Sun Life Financial Inc (SLF) 2011 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Sun Life Financial's fourth-quarter 2011 earnings conference call.

At this time all lines are in a listen only mode. Later we will conduct a question and answer session for analysts. (Operator Instructions).

I would like to remind everyone that this conference is being recorded today, Thursday, February 16, 2012 at 10 AM Eastern time. And I would now like to turn the conference over to Mr. Phil Malek, VP Investor Relations. Please go ahead sir.

Thank you, Luke, and good morning everyone. Welcome to Sun Life Financial's earnings conference call for the fourth quarter of 2011. Our earnings release and the slides for today's call are available on the Investor Relations section of our website at SunLife.com.

We will begin today's presentation with an overview of fourth-quarter results by Dean Connor, President and Chief Executive Officer of Sun Life Financial. Following those remarks Colm Freyne, Executive Vice President and Chief Financial Officer, will present the fourth-quarter financial results. Following Colm's remarks Keith Gubbay, Senior Vice President and Chief Actuary, will provide an update on assumption changes and on embedded value.

Following the prepared remarks we will have a question and answer session. Other members of management are also available to answer your questions on today's call.

Turning to slide 2, I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures which form part of this morning's remarks.

As noted in the slide, forward-looking statements may be rendered inaccurate by subsequent events. With that I will now turn things over to Dean.

Thanks, Phil, and good morning everyone. Yesterday Sun Life reported results for the fourth quarter of 2011. The Company reported an operating loss of CAD221 million or CAD0.38 per share. The most significant impact to earnings in the quarter was the previously announced methodology change to the valuation of our variable annuity and segregated fund liabilities. This resulted in a one-time charge to net income of CAD635 million, within the range provided on our Q3 earnings call.

We continue to be a strong and well-capitalized company with a minimum continuing capital and surplus requirement ratio for Sun Life Assurance of 211% at December 31, up from 210% at the end of Q3, and remaining well in excess of regulatory requirements.

I'm pleased to announce that the Board of Directors of Sun Life Financial has approved a quarterly shareholder dividend of CAD0.36 per common share, maintaining the same level as the previous quarter.

When we spoke to investors in November we said that the degree of volatility in our business results was unacceptable. And when I spoke to you back in December I said that we are charting a new course with a new four pillar strategy that leverages what we do best and positions us to capture the many opportunities we see in our chosen markets.

Our management team is focused on executing on our strategic priorities -- driving profitable growth, improving ROE and reducing the volatility in our results.

There were a number of areas where we made excellent progress in Q4 and 2011 in driving profitable growth. In Canada individual life insurance sales finished the year at a record CAD221 million of annual premium, up 9% for the year. Insurance sales in Asia grew 29% in the fourth quarter, finishing the year at CAD615 million of premium. And our Philippines operation had an exceptional year with 35% sales growth and moving it to the number one position.

In 2011 we continued to expand our asset management capabilities globally. We merged our Canadian asset management firm, McLean Budden, with MFS, giving the combined operations an expanded research platform and broader range of investment offerings. MFS delivered another year of outstanding investment performance and won the prestigious Lipper Fund Award for best overall large company.

MFS grew its gross sales to $57 billion in 2011, recording over $3 billion of positive net mutual fund flows, which is a strong achievement given that mutual fund equity sales were a net negative last year in the US industry. MFS finished the year with $253 billion in assets under management.

Sun Life Global Investments, our new mutual fund company in Canada, completed its first full year of mutual fund operations with over CAD3 billion in institutional and retail assets under management and a growing stable of top performing funds.

Sun Life Global Investments has been winning the confidence of advisors and by Q4 had grown to 10% of the mutual fund sales made by Sun Life advisors in Canada, overall a very promising start.

In China regulatory approval was granted to establish Sun Life Everbright Insurance Asset Management Company. And in India, Birla Sun Life Asset Management became the country's fourth-largest asset management company.

In December we took decisive action to cease variable annuity and life insurance sales in the United States. Wes Thompson and his team are making excellent progress, and we are on track to achieve the expense reductions we outlined on December 12. It will take time to transform our business, but we are pleased with progress on building out our voluntary benefit capabilities.

We will provide you with more detail on that, on our medium-term financial objectives and the actions being taken to achieve these objectives at our upcoming investor day on March 8.

With that I will ask our CFO, Colm Freyne, to walk you through the financial results in more detail.

Thank you, Dean, and good morning everyone. Turning to slide 6, yesterday the Company reported an operating loss of CAD221 million or CAD0.38 per share. Results in the quarter were impacted by several one-time items, most notably the previously announced change to the valuation of our variable annuity and segregated fund liabilities.

On a reported basis the loss for the quarter amounted to CAD525 million. In addition to our usual operating adjustments, operating results this quarter also reflect restructuring costs arising from the recent changes in our US operations, restructuring in other areas of the Company, and goodwill and intangible asset impairment charges in our US and Canadian variable annuity and segregated fund businesses.

Slide 7 outlines the notable impacts to earnings in the fourth quarter of 2011. As you can see, interest rates on equity market movements did not have a material impact on earnings in the quarter. The net impact of interest rates was a CAD27 million contribution to earnings. Interest rate movements in the quarter were less impactful, with the US 30 year Treasury declining by only 2 basis points, while long rates in Canada declined approximately 20 to 30 basis points.

