Sun Life Financial Inc (SLF) 2012 Q4 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Life Financial's Q4 2012 earnings conference call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session.

(Operator Instructions)

I would like to remind everyone that today's conference is being recorded. I will now turn the presentation over to Phil Malek, Vice President of Investor Relations. Please go ahead, sir.

Thank you, John, and good morning, everyone. Welcome to Sun Life Financial's earnings conference call for the fourth quarter of 2012. 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 our 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 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 today's remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events. And with that, I'll now turn things over to Dean.

Thanks, Phil, and good morning, everyone. Yesterday, Sun Life reported results for the fourth quarter of 2012, with operating income of CAD453 million or CAD0.76 per share on a fully diluted basis. Operating income excluding the impact of market factors was CAD420 million, an increase over the CAD405 million reported last quarter. Operating net income for the full year 2012 was CAD1.679 billion and operating return on equity was 12.3%. We generated strong top-line growth in the fourth quarter. On a constant currency basis, total life and health insurance sales were up 12% to CAD662 million of premium. Total wealth sales were up 60% to CAD29.5 billion, and adjusted premiums and deposits were up 49% year-over-year to CAD34 billion. Total assets under management reached CAD533 billion at year end.

2012 was a transformational year at Sun Life and I'm pleased to say that we made significant progress in each of our four pillars. Starting with asset management, the MFS team had an exceptional year, achieving record gross sales of $86 billion, with strength in both institutional and retail flows. Gross sales in the fourth quarter were $26.2 billion, which included the one-time inflow of $6.7 billion from Sun Capital Advisers. Assets under management ended the year at an all-time high of $323 billion. MFS continues to gain recognition for their outstanding performance. In Europe, they were named Equity Manager of the Year by Financial News for the second time in three years. I'm also pleased to report that in the recently released Barron's Lipper annual ranking of funds families, MFS was in the top 10 funds families for one-year performance in 2012 for the second year in a row, the only Company to repeat a top 10 ranking in 2011 and 2012. MFS was also one of only two companies to rank in the top 10 for each of 1-year, 5-year, and 10-year performance.

Sun Life Global Investments Canada completed its second full year of operations with gross sales of CAD2.5 billion and client assets under management growing to over CAD6 billion. We made significant progress in Asia, expanding our footprint. Last month, our joint venture life insurance company with PVI Holdings in Vietnam received regulatory approval to start operations. Vietnam's life insurance market is poised for growth, providing an excellent opportunity for PVI Sun Life. In January, we announced a strategic partnership with Khazanah Nasional to acquire 98% of CIMB Aviva in Malaysia. This expands our footprint in Asia to seven markets, including four of the ASEAN countries. Malaysia offers excellent opportunities for long-term growth with a fast-growing economy and middle class and we couldn't think of two better partners than Khazanah and CIMB. Insurance sales in the Philippines for the full year were up 67%, benefiting from agency expansion and the successful integration of the Grepalife acquisition and bancassurance joint venture. We maintained our number one position in life insurance sales in this market.

In the United States, we achieved key distribution and operational milestones that we set for 2012 in both employee benefits and voluntary benefits, and combined sales for the full year were up 26% over the prior year and voluntary benefits sales finished the year at $141 million, up 81% over prior year and well ahead of our targets. We expanded the distribution organization to almost 200 sales professionals, adding experienced group sales reps and building our voluntary benefits distribution force, as well as establishing a small business center for group insurance. We also launched five new products and expanded our enrollment capabilities. In December, we announced the agreement to sell our US annuity businesses. And this transaction represents a transformational change to the Company's business and marks real progress towards improving our risk profile and reducing the volatility of earnings.

Our Canadian operations performed very well across all businesses. Individual life and health sales for 2012 grew 6% over 2011 and we moved into the number two position in life and health sales. Individual insurance and investments also successfully repositioned its product portfolio for a lower interest rate environment and at the same time, shifted to a more profitable mix in both insurance products and wealth and you see this coming through in terms of improved new business strength. We grew our career sales force by 119 advisors in 2012, while at the same time improving the productivity of our existing advisors. Sales and group benefits were up 7% for the year, 36% for the quarter, with excellent retention across all segments. Business in force grew to CAD7.7 billion, solidifying our position as the number one group benefits business in Canada. As you can see on slide 17, our combined business in force for both US EBG and Canada Group exceeded CAD10 billion at the end of 2012. We retained our number one position in group retirement services, with sales up 3% and assets under administration of CAD54.7 billion, up 11% from a year ago. Wealth rollover sales were up 26% in Q4, representing the highest discrete fourth-quarter sales since the creation of this business.

Sun Life continues to be a strong and well-capitalized Company with a minimum continuing capital and surplus requirements ratio of 209% at Sun Life Assurance as of December 31, remaining well in excess of regulatory requirements. I am 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. So in closing, I'd like to emphasize that we've been moving quickly to execute on our growth strategy. As we begin 2013, we recognize that there is still plenty of work to be done and we remain focused on executing on our strategic priorities and our four pillars. And with that, I'll 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 5, yesterday the Company reported a operating net income of CAD453 million or CAD0.76 per share, and operating return on equity of 12.9% for the fourth quarter of 2012. Operating net income for the full year was just under CAD1.68 billion with an ROE of 12.3%. As a result of the recently announced agreement to sell our US annuity business, that business is now classified as discontinued operations in the Company's income statements and the assets and liabilities of the business are classified as held for sale on the balance sheet. Our go-forward businesses are referred to as continuing operations. Given that the sale was announced very late in 2012, the presentation this morning will focus primarily on the combined total Company results.

