Sun Life Financial Inc (SLF) 2006 Q2 法說會逐字稿

Welcome to the Sun Life Financial Q2 2006 results conference call. (OPERATOR INSTRUCTIONS). I'd like to remind everyone that this conference call is being recorded on Thursday, July 27, 2006, at 4pm Eastern Time.

I will now turn the conference over to Mr. Kevin Strain, VP, 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 Stuart, 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 of Sun Life Financial Canada, who will be providing a brief overview of our Total Benefits strategy in Canada.

Also available to answer questions are Bob Salipante, President of Sun Life Financial US; Rob Manning, President and CEO of MFS; Nigel Hodges, Senior Vice President of Finance; and Bob Wilson, Senior Vice President and Chief Actuary.

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 in accurate by subsequent events.

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

Thank you, Kevin, and good afternoon to everyone. Before I turn to our results and the progress we are making against objectives, I will note that as Sun Life increasingly shares people, technology and strategies across multiple jurisdictions and business units, these interdependencies make it more difficult to treat units as self-contained entities and create some volatility by individual business units.

We offset this at the total Company level through our enterprise risk management processes. A focus on our results in aggregate provides the clearest picture of how we are evolving and growing.

Turning to slide number 3, I am very pleased to be reporting results for the second quarter of 2006 that exceed the goals specified in our 2005 Annual Report. A summary of our progress against the medium-term objectives is shown on the slide, and you can see that we are exceeding three of our goals and are on track for the fourth.

Operating earnings per share of $0.88 were up 8.6% over the second quarter of last year. Normalizing this for the effect of currency lifts the increase to almost 15%, well ahead of medium-term objectives.

Similarly, our operating return on equity of 13.6% was up 60 basis points over the second quarter of 2005. Eliminating the effect of currency on this lifts the 60 basis points to 100 basis points, again, well ahead of our 75 basis points objective.

During the quarter, we bought back more than 6.5 million shares for an outlay of $297 million, bringing our year-to-date purchase to $398 million, which represents significant progress towards our full-year goal of $500 million.

And finally, we achieved a dividend payout ratio of 31%, on track to meet our objective of a 30 to 40% range.

On the next slide, we continue to execute on the key elements of our strategy -- namely, sustaining our earnings growth, building diversified earnings and expanding our global distribution.

Since becoming a public company over six years ago, we have delivered a consistent record of growth in quarterly earnings per share. Expected profit is up 22% Q2 '06 over Q2 '05, and the value of new business is up 14% over the same time frame. These metrics demonstrate sustainable growth in earnings from our in-force block of business and new sales.

MFS pretax profit margins increased to 27%, up from 21% 12 months previously. Profit improvements at MFS have been driven by asset and revenue growth, as well as cost containment. These improvements support long-term growth in earnings from MFS.

Our credit quality remained high over the quarter, with our net impaired asset ratio falling to 15 basis points. We continue to have over 97% of our bonds rated investment grade or better. We believe that a high-quality investment portfolio provides for the greatest stability in investment income.

Our consistent earnings performance allows us to continue our track record of steadily increasing quarterly dividends to shareholders. We are raising the current quarterly dividend of $0.275 to $0.30, which leads to an 18% increase in the dividend in 2006. In fact, our third-quarter dividend rate will be 2.5 times what it was five years ago, an increase equivalent to a compound growth rate of over 20% per annum.

Turning to slide 6, Sun Life's earnings are diversified by both business and geography. Our Canadian and international earnings are roughly 50/50, and our protection and accumulation earnings are also close to an even split.

SLF Canada saw overall second-quarter earnings up 12% on improvements in all lines of business. CI earnings were up $19 million, primarily from the tax rate change. GRS benefited from improvements in mortality experience in the group payout annuity block, and group benefits benefited from strong investment results. Note also that group benefits rebounded strongly over the first quarter through claims experience as our mortality and morbidity rates returned to more normal levels.

SLF US earnings were down overall due to significant new business strain and reinsurance transition adjustments in individual life. Volatile equity markets negatively impacted our variable annuity earnings. These negatives were partially offset by a strong return to profitability in our U.S. group insurance lines as claims experience normalized. MFS earnings, Asian earnings, UK earnings and reinsurance earnings collectively were up an average of 36% overall.

Turning to slide 7, a highlight of the quarter is the fact that worldwide protection sales more than doubled over the past year. In Asia, Indian agency sales increased over 100%, with advisor count now exceeding 18,000 individuals. We are well on our way to executing on our strategic objective of growing the salesforce in India to 20,000 advisors and adding 50 new branches.

Chinese sales rose 121%, and each of Hong Kong, the Philippines and Indonesia delivered sales increases. In the United States, our continued investments in individual life distribution generated strong individual life sales, albeit with stress on the bottom line, as referenced earlier. We have very good penetration in the U.S. independent channel, working with nine of the top 10 independent firms in the United States. Our new partnership with Medical Group Insurance Services Inc., MGIS, became operational, resulting in new sales during the second quarter.

U.S. variable annuity gross sales increased by 23% over the 2005 second quarter. We continue to focus on growing our market share in this space. And to that end, we launched an enhanced living benefit rider for the product this quarter.

