Sun Life Financial Inc (SLF) 2005 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Sun Life Financial third-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, October 27, 2005. I would now like to turn the conference over to Mr. Tom Reid, Vice President Investor Relations.

Thank you, operator, and good afternoon, everyone. I'd like to start by introducing the speakers on today's call. We have Don Stewart, Chief Executive Officer of Sun Life Financial; Jim Prieur, President and Chief Operating Officer; Paul Derksen, Executive Vice President and Chief Financial Officer; and Gary Comerford, Vice President and General Manager for India who will be providing a brief update on the progress in our joint venture operations in India. Also available to answer questions today we have Kevin Dougherty, President of Sun Life Financial Canada; Bob Silipante, President of Sun Life Financial U.S.; and Rob Manning, Chief Executive Officer of MFS.

In the slides to which the speakers will be referring are available on the Sun Life Financial website. Turning to slide 2, 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. With that I'll now turn things over to Don.

Thank you, Tom, and good afternoon, everyone. The third quarter of 2005 was an extremely eventful one. In fact, we have slides in our presentation to address at a summary level all of the activity that helped to make the quarter a significant success. And we begin by measuring our achievements against the commitments we made to shareholders a year ago at our 2004 investor day.

Operating earnings per share of $0.82 are up over 12% from the third quarter of last year and up 18% in constant currency. This is well ahead of our published goal of increasing earnings by 10% on a constant currency basis. We've made improvement in return on equity a key focus in shareholder value creation. ROE in Q3 was 13.1%, up 120 basis points from Q3 of last year and well ahead of our goal to increase ROE by 75 to 100 basis points per year. The value of new business was also up 16%. We see this metric as a better predicator of future profitability than just top-line growth and we're very pleased with our progress.

The completion of the acquisition of the CMG insurance and pension business in Hong Kong earlier this month is an important development for our Asian business. The hard work of integration has commenced and will be complete by the end of next year. This transaction in terms of its size, scope and ability to deliver shareholder value is precisely the type of transaction we've been signaling for some time.

The sale of our 31.6% (ph) interest in our Chilean pension manager holding provides additional focus to our core business as this stake was not a core holding and the capital is better redeployed in the rest of our operations. We also continued our share buyback in the quarter, reaching a goal of $464 million for the year-to-date, well within reach of our 500 million target for the full year of 2005. Overall, I'm very pleased with our consistent record of delivering on the commitments made.

On the next slide, on the operating front we've made excellent progress on a number of initiatives intended to continue our profitable growth into the future. MFS produced a fourth consecutive quarter of positive fund folds (ph). In Canada our focused expansion in the wholesale channel coupled with productivity gains in the Clarica sales force led to our increase in market share for individual insurance new sales to a little over 14%, up a full 1% over the corresponding figures one year ago.

Our group retirement services business, already the clear market leader, continues to gain share with sales up 58% over the third quarter last year. In the United States group insurance sales enjoyed a dramatic increase over a year ago with a 20% increase in our salesforce contributing to a 51% increase in sales. Asia continued to produce solid sales growth with India launching an aggressive distribution expansion designed to accelerate that growth. Gary Comerford will speak to that in greater detail shortly.

Overall, this was a very productive quarter. We've continued our record of delivering what we promised while investing prudently to ensure we continue to deliver into the future. With that I will now hand over to our Chief Financial Officer, Paul Derksen. Paul?

Thank you, Don. As Don mentioned, we had an excellent quarter. $0.82 -- our operating earnings per share were up 12%, up 18% inconstant currency, well in excess of the guidance we had been providing of 10%. The loss on the sale of Cuprum which we announced in August reduced earnings per share to $0.74. This loss was mostly due to currency fluctuations which had already been reflected in the capital of the Company.

Currency translation account. Slide 6, it shows that return on equity also increased significantly by 120 basis points to 13.1%. We were very pleased with this increase which compares favorably to our target of 75 to 100 basis points for the full year.

Slide 7 shows the high quality of our earnings. Our focus on value increased expected earnings by 13%, up 18% in constant currency. The earnings from our asset management businesses, profitable new business growth, and continued improvements in the efficiency of the in-force block all contributed. These improvements were noted throughout the Company.

Experience gains were very positive this quarter as well driven by mortality, morbidity, equity markets and credit experience. These experience gains reflect the conservative nature of our assumptions. Assumption changes on the following line, $7 million reflect a loss on the sale of Cuprum which was $43 million pretax. Excluding this loss assumption changes were $50 million. These assumption changes resulted from a series of adjustments, none of which were material.

Turning to slide 8, value of new business is up 16% and up 19% if you exclude MFS. As I have noted in the past, we are very much focused on profitable market share. We do not want to sacrifice profitability in order to grow premiums and deposits. We believe that the growth and the value of new business as opposed to premiums and deposits is the critical key indicator of future profitability.

