anniversary to the CI transaction ended this week and I'd like to know what Don's view is with respect to that relationship? And more importantly, is there another timeline or date in which the exclusivity for the Clarica sales force ends with CI?

Thank you, Tim. With regards to the interest rate sensitivity, as you know, we have a very active risk management program in place that calculates the exposure to interest rate movements on a continuous basis and it makes hedging decisions as we approach certain operational limits. And so we have billions of dollars of floors and other derivatives in place to manage our interest rates risk exposure.

So the number that we've given you in the past is something that is still in effect for every 100 basis point move in the interest rate for a drop in interest rates for instance, the impact under earnings is $0.17 to $0.20 per share. And so we have a relatively modest exposure relative to the industry as a result of our active hedging program.

Let me swing in with some comments on CI. As you noted, July 25, 2005 has passed us and that is the three-year anniversary of the beginning of our partnership with CI. We are very pleased with the partnership. The sales through the Clarica distribution channel have been very strong. We work very closely with CI and we are really delighted at how things have gone in the last three years. We see that as an ongoing partnership.

We have a number of agreements with CI, some of which carry on including the reference to the distribution and in fact, we see the partnership as really more about how we're working together rather then words on paper. So although three years has come and gone, we continue to work with CI on the distribution front and that will carry on in the foreseeable future. It has been every good relationship, very pleased with it and it really transcends any specific contractual arrangements.

Sorry, Don, could you just actually tell us what the expiry of that exclusivity arrangement is? Albeit not that important. I'm just looking for the date.

Our distribution arrangement runs out, if memory serves, another three years.

Okay. Thank you very much.

Michael Goldberg, Desjardins Securities.

Thanks very much. I had a couple of questions. First starting off again on the interest sensitivity. How much were reserves actually strengthened low interest rates which I guess is the low reinvestment rate in the United States?

That too is a fairly small amount in the mid single digits. So it is not something that hits the materiality level, Michael.

What does it cost you every quarter roughly to run the hedging program that you have?

I'm not sure. I didn't hear the question. What does it cost us? Oh I see. Well, the concept is -- I mean executing the trade is not that expensive but the mindset is that we want to run a good business by focusing on creating a consumer franchise where we sell appropriate products to our customers as opposed to taking a market risk. And so the cost of selling these products requires that we put up a hedging program. For instance I would say that in the variable annuity, the costs -- I'm looking at Bob here -- but the cost of hedging the variable annuity plan is in the 40 to 50 basis point range. Is that correct, Bob?

It's factored into the pricing of the product.

Right -- factored in the pricing of the product. And so that is what keeps our sensitivity to our key markets in check. But writing naked options is something we just don't want to do.

I know you are presenting your VNB on a trailing 12 month basis. But can you give us some color on whether growth is actually accelerating or decelerating? And when do you think you might actually be able to provide quarterly VNB?

Michael, the growth is fluctuating. It is up to one quarter, a little bit less the next quarter. As you know, we reported VNB because we think it's a very important metric. And as I pointed out in the past, our senior management doesn't get motivated to focus on premiums and deposits. They get motivated by generating value from business. It is a key metric that is used internally and externally as well.

The reason we don't show a discrete fourth quarter is because it is a many elements of it are estimated, we don't have necessarily got the final numbers in by the time we go public although --. And so we get some fluctuations from that. We think that a 12-month track record give you a better indication than on a quarterly at this stage. When we are ready to do them on a quarterly basis, we will change the way we report it.

Okay. One other question. (technical difficulty) in the Canadian.

You are cutting out, Michael.

Great. Health product in the Canadian wholesale channel. Can you talk about pricing in the competitive environment? And what is the particular value proposition for this product?

We only got part of your question but I think the general direction is pretty clear. I'm going to ask Kevin Dougherty to speak to this.

Thanks, Michael. Can you just repeat the first part of your question? Which product were you focused on?

Just hold on a second. It's the limited pay life -- limited pay life?

Okay, thanks. That was a product that was launched I believe May 16. So it is not yet showing up in our sales results. But there is quite a bit in the pipeline. There is a number of distinct options and features. One of the key things though is we improve the point last to die competitiveness of that product and that is a key thing for universal life.

Is that fairly unique?

No, I don't believe it is unique. It is just an area that we needed to improve the competitiveness.

Thanks a lot.

Tom MacKinnon, Scotia Capital.

Thank you very much. A question on the source of earnings analysis that you provide on page 13 here. If I look at 111 million in experience gains in the quarter, that seems to be typically better than the average run rate we've had over the last five quarters, maybe about 40 million better than that. And I'm wondering if you might be able to give us a little color as to what is driving that significant experience gains that we are seeing in the quarter? How sustainable is it? I don't think equity markets year-over-year are -- they certainly improved a lot more in '04 versus '03 than '05 versus '04 on average. But we didn't really see a significant bump up in experience gains year-over-year in 2004 versus 2003. I'm wondering what else it is that is contributing to this and if you would be able to break it into say credit, immortality and some other stuff?

