Sun Life Financial Inc (SLF) 2005 Q4 法說會逐字稿

Welcome to the Sun Life Financial Q4 results analyst conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. (Operator Instructions).

I would like to remind everyone that this conference call is being recorded on Thursday, February 9th, 2006 at 4 PM Eastern. I will now turn the conference over to Mr. Kevin Strain, VP of Investor Relations. Please go ahead, Mr. Strain.

Thank you, operator, and good afternoon, everyone. I'd like to start by introducing the members of the management team present for today's call. Hosting the call, we have Don Stewart, Chief Executive Officer of Sun Life Financial; Jim Prieur, President and Chief Operating Officer of Sun Life Financial; Paul Derksen, Executive Vice President and Chief Financial Officer; and Kevin Dougherty, President, Sun Life Financial Canada, who will be providing a brief overview of growth in our Canadian individual operations. Also available to answer questions are Bob Salipante, President, Sun Life Financial U.S., and Rob Manning, President and CEO of MFS.

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

And with that, I will now turn things over to Don.

Thank you, Kevin, and good afternoon, everyone. We are very pleased to be reporting strong results for the fourth quarter of 2005, both financially and operationally. This concludes an impressive calendar year where we achieved our fifth consecutive year of improved earnings since going public.

Let me begin with our financial results. Through growth and earnings and active capital management, we have increased our operating return on equity by 110 basis points for 2005 to 13.1%. This exceeded the targeted 75 to 100 basis points that we had set as our medium-term goal.

We continue to believe that growth in organic ROE delivers value to shareholders, and that will be an ongoing focus at Sun Life Financial. 2005 operating EPS came in at $3.24 Canadian, up 11.3%, or 15.5% in constant currency. This exceeded our target of 10% growth in earnings on a constant currency basis.

For the quarter, operating ROE was 13.3%, an improvement of 120 basis points over Q4 2004. Operating earnings per share for the quarter of $0.84 Canadian represents another solid quarter for Sun Life Financial.

Strong earnings in Canada, the United States, and the United Kingdom were partially offset by losses in the reinsurance business due to reserve strengthening and poor mortality experience as well as integration costs related to the CMG Asia acquisition.

Our earnings performance and our confidence in our ability to continue to move forward have allowed us to increased our quarterly dividend to $0.275 per share, an increase of 8%. In addition, we are very pleased to be increasing our target payout range for dividends to 30 to 40% of earnings. Our dividend payout ratio in 2005 was approximately 31%.

Over the quarter, we bought back an additional 1.8 million shares, bringing the year-to-date total to close to 13.5 million shares for $555 million. This exceeded our full-year target of $500 million. As listeners will be aware, we have renewed our normal course issuer bid for up to 5% of the common shares outstanding, beginning January 12, 2006. In 2005, the combination of dividends and share buyback returned $1.1 billion to shareholders.

Our acquisition of CMG Asia closed in the quarter. This transaction significantly enhances our strategic position in Asia, providing us with greater infrastructure to grow in Hong Kong and in China.

We continue to expand our distribution capabilities across the company. In Canada, we increased our market share for individual life in the most recent market statistics by over 100 basis points to 12.6%. This is a significant improvement, and is the result of traction that we're gaining in the wholesale channel as well as increases in productivity in the Clarica sales force.

Group retirement services was again ranked number one by Benefits Canada magazine for market share in assets under management. Group retirement services increased retention assets on termination of plan members to 31%. This is an important strategic initiative that delivers value to customers by providing them with ready access to high-quality fund managers at a relatively low-cost, and it also adds value to our shareholders by building higher-margin business. As well as GRS progress, we continue to see our [total] (technical difficulty) benefits business grow, adding new customers over the quarter.

In the United States, I'm delighted that we've just announcing the partnership with National Financial Partners, a premier distribution company in U.S. individual life. And this comes on top of good growth in domestic sales in the fourth quarter. Our U.S. annuity business ended the quarter with 78 wholesalers and held market share. We will continue to work towards increasing our business in 2006 through innovative product and focused execution.

Our group life and health business had record sales, and ended the year with over US$1 billion of in-force premiums. We are now close to a top 10 ranking for group life and health providers in the U.S.