Slide 9, turning then to the business groups. Canada had a solid quarter with earnings growth of $7 million. This was driven by good morbidity, an increased contribution from CI, and lower new business trends (ph) as a result of expense improvements. Revenue was up 8% from a year ago mainly in the group health line. Each business unit in Canada had outstanding fields results. Let me go through that.

On slide 10, Canadian individual sales were very strong this quarter. Individual life and health sales were up a healthy 20% and marketshare increased by a full percentage point to 14.1%. Individual wealth sales were up 27% from a year ago with improvements in both the annuities and mutual fund sales. They were lower than in the second quarter primarily because of the seasonal nature of sales.

On slide 11, group retirement services continued to do extremely well. It had an impressive 48% marketshare in the first half of '05. Third quarter sales were up 58% from year ago. Asset retention of individuals transferring out of group plans is up 65% year-to-date to $346 million and up 82% in the third quarter, very good quarter.

Group Benefits, on slide 12, also had an excellent quarter with sales up 74%. Business in-force was up 8%. Group Benefits was awarded the life benefits business for Canada Post's 64,000 employees. Lapse rates also were very low and, as a result, Q3 net sales were up 250%.

Turning then to slide 13; the U.S. also had a very good quarter. Improving spreads and equity markets contributed to a 56% earnings increase from the third quarter of '04. ROE is almost up 400 basis points to 13.6%.

Slide 14, variable annuity sales trends continue to improve. Gross sales are up 17% from a year ago and up 8% from the second quarter as the rejuvenation of the wholesale network starts to take hold. Marketshare is up from earlier quarters this year. The book is still a net redemption but less so than in the second quarter. Sales of fixed annuities suffered somewhat from the low rate environment as customers prefer bank CDs and redemptions have increased as well.

On slide 15 individual life sales continue to be somewhat volatile mainly due to the nature of the BOLI COLI and high net worth sales which can have significant variations from quarter-to-quarter as large deposits are made. High net worth sales continue to be strong reaching over $100 million year-to-date and up 140% from the third quarter in '04.

Turning to slide 16, group life and health had an outstanding quarter with sales up 51% from a year ago and business in-force up 19%. The investments we've been referring to in the past, the investment in distribution is clearly paying off.

Slide 17, MFS earnings are up 19% from year ago primarily from increased revenues on higher average net assets. Gross sales are up 37% and the liquidation rate was reduced to 20% from 25% a year ago.

On slide 18, assets under management are up 70% year-over-year to $157 billion with increases of $17.8 billion due to market improvements and net sales of $5.7 billion. The assets of all segments are higher or the same as they were last year.

Slide 19, net sales for MFS of 1.4 billion continue to be positive with strong sales of institutional products partially offset by slight negative flows in mutual funds. However, the third-quarter mutual fund sales -- the gross sales were up 31% from the third quarter in '04 and, as I mentioned, the retention rate is down 20%.

Turning then to Asia on slide 20. Asia continues to build its sales infrastructure with the CMG acquisition in Hong Kong, the opening of offices in a third city in China, and the signing of the bank assurance joint venture agreement in the Philippines. Revenues in the third quarter were up 22% in constant currency and stronger operational earnings were mainly offset by higher development costs.

Slide 21, asset quality remains very high this quarter. Gross impaired assets are up slightly from the second quarter mostly due to the increase of $56 million for Delphi. The net impaired ratio of less than 20 basis points continues to point at the very high level of asset quality.

Slide 22, we had a lot of activity in the capital management area. We repurchased approximately 2 million shares in the quarter for $85 million, $468 million to date compared to our $500 million objective for the year. Our MCCs are dropped somewhat this quarter primarily because of business growth, the rearrangement of some reinsurance contracts and asset mix.

Turning to slide 23. In conclusion, we had an excellent quarter and are well underway to meet or exceed our commitments. EPS growth, ROE growth were all well in excess of the targets, dividends and payouts -- dividend payout ratios and share backs are on track. I'd like to summarize the results for these significant improvements as follows. There are really four reasons for this. Our focus on both value of new business and value of the in-force block have increased expected earnings and experience gains. In other words, by focusing on value the insurance business is just more profitable than it used to be.

Secondly the asset management businesses have done extremely well within some strong markets -- CI, MFS, MacLean Budden, all have shown strong earnings improvements. Our asset quality is very high which allowed us to benefit from a very positive credit environment. And fourthly, active capital allocation and management have also been very strong contributors. These four reasons are why we had an excellent quarter and continue to produce stable and predictable earnings growth. So this concludes my presentation and Gary Comerford, the Vice President of International and General Manager of India, will now provide you with an update on our Indian joint venture.