It's Bob Wilson, Tom. A lot of it is purely from favorable normal experience that you'd expect from an insurance company, favorable mortality and morbidity in both Canada and the U.S.

If it's normal, then why wasn't it normal last year?

We didn't have -- I'm looking at the favorable compared to last year. In other words, this year was better than last year in terms of claims experience on mortality and morbidity in Q2. We had a very good QT this year. A lot of it has to do with the investment gains because the investment gains are experience and last year we had investment write-downs and this year we had investment write-ups.

Okay so it is the reversals of these that we are getting -- that are driving this a lot more than --?

Right. Then you also get the previously discussed hedge performance where the interest rates -- as you know, when we hedge the variable annuities, we are primarily hedging the movement in the Standard & Poor's, which actually didn't do very much in the quarter. But interest rates dropped 55 basis points which has an effect on the options and derivatives market values. And vols (ph) for that particular item went up in the quarter. They are basically where they started the year at but they went up in the quarter. So that caused the experience gains.

So we would need another quarter as such in order to find out how much more we got in terms of credit provisions to release in order for this 111 to be sustainable then?

Right.

And then to continue on that I guess if we look at the management changes -- if I look at those things year-to-date, those are -- and I compare them to what they were in 2004 and 2003 for the total year, then they were -07 in '04 and -17 in '03 for the whole calendar year. And yet we are running at 107 year-to-date right now. What is in that and how sustainable is that?

The assumption changes that you see in the second quarter were almost exactly the way they were last quarter of Q2. Sorry, Q2 '04. If you look at the difference actually comes in the first quarter of '05 relative to the first quarter of '04 and in that quarter if you add the assumption changes and the experience gains together they were actually very similar as well. And so it is in between those. I can't recall precisely what happened in the first quarter of '04 and in the first quarter of '05 that gave rise to it. But if you look at the two in the aggregate, you see that they are pretty similar.

Is there any -- I mean what changed in the macroenvironment in '03 and '04 of last year that forced you to make all these changes? Or is it just the timing of when you actually do some of these things? I'm wondering if -- can we expect a continuation -- will '05 look like '04 in this where it was nice in the first two quarters and then negative in the next two quarters?

I think many of these experience gains are a part --

No this is management changes I am talking about.

Management changes.

The line is assumption changes and management actions.

Well --

-- assumption changes.

So the assumption changes that we're going to get that we got in 2003 and 2004 in the third -- I'm sorry in 2004 in the third and fourth quarter, you wouldn't anticipate that those would -- I'm just looking at the way this trend went. We suddenly released reserves and then we strengthened reserves. What is different in 2005 to say we're not going to do the same?

It is hard to do tell what the assumption changes are going to be Q3 and Q4 because we if knew what they were going to be we would have already taken them. But I would say generally speaking the actuaries are very conservative in their reserving and what I've found in my number of years here is that there is always opportunities to change reserves usually in a positive manner.

One final thing is the expected profit doesn't look what we're getting any kind of growth in that.

That is primarily a change excluding which it would have been up by about 5%.

Okay. I mean I think in 2004 you said it was 45 million, the impact of the currency for all of the U.S. -- so what is in dollar amount? It looks to be -- sounds like it is a lot greater than a quarter at that?

You mean year-to-date?

Did you say 5% year-to-date? I just want to make sure what it would be excluding currency for both the quarter and year-to-date?

Tom, if you don't mind. If you don't mind, we will get that answer to you and we will circulate it to the rest of the group off line. It is kind of getting drilling into the weeds a bit.

Sure. But is only just a question of just relating this to all that great growth and the value of new business. I would have expected to see the expected profit on the in-force business start to show a little bit better.

I think I know where you are going and I'd be happy to get you the answer off line. If you don't mind, we will move on just so we can get some others in the queue.

All right.

Thanks, Tom.

Eric Berg, Lehman Brothers.

Thanks very much and good afternoon. Three questions and I'll certainly be pleased to repeat them if they can't be easily remembered. First, if the major driver of your earnings increase in the June quarter was improved annuities spread in the United States, how can we track that in your financial reporting? Where specifically do you disclose that?

Is that the first question?

Yes.

We do not disclose specifically by product groupings the spread and the causes for the differences in the spread in any of our supplementary information, Eric. This is something that is very specific to a particular product and really to get a handle on it is to ask Bob Salipante a question and he'll give you an answer.

I mean it is just as a suggestion which you will either take or not take. One of the most important -- there is no way for us to quantify or know what the most important driver of earnings but in any case, I will move on. What is happening with your equity index annuity business? Its decline would seem to be the major reason why your cash flows remain negative in the United States. Why is that business in a downward trend?