At MFS, the trend in positive net sales continued for the fifth quarter in a row, reaching US$1.9 billion. Net sales of retail mutual funds were down in the quarter, offset by very good institutional net flows of $3.2 billion.

In Asia, the CMG acquisition increased our sales force to 1,700 in Hong Kong, and contributed to an 80% increase in sales. In early January, we expanded our operations further in China, commencing operations in [Huangcho], a city of over 7 million people.

In India, we continue to grow our sales force, ending the year with almost 14,000 agents, well on our way to our goal of 20,000 agents and 50 new branches.

While we're very pleased with our growth, we are committed to making sure that growth is profitable, and to that end, the value of the business increased 18% in 2005 to $791 million.

Finally, we are one of five Canadian companies to be named as one of the 100 Most Sustainable Corporations in the World. The list was recently unveiled at the World Economic Forum in Davos, Switzerland. This prestigious annual ranking is based on nontraditional success criteria such as strategic governance, environmental initiatives, corporate citizenship, and employee practices. Research indicates that companies who excel in managing social, environmental, and governance factors gain a competitive edge.

I look forward to reporting our continued progress on these fronts at the next quarter. But at this point, I will now hand over to Paul Derksen, our Chief Financial Officer.

Thank you, Don. As Don pointed out, we had another excellent quarter. At $0.84 operating earnings per share, we're 13.5%, up 16.2% in constant currency. This is well in excess of the target we've been communicating of 10%. The CMG integration cost of $12 million this quarter reduced earnings per share to $0.82.

Slide 6 shows that ROE also increased by 120 basis points to 13.3%, 13.1% for the full year. We were pleased with this increase, which exceeds our target of 75 to 100 basis points for the full year. This positive trend is also reflected in earnings. Operating earnings were up 12 percent, up 15% in constant currency.

On slide 7, you can see the high quality of our earnings. Our focus on value has increased expected earnings by 9%, up 12% in constant currency. Profitable new business and continued improvements in the efficiency of the in-force block both contributed. This improvement was noted throughout the Company.

If you take earnings from surplus and add expected profit, those two numbers in the aggregate make up 95% of pre-tax earnings. New business strain cost us $34 million more this quarter as a result of stronger sales in the United States group business, Canadian individual, and in Asia.

Experience gains were less positive this quarter, mostly driven by negative mortality and our reinsurance operation. Assumption changes were $17 million, a modest 3% of pre-tax earnings, 5% if you exclude restructuring charges.

Our tax rate is higher in the fourth quarter of 2005 than it was a year ago. Pre-tax earnings are up a very strong 17% for the quarter, and up 22% for the full year. Having noted that, we did benefit this quarter from the recognition of a future tax asset in the United Kingdom, and favorable opinion we received in the United States with regard to a tax item that we were pursuing. For the year, our tax rate was a very sustainable 22%, again underscoring the sustainability of the earnings in 2005.

Turning to slide 8, our value of new business is up 18%. This is very much a result of our focus on profitable market share. We believe that the growth of the value of new business, rather than premiums and deposits, is a key indicator of future earnings growth.

Turning next to the business groups, Canada had an excellent quarter, with earning increases of $30 million or 13%. This was driven by strong business growth, favorable experience in group benefits, and the wealth management business.

Revenue was up 13% from a year ago generated across the business operations. We continue to improve productivity in the Clarica sales force and gain traction in the wholesale channel. Kevin Dougherty will be highlighting growth in sales after my comments.

Slide 10 -- Canadian individual sales were very strong this quarter. Individual life and health sales were up 15%, and market share increased by 1.2% to 12.6%.

Slide 11 -- individual wealth sales were up 30% from a year ago, with improvements in both segregated funds and mutual fund sales. The partnership with CI continues to be working very well, with the Clarica sales force representing 42% of CI net sales.

On slide 12, you can see how group retirement services also continue to do extremely well. It had an impressive 48% market share in the first half of '05 for all DC plans in Canada. Q4 sales were up 24% from Q3, although they were somewhat lower than in the fourth quarter of 2004 because of a single large [take] in that particular quarter. The group also retained a $0.5 billion of assets this year that would have otherwise rolled over -- up 52% from 2004.

On slide 13, you can see that group benefits also had an excellent quarter, with sales almost triple last year's levels, and business in force being up 9%. This quarter, [we won] the Canada Post account and a major retailer as well.