Thank you, Paul. I appreciate the opportunity to bring everyone up-to-date on our Indian joint venture, Birla Sun Life. Please turn to slide 25. The reason that Sun Life Financial is pursuing an aggressive expansion program in India is because of the significant opportunity that exists particularly in the area of life insurance.

As you can see from the first slide enclosed in your package, Swiss Re estimates that by 2013 the life insurance market in India is projected to triple to $45 billion U.S. India is today and will continue to be for the foreseeable future an extremely attractive opportunity for growth.

Now how is Sun Life Financial doing? Please turn to slide 26. Before the industry opened up in 2001 the life insurance Corporation of India enjoyed 100% market share. Today 4.5 years later their market share has fallen to 72%. The private players have not only created a significant presence in India, but they've also expanded the entire market for life insurance.

Birla Sun Life as of March 31, 2005, India's fiscal year end, enjoyed the position of being number two amongst the private players. Now over the past five months we have witnessed a very competitive market environment where our market share has bounced around between second and fourth position. And let me be clear, that our sights are focused on remaining one of the top three players in the life insurance market. And in order to do that we recognize that we must continue to be an aggressive and an innovative player in the market.

Slide 27. As I mentioned in my introduction, India has become a very competitive market. Several new players are either preparing to enter the Indian life insurance market or have entered. And a number of the existing players have embarked on aggressive expansion plans. In individual insurance there has been a significant increase in the number and type of products being offered by our competitors. This would include a rapid growth in the number of players offering unit-linked products, a product first introduced in India by Birla Sun Life, as well as a significant increase in the number and size of single premium cases being written.

In the group market where Birla Sun Life was one of the pioneers amongst the private players, several of our competitors are attempting to rapidly build marketshare through what we believe is irrational pricing. But we also believe that it's important to maintain our leadership position in the group pension market. So we have been working with the considerable expertise that we have in group around the world at Sun Life and our experts to ensure that we take full advantage of the growing pension market in segments where we believe the VMB can be sustained.

Turning to the investment environment for a moment; there remains a very bullish attitude towards Indian prospects. More and more attention of late is being paid to that other giant market in Asia. Thus far in 2006 the Indian equity markets have been very strong with the (indiscernible) reaching an all-time high, up 17% year-to-date. Now through Birla Sun Life asset management, our mutual fund company, we manage Excel Mutual Funds, a small Canadian mutual fund company offering an Indian specific fund. Birla Sun Life has been the asset manager of this fund since its inception. It has a three-year annual return of 44.1% and a 17.2% return since inception in 1998. We're proud of those results.

Slide 28. Why has Sun Life Financial been so successful in India? When Birla Sun Life was launched in 2001 our strategy was very different from our competitors. We were the only company to launch a unit-linked product targeting high net worth individuals. Because of this product differentiation we were very successful at attracting high net worth individuals enjoying the highest average policy size and premium per policy in the industry. We also had a clear strategy of using a balanced distribution model in India.

While we were and still are very much committed to establishing a significant direct sales force, we believed that bank assurance and corporate agent distribution would prove to be a significant contributor to our success, and it has. Today we attract approximately 50% of our new premium from nonagency channels and have succeeded in creating a balanced distribution model. However, we must not ignore what our competitors are doing.

Slide 29. While we concentrated on a balanced distribution model, several of our competitors focused primarily on building a very large direct salesforce. As our competitors today are now copying both our product and our balanced distribution model, it has become very apparent that Birla Sun Life must now double its efforts and build a much larger direct salesforce.

Slide 30. Over the next 12 months Birla Sun Life will open approximately 50 new branches, increasing the number of career agents from 11,500 today to approximately 20,000. For the last six months we have been working on an extensive recruiting program that is now producing net results of 750 new advisers per month. We believe that by redoubling our direct sales force we will continue to be a top tier player in the Indian market. We also believe that the investment in doubling our salesforce is critical at this time and, while it will extend our anticipated breakeven from 2006-7 by one year to 2007-2008, this is the time in the Indian market to invest and capitalize on the rapid growth of market.

Slide 21. Let's talk about our asset management company just for a sec. Our asset management company continues to be a strong brand in the Indian market and a significant player in the mutual fund business. On September 23rd we completed the acquisition of Alliance Mutual Fund bringing our total assets under management 3.5 million Canadian. Birla Sun Life asset management continues to be a profitable company with significant growth prospects. Over the past six years we have had a compounded average growth rate of 38%.

In conclusion, India continues to be a land of significant opportunity where Sun Life Financial is a major player. While we have enjoyed early success, it is still early days in a very competitive market. But given the current market position and strong brand we believe that India will continue to be an important market for Sun Life Financial in Asia as we move forward. This concludes our presentation; I'll now turn it over to Tom.

Thanks very much, Gary. Operator, we're now ready for the Q&A portion of the call, so I would ask that you please poll the callers for questions.

(OPERATOR INSTRUCTIONS). Bob Russell (ph), National State (ph) Financial.