Our capital position remains strong, as we ended the fourth quarter with a net MCCSR, or minimum continuing capital and surplus requirements ratio, of 209% at Sun Life Assurance Company. The change from the ratio of 213% at the end of the third quarter is attributable to the final impact of the IFRS conversion phase-in and segregated fund capital usage caused by the aging of the in-force block as disclosed in prior quarters in 2012, as well as the impact from the reduction and the ultimate reinvestment rate in the fourth quarter. The IFRS phase-in is now complete and we expect segregated fund capital usage will be significantly reduced going forward. In 2013, we expect to have a one-time benefit of approximately 3 percentage points of MCCSR from the reduction in lapsed capital requirements, which is effective from January 1. And we also expect to have a reduction of 3 percentage points of MCCSR phased-in over eight quarters due to the impact of the change in accounting for defined benefit pension plans. As of the end of the fourth quarter, we continue have a strong level of cash resources at Sun Life Financial, our holding company, to fund our dividend payments and other corporate obligations.

On slide 6, operating net income excluding the impact of market factors, was CAD420 million in the fourth quarter. Net equity market impacts resulted in an after-tax gain of CAD49 million. This impact includes a CAD14 million contribution from positive basis risk due to fund outperformance versus the relevant hedging instruments and CAD35 million of gains primarily from the outperformance of underlying variable annuity investments, versus their benchmarks. And lower than expected volatility. Equity market gains in the quarter were offset by the negative after-tax impact of CAD51 million from interest rates. We experienced unfavorable movements in credit and swap spreads, and the impact from the 10 basis point decline in the ultimate reinvestment rate of CAD44 million, which we had previously noted, and which was offset by a contribution of CAD 33 million from higher risk-free rates.

We have updated our disclosure regarding the potential impact of a continued low-interest-rate environment on our net income through 2015. If current very low rates persist, our net income for our continuing operations from 2013 through 2015 would be reduced by approximately CAD350 million in total, down from our previously disclosed impact of CAD500 million. This improvement is due to slightly higher interest rates, the impact of methodology changes in our business in Asia, and the sale of our US annuity business. Income in the fourth quarter included after-tax net gains of CAD20 million from increases in the fair value of real estate classified as investment property in our Canadian operations. Actuarial assumption changes driven by capital market movements had a positive impact of CAD15 million on our net income. These changes represent refinements to our economic scenario generator for interest rates implemented last quarter.

Slide 7 outlines other notable impacts to earnings in the fourth quarter of 2012. The impact of investing on insurance contract liabilities resulted in a positive of contribution of CAD46 million. These gains came from actions taken to extend the duration of our assets to better match our liabilities, and increasing the yield on investments over what is assumed in the valuation of the liabilities. The net favorable mortality and morbidity experience of CAD5 million, was driven by the unfavorable experience in the US and the UK, partially offset by a positive experience in our Canadian Group benefits business.

Positive credit experience contributed CAD11 million after-tax to earnings in Q4. This favorable impact is attributable to the release of best estimate reserves in excess of downgrades and impairments in the quarter. Lapse and other policyholder experience resulted in a net negative impact of CAD16 million, primarily from higher lapses on US corporate-owned life insurance contracts and Canadian individual life. Higher expenses from investments in growth and other project costs, a number of one-time items, and seasonally higher expenses, resulted in a CAD67 million experienced loss in the quarter. Project-related costs were elevated due to items such as Solvency II in the United Kingdom and investment in voluntary insurance growth initiatives in the United States. We traditionally see seasonally higher expenses in the fourth quarter of each year, including expenses relating to year-end sales and the annual compensation cycle. Other assumption changes and Management actions are composed of non-market related items that have not been called out on the previous slide. These updates relate primarily to a number of refinements to assumption changes made in the third quarter of 2012, including refinements to mortality and morbidity assumptions and the modeling of swaps in our US life insurance block.

Moving to slide 8, we provide details on our source of earnings for operating income. Expected profit of CAD489 million increased by CAD51 million from Q4 of 2011 and was in line with our results in the third quarter of the current year. The year-over-year increase is mainly attributable to higher assets under management at MFS and the positive impact of the reserve hedging methodology change implemented at the end of 2011. New business strain was CAD27 million, representing a significant improvement over the CAD81 million reported a year ago and the CAD46 million reported in the third quarter of 2012. The actions we have taken in recent quarters to close our US variable annuity and individual life businesses to new sales as well as the repricing actions in our Canadian individual insurance and investments business, have had a positive impact on new business strain over the course of the year. The experienced losses of CAD50 million reflect the net pre-tax impact of capital markets and other experience items described on the previous slide. Assumption changes and Management actions resulted in reserve releases of CAD113 million before taxes. Earnings on surplus of CAD78 million were lower than the fourth quarter of 2011, due to the higher realized gains on available-for-sale securities year ago.