The U.S. on slide 14 also had very good earnings this quarter, up 68%. Improved spreads, equity markets, lower taxes, the benefit of the AXXX structure all contributed. ROE is up over 500 basis points to 15.7% based on these improved earnings.

On slide 15, gross variable annuity sales were up 9% from a year ago, and market share has improved slightly as well. Variable annuities are in net redemptions, primarily because of the single manager block written sometime ago. Fixed annuity sales were lower because of customer preference, but spread is up measurably from last year.

Slide 16 -- individual life sales were up 34%. They continue to be somewhat volatile, mainly due to the nature of the BOLI/COLI type product which can have significant variations in each quarter. Other individual sales are up significantly from previous quarters, but up slightly from a year ago, mainly due to reduced offshore sales.

On slide 17, group life and health had an outstanding quarter. Sales were up 21%, and business in force was up 19%. The increase in the investment and distribution has certainly paid off extremely well. The total value of the book is now exceeding $1 billion.

Slide 18, MFS flows continue to be in positive territory for the fifth quarter in a row. Asset growth was 11% up year over year, and reached a record level of $168 billion in January of '06. Margins continued steadily in the 23% range.

There's one correction on this slide. Q4 '04, where net income shows 38 million, should show 36 million.

The annual liquidation rate of 19.7% in Q4 was down from 23.7 a year ago -- again showing strong improvement.

Slide 19 -- assets are up 11% year over year to $162 billion, with increases of 8.6 billion due to market improvements, and net sales of 7.5 billion.

Slide 20 shows this quarter net sales for MFS of $1.9 billion. They continue to be positive, with strong sales of institutional products, partially offset by negative flows in mutual funds. As I mentioned, the redemption rate has decreased to below 20%, and market movements contributed $2.9 billion this quarter.

Slide 21, in Asia we keep driving the sales momentum with the CMG acquisition, the opening of offices in a fourth city in China and the establishment of a joint venture for bank assurance in the Philippines.

Revenue in the fourth quarter was up 18% from a year ago. Fourth-quarter earnings were down from last year because of integration charges, higher new business strain, and continued investments in developing markets.

Slide 22, sales are up 31 in Asia. Hong Kong, the Philippines, and Indian sales were strong contributors, with the number of agents in India now approaching 14,000.

Turning then to asset quality on slide 23, asset quality remains at very high levels. Gross impaired assets were down slightly from Q3, with an improvement in the bond portfolio. The net impaired ratio at 18 basis points remains very low. We continue to have a highly diversified portfolio, with 97% of our bonds investment grade.

Slide 24 shows we had a lot of activity in the capital management area. We purchased approximately 1.8 million shares in the quarter for $85 million, $555 million for the full year. This compares to our annual objective for the year of 500 million. We also issued $250 million of perpetual preferred shares in January, and $600 million of debentures in November.

As a result of our continued earnings growth, the Board has improved an increase in our quarterly dividend to $0.275 per share, up 8% from the fourth quarter. The acquisition of CNG and some rules changes reduced our MCCSR to 216%. However, we expect it to be well in excess of 220% in the first quarter.

So in summary, we had an excellent quarter, meeting or exceeding our financial targets for the year. Almost all business units ended the year with strong sales momentum and very strong earnings growth.

This concludes my overview, and Kevin Dougherty, the President of SLF Canada, will now give you an update on the Canadian individual business unit.

Thanks, Paul. Good afternoon, everyone. In November 2004 at investor day, we announced a plan to increase our individual sales in Canada. And I wanted to provide a progress report on this work today.

At that time, the major components of the plan we discussed were -- an increased focus on Clarica sales force productivity; increasing our distribution reach by building relationships with various wholesale channels; positioning ourselves to take advantage of the growth, which we anticipated in the individual health insurance market; and leveraging our unique relationship with CI investments.

So turning to slide 27, in these next few moments I'd like to give you an update on the work that we've done to reposition our product line for multichannel distribution, and work we've done on distribution focusing on the Clarica sales force productivity and building out our wholesale distribution. Then I'd like to give you a picture of our overall sales results since that time, and finally, put all of this into the context of our overall financial results within our individual line of business.