As we have mentioned in previous quarters, when interest rate movements are small in a quarter relative to our published sensitivities, the impacts are more readily offset by other items such as changes in duration, rebalancing and other asset liability management activities. In the fourth quarter the impact of declining rates was more than offset by the nonparallel nature of the decline, favorable movements in swap spreads, as well as asset liability management and hedging activities.

Our Chief Actuary, Keith Gubbay, will discuss changes in our published market sensitivities this quarter, including the addition of a 50 basis point interest rate movement sensitivity disclosure.

Positive equity market performance contributed CAD20 million to earnings this quarter. The level of the benefit from increasing equity markets in the quarter was negatively impacted by two factors. The first related to the performance of underlying variable annuity investments versus the relevant hedging instruments in our US variable annuity business. The second was the negative impact of high equity market volatility on hedging costs in the quarter.

Credit impacts were not a significant factor in the fourth quarter with a net gain of CAD2 million relative to best estimates, and the overall credit performance in 2011 was solid. There were a number of nonmarket-related experience items in the quarter.

Positive lapse experience, primarily in our Canadian individual wealth business, contributed CAD25 million to earnings. This contribution was offset by unfavorable morbidity experience in our US employee benefits group due in part to the continued weakness in the US economy.

Higher expenses from investments in growth and service initiatives and from projects, such as Solvency II in the UK, resulted in a CAD22 million impact to earnings.

Other net experience losses arise from a number of items, including the impact of updates to prior quarter's estimates of policyholder liabilities in our US individual life business. Due to the very substantial capital market volatility in the third quarter of 2011, some residual impacts continue to be recognized in the fourth quarter.

Other notable items in the quarter include a one-time tax benefit of CAD59 million related to the re-organization of our UK subsidiaries. The reorganization simplifies our structure in the UK following our acquisition of Lincoln's UK business in 2009, and also allows for greater utilization of previously unrecognized tax losses.

Additionally, in recognition of the very low interest rate environment we realized a higher level of gains on available for sale securities in the quarter in the amount of CAD45 million, above what we would consider to be a more normal run rate of approximately CAD25 million per quarter.

Moving to slide 8, we provide details on our source of earnings for operating income. Expected profit of CAD438 million increased by CAD21 million from Q3 of 2011. This increase was primarily due to the weakening of the Canadian dollar in the fourth quarter.

The year-over-year decrease of CAD9 million is mainly attributable to higher realized hedge costs which are reflected in expected profits as incurred. These costs are higher in periods of low interest rates and increased volatility.

New business strain was CAD81 million, up from the CAD53 million reported in Q4 of 2010. Higher strain on segregated fund sales due to the low interest rate environment was a contributor to the increase in the strain this quarter. This is a higher level of strain than we have experienced over the past four quarters. The actions we have taken in recent quarters will have a positive impact on new business strain over time.

The experience losses of CAD33 million reflects the net pretax impact of the capital markets and other experience items described on the previous slide.

Assumption changes and management actions resulted in reserve strengthening of CAD968 million. The most significant change relates to the valuation of our variable annuity and segregated fund insurance contract liabilities. Our Chief Actuary, Keith Gubbay, will describe this in more detail following my remarks.

Earnings on surplus of CAD131 million were CAD47 million higher than the fourth quarter of 2010 due to the higher realized gains on available for sale securities mentioned previously.

Beginning this quarter we are disclosing the source of earnings by business group on a quarterly basis, and slide 9 provides a summarized view. On this slide you will see the pretax impact of the notable items shown previously on slide 7. The full disclosure can be found in the Q4 of 2011 supplementary financial information package.

Turning to slide 10, and the results by business group. SLF Canada reported operating earnings of CAD182 million, an improvement over the CAD175 million reported a year ago. Earnings were negatively impacted by the implementation of changes to the valuation of our variable annuity and segregated fund insurance contract liabilities, partially offset by the favorable impact of investing in higher yielding assets and net realized gains on available for sale assets.

Operating earnings in Canada this quarter excludes the negative impact of goodwill and intangible asset impairment charges of CAD194 million, partially offset by a CAD50 million positive impact of certain hedges that do not qualify for hedge accounting under IFRS.

As we have noted previously, under international financial reporting standards the goodwill impairment testing occurs at a more granular level known as the cash generating unit level. Under these standards impairments can occur due to factors such as the low interest rate environment, which would have not have occurred when assessed at the business group level, as was the case under Canadian generally accepted accounting principles. This is what occurred in the fourth quarter.

We continue to believe that the acquisition by Sun Life of Clarica in 2002 was a very successful transaction for shareholders, and the current impairment charge is a reflection of the macro conditions we face today.

Our US operations reported an operating loss of CAD511 million compared to income of CAD294 million reported a year ago. This loss was primarily driven by the implementation of the changes to the valuation of our variable annuity and segregated fund insurance contract liabilities.

Operating earnings exclude the negative impact of goodwill and intangible asset impairment charges of CAD72 million and restructuring costs of CAD32 million.

Operating earnings from MFS were CAD68 million, up from the CAD63 million reported a year ago. This increase was driven by slightly lower compensation plan expenses and higher average net assets. Margins of 32% were up from 31% a year ago.

Operating income from our Asian operations was CAD44 million, compared to income of CAD28 million in the fourth quarter of 2010. This increase was primarily due to the favorable impact of renegotiated reinsurance agreements in our Hong Kong operations, realized gains on available for sale securities, and underlying business growth.