I had a couple of questions. The first is -- can you hear me okay?

Yes.

The first question I have is the strong performance in the annuities sub segment within the U.S., part of it is because the Company flags (ph) repricing of the annuities, some of the older blocks of business. Can you give us a sense for the duration that you think this process will continue in? For example, you've benefited for two quarters in a row. Is this something you think will happen or continue on for four or five more quarters or is it sort of two quarters and now it's over? Can you give us a sense for that?

Yes, Rob (ph). Bob Salipante here. There's a variety of factors at play in this quarter and I'll talk about fixed annuity spreads first. Spreads have improved as we continue to lower crediting rates as contracts renew and I talked about that the last quarter. In the near-term, assuming that rates don't spike upward, spreads should remain in the range of 140 to 150 bips for this fiscal year, so for the fourth quarter of this year.

In the third quarter of 2005 our spread opened up quite a bit due to favorable credit experience and some lumpy interest income due to recoveries. Those we think are unusual events at this point in the credit cycle, so that portion of the spread improvement would not be sustainable. Again, we think our run rate for the rest of this year is estimated to be in the 140 to 150 bip range. 46.5% of our fixed annuity block is at the guaranteed minimum rate. The average crediting rate for the largest subset of that which is the single premium deferred annuity has decreased from 4.46% in September of last year 2004 to 3.94% in September of 2005.

The business' duration matched, as I've talked about in the past, but not reset matched. So asset resets or maturities are longer than the initial crediting rate periods, so we'd benefit from the timing of the crediting rate reductions. As contracts renew we have the opportunity to reset the crediting rate. So somewhere out about a year or so bonds will mature associated with these contracts that are resetting now. When those bonds do mature the ultimate impact on spreads will be known since only then will we be able to ascertain the reinvestment rate associated with that cash flow.

Okay. Just to clarify though, the liability side though, is the repricing process basically complete?

No, that continues on. We estimate an additional 1.9 billion of the FA, fixed annuity business, and that's on a block of 10.5 of account value is up for resale over the next 12 months, Rob.

And I guess you only do your RBC ratio I guess at year-end, but could you give us a sense for whether the significant growth in earnings on the U.S. side has had a material negative impact on your capital ratios in the U.S. just on that growth?

Yes Rob, the capital ratios in the U.S. were not affected by growth. Not significantly.

Okay, great. Thank you very much.

Colin Devine, Citigroup.

Good afternoon gentleman. A couple questions. Books and course (ph) on Canada posted exceptionally strong sales. I was wondering if you could give us some color on who you're taking market share from. Obviously it's such a concentrated market coming from somebody.

Second, Don, perhaps you could give us an update on your thoughts on the overall Canadian regulatory environment with respect to bank insurance mergers as that seems to be off the table.

Third, in the U.S., certainly I guess two of the companies we've speculated that you might have been looking at are now doing their own merger. What does that say for Sun's M&A opportunities in the U.S. and should really be thinking that may be off the table or are you looking at something big, bigger?

And then lastly, if you could give us an update on your thinking with MFS, if there's been any change I guess with CI as well. Where does MFS strategically fit within Sun today and are you still considering potentially spinning part of it off?

That's a bunch of questions, Colin. We'll be happy to run through them. I think first of all I'll ask Kevin Dougherty to respond to the first question on a little color on Canadian growth market share.

Thanks, Don. In terms of where we're taking market share, I would say it would be really very much across the board. Although there are indications that a couple of the majors are down a little bit this year and so obviously we're taking them directly from some of the market leaders. And as you know, we're really just early stage in our strategy. I think we'll continue to get good traction in the wholesale channel and the Clarica salesforce has been delivering very solid results this year.

If I come to the 2nd 3rd and 4th of your questions, Colin -- it's Don Stewart. On the overall Canadian regulatory scene I think it comes down to two particular general segments. From the question of bank mergers, cross-color ownership -- the world seems to be settled into the mold of no action contemplated as best we can tell. A number of the ministers, the government in general have made public statements to that effect and we don't see anything out there that would contradict it.

We may be seeing an election in Canada, as you're well aware, in the not too distant future. And I would suggest that if there is an election the whole field will perhaps reopen or at least we can look at all of this again in light of whatever the election results are. But for the moment the ownership issue seems to either be on the back burner or not be on the table at all as best we can see.

Turning to your third question on combinations in the United States market. Obviously there has been a fair amount of discussion in the industry in general anytime there is a transaction of size and of course there was a transaction of size earlier on this year when one of the New York -- major New York companies took over the business with which you're very familiar with. So the market continues to consolidate. We see ourselves as well positioned from a number of perspectives going forward and the United States market is so big that any single transaction really doesn't affect the market in a major sense.