So turning to slide 28, one of the key tasks in 2005 was to update our product line following the Clarica integration and to reposition it for use in the multichannel environment. As you can see from this picture, we've retooled the entire product line of protection and wealth products in the last 12 to 14 months, with new product or product enhancements coming to market every six to eight weeks throughout 2005.

The impact of this work is that we now have a full suite of products will be competitive in the wholesale channels. And importantly, this has improved the products available for sale through our Clarica sales force as well. So we have a very competitive term, UL products, critical illness products, and are positioned to be effective in both the exclusive and third-party channels.

At Sun Life Financial, our strategy in all of our lines of business is to be competitive, but not to be the price leader. We compete on other dimensions such as product features, underwriting service, strong relationships, and sales support. These qualities are even more important, of course, in the third-party and affluent segments that we are now targeting.

A good example of this would be the enhancements to our UL products in December, where we wrapped our GRS fund [to chassis] into our individual UL product, effectively providing access to the best high-net-worth money managers in Canada inside our UL offering at highly competitive management fees. By teaming up GRS and individual in this way, we are able to avoid competing purely on cost by providing exceptional value for our customers and advisors.

Turning to slide 29 and our wealth products, at the core of our wealth strategy is our relationship with CI investments. We have a strong and successful partnership that continues to develop. And as Paul mentioned, the Clarica sales force generated 42% of CI's net sales flows in Q4 2005.

The CI brand, one of the strongest in Canada, provides an excellent foundation for our advisors to sell wealth accumulation and wealth protection products such as seg funds, principal protected notes, critical illness, long-term care, and estate planning products. You'll see the impact of this in the results in a moment.

Turning now to slide 30, that's a quick overview of the work we've done on our product lineup, so let's now turn to our distribution strategy. We've talked about a focus on productivity in the Clarica sales force growing our overall topline. In late 2004 and early 2005, the number of low-producing advisors was significantly reduced. And since then we've been focusing our resources on increasing productivity in this channel. Within a relatively short period of time, the results of this strategy are evident, with protection productivity up 13% and wealth productivity up 32%. With this now well underway, we are beginning to turn our focus to increasing the number of recruits into the system, the impact of which will show up in 2006.

The Clarica sales force is the foundation for our individual distribution strategy in Canada. Through their strong links in over 850 communities across the country, we can count on them to produce over 130 million in protection sales year over year, and over $2 million of wealth sales. By comparison, many other companies have to rely solely on third-party distribution which obviously can be less predictable.

Turning to slide 31, and Q4 2004 we launched our strategy to build distribution through third-party channels. A key component of that was retooling our product line, which was greatly enhanced over 2005. A second component was building out underwriting and sales support for these channels, which has now been completed with the addition of new talent, key underwriters, and advanced sales specialists who are well-known to reinsurers and advisers across Canada -- and finally, the signing and developing a new distribution relationships.

As you can see from this slide, we've increased sales for these channels from 8 million in 2004 to 20 million in 2005. In Q4 2004, our sales were 1.4 million. In Q4 2005, they were over 6 million. So it is clear that we are gaining good traction here, even though we haven't yet seen the benefit of the launch of our new term and new UL products in late 2005.

As you can see from this picture, our MGA and our national accounts channels are developing nicely. Our total number of MGA contracts is now at 14. These 14 represent about 15,000 advisors across Canada who now have Sun Life Financial product on their shelves. In the national accounts channel, we recently announced a distribution agreement with Edward Jones which will go into place in the first quarter of 2006.

And thanks to their affinity to the Company, we've been able to rekindle some very deep relationships with many, many former Sun Life advisors. Much of the success is due to the strength of the Sun Life name, which resonates well with brokers, because of our reputation as a premium brand known for financial strength, customer service, and product innovation.

Slide 32 -- so the net effect of all this is protection sales grew by 11% last year; wealth sales grew by 22%; life insurance sales grew by 12% compared to market growth rates reporting by LIMRA in Q3 of about 5%. Our share of industry sales as reported by LIMRA in Q3 '05 increased 120 basis points from 11.4% to 12.6%.

The LIMRA sales numbers include universal life, term, and permanent products, including par and nonpar life sales. At Sun Life, we discontinued par sales when we demutualized in the year 2000 due to the low marginal value of this business for shareholders. We believe that if one stripped out industry par sales by major competitors, we would be in the number one or number two marketshare positioning today.