Turning to slide 9 and the results by business group, SLF Canada reported operating earnings of CAD149 million, down from the CAD182 million reported a year ago. Earnings in the fourth quarter were negatively impacted by the CAD44 million, due to the decline in the ultimate reinvestment rate, partially offset by improved new business strain, and the favorable impact of investing in higher-yielding assets. Our US operations reported earnings of CAD211 million compared to a loss of CAD511 million a year ago. Positive impacts from market factors, reduced new business strain, and investing in higher-yielding assets were partially offset by negative impacts from expense and morbidity experience. Operating earnings from MFS were CAD85 million, up from the CAD68 million reported a year ago. This increase was primarily driven by higher average net assets under management. Margins were strong at 35% and up from 32% a year ago.

Operating income from our Asian operations was CAD50 million compared to income of CAD44 million in the fourth quarter of 2011, as a result of lower new business strain from improved sales mix in India, and lower sales in Hong Kong and China, higher earnings from the Philippines, and a net positive contribution from experience gains. Our UK operations reported operating income of CAD28 million compared to income of CAD71 million a year ago. Results in the fourth quarter of 2011 reflected a significant one-time tax benefit of CAD59 million. Corporate support included under the corporate segment reported an operating loss of CAD70 million compared to a loss of CAD75 million a year ago.

On slide 11 in the appendix to the presentation, we have provided a view of the results for the discontinued operations. You will note that our discontinued operations had reported net income of CAD180 million for 2012, which includes impacts from market factors and other experience and assumption changes and Management actions. After the anticipated pre-closing transactions, and other adjustments on sale, the expected annualized impact from the sale of the discontinued operations is a reduction in the earnings per share of approximately CAD0.22, as we had disclosed to you in December. I would remind you that these adjustments will not have occurred for the first quarter of 2013 as they include the anticipated debt redemption in June of this year, deployment of the cash proceeds, and the transfer of certain retained assets from the discontinued operations to the continuing operations. Because these adjustments will not have occurred in the first quarter, the earnings per share attributable to discontinued operations will likely be higher by approximately CAD0.02 per share in the first quarter.

Finally on slide 12, you can see that our disclosed sensitivities have improved significantly as a result of the sale of our US annuity business. Of particular note is the equity market sensitivity, where the negative impact of a 25% decline has improved to CAD150 million from CAD400 million disclosed at the end of Q3, and a negative impact of a 10% decline has improved to CAD50 million from the CAD150 million at the end of the third quarter. I'll now turn the call back to Phil for questions and answers.

Thank you, Colm. We would like to ensure that all of our participants have an opportunity to ask questions on today's call, so I'd ask each of you to please limit yourselves to one or two questions and then to requeue with any additional questions. With that, I'll now ask John to please poll the participants for their questions.

Robert Sedran, CIBC.

You disclose a fair number of different cuts at the earnings but the one I want I can't seem to find anywhere so, is it possible to get the earnings from continuing operations excluding the impact of the markets? Because it looked a little on the weak side and I'd like to know how much of that might have been related to URR build or other market forces on the quarter?

So you quite rightly point out that we have a lot of disclosure in the fourth quarter, reflecting the discontinued operations, continued operations and you've raised a question around what is the best way to look at that. Rather than trying to re-create a new exhibit for you on the phone here, I'd certainly be happy to talk you through some of the ways of thinking about the discontinued operations to get you back to something that you could subtract from the core earnings adjusted for all the notable items, et cetera, that we have disclosed. So one way you might think about, Rob, is to think about the discontinued business, the operating earnings for the fourth quarter. On an operating basis it came in at CAD120 million. And included in that were positive market impacts, assumption changes that related to that business, the impact of investing activity that I noted, and if you add all those up that would come to about CAD80 million. So, you could subtract that CAD80 million from the CAD120 million to get to a number of CAD40 million.

And then you might want to relate that back to the earnings per share impact that we had given you previously for the business when we talked about that CAD0.22 per share, CAD130 million approximately for the year. And you would note that the CAD40 million I just mentioned does not equate to -- if you annualize that, you are at the CAD160 million, that does not equate to the CAD132 million, and you might have some questions around that. A way to reconcile back from that CAD132 million to the higher number is to think about what will happen at the time of close, as I mentioned in my remarks. We will repay debt and that will happen in June of this year. And we will invest cash proceeds, we've taken a conservative view around how we will invest our cash proceeds. And we will earn a return on certain assets that we are not transferring over as part of the transaction. And those impacts would take you from that CAD132 million back up to the CAD160 million on an annualized basis. And I do apologize for going through all of this over the call, as opposed to having all laid out, but you will appreciate that presenting our earnings on a continuing basis in the discontinued basis given that the transaction was announced at the end of the year, was a complex task and we're happy to provide you with additional detail as we work through this.