Integration is a time-consuming process and sometimes it's a distracting process. But as far as impact on the total market so we really see ourselves as being strongly capitalized, as having several base businesses that are doing well. We're in the dual stream. We are in fact seeing one or two books of business that we have been coming to the market as a result some of the activity you referred to. Otherwise it would be hard for us to be sure of that. So we see a steady amount of action. We get to see it and we remain focused on looking at the valuation of the transaction rather than necessarily anything of size. So the discipline of the right deal at the right price at the right time continues to drive our thinking.

And then finally, if I turn to the question of our relationships with various wealth management subsidiaries, specifically MFS and perhaps CI. As you know, we enjoy an extremely strong partnership with CI that goes far beyond our 35% ownership. Great confidence in both the management team and we continue to see strong sales through the Clarica sales force. In the case of MFS, we're just delighted to see the fourth consecutive quarter of positive net flows, as Paul outlined to you earlier on in the call.

From my point of view, some of the discussions that were out there surrounding the second quarter were somewhat speculative and the focus at MFS is very much on the management team delivering the kinds of investment performance that have really brought in major institutional flows. And I would say it's business as usual at MFS. So over to you to see if his efforts are responsive to your multipart questions, Colin.

Maybe we'll just clarify two things. Are you then saying that you're not contemplating a capital markets transaction with MFS at this time? And then the second follow-up, if we look -- when I look at Sun it seems to me that a lot of the growth for the Company in terms of what's really going to move the earnings, meter (ph) in the next couple years will need to come out of the United States. Do you really feel that you're in a lot of businesses down here, may even can benefit I would think from considerably more scale. Do you really have the horsepower to be a player today or are you in too many businesses and need to trim it back?

In terms of transactions that might or might not be contemplated on any front in any country, very hard to deal with that specifically. All I can tell you is that focus at MFS is on continuing to deliver the investment performance that has produced the kind of flows that we seek. I obviously couldn't comment on any specific transaction, but we are really focused on making sure that management of MFS is not distracted by some of the comments that are out there and are continuing to deliver on this first-class investment performance, particularly on the institutional side.

Addressing the scale question in United States. The United States, as you should well know, is a huge market with many segments. And in terms of scale, if I look at some of the businesses piece by piece, we are in the top ten in a our group life business for the first six months and that's a first. And so we see our group insurance business as moving under its own steam into a scale position.

In terms of whether or not the particular combination of businesses that we have in the United States would be stronger if we had, let us say, three businesses going forward rather than the present four or five -- and I'm thinking primarily four -- that always is part of our looking at every business on a continuing basis to make sure it adds value. And I think it is evident the United States market is consolidated.

The question of front of us can we continue to grow sufficiently to compete in selected segments as opposed to across the market because we are not a coast-to-coast player in all business segments, as you're well aware, and the real question is have we enough scale in the market segments we choose to compete with? And we think for the moment we have. Will that always be the case in the light of transactions that have taken place in '05 and may continue to take place? We will be ready to respond to that challenge and I think it will evolve as it will.

John Reucassel, BMO Nesbitt Burns.

Just, Paul, a question for you. Your strengthened reserves in the reinsurance business, how much was that?

It was an immaterial amount. It was not a large amount.

I'm just trying to get your changing assumptions was 50 million in the quarter. Are you -- can you tell us where that went through, which divisions, what's that made up of? It seems to be a relatively large number.

Well, it's not that large if you look at the size of the reliabilities. As you know, we go through the process on a quarterly basis to look at our assumptions throughout the book to ensure that are properly stated. We had $117 million worth of experience gains which tells you how conservative our assumptions are. And so based on that you would expect some positive assumption changes.

Last year you could see they were negative, I think it was 11, this year they were positive 50. It fluctuates from quarter-to-quarter. The assumption changes were across the organization. There was nothing really material in there that I would like to identify; there was nothing material in there. And so it's just part of the -- running the business with a focus on value which enables us to continue to create value and recognize that through assumption changes.

So it wasn't focused in parts of U.S. or parts of Canada?

It was throughout the organization.

And just back to the annuities, I guess I'm just -- I understand Bob was saying on the much better spreads. But I guess if I look at -- the earnings have doubled this year from Q1 to Q3 Canadian dollar terms even with the currency going up -- I guess I'm just trying to understand. You know, it's hard for us to understand where this is going given that we've gone from 45 to 96 million in earnings. So if you could maybe just give us a sense of what we should expect to do or -- it just seems it's going to be difficult to model this.

Well, I agree with you, John. If you don't have the details it's impossible to model it. I'm not suggesting that you could actually -- I mean, it's hard to model if you had all the data to begin with. So I think Bob has gone through some detail as to why the spreads and the margins have improved and the earnings have improved. And it all comes back to managing the book carefully for value and having these asset reset parameters invested in a way so that we have the very positive impact of that on the bottom line.