On the wealth side, we can see strong growth in mutual fund and seg funds sales, reflecting the strength of the Clarica sales force and additional seg fund sales through various CI distribution partners such as Assante.

I think that these two pictures show that there's considerable opportunity for us in the protection business as we widen our distribution to allow us to grow at a faster rate than the industry, and that the underlying fundamentals of our wealth business show that we are very well positioned to take advantage of the boomers in the homestretch toward their retirement.

Turning to slide 33, the net income summary on this slide shows that we've been able to make the investments required to achieve strong sales results while continuing to deliver solid growth in earnings, increasing both net income and ROE. We've accomplished this by extracting further efficiencies out of our core operations post integration through the use of technology and outsourcing and redeploying a portion of these savings towards product development and sales support.

So to summarize, our individual team, our leaders, employees, advisors and wholesalers made excellent progress in 2005. They have repositioned our product and service infrastructure to execute on our multichannel strategy. They've increased productivity in the Clarica sales force and developed a number of important partnerships with third-party channels. We are seeing the early results, with protection sales up 11% and wealth sales up 22%, and we are doing this while delivering very solidly on our income targets. I'm very optimistic that we will continue along this trajectory in 2006.

That concludes my remarks. And with that, I'd like to turn the call back over to Kevin Strain. Thank you.

Thank you, Kevin. Operator, we're now ready to start the question-and-answer portion of our call. And I'd ask that you please poll the callers for questions.

(Operator Instructions) Rob Wessel, National Bank Financial.

I just wanted to ask -- you had a collection of sort of unusual items. And given that it's not clear to what degree it contributed or took away from earnings, I just wanted to know -- if we were to think about Sun Life UK, which had the recognition of tax assets offset by reserve strengthening, we had a couple of items which appeared to offset in reinsurance for a loss, we had some items in Asia which appeared -- including a tax resolution, which produced sort of flat earnings. And you had sort of the innovative structure dealing with the AXXX. And then you had some tax issues or tax items related to the U.S.

If we were to think about those in sort of a compartmentalized fashion, what would be sort of the net effect? And can you give maybe some insight as to what would be sort of in your view clearly one time, and what you think would sort of be considered -- I don't know, sustainable or sort of part of ongoing operations.

If you combine all the tax items, our income tax rate is in the 15% range, whereas if you exclude them, they would be more like the 21, 22% range for a difference of close to $50 million. I might add on the tax side that we are very focused on reducing our expenses, and we consider tax and expense to be reduced as well. And so the 21, 22% -- our objective is to continue to reduce that over time.

If you look at our tax rate historically, you'll see it's been a little choppy. And it will continue to be that way, but that's because we just have a lot of opportunities, a lot of issues that come in at different times.

And if you take the 50 million I just referred to and look at the items that also occurred that were mentioned in the MD&A, such as the strengthening of the provisions in the UK, strengthening of reserves in the UK, the mortality -- changes in reinsurance, assumption changes in reinsurance, then the latter group of events added up to something in the high 40s as well. So I'd say that -- as you've seen in the past, our SBU earnings are sometimes a little bit volatile. They're choppy. As you know, we report all our assumption changes in the business units as opposed to combining them. And so that gives you a little bit more choppiness that you might see otherwise.

While the earnings of the business units are a little choppy from time to time, the portfolio in the aggregate has gone extremely well, generating stable and predictable earnings growth. And we are quite confident that we are able to meet or exceed the earnings target we set for '06 constant currency of 10%.

And I'm sorry, Paul, would you include in that the benefits from the innovative structure you're [doing] with AXXX?

That's a good point. I excluded that from the math, because the AXXX benefit this quarter will be continuing in '06 and beyond, and in the aggregate, are sustainable.

In that magnitude?

Yes.

Jamie Keating, RBC Capital Markets.

Paul, I would be remiss not to ask you in what magnitude that AXXX is roughly? Is that the one that -- we disclosed that already last quarter?

The AXXX is the item that we --

No, I know the item; I'm sorry, what the sustainable amount is, the run rate? Is that in that (multiple speakers) also?

We haven't quantified the amount of the AXXX impact. As you know, that's quite a proprietary structure, and so we haven't gone into a lot of detail. But what I can tell you is that is that it's very beneficial to the bottom line of the organization, and the impact this quarter will be sustainable going forward.

