Sun Life Financial Inc (SLF) 2006 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Sun Life Financial Q3 2006 results conference call. (OPERATOR INSTRUCTIONS). I would like to remind everyone that this conference call is being recorded on Thursday, October 26 at 4:00 PM. I will now turn the conference over to Kevin Strain, Vice President of 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; Paul Derksen, Executive Vice President and Chief Financial Officer, and Rob Manning, President and CEO of MFS. Rob will be outlining our strategies and plans for growth at MFS. Also available to answer questions are Kevin Dougherty, President Sun Life Financial Canada; Bob Salipante, President Sun Life Financial US; Nigel Hodges, Senior Vice President of Finance, and Bob Wilson, Senior Vice President and Chief Actuary.

We are also pleased to have on the call Rick McKenney, Executive Vice President who will assume the role of Chief Financial Officer when Paul Derksen retires in 2007.

As many of you know, while the primary purpose of our call today is to update equity analysts and investors on our results and answer their questions, our audience also includes media, industry peers, rating agencies, our regulators, our employees and our distributors and we welcome them. The slides to which the speakers will be referring are available on the Sun Life Financial website.

Turning to slide two, I draw your attention to the cautionary language regarding forward-looking statements, which form part of this afternoon's remarks. This slide reviews the reasons why forward-looking statements could be rendered inaccurate by subsequent events, and with that, I will turn things over to Don.

Thank you, Kevin, and good afternoon, everyone. It has, indeed, been an interesting week, and it is great that we can now focus on our record third-quarter results, our best quarter ever.

First, I would like to speak to MFS. As we announced on Monday, we have completed our strategic review of MFS, and there will be no changes in MFS' ownership structure. There has been an unusual amount of speculation around this process. I want to say how impressed I am at the ongoing professionalism and dedication of the men and women at MFS while various distractions were taking place.

It is also worthy of note, again alluding to speculation, that our strategic review did not include the possibility of an outright sale. We strongly believe that we have arrived at the right decision for Sun Life shareholders. We stayed true to our disciplined approach to transactions. The easiest path in any discussion is to say yes. It is much harder to say no.

We remain committed to the Asset Management business in the United States, and MFS is a valuable strategic asset with a premium brand. We are confident that the course we are pursuing is the right one for growth and value creation. Together with the senior management of MFS, we will focus on improving fund performance, profit margins, while increasing the expansion of MFS' global investment and distribution platforms.

As you know from our release, MFS' profit margins increased to 30%. up from 22% 12 months previously. Profit improvements have been driven by asset and revenue growth, as well as cost efficiency. These improvements provide for long-term growth and earnings from MFS. These earnings were up 37% as management delivered on margin improvement, and higher equity markets increased asset balances and fee income. Institutional assets under management were up 38% over the past 12 months to $54 billion. We continue to win mandates in this space, and we earned positive net flows again this quarter.

We expect that media speculation about MFS over the past month may slow new mandates over the next few quarters, but we will focus on continuing our strong global fund performance and expanding the MFS platforms. As Kevin mentioned earlier, Rob Manning, the President and CEO of MFS, will be outlining our strategies and plans for growth later in the presentation.

During the third quarter, we also successfully added to the strength of Sun Life's executive management team with the additions of Dean Connor, Rick McKenney and Stephen Rajotte. I look forward to working with these senior leaders and introducing them to you over the coming months. We were pleased to be named one of Canada's top 100 employers for the fourth time in last five years by Mediacorp Canada. We were the only insurance company to receive this recognition in 2006, and we are proud to be included among the leading organizations in Canada. This is, indeed, a tribute to our Canadian employees.

Let me now turn to the quarter's results for the rest of the Company, the 90% portion. I'm very pleased to be reporting results for the third quarter of 2006, which exceeds the goals specified in our 2005 annual report. This bears repeating. In this quarter we have achieved what we said we would do, and in fact, we were ahead. Operating earnings per share of C$0.94 were up 15% over the third quarter of last year. Normalizing this for the effect of currency, the fee increased to almost 20%, well ahead of our medium term objectives.

Similarly, our operating return on equity of 14.4% was up 130 basis points over the third quarter of 2005. Eliminating the effect of currency lifts the increase to 160 basis points, again well ahead of our 75 basis points objective. During the quarter, we bought back more than 1.9 million shares for an outlay of C$85 million, bringing our year-to-date purchase to C$484 million. This is significant progress towards our full-year goal of C$500 million, and we will surpass this goal in the fourth quarter.

Finally, on this track we delivered a dividend payout ratio of 32% within our target range of 30 to 40%. Our third-quarter dividend rate was 2.5 times when he was five years ago, an increase equivalent to a compound growth rate of over 20% per annum. Our consistent earnings performance allows us to continue our track record of steadily increasing quarterly dividends to shareholders. In the second quarter of 2006, we raised the quarterly dividend to C$0.30, an 18% increase in the dividend from third quarter 2005.