The earnings this quarter in annuities were absolutely sustainable based on the events -- on the circumstances that occurred this quarter in annuities. As you look forward, when interest rates -- when equity markets go down the earnings are going to go down, and if the equity markets go up earnings will go up. And so it's very hard to give you a precise benchmark. And interest rates have an impact as well.

It's very hard to give you a benchmark -- precise indication as to where it will be every quarter. But the fundamentals that you have to take away from this is that we're running the book pretty tight, pretty well with a focus on value. And as a result of that you're seeing these improvements in earnings.

And last question, Don, you sold the Chilean operations. Are there other small businesses out there we should be aware of that potentially also are for sale?

We're always looking at all the (multiple speakers) John, as (indiscernible) repeated, we look at all the businesses all of the time and occasionally that general statement gets juxtaposed against a specific situation. This was really a holding. It was 31.7% of a total operation and it's more in the nature of that investment than in an operation. So I think it did standout. In fact, I've been mildly surprised that we haven't had more questions on that holding over the last several years because it does standout and I don't think there's anything else across the Sun Life enterprise that looks like our Chilean pension business did.

Timothy Lazaris, GMP Securities.

I've got three questions actually; I hope you can hear me.

Yes, Timothy, we can.

The first question, Paul, the boosting of the salesforce in the U.S. variable annuity business, there was a time when you could quantify what the cost of that growth phase was on an annual or quarterly basis. Is it possible for you to tell us what you're expensing in terms of beefing up that salesforce and if the salesforce now is actually at capacity in terms of the number of bodies? That's my number one question.

My number two question is I understand you have an interest rate floor hedge in place to protect against declining interest rates and I'm wondering what the duration of that hedge is and what the cost of that hedge is if it's at all material?

And then thirdly, I guess a question for the whole group. And that is this 10% guidance in earnings, you've clearly exceeded that for multiple quarters now and I'm wondering why you continue to give us that type of guidance and why you're not raising it?

Let me respond to those questions, Timothy. In terms of the salesforce, the investment in salesforce, what we have told the market is that we're investing $30 to $40 million across the organization. So it's not just the variable annuities, across the organization in improving the salesforce. That's the variable annuities that is in group in the United States, that is in Canada. It's in Asia and so on. So it's a broad statement. But that's being expensed quarterly. You see that in the numbers as it is.

With regards to the -- I think the question also was are we at capacity in terms of the annuity salesforce in the United States. I think we are where we are for now, but I think there is a second stage there. We'd like to increase the number and we'll take another look at that in '06, but for now we're comfortable where we are. We just want to make sure that we get the sales that we plan to get and indeed, as I said before, we aren't (ph) getting improvements in market share to show for it.

In terms of interest rate floors, I'm afraid I don't have huge specifics on this. These interest rate floors -- we have billions of dollars of them there. The cost of these floors are all embedded in the actuarial reserves. And so you see them and their expensed as we go along. So you seem them in our results as we go on on a quarterly basis. It also has actually made us the organization with the least sensitivity to interest rates on the downside on the Street. If you look at the comparisons that are out there you'll find that we're on the lower end of the range and so that makes -- and that's very consistent with our objective of having stable and predictable earnings growth over time with as little volatility as possible which we have achieved.

You are quite right that we have, in your third question, significantly exceeded our 10% guidance in terms of constant currency. The markets turned out a little better than what we thought. The credit markets were also a little better. We've had some good results in improving the profitability of the book. The objective is actually over the medium-term so we haven't just said it year-over-year; we've had medium-term. And so I'm delighted that we have achieved this.

I want to caution you, though, if you were to expect an 18% increase in constant currency every quarter I don't think we're going to deliver that. I think we'll have a little bit of mean reversion. This was an exceptional quarter. We're very pleased with it. But as the markets come off a little bit we expect the 18% to drop in those circumstances.

Okay, Paul. If I could just get somebody possibly to tell me the duration of that interest rate floor off-line I'd appreciate that.

We have a whole book. And what we'll do is we'll take a look at it in the detail and see if there is a sort of a logical way to present that so you can have a better handle on it in general. So we'll take a little bit of time to look at that and get back at you.

Okay. Thanks for those answers.

Michael Goldberg, Desjardin Securities. Tom MacKinnon, Scotia Capital.

Thanks very much; good afternoon. A question about -- or a couple questions, one about the -- the gross impairs went up 9% and the net impairs went up 27% and (indiscernible) see a little bit of a letting go of a sectoral (ph) allowance but you're really not picking up on the specific side. So if you can elaborate on that on nearly $40 million swing net impaired.

And then a general question I guess on experience gains. They're up nearly four times year-over-year on the quarter and they seem to be up about 70% year-to-date and they seem to make up a little over a third of the growth in earnings on a pre-tax basis. I was just wondering what's really contributing to this and how meaningful is it? I think that's the kind of key thing we want to see going forward, how sustainable that might be.