Swinging over to the MFS situation, I wondered if I could get any color as to the nature of the institutional flows this quarter -- a fairly good number there; I just wondered if you could describe what sort of wins were in their? Just curious about institutional clients and/or CDO-type structured product, if there's anything in there?

The institutional business is pretty geographically dispersed around the world. About a quarter of it came out of Asia, a quarter came out of Europe, and 50% came out of the United States. And in that number for the quarter, there was approximately $1 billion of CDOs that were priced and closed.

Terrific. And while we're on MFS, I wonder if you would just talk a bit about the mutual fund fourth-quarter phenomenon, if there is one. I noticed negative flows spiked up last fourth quarter, and it looks like they did again this quarter. Is there any story behind that?

Yes, there is a story. Pretty much -- in the United States, the 401(k) plans move in the fourth quarter if they are going to transition from one platform to another. We, as you know, transferred our retirement platform to Sun Life on January 1st. So during the fourth quarter, there was a little bit of turmoil given the information around that event. But generally speaking, it was consistent across the industry, and it led us to lose a couple of big plans that drove the numbers higher than what we had expected to happen.

Steve Cawley, TD Newcrest.

Back to Rob Manning, the [FRC] had some data leading in -- I think we got it in January that seemed to imply that December was a positive month for retail flows. And given the number that we've got in this [stat pack], it leads me to believe that maybe that wasn't the case. Can you talk about what December was like, and whether there was any positive trends through the end of the year?

Yes. I think what you're referring to is the FRC data. And what happens is in the mutual fund business, you tend to get on large platforms like Merrill Lynch and UBS and all the big brokerage firms. And Merrill Lynch reinvested dividends in some of their multidisciplined platforms. And they miscalculated the dividend reinvestment as an actual sale, and that is supposed to be stripped out. So that was where the error came from.

I think the general trend in the fourth quarter is fixed income flows turned negative as people are getting more concerned about interest rates rising. And that was the one category, particularly in high yield or junk bonds that had quite a bit of outflows.

But other than that, the categories are pretty much stable with asset allocation funds doing well, world income funds doing well, and value doing well.

Okay. Second one for you, Rob -- on the margin front, the average [S&P] was up about 6% year over year. Your margins didn't move. Can you go through what steps you are taking to improve that 23% profit margin?

Sure. Well, there's a few components to that, one of which is -- we had a full-year impact of fee cuts based on our settlement that happened, as you're all aware of. We also converted all of our soft dollar payments to cash payments during the year, which hit, as well as we began expensing all of our long-term incentive comp. So those three factors all hit us from a margin point of view during the year. In the fourth quarter, in particular, we took a real estate charge to rationalize real estate.

What I will say to you that now that the retirement business is out of MFS, and that we have tried to manage our headcount flat, which is what we see going forward, we think that the margin expansion will happen. And you'll see the earnings and the revenues of the firm track more closely with the market going forward.

Is any part of your compensation related to profit margin?

I think pretty much all of it is.

To improving the profit margin?

To the profitability of the business, as well as improving the margin.

Timothy Lazaris, GMP Securities.

I just wanted a clarification. Sorry -- I'm not sure that -- you might have said this, but I had a hard time getting on the call. What was the impact of foreign exchange in the fourth quarter and for the full-year, if you could give it to us in dollars, please?

Yes. We've got it in the press release, but just to summarize it for you, for the quarter, it was $13 million, and for the full year, it was $68 million. Is that helpful?

Yes, it is. And one other question -- you used to give us some sensitivity to increases in the S&P and/or interest rate sensitivity. Have you updated either one of those? And if you have them, could you perhaps share them with us?

They're very similar to what they were before. We said always for every 50 points movement in the S&P 500, you have about a $0.09 a share impact. And for every hundred basis point move in the interest rates, it's more like $0.18, $0.19.

John Reucassel, BMO Nesbitt Burns.

Paul, just on the -- could you quantify the dollar amount -- or what would the tax rate in the U.S. annuities business have been without the tax benefit? I guess what I'm going to trying to get at - what was a sustainable number? It's kind of moving around on us here?

Yes, well, I have the overall tax rates. I don't have in front of me what the sustainable tax rate is for the individual business. But that's something if you're interested we can work with you on that after the call.

Okay. And what was CI's contribution during the quarter?