Turning to highlights and strategy, we continue to execute on the key elements of our strategy, namely sustaining our earnings growth, building diversified earnings and expanding our global distribution. We continue to build on our strong record of sustainable earnings growth. Since becoming a public company over six years ago, we have delivered a consistent record of growth in quarterly earnings per share. As indicated, we had record earnings this quarter. We were pleased with the quality of our earnings as evidenced by growth and expected profit and our effective tax rate of 22%.

Value of new business is up 5% on a constant currency rolling 12-month basis. This is below our expectations, our strategic spending on distribution globally and increased new business training, particularly in the United States dampened growth in VNB. Credit quality remained higher over the quarter with our net impaired asset ratio falling to 11 basis points. Our risk management practices allow us to build sustainable earnings at lower risk. We're pleased to have industry-leading practices to manage risks. For example, we use sophisticated hedging programs to dynamically hedge the risks in variable annuity. To match the long duration risk in Individual Life, we have put interest rate (indiscernible) in place which hedge against significant drops in interest rates.

We continue to build on our diversified earnings platform. Our 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. We're able to balance businesses in emerging markets like China and India with established operations in Canada and the United States.

In the quarter we saw total assets under management grow to over C$400 billion. This growth was driven by MFS where we hit a record assets under management of C$175 billion. SLF Canada saw overall second-quarter earnings increase 5%, primarily on improvements in group benefits. SLF US earnings were up 11% as improvements in equity markets, fixed annuity spreads and lower-cost funding solutions were partially offset by higher new business strain in Individual Life.

Asian earnings were up as a benefit of the CMG acquisition, was partially offset by reserve strengthening in Indonesia. UK earnings were up, and reinsurance earnings were up significantly due to mortality increases.

We continued to build out our global distribution capabilities. In Asia, Indian agency sales increased over 60% year-to-date with the advisor count now exceeding 21,500 individuals in 116 branches serving 95 cities. This exceeded our strategic objective of growing the salesforce in India to 20,000 advisors and adding 50 new branches by the end of 2006.

Chinese sales rose 149%. We opened three new sales offices in Zhejiang Province during the third quarter, 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 US independent channel, and we are now working with nine of the top 10 independent firms in the United States.

US variable annuity growth sales increased by 16% over the 2005 third quarter. We continue to be focused on growing our market share in this space, and to that end, we launched an enhanced bonus variable annuity product this quarter. In addition, we saw good growth in fixed annuity sales as we increased our wholesaling capability.

In the fixed index annuity product, we launched a unique lifetime income feature. US Group Life and Health business in force increased 18% over third-quarter 2005 on strong business growth, including the impact of sales from medical group insurance services.

In Canada we continue to build on our industry-leading distribution in individual, group benefits and group wealth. Our Canadian individual third-party distribution sales continue to advance. We are adding market share in this critical segment of the market and are pleased with the progress we're making.

Clarica salesforce continues to increase productivity and remains an integral part of CI's distribution with 32% of CI net mutual fund sales. We continue to win significant mandates in our major group businesses based on the strength of our service and technology. Group benefit net sales in Canada increased 33% over last year. In Group Retirement Services, we continued to lead the market for asset retention on member termination with more than four times the asset retention of our closest competitor for the 12 months ended June 30. Total benefits continues to win us mandates and benefits in GRS as we enhance our reputation as a leader in this space.

It is now a pleasure for me to hand over to Paul Derksen. Paul?

Thank you, Don. As Don mentioned, we had another excellent quarter. At C$0.94 operating earnings were up 15%, up 20% in constant currency, well in excess of the guidance we have been providing.

Slide six shows the high quality of our earnings. Our focus on value increased expected profit by 21%, up 28% in constant currency. The conversion of CI into an income trust increased pretax earnings and expected earnings by C$16 million, also increased taxes by C$16 million, but excluding which expected earnings were up 16%.

Profitable new business and continued improvements in the efficiency of the in force block contributed. New business training caused us C$68 million, up C$55 million this quarter, primarily a result of the increase in Individual Life sales in the United States. Experience gains and assumption changes were about the same as last year. Our tax rate is 22%, which was increased by 1.7% as I mentioned before as a result of the CI conversion to an income trust. Excluding this, the tax rate is around 20.3%, well within the sustainable range that I mentioned last quarter of 20% plus or minus a couple of percentage points.

Our expected profit and surplus as a percentage of pretax earnings is 86%, up from 82% a year ago, reflecting the high quality of our earnings.

Value of new business on slide seven was up 5% from last year. (inaudible) that less companies would like to see, but we are looking for continued improvements going forward.

Turning then to the business groups on slide eight, Canada had a solid quarter. Earnings were 5% higher than a year ago, primarily because of group benefits. ROE at 13.3% was about the same as the previous year.