MFS institutional assets under management were up 43% over the past 12 months to US$50 billion. We continue to win mandates in this space and we are in positive net flows again this quarter.

And last on this slide, but certainly not least, our Canadian individual third-party distribution sales continue to advance. We're adding market share in this critical segment of the market. And I am pleased with the progress we are making.

Slide number 8 provides more detail on the progress we are making on EPS growth and ROE improvements -- EPS, as referenced earlier, up 9%, 15% in constant currency. The impact of lower equity markets and higher new business strain in the U.S. life business more than offset the increases to income from the change in federal corporate tax rates and the positive resolution of several outstanding tax issues.

Our ROE improved to 13.6% for the quarter, but was 14 on constant currency. This was driven by improvements in earnings and the share buyback program, which added 30 basis points to ROE on a year-over-year basis.

Before I had over to Paul, I want to make a couple of comments on management succession. At the end of the first-quarter call, I advised that our Chief Financial Officer, Paul Derksen, would be retiring early in 2007. Over the past three months, we have made solid progress in our search process. And I will be providing an update next quarter.

It is now a pleasure to hand over to Paul.

Thank you, Don. I want to start with slide number 9. This slide shows the high quality of our earnings. Our focus on value increased expected profit by 22%, up 31% in constant currency. And this, as you know, is a very significant improvement. Profitable new insurance business, improved asset management results and continued increases in the efficiency of the in-force block all contributed.

The new business strain cost us $77 million, $54 million more than it was in 2005. This is primarily due to the tripling of our U.S. life sales this quarter, demonstrating success in our sales efforts in the United States.

Experience gains and assumption changes in the aggregate are down $60 million from last year because of the negative impact of the equity markets on the [D&DB] reserves and because of the effect of increased reinsurance rates in the United States. This was only partially offset by favorable assumption changes.

Our expected profit and earnings on surplus as a percentage of pretax earnings is 108% -- you see that at the bottom of the chart -- 98% if you take into account the par adjustment. This means that basically all of our pretax earnings came from expected earnings -- expected profit and earnings on surplus. It reflects a significant [reverse] strain as a result of increased sales and lower experience gains and assumption changes that I mentioned earlier.

Let me then turn to the tax rate that we had this quarter on slide number 10. We reported an effective tax rate of 1%, and there is five reasons for this low rate. Firstly, the reduction in the Canadian federal income tax rate increased the profitability of the par block to the par policyholders by $58 million, which simply flowed through the income statement with no net impact to the shareholder. In other words, the lower taxes of 58 million were recognized in the income statement, but belonged to the par policyholders, and as a result, we increased par reserves with no net income impact on the shareholder.

Secondly, the same reduction in the tax rate also decreased nonpar actuarial liabilities. The benefit of this did accrue to the shareholder and amounted to $16 million. You see that in the second column from the right.

The settlement of some outstanding tax issues reduced taxes further by $29 million in Canada and in the UK. This brings our effective tax rate to 16%. This rate is lower than it was in previous quarters because of a change in business mix -- we had higher profits in low tax jurisdictions outside of North America and lower profits in high-tax North America.

The fifth reason for the lower tax rate is the fact that we have arranged our affairs so as to minimize taxes, and that is what is being reflected in our tax rate as well. Our sustainable rate has been brought down to the 18 to 21% range. You should see more of this in the ensuing quarters.

So let me capture all this -- net-net, the shareholders benefited by $45 million, and you see that on the schedule in the second column from the right, again -- from positive events that may not be recurring, such as the tax settlements and the impact of the tax rate.

So the question then becomes, is our real earnings run rate $45 million less than as reported? The answer is no, because we had a number of special items going the other way as well, some of which I have mentioned.

Firstly, we had strengthened annuity reserves by $28 million. This is as a result of a 25-point drop in the S&P 500 at the end of the second quarter relative to the first quarter. We maintained our CTE at the 80% level and did not reduce the CTE to mitigate or to further -- to reduce this adjustment. So this is just a gross adjustment.

Secondly, we had a higher level of new business strains of approximately $40 million after taxes. Individual life sales in the United States tripled from last year. Reinsurance rates increased as well.

Thirdly, the strengthening of the Canadian currency cost us $28 million. This totals close to $100 million, well in excess of the $45 million in taxes.

So this leads me to conclude that the $0.88 we reported is very sustainable. We fully expect to continue this earnings trend unless something negative -- seriously negative happens in the equity markets. We fully expect to exceed our targeted constant currency earnings growth by a very comfortable margin.

Turning, then, to slide 11, the quality of our earnings is also underscored by the growth in our PfADs and equivalents. This chart reflects the profitability of the insurance and wealth management businesses incorporated in the embedded value. Not only have we increased earnings by a 15% constant currency rate over the last number of years, on top of that, we had increased our PfADs and equivalents at a rate of approximately 10% per year, again, underscoring the value created and the high quality of our earnings.

Turning, then, to slide 12, as I have noted in the past, we very much focus on profitable market share, and as a result, our value of new business this quarter is up 14% from a year ago, approximately 9% for the last 12 months.