And then one final question I guess is on the new business strains down, I'm wondering how we might be able to look at that when we start ramping up business in the fourth quarter when we bring in the CMG business. Will that change the strain outlook in terms of individual insurance going forward?

Thank you, Tom. Let me take them one at a time. In terms of the impaired assets, the provision went from 155 million to 144 million. We had a negative provision established this quarter of -3, 5 of which -- -5 went to the shareholders and +2 -- or an increase in the provision of 2 went to the policyholders. Also the currency reduced the provision by $8 million and so that's how it evolved.

With regards to the shift in the sectorals, you're quite right. You're very observant and indeed, if you look at the accounting rules by the end of '06 January 1, '07, we're not supposed to have any sectorals. And so over time during the process of moving the sectorals into specifics. In this particular case the sectorals covered a fair amount of the automotive losses that we were anticipating. So in the sectorals we had provisions for the automotive sector. And when Delphi went we applied some of the provisions that we had here to Delphi. And so the gross went up significantly because about $56 million of Delphi was added. But we didn't increase the provisions significantly to deal with that. So I hope that explains that piece.

In terms of the experience gains, as you know, you get experience gains when your actual performance is in excess of the assumptions and it's that simple. And so why is the actual performance better than the assumptions? I go back to the points that I made earlier. We had very much focused on value creation and on an ongoing basis we were improving the existing block of business -- expenses, asset management, claims management and all that, it's very important. The equity markets have helped.

As I said, the equity markets have done better this year than what we thought and that has helped the experience gains. The credit experience has been positive as well and that goes on experience gains. And then because of our claims management the mortality and morbidity improvements are very strong as well. On top of that the assumptions are quite conservative and it's a combination of the two that has given us those strong experience gains.

How sustainable are they? Well, you tell me how sustainable the market is, I'll tell you how sustainable the experience gains are. I will tell you that if the credit markets deteriorate and the equity markets deteriorate the experience gains will reduce. So it's very much a function of the market.

I will tell you, though, that our very strong asset quality has -- will cushion the impact of the deteriorating credit markets. Also our very strong focus on risk management on our hedges will also mitigate the impact on equity markets. And so on a relative basis I think we'll do well, but obviously not as well as we would do under circumstances where the markets are very strong. So I'm afraid I can't give you a specific numbers because it's very situational dependent.

In terms of new business trend -- the reason our new business trend came down this quarter is they came primarily out of Canada and Canada has done a great job reducing its expenses and as a result -- and redesigning profits and as a result the products are just more profitable. I think it's a fallacy to say that higher new business trends means higher sales because it doesn't. It has everything to do with the profitability of the products rather than -- and volume has something to do with it, but profitability has a lot to do with it as well. And so I would say that if you look at the value of new business and the increase in that I think it's a much better indicator of profitable market share.

So CMG will certainly add some new business trends to the -- to our statements. Although much of that was included in the projections that we had when we launched the acquisition in July. I think in the statement we didn't specifically identify it, but the total earnings that we're getting out of CMG would include a certain amount of new business trend and so we'll see some increase but it shouldn't dampen the overall profitability of the business.

Okay. Just a quick follow-up from those responses. As we get some reserve releases here to some extent, I think we got 50 million in the quarter and about 164 million pre-tax, these management changes in assumptions should we -- your comment about you've got conservative assumptions and the fact that these numbers are a positive impact on earnings, doesn't that suggest that the conservativeness built into the reserving that throws of these experience gains might change somewhat going forward?

Well, I would strongly agree with you, if we had a starting block in which no new improvements were made and if there was no new business. But you know -- as you probably know better than most of us, a lot of the actuaries are very conservative. When we launch new products in different countries the actuarial assumptions are very conservative and if everything goes well we can expect to see reserve releases resulting from that going forward. So that is one dynamic I think you have to take into account.

The second dynamic is the fact that we're continuing to make improvements in the efficiency of the business and that is -- it's a huge block. We're going through this carefully on a quarterly basis people have very specific incentives to do so and I don't see at all that at this stage that we've finished going through that block. I think continued improvements in the block are quite -- we expect them to in the foreseeable future.

Mario Mendonca, Genuity Capital Markets.

Good afternoon, everyone. I want to go back to the individual annuities for a second. And Bob, you provided -- this was Bob Salipante, a pretty good thorough discussion of the dynamics in that business. And it struck me that there were two elements moving in opposite directions in terms of profitability. You explained that 1.9 billion of fixed annuity block would reprice over the next 12 months and presumably that's beneficial to earnings as the repricing has been so far. You'd agree with that, Bob, that that's a benefit to earnings?

That's correct. It depends on what happens with interest rates to some extent, though, Mario.