Well, Colm, I appreciate the additional detail on the discontinued operations. What I'm looking for more is more information on the continuing operations in that why they might have been down only around CAD0.55 or CAD0.56 for the quarter if there was a sizeable market impact -- a sizeable negative drag coming on to the continuing operations, it's more what I'm looking for, let's say bottom up rather than top-down in terms of trying to get to where your earnings for the quarter came in and what might've moved the business that is going to last beyond Q2? And so I'm wondering, is it largely market forces that were negative on the continuing operations? Or is there something else going on?

No I would think that we feel very good about the continuing operations. And the discontinued operations did have an outsized impact and I've reconciled that back to you. The best view is to start with the combined business and if you adjust for all the factors that we've called out as being notable items, you do arrive at a number that's around CAD390 million. It's up to you, of course, as to which of those items you would adjust for on an operating basis. We call out the earnings at being CAD420 million. But as I say, you would come back to that CAD390 million and then you would adjust for the core part of the discontinued business and that brings you back to the operating for the continuing business.

Thank you.

Peter Routledge, National Bank Financial.

I have a two-parter on MFS. I'll start with the easy part first. [You reach a fund] sales for the last four quarters look to me to be averaging a net basis, about CAD4 billion. And that's probably before the improvement in the tenor of equity markets, at least in North America just this first quarter. So what are you going to do this year? Can you hit $5 billion in net sales? Is that reasonable expectation?

Peter, it's Dean. We've got Rob Manning on the line, and Rob, why don't you jump in on this?

Your numbers are absolutely right. It's going to really depend on whether the shift to equities continues to occur. What I can tell you is that we had an all-time sales record in January. Now part of that is seasonal because people fund their IRAs and other retirement accounts but the early read is pretty positive because the equity mutual fund flow-ins have turned positive. So I'm going to let you model in what you think but we clearly believe that the business can be up this year versus last year and the wave towards equities benefits the firm quite a bit.

And I have a bit of a question on the share-based payments. We've had three years of a cost of CAD80 million to CAD94 million from that line item and I know you classify it as operating -- or not operating or ongoing in nature, but the last three years seems to be at odds with that. And I just--

Well, Peter, Colm here.

What's your response to that? And what would your pre-tax operating margin be if you did consider those costs operational?

Peter, it's Colm here, and Rob feel free to follow on, but I'll jump in because in fairness, this is a Canadian IFRS overlay as opposed to a US GAAP reporting requirement. Indeed MFS on a US GAAP basis continues to treat these compensation amounts and respective options in accordance with option accounting, as is required under US GAAP. So under IFRS, the features of the plan require this to be treated as a liability type of award. We feel very good that it's a large amount and while that may seem strange, it's because it reflects the growth in the business and the value of the business and, of course, that value accrues to all of the shareholders including the Management minority shareholders and Sun Life Financial. And, in terms of the operating ratios, Rob, you're a better place to speak to that but that reflects a very solid operating result.

Yes, the only thing that I'd add on the operating margin as it's reported here is that, as I described to all of you over the years that MFS build out this infrastructure and we're beginning to fill our pipes with capacity and you've seen the margin begin to move up and our target with asset levels around where they are as we continue to grow is to have the mid to high-30%s margin. And you'll begin to see additional improvement if assets stay where they are on the first quarter of this year.

Okay. And at the end of the day, Colm, is this a cost to Sun Life shareholders? The share-based payments? I know it's non-cash and I respect that it is an IFRS idiosyncrasy, but the end of the day if you're just looking through the noise, it this just value that shareholders sacrifice?

Well it really reflects the ownership of the Firm and the alignment of the interests of all the shareholders and the value creation that's undoubted at MFS accrues to all of the shareholders so from a valuation perspective, the [amos] community and investors need to look through the reported results in order to be able to assess where that value creation is and many of you do that.

Okay, thanks.

Michael Goldberg, Dejardins Securities.

Thanks. I was going to ask something similar to Rob's first question. But you gave a pretty good explanation there. So my other question, you've highlighted the CAD160 million of Canadian wealth goodwill that may still be vulnerable to an impairment charge. If it's going to happen, would it only be in the fourth quarter when you do your annual review? Or could it be earlier?

Yes, good question, Michael, and we did signal this in this third quarter as being a topic for review and we do our detailed review annually. That doesn't mean that if an event occurs throughout the year that we are not required under accounting standards to revisit that but we don't anticipate revisiting this item until the fourth quarter. And the reason we called it out is if you would recall a year ago we took a write-down on that goodwill so we bought it right down to its fair value and obviously, given the nature of the business, we needed to take a pretty hard look at it in the fourth quarter and we signal that in the third quarter. We were pretty clear in the call last quarter that we weren't pre-signaling that we intended to take a write down but we just felt it was important improvement to advise investors that the annual review takes place and if it requires a write-down, a write-down will occur.

So, why specifically -- what ultimately happened where you concluded that it wasn't necessary at the year-end of year two to take that charge?

Well, really what happened was we concluded that the value to which it had been written down the prior year would continue to hold. And all of the actions that Kevin and his team in Canada have taken around that business and just continuing to reposition the business for profitability, are maintaining value and I would hope, adding value over time and we will see that.

Thank you.

Gabriel Dechaine, Credit Suisse.