On slide nine, Individual Life had a solid quarter with sales up 6% at a steady market share at 13.6%. The number of advisors in the Clarica salesforce fell slightly this quarter, but productivity continues to improve.

On slide 10, individual wealth. Annuity market share increased significantly from 22% to 25.5%. Sales of CI mutual funds through the Clarica salesforce represented 32% of CI net fund sales.

Group benefits on slide 11 continue to have excellent retention of 97%, and as a result, its book of business increased by 11% to C$5.7 billion. This strong retention rate is an important indicator of our ability to deliver excellent service to our customers.

Group Retirement Services on slide 12 also continue to do extremely well. Sales were up 49% from a year ago. Asset retention increased to C$138 million. We had over 50% market share in asset retention and continued to make this a big priority for the group.

Turning then to the United States on slide 13, the US showed great sales momentum this quarter with revenues up 11%. That is excluding the medium-term notes. Earnings were up 11% as well on the strength of higher equity markets, improved fixed annuity spreads, the favorable impact of the AXXX and higher earnings in low tax jurisdictions. These items were partly offset by the impact of higher new business training.

Variable annuities on slide 14 show very positive sales growth. Sales are up 16% from a year ago; however, in the aggregate, variable annuities are still net redemptions. Fixed annuity sales were higher on more competitive rates, and spread is up measurably from a year ago.

Individual Life on slide 15 had an outstanding quarter with sales over four times last year's levels. They increased to C$150 million. Strong improvements in distribution, group product design and pricing, as well as the AXXX solution, all contributed.

Slide 16, Group Life and Health had a great quarter as well. Business in force is up 18% and is now approaching C$1.1 billion. All this is a result of the strategic investments in the distribution system and very good retention.

On slide 17 MFS also had an outstanding quarter with earnings of C$52 million, up 37%. Pretax margins are also up and have now reached 30% compared to 22% a year ago. Significant improvements in earnings and margins resulted from higher assets under management and effective cost containment in addition to the transfer of the 401(k) business earlier this year.

Slide 18 shows that this quarter institutional net sales for MFS amounted to C$1.1 billion altered by negative flows and mutual funds. Market movements increased assets by C$6.9 billion this quarter.

Turning then to Asia on slide 19, Asia also made great progress. Revenue was up 58% this year, and earnings were up 30% from last year. The Indian salesforce has now over 21,000 agents in 95 cities, and CMG integration is proceeding well, and we have opened seven new cities in China this year.

Q3 sales in Asia were up 53%, 64% in constant currency. The Indian agencies sales were up 61% year-to-date. Sales in China were up 149%. The Philippines, up 76%. Up 111% in Hong Kong. All evidence of strong focus on topline growth in Asia.

On slide 21, you can see that asset quality remains very high as well. Gross impaired assets were C$208 million, down C$118 million from a year ago. Net impaired assets dropped C$71 million to C$111 million or 11 basis points. So we have excellent asset quality but no material issues looming.

Slide 22 shows that we repurchased 85 million common shares per quarter, and we issued 300 million of preferred shares early in October. 47% of operating earnings have been returned to shareholders through dividends and buybacks this quarter. We have increased dividends by 18% year-over-year to get a 32% payout ratio. Despite these payouts, our [MCC's] are now increased to 225%.

Slide 23 shows our steady growth in earnings both as reported and expressed in constant currency. Every quarter we get some very very good questions on the sustainability of earnings. And indeed, our rate of tax and our business unit earnings will vary from quarter to quarter, but it is simply the nature of the business.

I have commented on the sustainability of these earnings most quarters, and indeed, when you look at the chart, you can see that earnings have been sustainable and sustained. This quarter constant currency earnings increased by 20%, driven by strong markets and profitable business growth. You should not expect that our constant currency earnings will continue to increase by 20% every quarter. But based on what I know and assuming the markets maintain their strength, we should have continued positive growth in the fourth quarter.

So this concludes my presentation, and I will now ask Rob Manning, the President and CEO of MFS, to give you an update on MFS.

If you all turn to slide 26, just to reiterate the conclusion that Don Stewart spoke of earlier, part of the analysis of the strategic review of MFS was to look at how the Company was positioned relative to other people in the marketplace. I think what we all walked away feeling after that process is that MFS is very well positioned in the marketplace to grow and to seek out opportunities, particularly in the global institutional marketplace. We believe that our platform is uniquely positioned, particularly in the pension world and that there are significant margin opportunities which we have begun to capture that we think will continue to exist that will allow us to increase shareholder value, not only through expense control but also continuing to scale our institutional and sub-advise businesses.

If you turn to slide 27, one of the things that is important about MFS and what we have done with the business over the last five to six years is we have really broadened out by assets the distribution of the product that we run inside the firm. You can see back in 2000 we were predominantly a retail mutual fund shop, and although that continues to be a very important distribution channel for us in terms of growth in the future, we have been able to balance our book of business by including significant institutional assets non-US assets in the retail space, as well as in the sub-advise channels including insurance products.