Our UK operations reported operating income of CAD71 million compared to a loss of CAD26 million a year ago. Results in the quarter reflect the CAD59 million net tax benefit described earlier. Expenses in the UK business remain elevated due to the higher regulatory and project costs related to Solvency II and the previously noted corporate reorganization.

Corporate support included under the Corporate segment reported an operating loss of CAD75 million compared to a loss of CAD49 million a year ago. The higher losses were driven primarily by a net impairment on an available for sale equity.

With respect to capital on slide 11, our capital position remains strong. We ended the fourth quarter with a minimum continuing capital and surplus requirement ratio of 211% at Sun Life Assurance, which is down from 228% a year ago, but up slightly from the 210% reported in Q3.

During the quarter we redeemed certain outstanding capital qualifying debt securities known as SLEECs in the amount of CAD950 million. The change to the valuation of our variable annuity and segregated fund liabilities made a positive contribution to our capital position in the quarter.

We also issued CAD300 million of preferred shares in the fourth quarter and CAD200 million in the third quarter, which we in turn invested in Sun Life Assurance, along with a capital investment of CAD200 million, from the proceeds of a dividend from Sun Life US.

Including the impact of this dividend, we expect the risk-based capital level at Sun Life US to be between 400% and 450% at December 31 when that measure is finalized and published in the next month.

As of the end of the fourth quarter, we continue to have a strong level of cash resources at Sun Life Financial, our holding company, to fund our dividend payments and other corporate obligations. We continue to manage our business to ensure that we maintain a strong level of capital in spite of a challenging macroeconomic environment.

I will now turn the call over to Keith Gubbay.

Thank you, Colm, and good morning. As described on slide 13, we implemented the change to our valuation method for seg funds and variable annuities effective December 31. The impact was largely as expected. The transition cost of CAD635 million was in line with estimates previously provided. Actually it was a little bit towards the higher end because interest rates fell a little. Most of this effect is in the US business, which has the bulk of the VA risk.

The impact on the MCCSR ratio was favorable due to the normal operation of the seg fund capital formula. Sun Life Assurance Co. of Canada reported MCCSR ratio benefited by approximately 5 points.

Looking forward, earnings emergence in the source of earnings report for variable annuities and seg funds will look a little different. First, as I have described last quarter, the total expected profits over the lifetime of the in-force business will increase by the amount of the reserve transition costs. Note that this is a long-duration block with lifetime payout benefits implying a long-term release pattern.

Given the decision to stop retail insurance sales in the US, new business strain will be lower than it otherwise would have been. The effect of this on net income will be around CAD10 million to CAD15 million pretax once it phases in, because strain in the US has been coming down in any event. Recall that we had already scaled back no lapse guarantee sales substantially and had derisked the VA products.

New business strain on EBG sales will continue, including the investment in the voluntary business.

We will continue to see experience gains and losses due to basis risk and other sources of experience variations. In particular, if future market volatility is comparable to Q3 and Q4, I would expect to see ongoing experience losses from this source. Expected profits are based on a long-term view of volatility costs. And differences between those long-term costs and actual costs will come through as experience gains or losses.

These changes in the source of earnings presentation are complex, and we will provide more information on investor day in March. However, on a net basis I would expect a moderate increase in the ongoing run rate of earnings of around CAD10 million to CAD20 million after-tax per quarter.

Note that it will take a couple of quarters for the US business to complete the restructuring needed to support the new strategic direction, so there will be some noise as we work through this, however, the new pattern should be evident in the second half of 2012.

Slide 14 shows the new market risk sensitivities at December 31, which apply for the first quarter of 2012. You will see that relative to the prior quarter interest sensitivities are larger and equity sensitivities are lower both on the upside and downside.

The aggregate sensitivity on a reported earnings basis is not that different, but the risk profile of our reported earnings will be different. Note that this is not a change in underlying economics. It is a change in the way market movements flow through the reported accounting earnings. In the new valuation method the reported earnings are now more aligned with the underlying economics of the business.

The change in sensitivities is mainly associated with the variable annuity and seg fund businesses and is the result of the new valuation method. This new method now captures future hedge costs in the liabilities. Future hedge costs are driven by interest rates rather than equity returns, and so the reported financial results are more sensitive to interest rates and less sensitive to equity returns.

The down 100 basis point interest sensitivity increased from CAD475 million at the midpoint of the range to CAD700 million this quarter. This down 100 basis point shock is from a yield curve that is already very low, and would take us to rate levels that have rarely been experienced. We have also shown the impact of a 50 basis point move in rates, as this is perhaps more plausible than a further 100 basis point decline.

Sensitivity to an upward 100 basis point move in rates increase from the midpoint of CAD275 million last quarter to CAD500 million this quarter. The equity sensitivities are significantly lower. For the down 25% shock the sensitivity dropped from CAD625 million at the midpoint last quarter to CAD350 million this quarter. This is partly the result of the valuation method change.

In addition, we have changed the presentation to incorporate the effects of our dynamic hedging program. Specifically, we now assume the market shock is experienced over a five-day period providing the opportunity to rebalance the hedge portfolio. We had previously seemed an instantaneous shock. This is a more informative view in most scenarios.

Market moves will also affect other comprehensive income, and as shown on the slide, this can provide an offset in net income by realizing gains on available for sale bonds. OCI can also provide an offset in reported book values.

I would ask that you pay particular attention to the footnotes on the slide and the MD&A, which provide important information.