Yes, that's the second part of question because with the fact that you back your liabilities with assets that are longer dated, and I understand why you do that. That makes perfect sense why you'd back it with longer dated assets. And I think in the past in some other presentation you referred to backing it with assets that are about a year longer dated than the liability. If we just go with that, what we're talking about is bonds that were purchased five years ago when the five-year rate was say 200 basis points higher than it is now.

If rates were to stay exactly where they are, in about 12 months those bonds, to the extent that you'd have to reinvest, would earn you 200 basis points less. So it would seem to me that about 12 months from now, or sometime in the summer next year, is it conceivable that fixed annuity earnings drop right back to $45 to $50 million a year if rates stay where they are that is?

I want to clarify one thing, Mario, for sure -- this is Bob. We're duration matched. The issue and reason I sort of went through that long explanation is I was introducing a concept that I did last quarter called reset match. So when an annuity -- an individual contract comes up for renewal we can reset crediting rate. Keyport had these five-year guaranteed instruments and so four, five, six years ago they were selling a lot of this product. We're getting into that heavy reset period now.

So as we get to that period not all of the money is going to come back to us at that point in time from the clients. There's some shock lapses that we estimate, but the cash will come back over time. And so the duration of those liabilities we estimate to be out approximately about a year. That's when the cash comes back. That's when we have the opportunity to reset on the asset side.

As things have progressed our crediting rate is -- our earned rate is something north of 5%. As you've seen, interest rates have moved up the last two months in particular in the U.S. If they were to stay where they are going forward out that year we would be able to hold our earned rate at about the current position. And that would give us this spread that I was talking about before, about 140 to 150 bips. If rates spike up we would seem more redemptions. If rates drop back down we get into that spread compression scenario again.

I just can't help but reflect on comments you've made in the past where you said when the bonds mature 12 months from now -- am I correct in saying that? I'm pretty sure that's what you've described to us -- when the bonds mature 12 months from now?

I just essentially repeated that. Yes.

Those bonds would get reinvested at a lower rate?

They would get reinvested at -- but that's been occurring throughout the term. This is a $10.5 billion block of business, Mario, and those resets have been occurring over time. And so, the issue of God is maintaining our average to earn rate and that's what I was driving at. So at these current levels of nominal rates and spreads and if rates move up a bit from here, we feel that we can hold our earn rate.

So this is a sort of sustainable as long as rates don't decline further is what you're suggesting.

If rates go back down we're back in spread compression. If rates spike back up, of course, then the convexity on the book would expect surrenders.

And Paul, just a question, this $50 million change in assumption, how would you react to someone characterizing Sun Life's earnings as not in fact being $0.82 this quarter but rather being say $0.76, $0.06 less. If you read that tomorrow, how do you react to that because it just seems like that's the obvious thing to go with?

Mario, you say when I read that tomorrow, I think I've read that every quarter now for the last three years where people have said that our earnings were not what they were (indiscernible) said they were and every quarter after that we've shown that the earnings -- this table (ph) of unpredictable earnings growth was there. So if I were to read that tomorrow I would save it's more of the same, but I would also suggest that you look at our actual performance and our ability to generate sustainable earnings growth under different scenarios.

We have a large book of business here with many moving parts. We have been able to deliver this and I think we will -- depending on where the markets go of course -- that's a big thing. Where the markets go over the next quarter or so we'll be able to continue to bring strong earnings going forward.

Paul, I fully agree. What analysts write probably isn't all that relevant and maybe even what you think that analysts write isn't relevant. What's relevant is what the market thinks. And could it be that part the reason why Sun Life has traded at a discount valuation to Manulife and other companies for a long time might precisely be that, that the market doesn't quite understand the earnings as well as they do say for other companies?

I'm not going to speculate on that, Mario. I don't really know why these things are there but I think that we have produced stable and predictable earnings growth over time and we'll continue to do so.

Okay, operator, we've reached the 5:00 cut-off time for the call. So I think I'm going to thank the participants on the call for today and if you have any additional questions we'll be available after the call on the investor relations line. And should you wish to listen to a rebroadcast of the call, it will be our website shortly after 6 PM this evening.

And finally, I want to remind everybody about our upcoming investor day which is scheduled for 8 AM on November 15th at the Toronto stock exchange. If you have not already registered or did not receive an email invitation, please contact us at the investor relations line and we'll take care of it. With that I'll say thank you and have a good evening.

Thank you. Ladies and gentlemen, this concludes the Sun Life Financial third-quarter 2005 analyst conference call. If you would like to listen to a replay of today's conference please dial 877-289-8525 or 416-640-1917 with access number 2105-4243 followed by the pound sign. Once again, if you'd like to listen to a replay of today's conference, please dial 877-289-8525 or 416-640-1917 with access number 2105-4243 followed by the pound sign. Again, thank you for your participation and you may now disconnect.