Good morning. Just a quick one on the strain. Colm and Dean, you made it seem like the lower strain this quarter is a sustainable figure given some of the repricing action you have taken? Because you had a gain in Canada, just wondering if that's sustainable?

Yes, Gabriel, it is a good question and this topic of strain obviously has come up and continues quite rightly to come up. The amount that we had last quarter was in the mid-CAD40 millions, CAD46 million, and we signaled that we had taken action that we would see that come down and it came down to CAD27 million. It's a little difficult to latch on to that amount and say that's the new run rate, there's a seasonality to these things depending on sales, et cetera, but we feel pretty confident that we have taken and continue to take actions to continue to manage this down certainly below that level that you saw run rate last year and while CAD27 million is a great result for the fourth quarter, it's possible that it could bounce up a little bit in Q1 if, for example, we have some sales programs, et cetera. India for example is a big sales quarter generally in the first quarter so you'll see that bounce around a little bit but certainly the trajectory is in the right direction.

Okay. Just a clarification. So your fully diluted share count 607 million but the number you use in the CAD0.22 dilution from the sale of the US business is 600 million. Is that an apples-to-apples comparison in terms of fully diluted versus--?

Yes it is. The 607 million, that bigger number is the result of the IFRS requirements around sleeks.

Okay so maybe more broadly on the capital management front, Dean, you made a relatively small acquisition, more of a growth-oriented one. I'm just wondering what the investors should expect once you close the deal of the US sale? What your bias is toward these days -- or funding organic growth? Are there that many opportunities? Or something more returning capital to shareholders?

Well, Gabriel, our first and primary focus is on organic growth and growing the businesses in our four pillars. And as we said almost a year ago at Investor Day, we see a lot of opportunity in all four pillars to grow the business. And I'll tell you that is our primary focus. I've said this before that we are in the deal flow, we're being selective, we're looking at things that we think, well, where we can create value from them and I've called out of Grepalife acquisition previously and we do believe that the Malaysian acquisition will be exactly in that category of value creation but I'll tell you our first focus is organic growth and to create value for shareholders. The -- as far as the proceeds of the sale of the US annuity business, I just remind everybody that it has not closed. We're working really hard on that. There's a lot to do to get that across the goal line and it's progressing well. I would say to you that we're quite pleased to have the additional liquidity on our balance sheets. Steve Peacher has said before that he is working on approaches for deploying more of our liquidity into investments that have stronger yields and you saw some of that in the fourth quarter coming through so we'll be prudent with it and we think it puts us in a very nice position.

So there's no -- I guess given the regulatory climate right now, is it something that makes you hesitant to even talk about deployment and the buyback or something like that?

Well, you call out the capital framework that OSFI is working on and that's a fair point to think about. We said before that the early work on the capital framework, we view as a positive in that it confirms that the industry has enough capital in aggregate, that insurance companies are indeed different than banks and that we would like to see or we would expect to see credit for hedging in our Canadian seg funds -- capital credit for hedging -- so those are all positives but as I've said before the devil will be in the detail and given the uncertainty, again, we're happy to have that additional flexibility on our balance sheet.

Thank you.

Andre Hardy, RBC Capital Markets.

Thank you. I'm looking at the growth in value of new business from CAD620 million to CAD853 million year-over-year on a trailing 12-months basis. How much of that came from higher sales versus margin improvements?

Well a good portion, Andre, has come from the MFS sales so we're certainly seeing the contribution that's included in those numbers. But we also have good results in the businesses and maybe I'll look to Kevin or Wes to comment on value of new business creation in their business in their business?

In Canada, VNB was up about 9% on the year. That was a combination of much better mix of business, also some headwinds in terms of methodologies so it's hard to put a precise number on it but I would say this is very much -- we saw good sales in Canada, pretty well right on plan, and growth in VNB.

And in the US, we saw good sales, strong sales growth, and strong VNB, up about 75% over prior year. And also reflected in that is the strong voluntary sales in 2012.

And just to clarify on strain, and I don't know if it's for Kevin or for Colm, but you had actually a positive impact from new sales in Canada. Is that something that you think can last over time?

Yes, we do. We've really done a lot of work around repricing, we've done a lot of work around product mix, as well, and we've got the table set really quite nicely now for -- we basically eliminated strain in the Canadian portfolio and can continue to see a positive contribution there.

Thank you.

Tom MacKinnon, BMO Capital Markets.

Couple questions here. The first one is, we've seen a trend here now of expense-related experience losses now for at least four quarters in a row. And they're obviously very high in this quarter. How should we be thinking about these things going forward? And if I'm looking, for the last five quarters they've been in there and you've noted them, should -- aren't they really becoming more recurring than nonrecurring? And if they are related to trying to grow you business especially in EBG in the US, why -- where you actually are trying to grow your sales 25% year-over-year and you did in this year -- then why aren't they necessarily treated more as recurring rather than notable items? And then I have a follow-up.