I know there is continued interest in the impact of ongoing low interest rates and the ultimate reinvestment rate, or the URR, so I would like to make a few related comments.

As we think about 2012, and if we assume rates continue at their recent low levels, there will be a modest adverse impact on our results. But the effect is not very large and is comparable to what we have experienced in our historical run rate. If rates stay flat, there will be a drop in the prescribed URR and we would need to drop our long-term reinvestment rate assumption in Canada by about 20 basis points over the course of 2012. A 10 basis point drop will cost about CAD30 million of earnings. Our reinvestment rate assumption in Canada has dropped by 70 basis points in the last three years, so this is not an unusual or very material item.

The US business uses a stochastic valuation approach, but the underlying principles are very similar. When we recalibrate our interest rate scenario generator, usually in the third quarter, we add an extra year of data, and given the experience of the last year reinvestment rates will reduce a little.

The calibration approach is based on many years of data, so adding one more year does not usually change the calibration too much. But, nevertheless, there would be a modest negative effect in the US as well. We are not expecting an overhaul of the scenario generator, so any effect should not be close to what we are seeing in 2009.

Slide 15 shows the embedded value as of September 30, 2011. The embedded value is the shareholders' net worth of the Company on a mark-to-market basis, plus the present value of future expected profits from in-force business adjusted to reflect the cost of holding regulatory capital. The embedded value does not include the value of future new business that will be sold after the valuation date.

Note that the EV is as of September 30. Markets have recovered somewhat since then but the EV shown has not rolled forward to the market changes.

The embedded value did not increase over the year due to adverse experience factors and assumption changes. Key drivers of the adverse effects were, firstly, the market experience through September 30. Next we revised our expectations of variable annuity seg fund and seg fund hedge cost based on an updated market view. And we also reflected higher expected capital requirements on these products.

Third, the net effect of assumption changes was also adverse. The largest of these changes related to policyholder behavior on life products. On a more positive note the value of new business sold in the four quarter ending September 30 was about 10% higher than the prior-year's annualized VNB.

I will now turn the call back to Phil.

Thank you, Keith. To help ensure that all of our participants have an opportunity to ask questions on today's call, I would ask each of you to please limit yourself to one or two questions and then to requeue with any additional questions. With that, I will now ask Luke to please poll the participants for their questions.

(Operator Instructions). Robert Sedran, CIBC World Markets.

Just a couple of quick ones actually. First of all, thank you for the incremental disclosure on slide 7, especially the other experience items, ones not related to market risk.

I wonder, Colm, if you can give us an idea of what that experience was like in 2011 as a whole? Because it seemed like it was a fairly large negative on the quarter, I am curious to know what the impact on the year was.

And then the second question revolves around capital. I guess the dividend from the US subsidiary went into the holdco. I didn't see, or I can find how much that was and whether the entire of that dividend was then downstreamed into Sun Life Assurance.

And if you think perhaps you could give some color, and maybe this is more for Dean, if there is room to do more of that going forward -- in other words, how much flexibility do you have to upstream capital in order to downstream it into Canada if needed?

It is Colm here. So on the capital I will answer the second question first and maybe come back to the first part. I didn't hear that very well. But on the capital question we dividended CAD300 million from Sun Life US to the parent SLF, and then we took CAD200 million of that down to Sun Life Assurance.

And the level of capital at Sun Life US on a risk-based capital basis is between 400% and 450%. We haven't quite finalized that, as I mentioned in my remarks. We will do that over the next month or so. So we think it will land somewhere in the midpoint of that range.

And we wouldn't expect at that level to take a further dividend in the short term. We obviously want to maintain an adequate level of risk-based capital at Sun Life US. We think that is a solid place to be, a very solid place to be, and we do tend to operate it in that zone. We wouldn't take a dividend that would take it down below 400%. So that is the position there. And then as I mentioned in my remarks we continue to have a good level of cash and flexibility at SLF.

On the first part of the question, I think you were asking about the performance on the full year for the other category within the --.

The expenses -- mortality, morbidity, that kind of stuff.

So I think we have had a bit of a mixed performance on that, and maybe I will ask Keith -- Keith Gubbay -- to make a couple of remarks.

I'm just looking back over the four quarters. Mortality and morbidity was favorable in Q1 and then had three quarters that were a little bit adverse. Q2 was much more neutral. So a little bit adverse over the year, but Q1 and Q4 pretty much offset.

Lapse has been up and down, but favorable to a small degree over the year. Expense has been adverse. We had one positive quarter and three negatives, but a little bit adverse trend there. And the other has been a little volatile but positive over the year.

If we could see those numbers somehow on the website or perhaps in future disclosure that would be great. Thank you.

Peter Routledge, National Bank Financial.

I'm going to try the capital just one more time. I wasn't quite sure. You had CAD200 million upstream from Sun Life US. And then in the last six months you have done roughly, I think, CAD700 million of capital issuances at the holding company, senior debt and press. And it looked to me like from the MCCSR disclosure in your sup pack you have only put down CAD300 million in incremental capital into Sun Life Assurance Co. of Canada.

Have I got that right and does that mean you're sitting on at least CAD600 million in free funds at the holdco for capital deployment down the road?

So, Peter, you haven't got that quite right, so let me just walk you through what happens in terms of the flows. So in the third quarter we issued prefs of CAD200 million, which we did not downstream into the third quarter, and in the fourth quarter we issued prefs of CAD300 million, so the combined amount of CAD500 million was downstream in the fourth quarter.

