Sun Life Financial Inc (SLF) 2006 Q1 法說會逐字稿

Welcome to the Sun Life Financial first-quarter 2006 results conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. (OPERATOR INSTRUCTIONS) I would like to remind everyone that this conference call is being recorded on Thursday, April 27, 2006 at 4 PM Eastern Time. I will now turn the conference over to Mr. Kevin Strain, Vice President Investor Relations. Please go ahead, sir.

Thank you, operator, and good afternoon, everyone. I would 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 Bob Salipante, President, Sun Life Financial U.S., who will be providing a brief overview of our U.S. individual life business. Also available to answer questions is Kevin Dougherty, President, Sun Life Financial Canada.

The slides to which the speakers will be referring are available on the Sun Life Financial website. Turning to slide 2, I draw your attention to the cautionary language regarding forward-looking statements which form part of this afternoon's remarks. This slide reviews the reasons why forward-looking statements could be rendered inaccurate by subsequent events. With that, I will now turn things over to Don.

Thank you, Kevin, and good afternoon, everyone. We're pleased to be reporting solid results for the first quarter of 2006, both financially and operationally. This quarter saw us complete the integration of new business functions in Hong Kong, an excellent demonstration of our international integration capabilities. We continued to build on our human capital in Asia, ending the quarter with over 25,000 advisers in the region.

In addition, we further expanded our distribution reach around the world, entering new distribution relationships in the United States; increasing our sales force and partner alliances in India; and expanding in China.

Through solid growth in earnings and active capital management, we have increased our operating return on equity by 60 basis points over Q1 2005, to 13.2%. On a constant currency basis, our operating return on equity was up 80 basis points. This is in line with our medium-term objective of 75 basis points improvement in ROE per year. We continue to believe that organic ROE growth delivers value to shareholders.

First-quarter 2006 operating EPS was C$0.85, and that is up 10%, or 14% in constant currency. This exceeded our medium-term objective of 10% constant currency earnings growth. These medium-term objectives have been in place for some time and have been reinforced at our annual investor days. They also appear in our 2004 and 2005 annual reports.

In all, earnings growth was driven by solid results in the United States on improved markets and spreads, and strong results in Asia on progress in the Hong Kong integration efforts.

During the quarter, we bought back more than 2 million shares for C$106 million. This is in line with our full-year target of C$500 million.

The dividend rate for the quarter was C$0.275 per share, an increase of 15% over first-quarter 2005. Our dividend payout ratio was within our target range of 30% to 40%, coming in at 32%.

Turning to slide 4 in the deck, our business highlights, we continue to grow our distribution capabilities across the Company. In the United States, following our recent agreement with National Financial Partners, we reached an agreement with M Financial Group, one of the United States' leading providers of financial products and services to the affluent market.

In group benefits, we entered into two important new distribution relationships. Sun Life was chosen as the exclusive provider of group life and disability benefits to Medical Group Insurance Services, the largest provider of these products to medical groups in the U.S. We also partnered with United Concordia, Inc., one of the largest dental insurers in the United States, to offer our customers group dental insurance, packaged with our group life and LTD products.

Finally, domestic variable annuity gross sales in the U.S. were up 27%, and we continue to be focused on profitably improving market share.

In Canada, we increased market share for individual life in the most recent market statistics to over 13%. We again held the number-one position in market share for career sales force in 2005.

This overall improvement in individual life market share is the result of continued traction in the wholesale channel and solid results from the Clarica sales force. The Clarica sales force also had a strong RSP season, with overall wealth sales up 12% over first-quarter 2005.

Group Retirement Services held the number-one position in market share in 2005 for new sales, with 38% of the defined contribution market in Canada. In addition, Group Retirement Services increased the retention of assets for terminating plan members by 16% in the first quarter. We also continued to see our total benefits offering grow, adding significant international relationships during the quarter.

At MFS, assets under management hit a record high of US$170 billion. MFS management continues to be focused on delivering positive investment performance and improving profit margins. While net sales for the quarter were a negative $300 million, net redemptions in January were followed by a return to positive net flows overall in both February and March. Our strategy to increase our global institutional sales continues to bring positive results with net managed fund sales of $1.4 billion for the quarter.

In Asia, we continued to grow our distribution capabilities, as I mentioned earlier. In India, we have climbed well above the 15,000 adviser mark and have added 26 branches since embarking on our recent growth strategy, well on the way to our overall goal of 20,000 advisers and 50 new branches. In addition, we added five new bank partnerships during the quarter.