Turning, then, to the business groups on slide 13, Canada had a great quarter with earnings of 12% higher than a year ago. Improved investment results, better mortality, CI earnings and lower taxes all contributed.

Slide 14 -- Canadian individual sales were solid this quarter. They continued to gain market share, which was up 60 basis points to 11.8%.

On slide 15, individual wealth had a great quarter as well. Annuity market share continues to grow. It is up 50% from 16.1% to 24.3%. Sales of CI mutual funds through the Clarica salesforce were also strong, up 13% from a year ago, and represented 35% of CI net fund sales.

Slide 16 -- group benefits had an outstanding quarter, with business in force up 10% to $5.5 billion and more than triple the sales from last year.

Group retirement services also continued to perform very well. It had an impressive 38% market share in 2005 for all DC plans, sales in Canada. Q2 sales were down from the first quarter because of seasonality of the business. In addition, we had a large case of $250 million in the first quarter. Asset retention increased by 12% to $119 million. We now have over a 50% market share in asset retention in Canada.

Turning, then, to the U.S. on page 18, the U.S. had great individual and group sales this quarter. However, these sales caused an increase in new business strain, approximately $40 million. The equity markets also caused us to increase our D&DB reserves, as I mentioned before, by 28 million as we maintained CTE at 80%.

Group life and health had a strong return to profitability from the first quarter, with earnings up 33% from last year. However, as I mentioned, net-net, U.S. earnings were down from last year in the first quarter primarily because of the new business strain and the GMDB reserve strengthening.

Slide 19 -- we saw positive improvements in variable annuity sales. Gross domestic variable annuity sales were up 23% from a year ago. However, in the aggregate, variable annuities continued to be in net redemptions. Fixed annuity sales are lower because of customer preference, but spread is up measurably from a year ago, and it's close to over 190 basis points.

As I mentioned on slide 20, individual life had an outstanding quarter, with sales almost triple where they were a year ago. We have grown our presence in the independent channel and began to see the results from our new partnerships with M and NFP. BOLI and COLI benefited from a large $200 million sale this quarter as well.

Group life and health had an outstanding quarter, with sales up 20% and business in force up 19%. Again, the investment in distribution, particularly the partnership of MGIS, is certainly paying off. The value of the book continues to grow and is approaching $1.1 billion.

The positive trend at MFS continues with earnings up 38% from a year ago. MFS had over $1 billion in positive institutional close. Asset growth was 12% year over year. Pretax margins are up 6 percentage points, from 21% to 27%, which is a very positive trend. This is primarily a result of improvement in operations, about 450 basis points, and partially due to the transfer of the 401(k) business, which added 150 basis points.

Assets under management, on slide 23, are up 12% year over year to $168 billion, with increases of 15.7 billion due to market improvements and net sales of 2.6 billion.

Slide 24 -- you can see how this quarter's managed funds sales were 1.2 billion. They continue to be positive, which is offset by negative flows in mutual funds for net outflows of 400 million. Market movements reduced the assets by 1 billion this quarter.

Turning now to Asia, on slide 25, keep driving the sales momentum. We had the CMG acquisition, approval to open offices in two additional cities in China, and the growth of the India salesforce to over 18,000 agents in 67 cities.

Revenue for the second quarter was up 55% and earnings were up 63%, up 78% in constant currency. You can see the sales on slide 26. Q2 sales were up 45% in Asia, 61% in constant currency. They were up 114% in India, 121% in China, 69% in the Philippines and 79% in Hong Kong.

Turning, then, to asset quality on page 27, asset quality remains very high. Gross impaired assets were $237 million, down $61 million from a year ago. The net impaired ratio continues to be very strong as well at 15 basis points.

On slide 28, you can see how we repurchased $297 million of common shares this quarter and we issued $300 million of debentures. We increased dividends by $0.025 to $0.30 per quarter to bring the dividends up 16% year over year. 89% of operating earnings has been return to the shareholders in the second quarter through dividends and buybacks.

So in summary, then, on page 29, we had an excellent quarter and we are well underway to meet our medium-term objectives that we have laid out on slide 29.

So this concludes my portion of the presentation. Kevin Dougherty, the President of our Canadian operations, will now give you an update on our Total Benefits product. Kevin?

Good afternoon. In these next few minutes, I'd like to give you a sense for our Total Benefits strategy, which has become a unique source of competitive advantage for our two group businesses in Canada.

As competition for employees and talent continues to increase, more and more employers, our customers, are focusing on becoming an employer of choice in their industries. Part of their strategy is a greater utilization of total rewards strategies, but they are faced with the challenge of how to do this with smaller HR departments, lower budgets and a more mobile workforce.

This is where our Total Benefits comes in. And as a result, Total Benefits continues to help us grow market share in group benefits and group retirement services, helping us to win major customers and contributing to our industry-leading client loyalty results -- in fact, the lowest group lapse rates in the industry today in Canada.