The other debt that was raised in the latter half of the year was not for purposes of Sun Life Assurance, it was replacement debt for reserve purposes in the United States, and so that was not downstream and is not available to downstream.

And the other piece I just mentioned in response to Rob's question, was the dividend from Sun Life US, which went up to Sun Life Financial and then down to Sun Life Assurance, and that was in the amount of 4 percentage point or CAD200 million of capital.

So to those items really are the items that offset the redemption of the SLEECS of 18 percentage points or CAD950 million. Then we also had the positive impact from the hedges and the reserves that we talked about previously.

So when you combine all of that, you end up in a place that was basically where we started the quarter. There were obviously other items in the quarter that had an impact on the capital of Sun Life Assurance. These would include the normal phase-in of the IFRS change that you know we're doing over two years.

There is the regular market movements. There is growth in the business, et cetera. But the big impacts where, as I have simply described, around the redemption of the SLEECS and then the capital items that offset that.

So all the prefs and the CAD200 million from the US goes straight into Sun Life Assurance.

It goes to Sun Life Assurance and the other piece of debt that was refinanced is not intended for Sun Life Assurance.

Then just on Keith's comments in regards to the incremental adds to expected profit and new business strain from the change in the VA methodology. You said that is CAD10 million to CAD20 million per quarter. Can you give us any breakout on how much incremental expected profit versus new business strain -- how does that breakout across those two categories?

So I think on the question of new business strain, first of all, the level of strain in the quarter was high at CAD81 million, and we do expect that to decline. In fact, it was high relative to even the average for 2011. The average for 2011 was around CAD55 million. So we had a higher level of strain in the fourth quarter, and going forward with the announced actions in the United States around the individual life sales and the variable annuity sales that is going to come down.

Then the question around expected profit, so yes, there will be, as we have talked, about a release in expected profit as a result of the hedges now reflected in the liability. But as Keith also mentioned, we will be seeing a higher level certainly in the short term of vol costs related to equity levels and that will come through in experience.

And, as Keith mentioned, when you net all of these impacts out we think of it in being in the CAD15 million -- CAD10 million to CAD20 million per quarter range in terms of the overall net benefit. But that may not necessarily come through in the immediate first quarter of 2012. We're still in the process of working through all of this. So think of that as being more in the nature of the net impact as we work our way through these various changes.

I know this is somewhat complex, because we are in the midst of this new reserve methodology that we have implemented for December 31. We are also in the midst of the significant changes in the United States, which have impacts on new business strain, expenses, et cetera. So this is, I think, quite a legitimate topic for us to talk a little bit more about at the investor day in March. But hopefully that has provided you a little bit more context around these changes.

Thanks, very much.

Andre Hardy, RBC Capital Markets.

I have a big picture question, and forgive me for the lengthy introduction. But you have had a medium-term ROE target of 12% to 14%. And there has been three meaningful changes in the last year that in theory should be positive to ROE.

There has been a goodwill write-down that has got no income or capital applications. There is a change to reserving methodology, which was again, expected to have a positive impact to income and does not -- it has driven your book value down.

And, lastly, the withdrawal from individual insurance sales in seg fund sales in the US should also be ROE accretive. So when you speak to us in March is there any reason why you shouldn't raise your ROE guidance over the medium term?

It is Dean. I think I'm going to defer that question to March. March 8 isn't all that far away, so we will be talking in some detail at that meeting about our medium-term target for ROE, and more specifically how we expect to get there, including the milestones along the way. So I am going to defer that question.

You're right to single out those three changes. Those are three positive changes, and we will be talking about those and how we see the business moving forward in more detail on March 8.

Thank you.

Michael Goldberg, Desjardins Securities.

Maybe this is going to have to wait until March 8 also. But what can you tell us -- what can you give us now to rely on other than faith that Sun won't reduce its common share dividend?

I will repeat what I said in December, which is to describe how we think about the dividend. And we think about it through two lens. The first is our view of the run rate operating earnings, and the second is capital levels and outlook.

In terms of run rate earnings, our view is that the run rate earnings of the Company continue to support the current dividend. It is admittedly a high payout ratio in the 50% to 60% range. But as we look at it we see it as generally supportive of the business, the capital requirements we need to grow our business organically over the next several years.

So that is the first lens we look at it through, and the second lens, of course, is the capital lens. We have, as Colm described, completed the fourth quarter again with a strong capital position. But we live in volatile times, and we are mindful that conditions could worsen at some point. And if we did see that happening we would need to take action to preserve our strong capital position. And I won't be specific as to what those actions might look like, but it could encompass a wide range of things.

So I appreciate everybody would love to have certainty on this topic, but we live in a world where it is not possible to be 100% certain, and so what we do is try to describe as best we can our thinking around this topic.

So when you talk about your run rate earnings there is a lot of volatility, which makes it very difficult to see what those earnings are, and it makes it very difficult for investors to gauge your sensitivity still to various market factors. Is there something that you can give us that can increase the transparency further?

It is Colm here. Let me have a go at answering that question. I think your observation around the complexity and the noise within the results and some of the underlying movements is exactly right. It is complex and this has been a noisy quarter. We have taken steps to break out in more detail the items that we see as being notable items and we have provided more granularity around some of the more recurring items, around the experience, whether it is lapse or policyholder behavior, other areas like mortality/morbidity. We will continue to do this in order to provide the best lens for you and for investors.