If you turn to slide 28, if you look at the picture by gross sales, once again you can see that we have been able to better balance where we are actually selling product and that global and international equity is about 37%, up significantly from five to six years ago, and including balance and asset allocation products at 13%, we're much better positioned and not over our skis, so to speak, in terms of domestic equity, primarily in growth in core, which are categories that are in net redemptions as we speak today. So we have been able to shift the business to a better balance.

On page 29 I have spoken in the past about retail mutual funds being an C$8 trillion marketplace, and MFS needs to sell about 15 billion of products there just to break even given the redemption rate that exists in the industry. I think the opportunity that we face is that in our institutional business, the market is two and a half times larger than retail mutual funds, and MFS' market share is very small, and so we have an opportunity to really grow on both a gross and net basis going forward. And so our opportunities as we look out in the global pension market is to really capture that share, and given our platform that I will talk about in a few minutes, we think we're very well positioned to keep doing that.

On slide 30, if you look at this global platform, we have increased our assets under management 38% in the last 12 months. We are seeing significant opportunities in the major institutional markets around the world from Japan, Southeast Asia, Australia and Continental Europe, as well as in the US, and we have the investment products and performance streams in the categories that the global pension market wants. So if you look at our composite in the key categories like global equity, international equity, large-cap value and international growth, global growth, etc., we have the performance on a risk-adjusted basis, as well as an absolute basis, to compete in that marketplace. And the consulting community that chooses investment managers believe that our global platform has a key competitive advantage that will allow us to have repeatable and durable investment performance over a long period of time.

On slide 31 we do need to continue to work on our US retail product line. We are seeing clearly redemptions in the growth category continuing. We do think that that will update as time goes on, but what we're doing is we're trying to be more provocative in how we approach the market. And one of the things that MFS is doing for the first time in its history is opening up our proprietary distribution to third-party products. We will adopt funds that have track records and rebrand them MFS. We will distribute other people's branded products and get paid for doing so. Our first product will come in the first quarter where we will announce the MFS sector rotational fund, which we will adopt from another asset manager. It is a five-star Morningstar fund in the core space that is quantitatively driven, and we're also negotiations as we speak with two other products to continue to enhance gaps in our product line-up on the retail channel.

We also are continuing to change the way that we go to market on the retail space by enhancing our investment analytics. We have set up a group that talks to the gatekeepers in a sophisticated manner. Today when you saw on a retail platform, it is just as sophisticated as it is in the institutional market, and MFS has positioned its advisory resources group to enhance the wholesaling effort in those sophisticated gatekeeper channels. We are focusing our distribution on not only reducing our product lineup where we have duplication, but also adding new products that we think will show great promise.

MFS just launched a product called Diversified Income Fund. It has been one of our most successful launches in the history of the Company. In a short period of time, we have raised over C$100 million, and this is a high-yielding product that we have brought to the market that we think will satisfy demographic demand going forward.

We're also increasing institutional distribution capabilities in our footprint. We're adding sales and client service people in Europe, the Middle East, Asia, Australia and the US. We are also opening up our first investment office in Australia in the first quarter where we intend to put three investment people on the ground, not only to help service our clients in that region but also to capture some of the Alpha that exists in the Australian marketplace.

We're also developing new institutional products -- a blended Alpha where you are taking our fundamental ratings and using quantitative tools to construct portfolios in something call Extended Portfolios, 130 long, 30 short, which are products that the institutional marketplace is demanding. And we will continue to expand structure in alternative products like CDOs and also additional quantitative strategies, including asset allocation funds as well as structured products.

As Don mentioned, near-term flows will be impacted by the press disruption that did occur, but we think we will be able to get back on track as we move into next year, and we think, as I said, that the growth can be significant.

Lastly on slide 32, MFS has a companywide mandate to get our margins up. We continue to look at ways to do that, and we have a 200 basis point margin improvement plan in place. We think we can get the pretax margins to 32% by the end of '07, and we will continue to focus on cost-containment, and you can see around real estate; productivity improvements; aligning people with our growth opportunities; finding ways to reduce costs through vendor relationships and software, hardware, as well as telecommunications; backoffice efficiencies by using technology, and we will also continue to look to outsource our non-value value-add service capabilities. We have outsourced our separately managed account backoffice area, and we will look at other places at MFS where we continue to find out where we can get savings.

On slide 33, just to finish up, we continue to grow MFS organically. We're going to continue to work on performance flows and margins. We think as we move forward into this year that we do have several products that the marketplace wants both in the retail and institutional channel, and the organization and the employees at MFS are excited to continue under the ownership structure with Sun Life, and we think that the firm has a great future.

So I'm going to turn it over to Kevin Strain.

Thanks, Rob. Before we open the call to questions, I would ask each of our participants to limit him or herself to one or two concise questions and to then re-queue with any additional or follow-up questions. We will make every effort to take all your questions before ending the call.