That too was in the --

(multiple speakers) it was $26 million.

Okay, I missed that, I apologize. And the VA net redemptions -- could you explain that a little more, what happened there?

I think the best way to look at it is if you turn to Page 15 of Paul's, presentation, you see gross and net VA sales -- I'll talk about those. We had an event in the fourth quarter that affected our offshore variable annuity gross in net sales. That event was the transfer agent for the MFS offshore funds was changed, and there were service issues. And so those didn't affect our offshore VA products directly, but we did suffer fallout from disappointed reps and gatekeepers, because the international MFS funds in our offshore variable annuity are wholesaled by the same MFS international wholesaling people.

So the bottom line is that about 80% of that deterioration in our VA net sales is from that event. Our VA gross sales were off 32% offshore in the quarter, and that attributes most of the dropoff in our gross variable annuity sales on page 15.

Okay. So is there a way to look at what net redemptions would have been if you -- I guess just take out 80%, okay.

On the margins at MFS, Rob, do you guys have a target in mind on pretax margins that you want to get to?

I think if you look at the industry it's low 30s on average, and that should be our long-term target.

So what is the time to get there, do you think?

If you tell me what the market's going to do, I can give you that answer.

So this is a -- you have to grow into the margin issue?

Yes.

Okay. And then last question for Don -- the payout ratio is going up. Do you want to discuss why? I think if a great idea to increase the payout ratio, but what was the discussion at the Board level and why did you come to this conclusion?

Well, I'd like to focus on the dividend increase as first measure of confidence in ongoing earnings. And the payout ratio, which went from a range of 25 to 35% to a range of 30 to 40, simply reflects this longer-term confidence. I don't think there's much more to it than that. But equally, I would emphasize the importance of our confidence in the numbers.

Mario Mendonca, Genuity Capital Market.

A question about the single manager variable annuity, perhaps for Bob Salipante. How large is that book, and at what pace is running off?

Let me see if I've got something here that gives us the size of the book. I don't have a specific number in front of me. We can get back to you, Mario, on the size of that book. It's a substantial book, because that was the preponderance of our sales for years. It's the older block, and so that is running off faster than the newer multimanager line.

Overall, lapse rate for VAs last year was 14.9%, and that would include both and multi- and (technical difficulty) manager products.

The multimanager products would obviously be a lot higher than that -- higher than the 14.9?

No, the manager multimanager products surrenders would be --

Sorry, I met the single-manager. I'm sorry. Wouldn't that be materially higher than the 14.9?

I don't think materially higher -- I mean, we can follow up on the facts; I just haven't got them in front of me -- because that 14.9, I think, would represent again primarily the single-manager product. And that's the preponderance of the book.

Oh, I see where you're going with this. It's such an important part of the book, that that's how you -- okay, I'm with you. Do you still feel good about sometime, maybe mid to late '06, turning that business around?

Yes, we are continuing to invest in our program -- gaining traction. I wish it was going faster, but there are signs that momentum is building.

We introduced our latest product on October 31st. October sales were soft; they picked up in November, December. Those were two of our best months of the year. January '06 -- domestic variable annuity sales were up 23% over January of '05, so those are the sales by Kevin Hart's wholesalers.

Just a couple of other indicators -- our new producers in 2005 that came to the semi-variable annuity were up 53%. And large tickets -- these are cases over 250,000 -- were up 25% in the second half of the year over the first half. And I would argue that large cases are an indicator of increase in product competitiveness.

Okay. Paul, a question for you -- just a small point of clarification. At the investor day, the most recent one, I was just checking my notes -- you indicated that the AXXX solution would save you about $10 million a year. Do I have that right?

I'm not sure that -- we quantified it at 10 million. We said it was at least 10 million a year, yes. I'm not sure exactly what number we quoted, but we would not have given a specific number, I don't think.

Okay. In my notes and then in the discussion with Kevin not long ago I remember the $10 million as being the number. So just a point of clarification to Rob Wessel's question, Rob asking if the 15 million -- if that was the order of magnitude that we could expect going forward, because that would be a lot higher than 10 million. I mean, am I looking at the numbers in too much detail, is this much --

[No, no, no] -- 15 million is an annual number.

The 15 million was what came through on the quarter for the AXXX?

Right.

And you suggested that that was sustainable?