So we will continue on that path. We hope we will address the concerns. The industry obviously has faced some pretty big headwinds in recent quarters, and we're working at ensuring there is a good visibility there.

What we want to do as well is provide a good lens around the underlying business that we are operating. We can spend a lot of time talking around these very important topics around the run rate earnings, but there is also real business that is being developed and parts of our organization that is growing and we would like to ensure that we have an opportunity to talk about that as well.

Thank you.

Gabriel Dechaine, Credit Suisse.

Just help me understand some of the movements in the experience losses. I guess the other net experience is the number I am focusing on. What did you mean by carryover from Q3? Was this market volatility related items, because as I understand it in your current methodology that would actually be going through expected profit and that will change under the new reserving methodology. Can you clarify what that CAD44 million was?

And then on the segmented ROE disclosure which is helpful, thanks for providing that, I was a bit surprised to see the ROEs in Asia as low as they are -- sub 10% for the year. Considering the emphasis you are putting on those businesses as a growth driver can you give some sense of how you're going to push that ROE up? Is it a cost related issue or what?

And then a last one, just to follow on Andre's question on the ROE, if you could give an early look on maybe the US and the capital consumption in that business, are you planning on telling us how that capital allocation or equity allocation of the US is going to be trending down over time just to get a sense for the timing of the ROE improvement?

So I think you have covered a couple of items here. So on the --.

Yes, sorry.

The point around the other, within the experience items, I would like if we never have to report on other category in an item of this sort, but it is a reality that sometimes we do. And the reality here is that there is a number of small items that make up this item. They often offset each other and therefore don't get attention, but this time they tended to all go in the same way.

But I think the big point to take away here is that the Q3 changes in equity markets and interest rates were obviously very substantial. And when you do the following work in the fourth quarter as you update for the actual cash flows, et cetera, you can sometimes find some residual effects.

There were a couple of other smaller items. There were some credit spread movements. There was an impact in the fourth quarter of a promotional campaign that was a bit of a negative in terms of its impact on our experience.

But I wouldn't say there is anything in particular to draw attention to. And I would say that you wouldn't expect to see that a category of this size in any regular quarter. If we hadn't had such a big change in the preceding quarter this would be a pretty nominal amount.

So we will continue to work at breaking these types of items out for you going forward, but nothing in particular there that I feel you would need to be concerned about.

There is nothing in there about the excess hedging costs or anything -- that would have gone through expected profit, right?

The expected profit does reflect the hedging costs. And then there is some -- there are some costs related to the excess volatility that would come through in the equity line as well.

Okay.

It is Dean. On the ROE in Asia just two comments. First is this is a growth business and there is a lot of investment being made in various parts of Asia, in particular India and China. And a very rapid expansion in China, and we are now selling in over 90 cities in China and expanding rapidly. And, of course, that all requires some investment -- significant investment and we are not yet making a profit in China. So that is one aspect of this.

India, the same. It is a very large operation, but nonetheless it has gone through some challenging regulatory changes. The thing I would point out to you though is the trend. So the very positive trend and upward momentum in ROE improvement. And if you triangulate that against the actual business we are writing and the profitability of the business, over time we see this trend continuing to improve. The actual underlying products and the profitability of the products are attractive, robust and should continue that upward march on ROE.

I'm sorry, the strain was -- we haven't seen a trend, but Asia seemed actually quite a big number -- like a big number. Is that unusually high or --?

It is Colm here again. No, I don't think it is surprising to see a high level of strain in Asia. I think this is a reflection of the state of some of the operations there. So we don't have the same level of scale in some of the operations, so you're going to see some of that.

And, also, we do sell a lot of life insurance in Asia, so we are setting up those reserves, and that will come back into expected profit over time.

Then the US, are you going to give us a sense at the investor day that -- how the capital consumption in that business is going to trend down over time?

I think that is a topic for investor day, because we are clearly a couple of months into the new year here, and the changes that were announced in December, we're still working through that. But we can certainly talk a little bit more about that at investor day.

Okay, thanks.

Doug Young, TD Securities.

I guess first question, Colm, on the capital at the holdco, can you give us what -- how much cash is up at the holdco? And I guess I jotted down that you put CAD300 million up from the US into the holdco and then CAD200 million down or did I get that wrong? That is my first question.

So you are right. I said CAD300 million came up, and we put CAD200 million down in cash at SLF, including the US holdco -- we don't always move it from the US holding company structure up to the parent -- is about CAD1.1 billion, which is roughly in line with where we were at the end of September.

But I think sometimes people do confuse this as to is this sort of an excess amount above some minimum. And we don't think of it so much in that regard. We think of it -- about it as being an amount of cash that we hold to fund our obligations as they fall due around interest rates and dividend payments, et cetera.

So I know the question has come up in the past around is that an excess level above 200%. So this is not the same as an excess above 200%, just to be clear on that.

And then, Keith, you're going to have to bear with me for a second here. On the methodology change -- and I just wanted to confirm a few things under the new methodology for seg funds and variable annuities.

So my understanding simplistically is now the value of your future claims or potential claims costs from these businesses as they fluctuate really that fluctuation is now going to be offset by the value of the derivative hedge, and whereas the reserves are obviously based on hedging costs and as a result are more impacted by interest rates.