Turning to slide 31, before describing Total Benefits, there is some important background. These two bar graphs represent the most recently available market share numbers from Benefits Canada magazine. You can see that Sun Life Financial enjoys a top three leadership position in both businesses. In fact, according to the Fraser Group, Sun Life Financial ranks number one in both large employer markets.

Our leadership in these businesses is the result of our commitment to customer service, innovation and technology. And Total Benefits is an excellent example of all of these things working together.

But the reason that this picture is important is that we at Sun Life are in the unique position to be able to offer a total benefits strategy for major employers, a unique position because of our leading market share with major employers and our industry-leading technology. Only Sun Life Financial can bundle these two businesses together for major employers into an industry-leading service offering. And this is at the heart of our strategy.

Turning to slide 32, a recent report from the Economist Intelligence Unit on the international insurance industry highlights Sun Life Financial as a global leader in the development of a customer-focused approach to serving clients.

In a publication entitled "From Products to Services -- Insurers Move Closer to the Customer," Total Benefits is cited as a unique competitive advantage. The report describes two key advantages that we enjoy over the competition -- our information technology infrastructure and our organizational commitment to providing integrated services. In fact, Total Benefits is cited as one of only a handful of examples across the globe of truly customer-focused strategies in action in the insurance industry today.

So turning to slide 33, this is an illustration of part of the customized service we provide to one of our major Total Benefits clients, EDS. Here you see our services, group benefits and group retirement services bundled together with a number of EDS's other providers -- their flex benefits enrollment provider, their defined benefit pension provider and so on.

You can see that this one-stop access is provided under the employer's brand. Here for EDS, our plan member services site is being provided using their brand instead of ours. And by integrating with our other providers, we are running a virtual pension and benefits department for EDS employees. This is all made possible by our investment in the unique information technology infrastructure which features our customer information file technology and enterprise authentication services.

Turning to slide 34, here is another example of how Total Benefits provides value to plan members and sponsors. Imagine the customer experience before Total Benefits -- employees have to keep track of four URLs, four access ID numbers, four passwords to access different providers and their different plans.

If you think about this, it makes no sense. These employees see their plans as part of one compensation arrangement that plays a central role in their relationship with their employer. And yet their experience as plan members is exactly the opposite -- disjointed, silo-oriented, frustrating. The member experience on the telephone is just as bad. In addition to the four access IDs and four passwords, they have four separate telephone numbers to try to keep track of.

Total Benefits can provide these plan members with integrated access to all of their benefits and pension plans via one portal, one telephone number, one authentication process -- just one access ID and password opens up access to all of their plans at their workplace or at home.

Our ability to provide this kind of plan member experience, and under the employer's brand, can make a huge difference for employers and their plan members, and as a result, provides a significant differentiation for us in the group marketplace.

Turning now to slide 35, Total Benefits has quickly become a significant part of our business. We have over 500 clients using our joint services and 120 already using our branding innovations. Our customer retention rates, a key driver of profitability, lead the industry.

We have also been successful in working toward the goal of increased levels of plan member self-service. We measured Web authentication ratios for the first six months of 2006 -- that is the number of unique Web-based logins divided by the total number of plan members. That ratio measured 11.3% for our single business unit clients that have not taken advantage of any Total Benefits innovations. The ratio among joint GB and GRS clients was 39.2% during the same time period. And among clients who have implemented our complete suite of Total Benefits innovations, the ratio is 68.2%.

This demonstrates that Total Benefits is a huge success with plan members. Plan members access and appreciate their plans more when they are bundled together this way.

Turning to slide 36 -- so we have shared a number of metrics with you that demonstrate the success of Total Benefits from a business development and shareholder value perspective. We know that currently, our competitors can't duplicate Total Benefits, either because of their strategic positioning in group benefits or group retirement services or because of the required IT infrastructure or both. IBM says Sun Life is probably two to three years ahead of competitors that have not yet started to implement such an infrastructure.

And this month's Report on Business Magazine featured a profile of Total Benefits as part of its Top 1000 package. One of the key points raised in the article is that as a result of Total Benefits, integrated service capabilities like these have emerged as a basic expectation for plan sponsors and their consultants.

Turning to slide 37, the list of employers adopting Total Benefits innovations speaks for itself. Here are a few familiar names. These organizations are some of the most innovative, forward-looking employers in the country. And it is indeed a privilege to work with them.

Thank you for your attention. And I would now like to hand the meeting back to Kevin Strain.

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

(OPERATOR INSTRUCTIONS). Jamie Keating, RBC Capital Markets.

I'm just trying to find the page -- sources of earnings, slide 9. I am curious about a couple of things, I guess. In fact, I guess it actually goes back to MFS, now that I think of it. Maybe it's value of new business -- sorry, guys -- value of new business looks like it's up significantly and well. I don't have the right page yet for you.

But I am curious about that because on the wealth side, I feel like MFS is having some spread erosion. And I don't know if I'm intersecting two disparate ideas or whether I'm talking about the same thing. But I wondered if Paul or anyone would care to just try and help me understand how the VNB, slide 12, and MFS seems to be on the rise year on year when I intuitively think the retail business would have been more valuable and the institutional business less so. Maybe my assumption is wrong. And I believe my assumption would be represented in the fact that spread's down, I don't know, 14 basis points -- 14% year on year.