In China, we continued to expand our distribution reach, adding three new cities in the quarter, and have applications pending for three more cities. I look forward to reporting our continued progress next quarter. I'll now hand over to Paul Derksen, our Chief Financial Officer. Paul?

Thank you, Don. We had another excellent quarter at $0.85, operating earnings per share were up 10%, up 14% in constant currency. This is well in excess of our medium-term objective of a 9% to 10% -- sorry, of a 10% increase in constant currency. The CMG integration cost of $2 million this quarter reduced earnings per share to $0.84.

Slide 6 shows that our return on equity also significantly increased on solid earnings and capital management. ROE is up by 60 basis points to 13.2%, up 80 basis points in constant currency. All this in line with our medium-term objective of 75 basis points. Operating earnings were up 7.6%, and up 11.6% in constant currency.

Slide 7 shows the high quality of our earnings. Our focus on value increased expected profit by 10%, up 14% in constant currency. Profitable new business and continued improvements in the efficiency of the in-force block have all contributed. This improvement was noted throughout the Company.

New business [drains] cost us $60 million, down slightly this quarter from a year ago due to mix. Experience gains and assumption changes in the aggregate are $3 million lower than last year because of negative mortality and morbidity experience in the group and the reinsurance businesses. Our expected profit and surplus as a percentage of pretax earnings was 88%, up 1 percentage point from Q1 '05, reflecting continued high earnings quality.

Slide 8 shows that our value of new business is up 12% for the trailing 12 months. This is a continuing indication of our commitment to profitable market share.

Turning then to the business groups, on slide 9, Canadian revenues were up 5% from a year ago, primarily in the individual insurance and group benefits business units. Earnings were off slightly because of higher group claims in the first quarter of '06 and very positive mortality in the first quarter of '05.

Canadian individual sales, on slide 10, were very solid this quarter, with a market share up 40 basis points to 13.2%. Life sales were typically lower in the first quarter as the sales force focuses on the RSP season. Individual life and health sales were up 9% on a rolling 12-month basis as the wholesale channel continues to gain traction.

Slide 11. We had an excellent RSP season, with individual wealth sales up 12% from a year ago. We experienced improvements in both annuities and mutual fund sales.

On slide 12, you can see that Group Retirement Services also continued to do extremely well. GRS had an impressive 38% market share in 2005. Q1 sales were up 36% from the fourth quarter. It was lower than in the fourth quarter of '05 because of a single large case in that quarter. Asset retention on a rolling four-quarter basis increased by 45% to $514 million in the first quarter of '06.

Slide 13. Group Benefits also had an excellent quarter with sales up 11% from last year and business in-force up 9%.

Turning then to the U.S. on slide 14, the U.S. also had a very strong quarter with earnings up 66%. Improved spread and equity markets were slightly offset by unfavorable group claims experience. ROE is also up over 400 basis points to 12.9% compared to the first quarter of '05.

Slide 15. Gross domestic variable annuity sales are up 27% from a year ago, and market shares improved slightly as well. Variable annuities are in net redemption primarily because of the single manager block written sometime ago. Fixed annuity sales are lower because of a consumer preference. But spread is up measurably from the first quarter of '05.

Individual life, on slide 16, had a very strong sales this quarter, $49 million, 2.7 times or almost triple the volume in the first quarter of '05. BOLI sales were somewhat lower than in the first quarter of '05, reflecting the lumpy sales pattern of these products. Account values have grown over 15% year-over-year, representing a significant improvement in the size of the in-force block.

Group life and health, on slide 17, had an outstanding quarter with sales up 63% and the business in-force up 17%. The increase in distribution points is certainly paying off very, very well.

Turning then to MFS on slide 18, MFS has made very good progress this quarter. Earnings were up 22% from the first quarter of '05. Pretax margins are up 3% from the first quarter of '05 and the fourth quarter. Half of this increase is due to the transfer of the 401(k) business -- the RSI business, as we call it -- from MFS to the U.S. insurance operations. But the other half is due to operational improvements in MFS.

Slide 19, assets reached a record $170 billion this quarter and are up 17%. The increase of $25 billion from a year ago is represented -- is caused by $18.7 billion due to market improvements and net sales of $6.5 billion.

On slide 20, the sales of managed funds for MFS of $1.4 billion were offset by negative retail flows in January, followed by positive sales in February and March. The retail redemption rate has decreased to below 22% this quarter. As you can see, market movements contributed $7.7 billion this quarter.