With that, I will now ask the operator to please pool the participants for questions.

(OPERATOR INSTRUCTIONS). John Reucassel, BMO Capital Markets.

First question for Bob Salipante. Bob, remind me how many wholesalers you have on the VA side?

We are at 83 at the moment, John.

83. And you said when you (indiscernible) about 50 million, was what you wanted to bring in on gross sales basis?

That is correct.

And I guess we're running, after that C$3.5 to C$4 billion annually in gross sales, I guess we're running well below that. Can you just give us an idea of what is going on on the productivity there of these wholesalers, and when -- I know you're hesitant to give timelines, but can you talk about when you hoped to get there, or what is going on?

Well, the strategy just needs time to mature. I'm convinced it is the right strategy. We have recruited people with experience in the business. We have seen continued but gradual progress in terms of growth sales, John. September in terms of average daily sales was the best month we have had in 32 months, and so we're seeing that progress. We're seeing that the longer that these people have with Sun Life and in their territories, the more progress we see with respect to their individual production. We are also committed and Don mentioned that we continue to refresh our product and upgrade it, and we continue to do so and will continue to do so. I view it as being just a steady execution of our strategy, and over time we will win.

Okay. I'm believe there are two questions. I guess a question for Don. As a Sun Life shareholder, should we look at MFS as mainly an institutional manager now as opposed to a mutual fund company? Is that what you are trying to tell us?

And I guess lastly, is there an agreement -- is there a negative control arrangement there where Sun Life management has a veto writer anything over what Sun Life could do with its ownership interest in MFS?

John, I will ignore the fact that that might have been more than one question and endeavor to do my best to answer it. (multiple speakers) I think what we were endeavoring to do is to highlight the very significant institutional and international strength of MFS as opposed to diminish the retail domestic base. MFS' great strength is in its diversification, but there seems to be a perception perhaps and perhaps we are at fault for not telling our story clearly enough that the firm is primarily organized around domestic retail mutual funds in the United States, and in fact, I think, as Rob's presentation made very clear, this is a firm of very considerable global depth and breadth.

So the emphasis on the institutional and international is both to highlight the opportunities and to try to rebalance the perception of what is a broadly based firm in the investment management space. I think you asked the question on negative control with some life in the question when you meant MFS management, and the answer is no, there is no negative control issue here. We manage MFS with the management of MFS and the management of Sun Life working together for the best interest of the business and for Sun Life's shareholders.

Andre Hardy, Merrill Lynch.

A question there for Paul I guess. You mentioned you expected further growth from the quarterly earnings run-rate. Can you just clarify if you're talking sequentially or year-over-year?

And secondly, your expected profit from in force business you highlighted CI as a reason for the increase, but can you give us more color? There was just an outstanding performance from a mature company to role that line by (inaudible) to exclude CI?

Okay. With regards to the growth in the fourth quarter, my comment was intended to be year-over-year, but it is possible we grow sequentially as well. So I don't want to pin myself down to pennies, but you're having -- we're running at a pretty good run-rate, and Q4 should be very positive.

With regards to your second question, I'm not sure I fully got the question. Could you repeat that, the second part of your question?

Sure. I'm looking at your sources of earnings disclosure, and I'm looking at the very first line, which is the highest quality line, up 21% year-over-year, and you mentioned it is around 15 excluding CI. You mentioned efficiency as one of the drivers, but was that it? I would suspect there is more drivers than just that.

Yes, the C$16 million from CI came from the fact that -- the additional C$16 million from CI came from the fact that it converted to an income trust where we get pretax earnings instead of after-tax earnings. And in terms of the rest, there are no big numbers anywhere. It is just a steady improvement throughout the business. Every business unit and every business group actually increased their expected earnings -- I have got the sheet in front of me -- it is just consistent across the business. And it is very much a result of our focus on value creation and VNB that has enabled us to increase the expected earnings across the organization.

Michael Goldberg, Desjardins Securities.

I do have a couple of questions. First of all, on the VNB, I'm wondering if you could just focus in on the third quarter of VNB, and if you could give us some idea of what the year-over-year and quarter-over-quarter momentum is just in the third quarter?

And also related to the VNB, you said that the growth is somewhat disappointing. What do you see happening that either holds it back right now or would lead you to expect it to accelerate going forward?

Michael, in terms of the first part of your question, we disclosed and we showed a year-over-year improvement or the changes in VNB because we believe that on a quarterly basis, it is hard to get these numbers accurate, and that is why we are showing a rolling 12-months improvement. But the trend that you see here in the annual would be reflected in the quarter as well. It is not quite the increase that we are looking for.

What is holding it back? It is a variety of matters, including the growth in Asia is quite expensive where we have a significant infrastructure that gets deducted from VNB. Also, we had some earnings strain in different parts of the country and different parts of the organization. And, of course, you know markets are quite competitive. Margins are not as wide as we would like them to be. I think that is an important point.