So, Tom, you're quite right to point out the expense experience in the fourth quarter, a significant amount of CAD67 million. If we look at the full year, and you're right that we've had items in this line item over previous quarters, it's CAD90 million so two-thirds of it is really coming through in the fourth quarter, if you annualize and look at the full year view. We feel that we are managing our expense program effectively. We think that it's not indicative of a run rate problem and if you really deconstruct it you find that it reflects deliberate investment, as you quite rightly point out, US voluntary is a key component of that. But there are other areas such as various outsourcing projects, in the United Kingdom we've talked about Solvency II initiatives in the United Kingdom that would not be considered run rate, albeit they have lasted for some time but we have now really implemented the requirements there.

So, we feel that they are rightly categorized as projects in many of the cases. They do in fact represent some other one-time items -- it can be a miscellaneous collection of reinsurance -- arbitration settlement, for example, was an item we had this quarter, certain corporate development costs. You've noted that we've been quite active over the past year. So these items get captured in this bucket, but the key take away is that we don't see it as being characteristic of an organization where the expenses are running ahead of the maintenance requirements and allowables. But perhaps on that note, I would just hand it over to Wes to speak a little bit about the voluntary in the US because that is a fairly significant piece of the program.

Yes, as I look at the results in 2012, first I would just say that as I have shared previously, in our group business, we do expense the distribution and acquisition costs up front due to the short-term nature of those contracts. And so we had increased sales, 26% overall, so that would drive some increases in the overall expense that reflects in strain. And we did, as planned, invest in our group and voluntary business capabilities so we see those as sustaining our opportunity for growth in the future. And overall, as we look ahead, and we saw this year, as a percentage of sales, we do expect strain to reduce fairly significantly over time.

Okay, thanks for that. And then one follow-up is for Dean. Without the benefit of the US annuity earnings here, really how comfortable are you with your CAD2 billion 2015 target? We could argue that hey, they were in run off maybe when you set that target but they were going to be here for a long time and now they're gone immediately. So, to what extent should we be looking at your ability to hit that target without the benefit of that?

Well, Tom, as we said in December that following the close of the transaction, we will come back to investors and restate our 2015 objectives. Are we expect that to happen towards -- we expect to come back to investors toward the end of the second quarter. And at this time we expect that we will adjust the US objective to reflect the sale of the annuity business in line with the CAD0.22 that Colm described in December and described again today.

Okay, thanks for that.

Joanne Smith, Scotia Capital.

Yes, I just have two quick questions. One is regarding the adverse -- less favorable mortality in the US employee benefits business as well as the adverse morbidity. I know that the experience was dissimilar from the third quarter, but there had been a couple of other quarters where you had some negative morbidity and mortality experience. And that also seems to be happening across industry. So I was wondering if Wes could just address that question? And then I have a follow-up.

Okay. Yes, what we're seeing, Joanne, is incoming claims or as we describe the notices, are actually lower than most of the quarters over the past two years. However, the average reserve per claim has been increasing, which reflects growth in the average gross benefits and we pointed that out also in the Q3. And as we saw this trend emerging, last year, we did take rate action in Q3 of 2012 particularly in our LTD business where we increased our standard rates or manual rates by 8.2%. And we're obviously applying that to all new business and renewals. I would also remind you that in Q3 '11, we applied about a 7% rate increase on our STD business and that has actually had good effects in that area so nothing systemic again that we've seen. I've said that before but we have taken action and we're taking a disciplined approach to underwriting new business also.

Okay. Thank you for that, Wes. And just on -- in terms of Asia, I'm trying to understand where we are in terms of the core earnings in the Asia operations and where they're going from here. You've had some -- a little bit of disappointing sales in India and there was down sales in China. Philippines appears to be on track but I'm just wondering if you could comment on the trends in core earnings in Asia? And also if you could give us an early indication of what you think there will be in terms of any accretion from the Malaysian acquisition that you're doing?

Okay, Joanne, I'll take the first piece and then Colm will talk about the Malaysian transaction. Asia is a series of moving parts as you've identified and if you looked at the three businesses that are wholly-owned, sales were up 18% year-over-year for those businesses and headlined by the Philippines as you noted. And in India, it's been a challenging environment since the regulatory environment shifted in 2010 and I would say some Birla Sun Life Insurance and, in fact, the industry is still finding its footing in terms of products, in terms of sales, in terms of strain. We have made progress in India in the sense that we've just rolled out four new products. We changed the product mix in the last year towards more profitable products and that's in part what is contributing to the improved strain number you see coming through in Q4. And the same applies China. You'll see a reduction in our sales in China. In part that is reflecting a shift that we've been working on with our partners to shift away from single premium business sold through the bank channel to more regular premium business and so in the second half of the year, regular premium business was up to 40% of sales from 10% in Q1 so very good progress on that front.

Also contributing to the improvement in the strain position although it obviously has a negative impact on sales, we are very focused in both China and India on driving VNB growth as opposed top-line growth. And so that's what you're seeing coming through in the sources of earnings. I would say, you stand back from Sun Life and you think about Canada as a very strong business, a strong franchise, leading market positions, growing our business. The US, a very strong position in group benefits, voluntary benefits with great leverage from the Canadian benefits platform, and a really nice opportunity to grow that business. MFS firing on all 12 cylinders. And when we think of Asia, we think of this as a mid to longer-term opportunity and you can see us through our actions -- product pricing, product changes, expanding the footprint, you can see us laying the foundation for future profitable growth. So let me, with that, turn it over to Colm to talk about the transaction in particular.