On slide 21, earnings in Asia quadrupled to $24 million primarily due to the CMG acquisition. Revenue was up 24%. We keep driving the sales momentum in Asia with the CMG acquisition, the opening of offices in three additional cities in China, and the establishment of five bancassurance agreements in India.

Slide 22. As a result, Q1 sales are up 29%, up 34% in local currency. Hong Kong and the Philippines contributed, while India sales were up 37%, with the number of agents now over 17,000 -- sorry, 16,000.

Slide 23 shows you that asset quality remains very strong. In the first quarter, gross impaired assets were down $68 million from the first quarter, and down $42 million from the fourth quarter of '05. This is primarily due to the sale of some bond portfolios in the U.S. The net impaired ratio continues to be very low at 16 basis points, indicating a very high level of asset quality.

We repurchased $106 million of common shares this quarter. We issued $250 million of preferred shares and $700 million of debentures. 54% of operating earnings have been returned to common shareholders in the first quarter through dividends and buybacks. The MCCSR increased to 223%.

The last two slides speak to our growth in embedded value. A significant growth in embedded value points to another year of significant value creation. Embedded value before capital transactions grew to $16.9 billion, up $2.6 billion or 18% from the beginning of 2005. As reported previously, value of new business increased by 17% for another solid year of value creation.

So this concludes my presentation. Bob Salipante, the President of SLF U.S., will now give you an update on the growth in our individual business in United States. Bob?

Thank you, Paul. Good afternoon, everyone. As you know, we have three insurance businesses in the U.S. This afternoon I will focus on our U.S. individual business and how we are driving for growth in that business.

I will start by reviewing our individual life strategy on slide 28. Our goal is for distributors to see us as a premier manufacturer of insurance product for affluent to ultra-wealthy clients. This means being innovative, being fast to market when there is a competitive move, and maintaining a broad product line-up.

The second part of our strategy is to deepen each of our existing distribution relationships. We believe these strategies have allowed us to expand our distribution reach and to sign on two new super distributors, National Financial Partners and M Financial Group.

While there are four segments within our individual business, we believe strategically there is tremendous opportunity to find leverage across our domestic, offshore, corporate, and private client programs. Increasingly, we're seeing that these businesses share common product engineering and risk management skills. As our distributors grow and reach for new opportunities in the high-end market space, we find there reaching to a place where we already have a presence.

Finally, we believe it is important to provide our distribution partners with an excellent producer experience and are making investments in sales and service to ensure that outcome.

On slide 29 we illustrate the importance of tying our growth strategy to a focus on the high-end markets. Our target market in the U.S. is the affluent and wealthy markets, and extending upwards to the ultra-wealthy market through our private placement and corporate client programs. Offshore, our focus is on ultra-wealthy individuals looking for clones of U.S. style, high-end life products. This graphic demonstrates continuing growth in the wealth segment in virtually all international markets over the next several years.

Slide 30 shows that we are already well positioned to serve this marketplace. This graphic demonstrates our success in moving up-market from our base as a provider of insurance product to the high-end market in the U.S. This slide shows the average face amount for the U.S. life industry overall; Sun Life's average face amount, more than 4 times the industry, illustrating our focus on the wealth market in the U.S.; the average face for our offshore life business, demonstrating service to the ultra-wealthy international client via our Bermuda affiliate; and finally, the average face for our private placement business, where we have built a presence the past few years, both in the U.S. and internationally.

Slide 31 provides a schematic to illustrate the breadth of our product offerings. For distributors who are focused on the affluent to ultra-wealthy markets, we believe that Sun Life currently provides the most complete array of product offerings. We offer very strong fixed and variable products, private placement versions of each, differentiated versions available for domestic and offshore markets, and versions available for both individual and corporate markets.

Slide 32 indicates the broad extent of our distribution network. As distributors seek to expand their offerings, they are increasingly interested in accessing our array of products because of the shared focus on the affluent to super-wealthy markets. We continue to strive to make it easy for these organizations to do business with us.

Slide 33. We're excited by the fact we were able to sign a distribution relationship with National Financial Partners in February of this year. The strategic focus of NFP on high net worth individuals and growing entrepreneurial companies aligns nicely with our focus on the ultra-wealthy markets and the associated corporate and private markets.

Slide 34. We were equally excited to sign a new distribution relationship with the M Financial Group in March of this year. They will be accessing a full set of Sun Life product offerings, from fixed and variable UL, to COLI, BOLI, and variable annuities, private placement products, and proprietary product offerings. We're making the requisite investments in staff, processes, and products to ensure we enjoy long, successful relationships with both firms.