I guess my question is, is my simplistic way of thinking about that correct? And then the second part of my question here is given that the more volatility is going to be based around interest rate movements going forward, less equity market fluctuations, can you talk about the percentage of hedge costs that come as a result of interest rates and volatility relative to equity markets or can you rank the cost of hedges between the different categories?

I think you are right to say that the value of the claims costs now -- well, previously we would value those using equity scenarios over time. And we are now placing a value on those equal to what we think the long-term expected hedge costs are likely to be.

So the reserves provide for future hedge costs. And if our reserve assumptions are correct and work out exactly, then we should be able to cover the claims and the hedge costs out of the reserves.

And what I have indicated is that, firstly, the volatility assumptions -- the long-term volatility assumptions, so we will not cover all of the current level of vol costs and we will have experience losses on vol.

Secondly, I would point out that we don't always have 100% coverage of the exposure. So, for example, right now we are not quite at 100% Rho hedging. We're a little bit below that. So there will be some unhedged risk that will cause gains or losses.

And, thirdly, of course, we will have basis risk and other sources of hedge ineffectiveness, and all of that will show up in the experience gains and losses.

In terms of how to view the hedge costs and whether it is driven by interest rate movements or equity movements, the largest part of the hedge costs comes from swapping the equity returns for the risk-free rate. And so really it is equity volatility and equity movements that drive the consummate hedging that you have to do, and then the cost of that is driven by the level of interest rates. So it is very much a combination.

But what I would tell you is that our assumptions are intended to capture -- the reserve assumptions are intended to capture the long-term expected hedge costs using current market interest rates, current equity levels, and the long-term level of equity volatility.

In terms of the hedging costs is it 75% of the cost really driven by the short-term rate? I guess, I am just trying to get a sense of -- or is it 50%, or what should we be looking at when we are looking at what is going to drive the sensitivity?

I think the sensitivity will be driven more by volatility and by basis risk going forward under the new method. Because you are right to think that the hedge portfolio will offset the change in the cost as reflected in liabilities.

I think that I have got that. Great. Thank you.

Mario Mendonca, Canaccord Genuity.

A question probably for Dean or maybe Keith. You started off -- Dean, your opening comments you articulated the goals and you talked about earnings growth, improving ROE and reducing earnings volatility. The reduction in earnings volatility I suspect what you're getting at there is taking down the sensitivity to interest rates mostly, because that seems to be where some of the greater volatility is emerging.

My question really is around whether those goals are really compatible. Whether in the near term or even medium term you can improve ROE and grow your earnings, while at the same time trying to take out the volatility.

And I ask the question this way because it was an important lesson I think we all learned with Manulife over the years that those goals did not seem entirely compatible.

So the question is how do you do that -- how do you take down the volatility, and can you do that without impacting the Company's core earnings power?

A couple of comments on that. One is we think we can by -- through a number of approaches. But you are right to call out the fact that this is not a short-term agenda, this is going to take time to do.

So think of the way we manage our hedging programs. Think of possible changes to -- and the use of reinsurance, comparable alternative structures for some of our businesses that live under a CGAAP income environment and present volatility through that lens. And as you think about ways to restructure the business, obviously, one of the questions we ask is there a way to move parts of those businesses the present the most volatility into an US GAAP style reporting environment? And I am the first to acknowledge that is much easier said than done.

But these are some of the things that we are thinking about and working on. I think your point -- your fundamental point, which is if you just went out and hedged it all wouldn't that be a bigger drag on run rate earnings is a fair point. But I think we are at a place where we do see some different options for reducing volatility.

I think certainly the earnings growth in the ROE portions go hand-in-hand. And a lot of the things that we can do -- pretty well most of the things we can do to drive earnings growth are going to help ROE as well.

I would invite Colm and/or Keith to add to that, particularly on the volatility piece -- or Mike Stramaglia.

It is Mike Stramaglia. I would be happy to throw in a couple of other thoughts. I assume that your question really related more to interest rate risk as opposed to equity risk.

Yes.

And we have seen an increase in interest rate risk over the quarter, and largely as a result of the new valuation method. Just a couple of thoughts in terms of some additional context around that and how we think about it.

One, CAD700 million out of 100 basis point shock is certainly a big number and it is larger than what we have seen in the past. It is also important to recognize though where 100 basis point is currently on the probability distribution.

We are looking starting at a 10 year treasury of 190 -- 100 basis points off of that certainly would take us -- we are at historic lows now -- pretty far out into the tail in terms of the historical precedent in terms of interest-rate levels.

Quite a different place than where 100 basis points would have been at the end of last year when 10 year treasuries were over 3%. So that is part of our thinking and that was really why we added the 50 basis points disclosure as Keith talked about.

The other thing to keep in mind is what we would view as some of the natural hedge that exists on the balance sheet as well that is really not part of that CAD700 million. So we're currently sitting on CAD9 billion or CAD10 billion of bonds in our surplus account, and they have over CAD250 million of unrealized gains associated with them, and they will have sensitivity as well. So under the same 100 basis point shock we got CAD375 million of incremental unrealized gains in terms of after-tax. And that certainly we view a significant portion of that as representing some level of natural hedge and that would mitigate that.

We also look at -- you are right, I think, to focus on the downside scenario, but we also look at the upside, and the fact that under an interest rate upward movement we have some positive sensitivity there. And we think we have actually gone to a better place in terms of a balanced -- more balanced risk profile than where we were earlier in the year. And we look at trying to position around that balanced risk profile in the context of overall risk appetite, but with due regard to the undo -- not creating undue volatility.