It is Don Stewart. I think Rob Manning is well positioned to comment on the relative economic position of institutional investors retail. Rob?

Well, in our institutional business, that business has an incremental margin equal to retail because you pay less to gather the assets than you do on the retail platform. So as long as the net flow is a positive, the incremental -- if you call it spread or margin in our book of business is actually consistent because you pay program support fees and obviously commissions to the retail broker that sells the product, whereas you just have one individual running around the country dealing with the big consultants that brings in the institutional business. And you pay that person 10 basis points to do that.

So the sales cost is much cheaper. But even though the management fee on institutional is less than retail, we view it as having the same margin contribution because of the dynamics I just described.

Ken Zerbe, Morgan Stanley.

I guess a couple of questions. First of all, in terms of share buybacks, with 300 or I guess actually almost $400 million of buybacks to date, can you just comment about the possibility that you may exceed your $500 million target this year?

Sure, Ken. Our policy has always been we buy more when the price is low and less when the price is high. And as you know, in the first quarter, we were less active. In the second quarter, we were more active. And we expect to continue to be active if we think that the price is low. If the price continues to be low, we'll probably exceed the target that we set for the year for 500 million.

Any maximum range that you would sort of back away from regardless of the price?

Well, the legislative maximum is 5%. And we obviously won't go over that. And in between the 500 million and that number, we will just have to let the circumstances determine what the number is.

The second question I had was -- your discussion about the new business strain in the U.S., I think it was $40 million on the life side -- given that you do seem to be gaining traction in [FPNDM] group, very strong U.S. life sales, if you continue to write a similar amount of U.S. life sales going forward, should we expect that new business strain to remain at current high levels?

Bob Salipante here. We had an unusual circumstance in the quarter. I mean, first of all, we had significant sales that you indicated. But we also had a reinsurance rate increase that hit us at the beginning of the quarter. It came on the heels of our new partnerships with National Financial Partners and M Financial Group.

Since we had some other rework we wanted to do with our core universal life product, we didn't want to have multiple price changes in a short period of time. So we held the line on the price of that. So there is incremental strain in the quarter associated with the present value, the PV effect of that reinsurance rate increase.

So earlier this month, we launched our new universal life product series. And it not only covers the reinsurance rate increase, but it includes a number of refinements, including the introduction of a superpreferred category for us for the first time. So it was a significant addition that will help us compete for the best risks in the single life market.

That change required that we rebid the entire reinsurance pool. So the transition from the old product to the new will not happen overnight. So we have business in the pipeline in the third quarter on that old product that had the excess strain. So you'll see that strain continue well into the third quarter until we get to the cutoff for the new product. So I think our expectation is we will return to a more normal level of strain in the fourth quarter.

And I guess under the new products, again, let's assume you sold the same amount of life insurance, but again, at the lower business rate, how much marginal improvement or how much less strain should we anticipate for the same level of sales, given the different products?

I won't quantify it. I will say that the reinsurance effect in the quarter was significant.

John Reucassel, BMO.

Just on the U.S. sales strain, Bob, maybe you could just talk to me about the timing of when you found out about the reinsurance rate increase and when you launched the new products. I'm just surprised -- I thought this was usually pretty well telegraphed and you could adjust your product accordingly. Could you just talk a bit about that?

John, we did see it coming, so we have a couple of months to prepare for it. But when you think about it, M and NFP, probably the two top producers in that marketplace -- the reinsurance rate increase took effect just about the time that we were launching with these two new carriers.

And so we made the management decision to hold the line until we could get the new product launched. We launched that new product in the beginning of July. I've described that product. I would go on to add that we have in house many hundreds of pieces of business from M and NFP each and we have issued millions of dollars of new business with each firm.

I guess, Bob, the summary/summary to this -- they had approved a product. You got the rate increase about the same time. You didn't want to disturb the channel with a new launch, so you just -- you kind of just sucked it up until whenever you could introduce a new product. Is that right?

Yes.

Now, is that going to in fact impact your sales? You've had pretty good sales here. Should we expect a sales slowdown? Or is there some -- is there a buildup of sales in anticipation of a new launch?

We expect the third quarter, fourth quarter to be somewhat less. We are still, as I said on the last call, we think it's going to take up to 18 months to get the full production with M and NFP. So I won't make any forecasts.

However, our competitive positioning in the market -- so if you take all the producers in the U.S. and you stack them up, you know, they talk about being on the first page -- you want to be on the first page, which is the prices of your product are, say, in the top half a dozen. With the old product, we were top three or four. With the new product, we are top three or four.

So our product positioning -- our product pricing position continues to be good. We rearchitected the new product pretty heavily. And as I indicated, we have introduced for the first time our superpreferred category.

Just turning to MFS, Rob, if I go back to Q1 '02, gross sales were running at around 5 to 6 billion of quarter. Now we're down to 4 billion, 4 to 4.5 billion -- around 4 billion on the retail mutual funds. Is this a gross sales issue? Or is this a redemption issue? How should we look at this business as far as your competitiveness in U.S. retail mutual funds?