Slide 35. With our focus on the high-end markets, our products tend to have a significant emphasis on asset and cash value accumulation. Consequently, the best measure of our book is to look at account value growth. Here you can see the account values at our actively sold products. This chart excludes our discontinued [par] and term lines. These have enjoyed a 25% compound annual growth rate for this period.

Moving to slide 36, as you know, it's a competitive market and there are contemporary challenges. In fact, it's the most dynamic time in this business that I have experienced. We've listed a few of the forces for industry change on this slide. Just to call out one item, the reinsurance market has changed significantly over the past year, with rates increasing.

Turning to slide 37, our response to these challenges is to continue to execute our strategy with a high degree of business and financial rigor. We feel that we are well positioned to compete in this market. We will adjust prices to respond to reinsurance rate increases while remaining price competitive. We will continue to grow by focusing on those parts of the market that are growing and by expanding distribution.

Strong risk management is fundamental to our strategy, and our underwriting discipline and avoidance of table shaving have paid dividends for us in solid ongoing relationships with our reinsurers. Importantly, leveraging the global Sun Life resources has allowed us to create an AXXX solution.

So in closing, on slide 38, our U.S. individual business is led by a strong, experienced management team. That team has positioned this business for growth by a competitive, comprehensive product suite, broad distribution access, expertise in the high-end segment of the market, superior risk management skills, and a strong capital position.

Thank you very much, and now back over to Kevin Strain.

Thank you, Bob. Operator, we're now ready to start the Q and A portion of our call, and I would ask that you please poll the callers for questions.

(OPERATOR INSTRUCTIONS) Jamie Keating from RBC Capital Markets.

A couple quick questions, just on the distribution theme if I can, and probably for Bob on the first part. Could you just help thumbnail for us how much leverage these distributors might represent within your system? I don't know, as a proportion of existing firms or advisors perhaps, what kind of lift you get?

Just curious if you could just describe the investment required, and how much is made, and over what period of time you think you get up and running. That sort of thinking, of layering in the timing.

Also hoping to come back to the five bancassurance deals as well in India, if we could talk about that. Thank you.

Yes, this is Bob. Without making any predictions, these are material distribution organizations on the life side in the U.S. We're making requisite investments in new business and underwriting people; and we have been doing so for some time. So the investment and the expense will run ahead of the revenue.

We do already have a significant number of applications in house from both organizations, and we did close our first piece of the business with both organizations in Q1.

Just to follow up on that, is that sort of an idea of maybe you can get up to 25% of capacity in the first year? Or is it faster, slower? I'm just trying to understand how it layers in.

I think it probably takes a couple years to get it fully up with them. We will be producing some proprietary product. But I would say we're off to a good start.

That's helpful. Thank you.

It's Jim Prieur on the bancassurance question in India. We added five new bancassurance relationships. We have a very broad set of relationships in India. There have been quarters where as much as 50% of the individual life business has been sold through bancassurance. So we're a very strong player.

The five incrementally are not that significant, other than to show that we are continuing to be strong in that channel.

Helpful, thank you, Jim. Can I just ask quickly, do credit provisions get released in this quarter. Just looking at the slide where it looks like the --?

It is about $7 million this quarter. Of which -- yes, $7 million.

Thank you for that.

I should add, 6 of that belong to the shareholders and 1 to the policyholders.

Mario Mendonca from Genuity Capital Markets.

I'll start with a comment you made in your press release, Paul, I believe, where you suggest that very strong equity markets had significantly reduced the exposure to variable annuity guarantees; and that that may not be as important going forward if the market were to improve.

Maybe by looking at this quarter specifically, individual annuity earnings were up, I think, something like US$50 million pretax. Or I can't remember exactly what it was, but it was a rather material number. This is year-over-year. And spread, improved spread income maybe accounted for 13.

Is it fair to say that the rest, or most of it, related to, let's say, releases of variable annuity reserves or experience gains on variable annuities?

Mario, [indeed] the earnings and annuity was $85 million this quarter, significantly ahead of last year, but roughly the same as it was in the fourth quarter of '05. A portion of that is the impact of spread. A portion of that is the reserve strengthening last year; so in the first quarter of '05, we had to actually increase our reserves because of market conditions. And this quarter we, because of improving markets, released some reserves.

May I go on?

Sure.

Canadian accounting standards or disclosure standards for sources of earnings, I think they recommended that a company disclose the portion of earnings coming from segregated funds associated with the release of the reserves. Can I take it that because it's not disclosed separately for (indiscernible) that it is probably not material?