A couple reasons, Eric. As I indicated, this is Bob Salipante. On the last call our old product was stale and on June 20, of this year, we introduced a new annual reset product. That is where the market has moved and we are back with a competitive product. So as we speak and we are getting the word out to the distribution world about that product and we expect to see some recovery later in the year.

Good. And my third and final question is, and the answer may lie in Canadian accounting versus U.S. GAAP. But I would have thought that if you are enjoying a favorable appreciation, a favorable mark-to-market in the hedging of your variable annuities that there would not be an earnings impact because presumably whatever is being hedged presumably a liability, is also going up. And I would have presumed that you would book an expense for that.

Okay, Eric, these hedges, for these hedges we do not use hedge accounting. In order to for these hedges to apply, they have to be considered "effective". And it would create -- it would require an army at people to keep track of all this and do all the work. So we have decided to simply mark these hedges to market. They are economic hedges. We believe that that they cover as well in particularly in detail. But we will see some volatility in the way the economics works and the way the economy rules are and we've decided just to accept that.

That tells me what I need to know. Thank you, Paul.

Mario Mendonca, Genuity Capital Markets.

Good afternoon everyone. Probably a question for Bob Wilson the most. Going back to what Tom was asking about -- Tom certainly went through it sufficiently for me, but the question is more general. The sources of earnings document, the one that talks about improving disclosure. If someone had applied that document to this presentation, would Sun Life have been required to disclose more detail on the experience gains and management actions? Or what this meet with that standard?

We believe that this meets the standard that OSI (ph) has put out. The release that we gave at for the year-to-date at the end of Q4 did comply with the OSI standard and didn't have any more information than this.

OSI requires that in that document that companies provide sources of earnings by segment disclosed in their annual report.

Agreed. We did provide Q4. We did provide it by segment.

So then this document doesn't comply with it?

We do not on a quarterly basis do it on a segment basis. No you are right.

OSI also suggested that companies to the extent material provide details on their experience gains and losses.

It was actually on assumption changes.

Okay, I'll have to check that. But it was on assumption changes and management actions. Is this to suggest then that there is nothing material in those assumption changes and management actions?

Material is a pretty big number at Sun Life.

It's a very small number actually. It is $30 some million. It's the same as last year. It's quite an immaterial number.

But OSI said that materiality should not be applied on a total company basis but rather on materiality at segments.

And there is nothing in there that is of any size at all. So there is a large number of very small adjustments in there, Mario. There is nothing big in there.

So this disclosure is as good as it gets then? Is that right? It's as good as it gets I suppose if it meets all the standard?

For this quarter, Mario. The OSI requirement Mario is once a year.

It also seems toothless. But can I just move on to the next question? We had a doubling of individual annuity earnings this quarter. I fully appreciate that insurance companies have so many moving parts and so much flexibility to move reserves from one area to another. But because the companies do disclose segmented results, if we get to understand that doubling and individual annuity earnings. I would like to sort of understand it in the context of a few things. First, flat interest rates. Second, essentially flat equity markets. And also having spent a lot of money to recruit wholesalers in the quarter, despite those three things individual annuity earnings doubled. That makes no sense to me.

Well, Mario, there are many, many good reasons for that and Bob has alluded to some. We talked to the payoff of the hedge. We talked to the widening of interest spreads base and a fixed annuity block just the way the existing block works. We spoke to a number of other adjustments. I do appreciate that it is very hard from the outside to really understand all the elements of it. But I will ask Bob to give you a quick overview to see if he can shed some more light on this.

I think we've covered all the points. I think most essentially is we're maintaining CP80 (ph) on the variable annuity block. And so in the first quarter and this is geared off of the SPX at the end of the quarter. So in the first quarter, we had some reserve strengthening there and in the second quarter we had some reserve release as Paul has indicated. And I think I've described despite improvement we have strong credit experience, strong investment income this quarter. And I meant credit experience and then we have the reset event that I described in detail which provides a lift in our spreads during the quarter.

And again, that is a function of the type of annuity that was written by Keyport and the vintage of that block.

And just finally, Paul, you said that the marked-to-market gain, just the marked-to-market gain, not including any offsets from anything was in the mid single digits?

That is correct.

That does it. Thank you.

Operator, I think we've come to the end of our time.

Do you have any closing comments?

Yes, thank you. I'd like to thank all our participants on the call today. If there are any additional questions, we will be available after the call. And should you wish to listen to our rebroadcast, it will be available from our website shortly after 6 PM this evening. And before we conclude the call, I wanted to announce we will be holding our investor day on Tuesday, November 15 this year in Toronto. Details will be forwarded later in the quarter but we wanted to make sure you got this into your calendars now. So with that, I will say thank you and goodnight.

Ladies and gentlemen, this concludes the Sun Life Financial second-quarter results 2005 analyst conference call. We thank you for your participation. You may now disconnect.