I think that is a great question. It is both issues. We need to get our gross sales up, and particularly capture share on products in the retail space where MFS has typically not had shelf space in the last decade. And that includes fixed income, which we are working hard at, as well as in international and in global equity products.

While we are working on that, we clearly have a redemption issue, which continues to be endemic in our book of business, which is in our growth products. And we are working on trying to turn the performance around. But that has been a difficult space in general because the market has been more value oriented than growth.

So to answer your question, we need to get our tonnage up in terms of gross sales and diversify the book of business away from historically what MFS was known as in the '90s as a growth manager. But we also have to try to improve the performance on the four or five funds in the growth space which have been redeeming. And that's really been the issue. When you add it all up in the mix, the redemption rate continues to plague us.

And so to get the shelf space on the tonnage, like what -- I'm just trying to understand how you get there. Is it just a function of performance? Is it broader product offering? Do you need to get more -- are you going to need to invest in your wholesalers? How is it that you are going to do that?

Hopefully, we do it by having good performance in those categories and through our wholesaling, as well our marketing people that deal with the gatekeepers on the platforms. If someone slips in international equity or in core plus fixed income, we get slotted in because of our performance. So it's just a matter of telling the story, shifting the marketing and the sales support in the organization, and compensating them for diversifying over to other products.

And [Marty Ballou], who runs our global distribution, is working with the team to do that, not only in retail, but also in institutional, where a lot of our sales have been focused on global equity and international equity. And we are trying to broaden that book of business as well and sell fixed income and other types of products in that channel as well.

So part of MFS's challenge, not only in retail but in institutional, is broadening the number of products that we sell and diversifying the business on an ongoing basis.

So Rob, with the 73 billion in U.S. retail mutual funds, when I think of your competitors out there you're trying to go up against, they are five to 10 times larger than you in that space. Can you be competitive?

Well, we are the 12th largest mutual fund manager at the moment. So we are clearly not of the scale and size of a Franklin Templeton or an American Funds. But we clearly have scale with that size of assets. And we just need to continue to try to get net flows in. We would also make an acquisition if something came along that made sense in the retail mutual fund spot space. And as consolidation happens over time, we want to be positioned well to do that.

So we are trying to run the business as effectively as we can, trying to get the business retail into positive flows, and hopefully there is an acquisition that may be available to us sometime down the road. We don't know what it will look like or when it will come, but that is the basic strategy at the Company.

And last question, just for Don -- your opening comment, Don, about how the distinct units -- they are blurring between the two? I'm just trying to understand what point you were trying to get across on that.

I'm trying to get a point across, John, that there's a lot of moving parts to the organization. And increasingly, as we do business in other countries, we have links that don't always come together cleanly and clearly in any given business unit.

So I think there's more noise in the system. And we have gotten criticized in the past for noise in the system. I'm really trying to signal that noise in the system is in fact an inherent and inevitable result of having multiplicity of businesses that are interconnected. It's a greater -- if the businesses were in fact self contained, you would see less noise in the system.

Because when you say that, I just get a little worried about accountability. But that --

Well, there is lots of accountability. Don't worry about that.

Tom MacKinnon, Scotia Capital.

I want to revisit the strain issue in the individual insurance U.S. business. First of all, what's the level of price increases that you are probably going to be putting through the UL product?

Tom, it's Bob. We've really repositioned the product on the single life side. And so the price increases there aren't dramatic. It depends on the sell; it might be a couple of percent here and there. We have changed the cash values on the product. We have changed the underwriting standards. We rebid the whole product from a reinsurance standpoint. So it is, I would say, a pretty significant repositioning. And that's how it permits us to remain in about the same relative pricing position.

On the survivorship side, we have been a price leader there. We did raise our prices and still expect to remain a price leader on the survivorship side. And with U.S. deficit growing and the likelihood of a rollback of the estate tax diminishing, that market has been very strong for us.

How much were the cash values decreased by?

I can't say, Tom [technical difficulty] .

When would we be probably through the strain issue? Is it by the end of this year? Is that when we would probably -- this issue would be by us and then everything new --

That's right. We've got a lot of business in the pipeline from the old product. We've got a hard cutoff on that, midquarter, third quarter. So there might be some business that still gets issued in the fourth quarter. But I think the fourth quarter, we'll see a pretty normal -- resumption of normal business. But the third quarter will be impacted by this event.

What was your thinking, then, that you didn't want to have multiple price changes? Presumably what has happened here is you end up selling business, I would assume, then, at a lower rate of return in order to [multiple speakers] some good footing initially with M and NFP. Am I correct in saying that?

No, think about it at a -- down at a broker level or an agent level, Tom. So we are just launching Sun Life into those two systems. This was a competitive process that lasted upwards of a year with both firms. They both come along at the same time. And then coincidentally, we have a significant rate increase occur. So just at the time when we were having these hundreds of high-end distributors take a first look at our product, we didn't want to be in a moat and saying, it's not this one, it's another one.