Well, I'm not sure, in fact that it is correct, what you are saying, Mario, that the OSFI rules require that the -- Bob Wilson will expand on that a little bit.

I may have misinterpreted.

For segregated funds, changes in the CTE ratios are considered to be assumption changes and would be included in assumption changes in the source of earnings. For the variable annuities in the U.S., our CTE was 80 going into the quarter, and our CTE coming out of the quarter was 80, because that is the maximum allowed under the CIA rules. So there would have been no change in assumptions under an OSFI definition of change of assumptions during the quarter.

That makes sense. Maybe if we could just flip over for a second, you talked about increasing individual life market share in Canada. You're not referring to this quarter, but the last quarter; is that right?

That's right. I mean, the last information that is available is Q4 of '05.

The reason why I am asking is it looked like a bit of a soft quarter. What I am having difficulty understanding is whether it was a soft quarter for Sun Life, or is it just -- was it a bit of a challenging quarter for the industry as a whole? If there's anyone there that can give me some clarity.

Typically, your first quarter of a year the sales force is focused on the RSP season. You saw we had a great wealth sales, up 12% from last year, very successful. It often goes at the cost of the individual sales. But we certainly expect next quarter to have enhanced individual sales again.

But also on a year-over-year basis, the Clarica sales force sales were down there. That is just not something I'm accustomed to seeing. I'm trying to figure out if there is something specific to Sun Life, or do you feel that the industry was a little soft this quarter, maybe?

Let me ask Kevin to -- Kevin Dougherty (multiple speakers) of the Canadian operations to answer that question.

Sure, when you look at the sales force numbers they are down slightly year-over-year. One impact was the very strong focus on wealth sales during the quarter; so you've got a little bit of a trade-off there.

We also had a sales convention one week in the quarter which last year occurred in the second quarter. So a week of production was short in Q1 of this year.

You will see -- I don't think it's a general industry trend, and in fact you will see on the wholesale side our sales are up from $4 million to $7 million.

Okay. Kevin, can you just give me the count, the number of agents?

It is flat over Q4 of last year.

Okay. I think I will requeue. Thank you.

Tom MacKinnon from Scotia Capital.

Two quick questions. One is the transfer of the Retirement Services business from MFS over into Sun Life U.S. I was wondering what was the reason behind that. What is Sun Life U.S. going to do any differently with that business than MFS was doing with it?

Then the second question is about, from the source of earnings, I guess it's 7 of the slide deck, just if you can elaborate on the $87 million in management actions and changes in assumptions. What was that in the quarter? Thanks.

It's Don Stewart. I will take the first part of your question on the rationale behind the transfer of Retirement Services Inc. from the auspices of MFS to Sun Life U.S. The thinking there is generally driven by the market trends to a more open architecture.

We perceive and we have had confirmation in the marketplace that an insurance-based platform offers more flexibility. It has, in part driven by the success of one or two of the other companies, a very good standing in the marketplace.

At the same time as we made the switch, we expanded distribution, and we are also offering a broad platform of funds. So that the idea going forward is that there will be greater mutuality among fund choices that are available on the platform when it is being sponsored by one of the providers that doesn't actually offer the fund range.

I think you see some parallels on that in Canada, and it has also the parallels as to what has happened over the last decade in the VA business.

Is this 401(k) type business? So you're transferring the record-keeping capabilities from MFS over to Sun Life?

That is correct. The record-keeping capabilities are, in significant part, outsourced. But the entire business in both the fund choices, the administration, and the record-keeping capabilities are all under Sun Life U.S. as of January 1 '06.

I assume this may have -- from what I can gather from reading in the press release, this must have been a negative contribution into MFS in the quarter and to MFS's earnings. So with -- now that it's been transferred over to Sun Life U.S., how do you think you're going to get it out of the red?

With a lot of hard work and effort; and as I mentioned earlier, there has been some expansion of distribution. We are investing money in distribution going forward. We believe we have a better overall positioning in the marketplace by virtue of the perceptions of providers by clients. So it is a challenge, indeed; but we think with the dint of investment effort and dedication, we will build the sales.

Okay. Then they management actions and changes in assumptions?

Yes, Tom, in that amount, there is really no material component of it. There is a whole lot of small amounts, pluses and minuses. I just want to draw your attention to the fact that, if you look at experience gains and assumption changes in the aggregate, the benefit this quarter was $3 million less than it was in the first quarter of '05.