Yes, it's sustainable.

I'm just having difficulty reconciling the $10 million for a year and 15 million for a quarter.

Right. The numbers -- I guess specifically what I'm saying is that the AXXX impact of this quarter is sustainable.

Meaning that you [won't] have a --

I don't think we quantified the 15 for this quarter. I'm not sure where you're getting that from.

I think Rob and I got it from the same place in the press release, where it says that the $15 million increase in individual life earnings, related predominantly to the AXXX solution --

Oh, the AXXX solution was a component of it, but certainly not all of it.

We have a lot of adjustment -- I see what you're coming at now. I'm sorry I didn't -- but the $15 million includes AXXX, but it has a number of other smaller items in there as well. You should not conclude that the total 15 million for the quarter is AXXX.

That's how I interpreted it when you answered Rob's question. I think I understand it better now. Thank you.

Thank you for clarifying that.

Tom MacKinnon, Scotia Capital.

Just a couple of questions with respect to these one-timers. The favorable tax opinion in the U.S., can you give us what the dollar amount was, and in what particular segment it was in the U.S.?

That ended up mostly in annuities -- the [favorable] component of that. And the amount is in the high-teens millions.

And what about the tax recognition in the UK?

That was the remainder of the 50 million.

Okay. So we are expecting somewhere closer to over 30 on that one. Is that right, then?

Yes, that's correct.

And with respect to the AXXX solution, I assume what you used to do is house this business offshore, and you had an LLC cost. Is that correct? And was that LLC cost buried within the U.S. individual insurance segments? I know that you issued some debentures in November to help mitigate where that was part of the AXXX funding solution. Are the costs of those debentures fitting in another segment? I'm trying to get at how the costs have changed and where they might reside now.

Tom, let me talk about the benefits here, and I think gets at your question to some degree. So we've established long-term backing for long-term liabilities, first. Second, the structure enables us to lock in that long-term financing at a reasonable cost. And third, that cost enabled us to revisit the estimate of funding cost and the product pricing and in our reserves.

So while we do anticipate --

These [aren't NAIC] reserves, correct? They're in U.S. statutory reserves? They're not in any Canadian GAAP reserves?

Right.

Okay. So we're not talking about an earnings impact when we're talking about revisit reserves here? Am I clear, or do I make sense there?

Yes, we are talking about Canadian reserves. So we anticipate a sustainable lift in earnings driven by reduced funding costs.

Yes, so -- okay. And what were the LLC costs that you were holding before on these?

The question that you asked earlier as well was where are ythe resident in the business? And they are all in individual insurance business, so we consolidate that all on that product line. We have not broken out the LLC costs and the replacement costs and all that. We haven't gotten into any of that detail at this point in time. And given the nature of this transaction, we are not prepared to do that.

But there's a debt cost that was picked up that was added into corporate to help mitigate -- that was part of the AXXX solution -- is that correct?

In the end, it was all reflected in the individual business unit in the United States.

Okay, all right. So even the debenture cost is sitting in the U.S. individual insurance and not in the corporate segment?

All debenture costs and funding costs are allocated to the appropriate (multiple speakers)

Okay, that makes sense.

-- as a general statement.

Okay. And then the final is -- what percentage of the fixed annuity block is sitting at the minimum interest rate level, and how has that changed probably over the last year?

All right. So we got 28% of the block is now at the guaranteed minimum rate, Tom. We've got 1.9 billion that's up for rate reset over the next 12 months. In terms of how that's moved, let me just talk about average crediting rate -- I can get at it that way. It was 4 43 in December of '04, it was 3 85 in December of '05.

If the 48% -- if that hasn't missed significantly though in the last year and a bit, is that right?

No, I think that has moved significantly. I would guess it's probably something like 30% a year ago.

Michael Goldberg, Desjardins Securities. Mr. Goldberg, your line is now open; please go ahead with your question.

I'm sorry to interrupt. Mr. Strain, there are no further questions at this time. Please continue.

Okay. Thank you very much operator. I'd like to thank all the participants on the call today. If there are any additional questions, we'll be available after the call. And should you wish to listen to our rebroadcast, it will be available on our website shortly after 6 PM this evening. With that, I'll say thank you and good night.

Ladies and gentlemen, this concludes the conference call for today. Thank you for participating and you may now disconnect your lines.