It was a new product that you were launching at the same time as you were starting to sell through these channels, right? This wasn't an existing product --

No, no, I'm talking about the existing product. That is the product we did. And the new product was launched at the beginning of July. So the --

No, the product that had the -- when you went out and had -- that was launched with the higher than expected reinsurance costs to it, there was a decision then to continue to sell that product.

That is correct.

So if we look down the road, would there be a need for an increase in reserves associated with that product?

Not that I am aware of. For example, if you take this reinsurance rate increase, we've PVed that effect. So we get that taken care of this quarter and next, and then that is good business.

Okay, so what you've done -- it not only impacts the strain, but it impacts any kind of reserve development, just on that new issue business, is that correct? That 40 million?

Tom, it's Bob. When we did the -- strain is basically the reserve that you set up at time zero. When we set the reserve up at time zero, when the contract is issued, we know what the reinsurance rates are. So the strain includes the cost of the increased reinsurance rates on those policies through to the policies coming off the books 50 years from now.

So everything has been impacted; then going down the road, there shouldn't be any kind of reserve increase associate with the book?

Right.

Okay, I think that's clear. Thanks very much.

Colin Devine, Citigroup.

I had a couple of questions for you. First, if we can, I guess, why don't we start with the U.S. variable annuity business, Bob, where, obviously, sales are starting to pick up. I was wondering if you could just give us your comments on really what's driving your sales and how you would characterize the U.S. VA market today, and perhaps where you see Sun playing?

Second, if you could also give us some comments, and perhaps for Rob as well, as to how potential U.S. pension reform legislation may impact both Sun's U.S. business, as well as MFS?

I was wondering if you might also, I guess for Don, comment on where MFS sits today within Sun Life. It is still a core asset? And there were comments made about potential M&A -- clearly, you didn't win the Washington Mutual business this week. I'm just kind of curious as to why that might not have fit.

And then lastly, one more for Kevin, with what is happening in Canada, is there the opportunity in the group business to export some of the skill set you have built there down to the U.S.?

And then I guess lastly, for Don, if you can give us some update on where the CFO situations stands, given, of course, Paul's pending departure.

Colin, that is quite a list. Let me start with the issues that you identified as fitting within my ambit. And I will do that in reverse order.

I think what I said at the opening of the call, don't know if you were around, that the process was in place. We feel that it is moving along well. I think in the way you characterized the question, it was perhaps a more precise sense of an imminent departure by Paul. He is sitting beside me here. And I can assure you, he is going to be around for the full financial year and thereafter to sign the certificates. So there is a considerable runway left.

But having said that, we're moving through the process. It is going just as planned. And I will comment publicly at the next call. So that would be all I would have to say on the CFO.

In the case of where MFS sits within Sun Life, I'd like to assure both you and, in fact, the MFS folks in the room that MFS fits very well within Sun Life and that the business of investment savings accumulation is a critical business, as in fact you suggest when you're commenting on U.S. pension reform.

In terms of Washington Mutual, I think I might ask Rob -- I'll pass on to make any comment on a business that we don't usually comment on specifics. So I think you would assume that we wouldn't really be able to say anything there that would actually be very helpful.

So turning, then, to Bob for U.S. VA sales, and I'll come back to Rob on U.S. pension reform, and then go to Kevin.

Okay, Colin, as you can see on page 8 of the supplement, this has been our best growth sales quarter in 10, our best net sales quarter in eight. Our June daily sales were up 62% from our low point of September of '04. Tickets over 250,000 year to date are up 47%. I think that is a measure of the competitiveness of our product, getting those larger tickets. The number of producers year to date are up 27%.

The first-quarter industry data is out. We were up about the same amount as the industry on a sequential basis. Q1 '06 over '05, we were up 27.5%. The industry was up 20%. We're just going to keep executing our strategy. We've got our team in the field. They're telling the story. And as you know, it takes repetition to make this work.

In terms of the role of the product in the business, I think these living benefits are here to stay. And we will continue to execute our plan.

Are there any feature specific to your product, though, that's driving the sales? Are you really just saying it's a reflection of I guess the considerable money you spent last year building out your distribution?

We're starting to get some feedback. As you'll recall, we've got the combo AB/WB. And if you elect the AB at the end of the 10 years, if your account value is in the money, we refund the fees you paid. I think we're getting some recognition that that's a decent value proposition.

In terms of pension reform for MFS, pension reform globally is a great thing for MFS because we attack both markets, both defined benefit and defined contribution. Defined benefit is what our institutional platform goes after. So whether corporations are turning over the pensions to the government of Japan or whether U.S. corporations are going to be asked to shoulder more of the liability as opposed to the PBGC, our mutual fund business goes after the defined contribution platform.

So actually, about two-thirds of our mutual fund sales now come through a DC-type plan. So whether it is happening here or offshore, MFS should be pretty well positioned to capture both segments of the market.

We'll move to Kevin Dougherty on the total benefits question, Colin. Are you ready?

Yes, Colin, actually, today we actually run the U.S. technology platform out of Canada for the group business. The total benefits platform per se isn't directly extendable because it is a different market and different dynamics at play. But the applications, the major application systems such as premium billing and accounting, client-directed [keeping], disability management systems and so on in the U.S. group business run on a Canadian platform.