The other point is that I guess the way I look at these sources of earnings, if you just add the expected profit and your earnings on surplus, which is (indiscernible) numbers excluding any actuarial adjustments, you would see that we are at the 88% level, which is very similar to last year, confirming the quality of earnings being similar. Equally strong.

There is no big reserve change in the quarter? Is that what we are to assume from that?

That's correct, no material reserve change in there.

Is there more management actions than changes in assumptions in that 87?

No, it's just a whole series of small items. There is nothing really significant there, and it is primarily assumption changes.

Going forward are we to assume that that combined with experience gains is supposed to be just sort of a normal run rate that it's been in the past?

It certainly has been over the last six years. We expect that as we continue to improve the block going forward and the actuaries, as they set up business, continue to be conservative, we should see opportunities to have positive assumption changes on a quarterly basis.

However, it is always hard to tell, at this point in time, what they will be. Because if we what the assumption changes would be, we would have to book them this quarter, according to the rules. But tradition or history will tell you that we should expect continued assumption changes going forward.

Okay, thank you.

Timothy Lazaris from GMP Securities.

I've got two questions, one specifically about Canada, and then another one more about the medium-term or short-term guidance on return on equity.

My first question is, can you give us an update on your improvements in the wholesale channel in Canada? I see that premiums and sales are increasing. But I am trying to get a handle on if you can paint a picture for us on what it means in terms of the number of agents or advisers that are back with Sun Life, if you will, through that channel.

Then secondly, just about the 75 basis point ROE guidance, if you will, I am just a little confused about it. Are you telling us or are you expecting 75 basis points of ROE improvements from the ROE of the end of fiscal '05, which was 13.3%? Or is it somehow calculated differently from that?

It is Kevin Dougherty speaking. I will take the first part of the question. So as you can see from the numbers, we continued to see traction in the wholesale channel, with the sales in the first quarter up to $7 million from 4 in Q1 of last year and 2 in Q1 of the previous year.

We have 14 major MGA relationships, representing about 15,000 advisers. That is in addition to our career sales force of about 3,600. What you're seeing happening there is just as we work on these relationships and get to know individual producers inside these channels, activity is increasing. In fact, applications that we would be getting are up very significantly year-over-year, and that is what is translating into sales.

So Kevin, where would 14 MGAs be, sorry, say, a year ago? What would that number look like?

We brought them on at the beginning of last year. So what you are seeing is really the traction happening with those MGAs.

The penetration of the 15,000 advisers?

That's exactly right.

Okay.

Tim, with regards to ROE, the way to calculate that is to take the average for all of '05, compared to the average of what it would be for '06. So it's not a quarter end number; it is an average.

I would say we were a little light on buybacks this quarter. We were $106 million. We expect to pick it up a little bit, and that should help ROE in the ensuing quarters, in addition to, of course, the earnings growth.

Okay, gentleman, thank you very much.

Steve Cawley from TD Newcrest.

Don, just from a 1,000 feet up, if I look at the environment that we just had last quarter, some of the key factors that I would think would drive your earnings, like the equity markets which were strong, like a gradual increasing rate environment which would help your fixed annuity business, I was expecting better numbers than this. You fell about $0.04 shorter what I was looking for.

So what I am wondering is, are there businesses within Sun Life that you think were a bit disappointing this quarter, that you are expecting to see better results over the course of this year?

I think in terms of fluctuation, Steve, the perhaps most noteworthy phenomenon -- and Paul alluded to it -- were some adverse mortality and morbidity trends in the first quarter. We might hope for these to be better over the year, although that is fairly difficult to be determined with any precision.

The reality is that both mortality and morbidity follow statistical distributions, and you can get significant deviations from the mean over more than one quarter. But there is no question that we did see heavier mortality in three of our business lines in the first quarter and some heavier morbidity as well.

So they may bounce back over the balance of 2006, and we certainly hope they will. But because they are inherently variable events, we cannot be 100% sure about that; because in fact, we might be seeing a trend. We don't think so, but I would point to that.

I would also point out that we did see some currency strengthening. We also alluded to that. So that is a bit of a headwind in Canadian dollars, and may not have fully factored into estimates.

In regards to the Canadian group benefits area, that business has certainly gotten bigger over the last year in terms of the amount of capital that is behind it and the amount of premiums that you write there. It looks as if there specifically that the morbidity and mortality would have been perhaps felt the most of all the operations.

There is nothing there that points to insufficient pricing in terms of a trend? Because you have been winning a lot of business there. Have you been pricing that business appropriately?