So having said all that, we do look at opportunistically increasing the level of hedging around interest rate. And given the current environment in terms of a positive shape yield curve, you can actually do that with positive carry. It doesn't -- unlike hedging equity risk where you are trading equity returns for very low interest rates, when you are adding duration with a positive curve, you are actually picking up spread. And, as well, there can be some collateral benefits around reducing some of the C3 provisions that you need for mismatch.

So that is all part of how we think of it. Keith's comment earlier about the URR on the tick down, obviously over a sustained low interest rate environment that needs to be recognized as well as more strategic implications of a low for long interest rate scenario. That is obviously a key part of the mix.

But in terms of reducing interest rate volatility, that being a significant potential drag on earnings over the short to medium term, for those reasons I wouldn't cite that as a real big factor.

So to be clear then, going back to Dean, your opening comments about taking down the volatility and the sensitivity, it sounds to me from listening to Mike's explanation that it is not interest rate sensitivity you are referring to in taking down the volatility. So what sensitivity -- what risk area are you referring to if it is not interest rates?

I was referring to the general -- the fact is that when you still -- when you look at the residual sensitivities on slide 14, our market risk sensitivities, we have made forward progress on equities, as Colm said earlier, and the interest sensitivities have gone up at the 100 basis point level.

And I think our overarching point is that even with forward progress on the equity side, the comments on the interest side, this still comes at us as quite a bit of volatility in our quarterly results. So that is really what I am referring to.

And this most recent quarter -- excuse me -- the most recent year is an example of that and something that we want to address.

To be clear, I am still -- I am rather confused, because it sounds like from Mike's comments you are saying interest rate risk is not the issue, but yet you are talking about reducing volatility. Let me cut through some of this and say -- is it the Company's position that you can take down volatility, whether it is equity markets, interest rates or anything else, without impacting core earnings power? Is that essentially your view that you can do this?

It is Keith here. I would say that on the interest rate side the impact on core earnings is not very significant. It depends very much on the future scenario, right? So you can add a swap, and if interest rates move according to the forward curve then that doesn't really do anything to the overall economics of the business. So it depends very much on what your planning scenario is.

If you assume that rates will pretty much stay in their current range, maybe move up a little bit, perhaps not as fast as the forward curve, and many people would hold that as a planning scenario, then taking down the volatility, the published sensitivities by adding duration, will give you a little bit of positive carry, as Mike said.

But, overall, if you are in a range where interest rates are not highly volatile, then the core earnings run rate does not change very much.

And in the case of equities, of course, there is a significant opportunity cost, and there is no free lunch in terms of taking off that equity volatility. But if you look at our starting point, particularly post-sen we have moved to a pretty reasonable range in terms of equity sensitivities.

That was helpful. Thank you.

Joanne Smith, Scotia Capital.

I just want to switch gears a little bit here, and talk about one of the things that Dean mentioned is that he would really like to spend some time talking about the businesses and how you're growing the businesses rather than all of the costs and volatility and basis risk and hedging, et cetera.

So I would like to talk about that. And I would like to talk about the US in particular, because the results there were very poor this quarter. There was adverse mortality and adverse morbidity and sales results were down sharply.

So I would like to get a little bit of color of what you are expecting as we go forward there, and where we can see the timeline in terms of really starting to see some improvement there? Thank you.

I will take the question. This is Wes. First, I would comment on our sales results since that was disappointing by saying that we do have a very strong track record of sales growth in our group business. In fact, if you look back from 2000 to 2010, we have experienced double-digit annual sales growth.

2011 sales really were impacted by two primary factors. First, we did hold our pricing -- and in-line with pricing relative to the competitive environment that we saw in the US, particularly in stop-loss.

And, second, there was clearly spillover effect from the significant challenges that we had in closing or moving towards making that decision, and then enclosing the individual lines. It did cause some distractions inside of our group sales organization, and I recognize that. But very confident, however, that we are well-positioned to resume the strong historical growth trends that you have seen in our group business with a very strong distribution capability that we intend to continue to invest in going forward.

I would also add that we did come off of a very strong sales year in 2010, so the comparisons were also affected by that. But, nonetheless, I am confident that we can get that back on track and you will see good results in 2012 in that regard.

In terms of the underlying performance of the business from a morbidity perspective, we look very closely at the dynamics of what is going on there. And in 2011 notices, which would be incoming claims, really showed no material increase when you compared it to 2010. Although 2010 did have a higher run rate, as we have described, than perhaps a more normal period when you look at say 2005 to 2008 was ticked up. But relative to 2010, 2011 notices were flat.

And we also saw the same thing for approval rates. But what we did see in Q4 was an increase in the dollar amount of reserves per notices. So we're looking at that very closely. There is not a reason for any significant concern or concern overall there, because we are still operating within the ranges that we would view as normalized, albeit towards the top of that range.

So I would summarize by just saying feel very good about our group business overall, how it is positioned from a distribution and a manufacturing perspective, and I look forward to a good year.

Thanks, Wes.

Luke, this is Phil Malek. We are out of time for today's call. I would like to thank all of our participants. And if there are any additional questions we will be available after the call. Should you wish to listen to the rebroadcast, it will be available on our website later this afternoon. And with that I would say thank you and good day.

Thank you. Ladies and gentlemen, this does conclude the conference call for today. Again, we thank you for your participation and you may now disconnect your line.