In Canada we saw in the UL product, we have some very narrow margins, and recently we saw some competitors on top of that reduce margins even further to get presumably more marketshare. So it's very competitive in that is reflected in the VNB.

Okay. And for my second question, I am just wondering if you could comment on the impact of low interest rates. If rates remain at current levels, should we anticipate the changes in reinvestment rate assumptions?

No, you should not anticipate any changes in reinvestment rate assumptions because every quarter we take the rates in effect at that time and bring them into our actuarial calculations. So the actuarial reserves are pretty well up-to-date relative to where we are today.

Timothy Lazaris, GMP Securities.

I have a question for Don, and I'm starting the question knowing possibly, Don,, that you won't answer it. But I think that the shareholders of Sun Life have always felt that MFS has got a value, and as analysts we try to test what that value is on a regular basis. So I'm wondering in the process that you went through, was there a time when an actual price was put on the business, despite the fact that you did not want to sell it outright? And if so, can you share any metrics on that?

Timothy, I think your caveat at the beginning of your question was very much on point. I am not able to share specifics of the exercise, except the result that we announced, and so getting into a discussion on quantitative metrics I don't think would be helpful. But the exercises we have said reaffirmed that MSA is as a very valuable strategic asset, and as I alluded earlier on reflection of the trail of MFS, we would probably be guilty of not communicating that as clearly as I think we're now doing on the call. So the exercise was extremely worthwhile, but I'm not able to get into quantitative information on the exercise.

Okay. And for Rob, just help us as Canadians to understand that is it your view in the United States that the institutional $1 of institutional money is equally as valuable to a money management company like MFS than $1 of, say, retail mutual funds, or is that a reasonable comment, and if not, what is the relative value?

It is a good question, and the answer is the marginal contribution, the profitable contribution of an institutional dollar of assets is the same as mutual funds. There's two dynamics to think about.

One is that our mutual fund managers clearly run the same money as the institutional money. So you're not having two separate sets of investment people, you have one. And the second is, when an institutional sale occurs, the commission cost is much lower, and it is a onetime commission cost, as opposed to an ongoing cost to maintain your presence on a retail platform.

So I would say without a question, the marginal probability is the same, and the institutional assets tend to be stickier. They stay around for a longer period of time if you clearly have good performance. So we like that business, and we think it's a great way to leverage our fixed cost structure at the firm.

Okay, gentlemen. Congratulations and thank you.

Tim MacKinnon, Scotia Capital.

The first question is for Kevin Dougherty. If I'm looking at the Canadian division, which is almost half of the Company's total bottom-line, it has not really hit the medium-term 10% earnings growth objective here year-to-date. As well as last year, it is only up 4% year-to-date this year, and earnings in the Canadian division were only up 8% in 2005. So what is needed here to get this business up to the medium-term growth objective? And maybe you can comment on do you think the market is a little too mature, a little too competitive to be able to attain that goal?

Okay. Well, I think the best way to look at the earnings in SLF Canada would be to use a rolling 12-month basis to see the momentum that is inside the business, so that would be the first thing to look at. We believe there is still quite a lot of opportunity in the Canadian market space. We have been investing quite heavily in the last two years really on number one, building the wholesale channel; number two, building our health business, and three, investments in our Group business. And we expect that these will really pay off over time.

But you think the market is just a little too competitive in order to kind of get a sustainable 15% ROE?

Well, we're focused on 15%. That is how we price our products, and that is the goal that we fix for all of our lines of business. We position ourselves not as a price leader. We position ourselves as a premium provider in all of our lines of business, so we try not to compete directly on price but other aspects of value, whether it be underwriting or service or the value proposition in our products. So while there is certainly lots of competition, lots of pressure on price, we tend to use other dimensions of value to compete.

If I could squeeze in one follow-up about the UK business, that the mortgage endowment reserve keeps coming down. I'm wondering if that thing just flows directly into income or if that is kind of offset by any kind of claims expense?

Well, there certainly are claims expenses, and I guess what it is all leading to whether these earnings in the UK are sustainable, and indeed they are. They had a great quarter. We have a C$17 billion dock of business with 40 people running it, mostly being outsourced. It is run on a very efficient basis. They are actually having some annuity sales out of that business as well, and again our focus on value is bringing -- we have repatriated hundreds of millions of pounds of capital. As a result of that, the earnings are continuing to increase as is the ROE. So what you see there is certainly sustainable in the medium-term.

Steve Cawley, TD Newcrest.

This is back to the sources of earnings, back to the expected profit number that looks so strong. If you take a look at the VNB, 5% constant currency on a Canadian dollar basis, I'm guessing then the VNB would be negative. So the expected profit is so -- is up significantly despite that. And so I just think Andre asked the question, I'm still confused. I guess CMG goes in there, so CMG would have a positive impact. CI, you mentioned, has a positive impact. So ex-CMG and ex-CI, what would be the growth in expected profit on a year-over-year basis?