Well, yes indeed, we have been pricing in appropriately. But anytime the mortality is bad, by definition, clearly there is some question on the pricing. As I say, we will need to see for the year whether the quarter is an adverse quarter, or whether the year itself.

I think it is only really over time that you can determine. One quarter does not in these instances give you a full handle on the claim frequency or the claim impact. I don't thank you can tell from the quarter where the pricing is at.

We believe, as we win the business, we obviously have a bunch of very experienced underwriters. We are a significant player, particularly in the larger segment of the marketplace, and we think we are pricing appropriately. But if mortality were to take a trend away from the recent improvements of the past, then clearly the pricing might be experiencing some lag.

Two more quick ones. The tax rate, I think, was 21% in the quarter. But if you're guiding towards high teens for this year, should we still be factoring that in?

Indeed 21% which is consistent with where it was a year ago. I have not guided to -- I have guided to high teens over the next couple of years, not necessarily this year.

So for this year, should we still be using a rate that is in the 20% range?

Yes, I would do that, yes, Steve.

Okay, one other quick numerical thing. On the fixed annuity block, could you tell me what was the average crediting rate in the quarter? And also what percent of the block is at minimum rates?

It's Bob. We have got 50% of the block at minimum rates at this point. I can't quote off the top of my head. We will have to come back later what the -- oh, the spread was 163; I think he asked for the average crediting rate, which -- it's going to be in the high 3s, (indiscernible) somewhere. But I cannot -- Kevin will have to get back to you with a specific number.

Okay, thanks.

Ken Zerbe from Morgan Stanley.

In the U.S. life business, I actually was a little surprised to see the comment that the reason for weaker earnings was the offshore earnings were down. Can you provide any estimates in terms of how significant these offshore businesses is as a percent of total earnings?

Well, I mean, one way to look at this -- this is Bob -- the account value, if you take a look at the one slide in my deck, is rivaling the U.S. business. We did have a strong quarter in the first quarter of '05, and that did create a disparity.

Okay. My second question is, in terms of the retail outflows at MFS, I know you said that they improved in February and March. But if we just look at the trend over the last three or two quarters, it went from $0.7 billion of outflows to $1.7 billion.

Is there anything going on there? What is the reason for the turnaround or the negative turnaround in retail outflows?

The majority of the MFS assets classes are in positive flows, as well as the institutional business. Then as I mentioned before, February and March were positive. It was just in January where we had one particular rebalancing that took place at one of our clients that made the quarter as negative as it is. So we were, as I mentioned, the February March months were positive. So that should not necessarily indicate a trend for a quarterly trend that you see here.

And that was retail flows were positive?

The total flows were positive.

Total flows, not necessarily retail?

That's correct.

Okay, thank you.

Mario Mendonca from Genuity Capital Markets.

Quick question about not so much embedded value, but the embedded value added by new business, this 12% increase. A couple things. Correct me if I am wrong here, but that sounds like a little slower than what we have seen in the past. Because I distinctly remember Sun Life reporting sort of high double-digits over the last couple of years. Although 12%, don't get me wrong, I still think that is very impressive.

What I am trying to understand is, with the rates being where they are and companies having to revisit their interest rate assumptions or long-term interest rate assumptions, could the slight downtick relate in any way to just the fact that rates are lower, and the embedded profitability in any long-dated business is going to be a little lower? Is that an appropriate way to look at it?

Mario, I would say that the VNB growth indeed was a little lower than we would like to see this quarter. You are quite right that it used to be in the high teens. It is now in the low teens.

We do see from time to time fluctuations as a result of business mix and particular competitor's circumstances. We do expect in the second quarter that the VNB increase will be higher than what we experienced in the first quarter.

So we hope that this is sort of a temporary situation with improvements to come in ensuing quarters. We're clearly looking at it as something to focus on.

Regarding my comment about long-term interest rates, perhaps Bob, if Bob has a view on that? If you -- actually let me ask it this way. Did you lower your long-term interest rate assumption or your ultimate reinvestment rate assumption at the end of 2005?

We had to make no significant changes to the ultimate reinvestment rate assumptions at the end of '05. So that would not have had an impact on our VNB production for this year (multiple speakers) this quarter.

Another quick one. I see that the variable annuity gross flows certainly did improve. So it sounds like, Bob, your wholesalers are starting to have some success there. The net outflows are obviously still there, and I think you have been clear with us that relates to a single manager product.

Is there anything you can tell us about either the size of that book, the age of that book, or anything that can help gauge when we might seek the outflows taper off somewhat?