Yes, and Joanne, so from an EPS perspective, the transaction really in the first couple of years is neutral. And the reason for that is it is a profitable business, as you know, and we're buying a business that's operating today but the impact of the accounting is that you set up an intangible asset for the bancassurance, the value of the bancassurance contract that's embedded in the price that we're paying. And you amortize that so from -- when you go through all of that you end up being neutral and, in fact in the first year, we will be spending some money to get everything up and ready and running. It will contribute by 2015 but, the takeaway is that the amortization of the intangible does offset the pick-up from earnings.

And Colm, I just want to revisit the question about how should we look at core earnings right now? And how comfortable are you with the CAD250 million target for 2015?

Well, Dean has mentioned already that we will be looking at the overall levels when we come back to investors by mid-year. And he specifically commented on the US. But as we look at that overall, we will be taking another look at the components. That's not to say that we're, at this point, giving you any additional information around that, but clearly if we come and, as we will come back, we will take a look at that overall.

Okay, thank you.

Mario Mendonca, Cannacord Genuity.

I want to follow up on a question that's already been asked on the MFS awards. Those are share awards. They're settled in whose shares? Not MFS -- they're Sun Life shares, so how are those actual awards settled? How are the employees actually paid?

Rob, did you want to comment on that?

Well, what we have at MFS is a private formula value for the employees, they are given stock based off that formula value. And as that stock vests, MFS buys those shares back and delivers cash net settled to the employees. And that formula value has been backtested for 15 years and it has a 99% [R] square with the publicly traded asset management firms but the formula is based off o a percent of assets, a percent of pre-tax profits, and a multiple of revenues.

So eventually, it's settled -- it has to be settled in cash -- these folks are paid money, because -- cash -- because there's no such thing as an MFS share?

Well, there is. Let me--

Well, it is--

Go ahead, Rob.

Go ahead, Colm. Colm, why don't you take it?

What I was going to say, of course there is an MFS share and that's -- as Rob described -- that's exactly how it works. And this program, when we operated under previous Canadian GAAP, before IFRS, was treated as a stock option, continues to be treated as a stock option in the United States and it's a feature of the IFRS change. We spent considerable time on this topic when we adopted IFRS and, Mario, we would be happy to take this one offline with you to go through the accounting requirements.

No, I understand the accounting requirements. What I'm getting at here is over the last three years, this amount that we've treated as non-operating have amounted to about one-third of Sun Life's earnings and that's one-third -- sorry, of MFS's earnings -- that's one-third every year, and because it's ultimately settled by MFS paying cash, why is it appropriate to not treat as a real expense? What I'm getting at is if you're giving one-third of the earnings to the employees, is it appropriate to really think of Sun Life as owning 100% of MFS?

Well we don't think of ourselves as owning 100% of MFS. It's very important under the construct that we have the very engaged Management team at MFS that has direct ownership in the business and it has worked extremely well. The point really is around valuation and if you apply an insurance multiple to the MFS earnings, one could argue that that is not an appropriate factor either. So, it really comes down to how you think about MFS within the overall Sun Life Financial enterprise and your question is really around valuation and there are different ways for investors to approach the valuation question.

Okay, I'll stop there, then. You said that you don't think of yourself as owning 100% of MFS. Is it -- do you conceptually think of Sun Life as owning about two-thirds of MFS then?

No. We own effectively -- it's Dean here, Mario. We effectively have economic interest of around 90%, 91%, something in that range. And I just want to add to Colm's point around how we think about this. It's interesting, the accounting rules require you to mark this stuff to market. And, we don't -- if you wanted to follow the same logic, you'd say for the 90%, 91% that Sun Life shareholders own, should we be marketing our shares to market through the income statement? Which we don't do, of course. It shows up -- it's a capital valuation issue as opposed to an income issue. So it's a little perplexing to me that the accounting rules work this way for -- but then again I'm an actuary and not an accountant. So I'll just stop there.

The real -- the issue -- the reason why we're asking the question, is number one, the numbers are getting large; and number two, this is -- it's not appropriate to call this a non-cash item. Eventually, dollars come out of MFS's coffers to pay for this. So, there's a consequence to this -- a real dollar consequence and perhaps this is something we can think about over time but, it doesn't -- it's not -- it doesn't really make a lot of sense to treat these as non-operating when in fact they're settled, ultimately, for cash. I'll just move on to one quick other question. Just on the tax rate, excluding MFS, the numbers look pretty light, 11% tax rate? Excluding MFS -- it's an appropriate way to look at it, because you rightfully call it MFS separately. How does 11% -- does that feel like a sustainable number for a Company operating in Canada, US, and Asia?