Well --

Maybe throw in the VNB into that conversation, please.

Right. Well, as you know, we detailed the resources of earnings on an annual basis, and you know we don't go through this sort of detail on a quarterly basis. But directionally MFS, CI, CMG all contribute. In addition to that, the other element is the improvements in the efficiency of the business. The focus on value in terms of running the efficiency of the business, getting the expenses down, reducing the improvement in the investment returns, all have very important contributions to make to the expected profit.

VNB is lower this quarter, but in previous quarters, we have shown significant increases. So this is really probably the lowest quarter, if I go by memory, that we have had in a long time. But over the preceding years, we have had VNB increases in the teens and 20% range. All of that is working its way to expected profit. If VNB remains at the 5% for the next couple of years, you will see that impact on expected profit eventually. But the expected profit tends to be a bit of a lagging indicator, whereas the VNB is more of a forward-looking indicator. And so you won't see the impact the same quarter.

I think VNB growth was low last quarter as well, and that is why I'm getting confused on this. So maybe we can take it off-line.

The second question, the corporate division. With Canada being flat, the corporate division seems to be the area where you're getting the biggest year-over-year growth. And I know in the same quarter last year there was a onetime item. So even excluding that, you're getting good profit growth from corporate. Can you somehow reconcile for me the improvements in corporate so that being the UK and also the reinsurance profitability and tell me where that goes into the SOE?

Yes, corporate is made up of three segments as you pointed out. It is the UK, reinsurance and then the true corporate other area. The UK has had significant improvements in earnings, as I pointed out earlier in the call, and we believe that the number where they are now is more or less sustainable going forward.

But is that going to affect the profit power or experienced gains?

The expected earnings in the UK will, indeed, go to the expected profit. Absolutely. As does the expected profit from the reinsurance group.

And so the experienced gains are up significantly because --?

Sorry, I'm not sure what the question is.

The experienced gains are 116 million. What drove that versus the 30 last quarter?

The experienced gains are primarily a result of exiting markets which have been very positive this quarter, as well as the credit continues to be positive. And Bob Wilson is here with an in-depth memory of all the composition of that number will give you an update.

The experienced gains increases quite considerably the UK and quite considerably the reinsurance operations, which had a record quarter in terms of income. For some reason or another, most people decided not to die this summer. So there was very good experience gains in the reinsurance operations from mortality.

The weather must have been better than in Montreal. Thank you very much.

Mario Mendonca, Genuity Capital.

Last quarter you gave us some good disclosure on the variable annuities in the US and explained that you increased reserves, so the Company increases theirs by $28 million to cope with the down equity markets. This quarter what I'm trying to understand is clearly you would not have had to increase reserves, but that $28 million or a portion of that $28 million, did that come back into earnings this quarter?

What came back was in the low to mid low teens in terms of millions.

Okay. And the CT is still 80 then I suppose?

That is correct.

Moving on to MFS, second question, it is great to hear that there is still a push to improve the margins further from the 30 that you are at in this quarter. What I found sort of interesting is you're talking about a 200 basis point improvement in 2007. This quarter alone the improvement was 300 basis points. You made that point clear to us. If you look at it year-over-year, even if you exclude moving that lost business, that 401(k) business out, the improvement was still dramatic. What I'm trying to understand is, with all these initiatives in place, why only 200 basis points in 2007 when you can do 300 basis points in one quarter?

You know, I think what you're seeing is that our institutional business is starting to scale up in terms of size. For instance, we just turned profitable in Japan. We had been losing money there building that business out for quite a bit of time. So we have had pretty strong equity, particularly international equity markets. Many of the markets are up, you know, 15, 20%. So that asset growth, and as I have tried to explain probably not too eloquently in the past, our fix cost structure gets leveraged when the assets increase, whether the market gives it to us or whether we get it organically. And the dramatic run-up that we have seen in the equity markets has come through quite well for us. We are not projecting and do not project in '07 that that is going to happen again. So things will flatten out where they are, and we need to continue to take costs out of our structure and not count on the market appreciation to bring that margin gain for us.

So to be clear then, part of the margin improvement we saw in 2006 was just plain old equity markets helping us out?

Yes, it was that, as well as a change in mix because the funds that are redeeming are older larger funds with low management fees. The money we are bringing in tends to be in more specialized higher fee categories like global and international. So our effective fee rate is actually increasing because of the shift in the mix and the book.

And I am sorry. Paul, there was something that you said on the call that really confused me. You referred to variable annuity gross flows being up 16% year-over-year. I have them down C$5 million, so maybe if you could just clarify that for me.

I think that was domestic variable annuity?