If you look at page 15 of Paul's deck or page 8 of the settlement, you have the details there. So in both domestic variable annuity and fixed annuity, surrenders did tick up in the quarter.

What I can tell you is that the fixed annuity surrenders at this point are at about a 20% rate. We have been able to reset crediting rates, because that block is coming into the period where -- it is a five-year product, where we're hitting that five-year mark.

On the variable annuity side, the overall surrender rate is about 17%. In the older business -- this is going to be four to seven-year-old business -- is about 20%; and the newer businesses' surrender rates are about 10%.

Would you say the majority of the business is the old business? More than 50% of the AUM?

That's correct.

We are in that four to seven-year period then?

We're entering into that period. There is older Keyport variable annuity business as well, and that is multi manager business. That surrender rate is about 20% as well. So it isn't just a single manager thing; it is more the vintage of the book.

It is really reminiscent of something that Lincoln went through a long time ago. It just took a massive increase in their gross flows to really pull them out of it. Is that the strategy here? That you don't -- we should not count on the outflows necessarily diminishing; or sorry, the redemptions themselves, the redemption rate to diminish. But rather a real ramp up on the gross flows. Is that really what you're hopeful of?

I think I have said that several times, that I don't expect a dramatic change in the surrender rate downward in the foreseeable future. We have got to drive the gross sales up. That is our focus. That is why we invested in the wholesalers.

One small thing. Paul, you made the point that MFS's improvement in the pretax revenue margin, half of it related to the transfer of the business, the other half to just operational improvements. Could you share with us what the operational improvements were and what your plans are going forward?

I think, Mario -- it is Don Stewart here -- the operational improvements are a bunch of efficiencies across the operations of MFS. I can certainly share with you the target is to have continuing operational improvements.

The company has some real estate leases that are fixed leases but will be coming up in the next year or two. Actually mainly the next two years. That will be of considerable help to it.

But for the moment, it is an across the board addressing of a whole bunch of issues. Bob Pozen, Rob Manning, and his team are very focused on these margins and on improving them going forward.

You can't give us a sort of a target? Like in a couple years we hope to be here?

I can give you a target. In a couple of years we hope to be discernibly higher than where we are today.

That's fair.

Mario, sorry, it's Kevin. We just have time for one more question. I was wondered if we could (multiple speakers).

Sure. (multiple speakers) Thanks.

Sorry, thanks. Operator, we have time for one more question.

Jim Bantis from Credit Suisse.

I am glad I was able to sneak in their before. I just wanted to chat about the M Group and National Financial. Maybe Bob, we can look out a year and a half to two years from now, when it is fully operational. Maybe you can give us the mix of the type of business that is going to be coming out of the sales distribution from here? Like on a percentage basis, how would you see it really shaping out a year and a half, two years from now?

I'm not going to make any forecasts. What I will tell you is I think the reason we landed these two organizations, in fact, a strong part of the reason is that we had a broad product set.

When you're serving the high end of the market, it isn't a uniform approach. There are people who specialize in COLI; there are people that specialize in universal life, variable universal life private placement products. And we have that full set. So these two organizations could look to one manufacturer and fill out their product line by just adding Sun Life to the deal.

I can't tell you percentage-wise, but I know, from interacting with the people at both NFP and M, that we have distributors interested in all those products. We're beginning to get business across the board today.

Got it. Do you see them making a meaningful impact with respect to variable annuity sales as well?

I don't expect that would be the case.

No? Okay.

Jim, can I cut you off here? Because we actually -- that is all the time we have for questions on this call. But I would ask for your attention for an important announcement. This announcement is the subject of a news release being issued this afternoon. Don?

Thanks, Kevin. I wish to share with all the listeners that Paul Derksen has decided to retire from Sun Life early in the year 2007. Paul's retirement will be effective after the completion of the 2006 financial reporting cycle in January or February of next year.

Since joining Sun Life a little more than six years ago, Paul Derksen has had a tremendous impact. He played a key role in taking the Company public, and we went public with an initial market capitalization of $5 billion, to a strong position today with a worth approaching some $30 billion.

Paul has overseen numerous important transactions and broadly based finance initiatives. Paul's decision to continue with us into 2007 enables an orderly succession process as we select the strongest possible successor.

I will conclude by thanking Paul for his many contributions, and I know I can look forward to his continuing support through the balance of 2006.

Thank you, operator. That will conclude our call. If there any additional questions, we will be available after the call. Should you wish to listen to a rebroadcast, it will be available for our website shortly after 6 PM. With all that, I say thank you and goodnight.

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