Well, on the MFS piece, again I would not extract MFS because in the United States we do file on a consolidated tax basis so MFS is very much part of our tax profile in the United States and if you subtract MFS you're taking out a high tax rate jurisdiction. So consequently, you will get back to a lower rate. We are and we look very hard at the range that we have for tax rates. We look at it every quarter. And we continue to feel that the 18% to 22% range is the appropriate range and indeed on a continuing basis, once the sale of Sun Life US closes, we continue to believe that that will be the appropriate range, albeit we might be at the hiring end of that range. So we feel it sustainable. It's something we examine very closely and we think that range is the right range.

Thank you for indulging my questions.

Doug Young, TD Securities.

Most of my questions have been answered. Just wanted to go back quickly and I don't want to belabor this but the core and, Colm, maybe I'll just walk through and you can point me out where maybe I'm wrong because there's still a lot of confusion around core in the quarter and what it could look like in Q1. So, the way I look at it is I take CAD392 million, which you've stated and you get to that by removing other notable items and that's about CAD0.66 per share. If you think of what it is going to look like on an ongoing basis, you remove basically CAD0.055 cap so you get to CAD0.60 to CAD0.61, excluding the discontinued operation on a core basis. And then you're saying in Q1, it's going to look a little bit worse because of just the pre-transaction or the post-transaction adjustments haven't gone through. So maybe you get to CAD0.58 would be a comparable to what we should think of on Q1. And I know strain is a little bit lower. Earnings on surplus was also a little bit lower. Is that the correct way to think of it? Or am I missing something?

Yes. You've relayed or replayed items that I spoke about at the beginning of the call, Doug, so that's a reasonable way to look at it. And we do appreciate that the continuing and discontinued operations does add complexity and we will over the course of the first quarter, we will be reporting on this basis and we will provide more clarity at the end of the quarter. But you're generally in the right direction.

So there's nothing that you can see that may change in forward quarters that would take us drastically away from those numbers that I just quoted?

No the way I look at it really is to take that CAD392 million as you noted after all of those notable items and to say how do I adjust for a business that's reflected within that and also the fact that there are certain transactions that will create some value for us once the sale occurs so it's -- you're triangulating against a couple of different data points. So one has to apply some judgment and I will remind you that of course it's all forward-looking and real-world will play out as it does.

Okay, thank you.

John, it's Phil Malek. We have time for one more question before we end today's call.

Darko Mihelic, Cormark Securities.

I'll have about two last questions. They're both quick. I just want to revisit Asia and what I see here in Asia and I'm going to ask this question a certain way. I see premiums and deposits up 45% year-over-year, 31% quarter over quarter. I have AUM growing at 20% year-over-year, and wealth sales are up almost 100% year-over-year. So apart from a little bit of weakness in insurance sales, I see an awful lot of value creation there but I still see expected profit going down 7%. Now my suspicion is there's a lot of cost in here with these sales and you're building out a lot of networks. What I'm ultimately aiming at here is at what point do you think we could see expected profit start to behave the way we should think about with double-digit growth? And then my last question is, for Dean, now that the VA business is out of the way, are you largely satisfied that you've reduced the volatility of Sun Life in its earnings stream or do you think there is still an awful lot of way to go before you're satisfied? Thank you.

Darko, on your first question around Asia, you're right to call out the wealth sales and the wealth sales show up in Asia in our Hong Kong Mandatory Provident Fund business, which is a very successful business. We've had terrific sales growth in 2012 and very good progress on the employee choice arrangement that was introduced in November in the industry and our progress there has been very strong. We also have 50% ownership of Birla Sun Life Asset Management and it continues to perform well as a top-rated mutual fund company in India and our mutual fund business in the Philippines is doing well, as well, although it's a relatively small part of the business. Your question is at what point do you -- should we expect to see expected profit turnaround?

And I'd come back to China and India, in particular, and say there's a lot of work underway to reposition the product set in both countries to a product set that has better economics and better sustainability. It's been a pretty dramatic change in the Indian industry and I would say all the -- we're holding are own in terms of position in the market but all the players are working through how best to restructure the products to work in that environment. As I said, we've filed four new products, we've started to sell four new products, and the early indications are positive from those four products so I'm not going to be specific and name a quarter or a particular moment when we should expect to see expected profit grow. I would tell you that there's a lot of action underway and, as I'm saying that, I'm thinking at a future call we should provide you with more detail as to what exactly is underway and we will get Kevin Strain, who runs Asia, to do that for us--

Just to interject real quickly, it doesn't some like it's imminent anyway?

That's a fair conclusion. And then on your second question, around the volatility, post the sale of our US annuity business, as Colm pointed out, we will have significantly reduced the equity and interest rate sensitivity to the business and I would also point out -- some of the earnings volatility has come through our annual review of assumptions in the business and we've had -- we had some reserve strength in the third quarter of last year around policyholder assumptions in the US VA business and as we part ways with that business, when you put all of that together, it's a significant reduction. So it's not just the equity and interest volatility but it's the whole -- it's all of the moving parts, including policyholder behavior for the US VA and [FHA] business that is really going to set us apart and make a big difference in reducing the volatility of the business.

So you are satisfied then? That you're pretty much most of the way down with reducing volatility?

Yes.

All right. Thank you very much.

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

Ladies and gentlemen, that does conclude our conference call for today. Thank you for your participation. You may now disconnect your lines.