So the other business the one, that is in -- because the other business is in positive flows. I'm not sure why that no longer makes it into your analysis. Because that one actually is generating positive flows as opposed to the domestic, which is an outflow.

Yes, it is the domestic variable that I was referring to.

Okay. Thanks.

That is what it says on the chart as well. Okay?

James Keating, RBC Capital Markets.

I want to follow-up to Rob if I may. I'm trying to understand the fixed cost leverage argument which makes eloquent sense. I'm looking at the fee line, that does not appear to be going up. It appears to be going down if I'm not mistaken. So maybe it is the effect of fee you want to describe. Am I -- what are we seeing there? Am I seeing it right, first of all? Are fees not down sort of 7% year on year? And obviously expenses are dropping faster, which is opening up the margins. Obviously on page 13 on -- (multiple speakers).

You're looking at the Canadian dollar version of the US numbers, and Rob obviously looks at the US version of this, and he is not going to be able to give you specific analysis. But I mean a big reason for that is the currency.

Can we get the same constant currency number somewhere?

Yes, we can give it to you. We will make it available.

That would be great. One other quick question then on the annuity side. Spreads 2.02 -- if you have already addressed this I apologize. I may have missed it. But I just wanted to talk to the sustainability of that. I consider myself a spread analyst from time to time, and I'm dead wrong on these. They keep going up. Is there anything funny in there this quarter? Has it gone up more? Is it sustainable?

Credit has continued to be good, so I think it is probably -- it is a little bit high than what we will see over the next couple of quarters. I would guess it will be 180 to 190. The lift is due to the fact that, as you recall, this was a business with a five-year reset, and we're into the period we can reset the crediting rates, which we are doing, and that is enabling us to open up the spread.

You mentioned credit. Are there some credit numbers in there as well? Recoveries of some sort or lower credit losses or something?

It has been favorable on a modest recovery basis the last couple of quarters.

So no big change? Okay. Thank you, Bob.

Michael Goldberg, Desjardins Securities.

I just wanted to follow-up on Mario's question where I think I heard that you held your CT level at 80. So you released some reserve this quarter, if I'm correct in what I thought I heard you saying, and last quarter you had strengthened. Could you just give us -- remind me of what the swing is from quarter to quarter? The impact on the bottom line?

Last quarter, I don't remember. Nigel, do you remember what the number was last quarter or Bob? We can dig it out for you, but -- Michael, we can dig that out for you, but it would have a significant -- it would have more of an impact on the bottom line because last quarter was a negative. This quarter is a positive. We will give you the numbers after the call if you like.

That would be great. Q3 '05.

Okay.

Pardon me?

Any other questions, Michael?

That is all for now.

Colin Devine, Citigroup.

I have two questions. (technical difficulty)-- first, if you could discuss your outlook for the 401(k) business in the wake of the Pension Protection Act passed in the US since we last talked. And what some of your competitors -- I guess we have seen Fidelity jump out there putting annuities in 401(k) plans and talk about their auto enrollment rates being up significantly.

And then secondly, with respect to the US Individual Life sales, well, I am certainly happy to see they are up over 300%. I have also heard from talking with producers that you had some very aggressively priced second to die products during the quarter. I think they are about 15% under competitors and that you since pulled those in. So is that sort of sales rate sustainable? Was there a hole in the pricing grid? Perhaps you could just fill us in a bit.

In terms of 401(k) of prospects -- this is Bob -- first, we've got to move that business towards profitability. So we are focused on efficiency there and so forth, increasing volumes. Clearly the Pension Protection Act is favorable in terms of increasing participation rates, providing investment advice and so on and so forth. So we supported the passage of that act, and we see it as favorable not only to the 401(k) business but to the industry overall.

In terms of Individual Life sales, on second to die, that product attracts more excess reserves than a single life product. So our funding solution has a better impact there. We are at the top of the page with respect to competition. We're not 50% off the price. We dropped -- we increased our prices in the second quarter, late in the second quarter, early in the third quarter of this year, and we're making a nice VNB on that product.

So you see the sales on the individual side as sustainable, and then just to follow-up on the 401(k) piece, you mentioned scale. Is it going to take an acquisition? It would seem to me trying to grow it organically right now is going to be pretty difficult.

You know, I think it is early days for us, and we've got to evaluate our options there. Clearly, as you know, it is a scale business. I think the Pension Protection Act puts us in a better position as an industry, and we will evaluate how we scale that thing up.

And then on the life piece, in terms of the sustainability? It was 15% below I think your competition, that is what I said. Not 50.

You know, we're just not that far off the page. That is just not a good piece of data. We're at the top of the page, but not by that amount. We will see how the market goes. It is a very dynamic market. With reinsurance rate increases, the changes in the reserving requirements and so forth, we expect to remain competitive and hope to maintain our share.

Gentlemen, there are no further questions at this time. Please continue.

Thank you very much, operator. 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 6:00 PM this evening.

So with that, I say thank you and goodnight.

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