And this actually gives them a scale that they wouldn't otherwise have. And I believe that's on of the reasons you're seeing so much success in their sales numbers because they actually are able to compete with the largest carriers, leveraging Canadian scale.

Rob Wessel, National Bank Financial.

I have a lot less questions. In fact, I only have one. All of my other questions were asked and answered, so I just wanted to mention or ask -- if you go to slide 19 of the investor presentation, fixed annuity spreads at the bottom -- there was quite an increase.

And I had thought, and perhaps I misunderstood that in previous calls, that maybe given the shape of the yield curve that it was getting more difficult to get spread expansion, given that bank products were becoming more competitive at the back of the short-term rates. I guess I was a little surprised to see a good 35 basis points or thereabout increase in margins -- or spreads, excuse me.

So I guess my question is this -- should we maybe assume that nearly 2% is a one-off improvement and will probably go back down to 170, 165? Or do you think it will stay at around 2%, or perhaps it will continue to expand from there?

Hey Rob, Bob Salipante. The 197 is the spread we're enjoying on the in-force, first of all. And over the course of the last year, because of movements in interest rates, our earned rate has actually moved up. And because of the opportunity to reset the five-year business, our credited rate has come down. We also had excellent credit experience in the quarter. So looking forward, we are thinking in a 180 range for the next couple of quarters.

I would note, Rob, that absolute earnings from fixed annuities are up 75% from two years ago as a result of the actions we've been talking about the last couple of years.

Eric Berg, Lehman Brothers.

Glad to sneak under the wire here. My first question relates to this reserve issue that has been discussed, or this strain issue. Again, given the competitiveness and the spreadsheeted nature of the universal life insurance business, I would think any attempt to rework this product, whether it is raising prices, changing underwriting, changing cash value -- I would think that you got the sales that you did because your products were unusually competitive, reflecting the fact that you sort of, to use another analyst's expression, agreed to eat the reinsurance costs, and that the moment everything is reflected in your reinsurance prices, it is just going to be a very, very different competitive situation for you in the universal life insurance area. Why don't you think your sales will be affected very significantly, Bob?

I think there are some facts, Eric, that mitigate against that conclusion. As I indicated, our survivorship product has been very competitive. A significant portion of our UL sales have been survivorship. Our AXXX funding vehicle is particularly effective there because the redundant reserve effect on survivorship product is greater than the single life. So we think we've got a sustainable advantage there and we are at the top of the first page with respect to the pricing of those products.

On the single life side, I think you know as well as anyone how dynamic that marketplace is. And so with the combination of factors, as you've published, we are one of the last players to move to a superpreferred position. So we think we are lining up with the marketplace and this product is still going to slot in around number three or number four in most of the sells on the single life side.

You add to that the fact that we have really just begun with these two major producers and see an opportunity to add proprietary product in n organization like M and that we have invested significantly in staff to keep the service levels up.

That's a good, comprehensive answer. And I appreciate it. I have one final question for Paul. I certainly heard your comments about sort of the overall tax rate. But when I look at the lines of business -- I'm referring to your supplement page 13, where you're giving us detailed results by line of business, by geography -- how should we think of what's going on in the June quarter with the tax rate in these various businesses?

I notice, for example, that you are hardly accruing any tax in your annuity business. You are accruing a negative -- I think I'm reading this correctly -- a negative tax rate in your individual life business. What is going on there, and what will happen in general to the individual business lines on this page -- the tax rate prospectively?

Eric, the reason that the tax rate in the U.S. is so low is one of business mix. Within these business units, there are sources of business that are both in the U.S. and outside of the U.S. And the businesses outside the U.S. have a very low tax rate and were quite profitable this quarter. And because of the reserve strain and because of the new business strain and the reserve strengthening and the annuity block, the profitability of the domestic parts of the business was less profitable. But it got a significant tax shield because of the higher tax rate in the United States. And so I would say that as over time this normalizes a bit, we expect these tax rate to recover.

However, we should note that all these businesses are being reported on an after-tax basis. And so the change in mix isn't going to affect the earnings outlook on these businesses as they recover -- the change in mix is not going to change the effective or the after-tax earnings of these businesses as they get higher earnings in the U.S. I hope that --

But just to clarify, Paul, I certainly understand that you write business offshore out of the U.S. If a larger percentage of that U.S.-reported business is written offshore prospectively, doesn't the mix of sort of non-U.S. business written from the U.S. -- doesn't that mix affect the tax rate?

Sure. If you have more business written outside the U.S., the tax rate will be permanently less than you have seen in the past, for sure.

And is the same thing true in Canada?

The same thing is across the organization. We operate in many jurisdictions with many different tax rates. And indeed, as the business shifts, for instance, to Asia, you will see us having a lower tax rate going forward.

Thank you very much, operator, and I would like to thank all of our participants on the call today. If there are any additional questions, we will be available after the call. And should you wish to listen to our rebroadcast, it will be available from our website shortly after 6 PM this evening.

With all that, I say thank you, and have a good evening.

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