Sun Life Financial Inc (SLF) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen and thank you for standing by. Welcome to the Sun Life Financial fourth-quarter 2013 conference call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions). This conference is being recorded today, Thursday, February 13, 2014 and I would now like to turn the conference over to Mr. Phil Malek, Vice President of Investor Relations. Please go ahead, sir.

Thank you, operator and good morning, everyone. Welcome to Sun Life Financial's earnings conference call for the fourth quarter of 2013. 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 that, Steve Peacher, Executive Vice President and Chief Investment Officer, will discuss Sun Life's investment management, our new institutional asset management business.

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 slides, forward-looking statements may be rendered inaccurate by subsequent events. With that, I'll now turn things over to Dean.

Thanks, Phil and good morning, everyone. Turning to slide 4, in the fourth quarter, Sun Life had strong operating net income from continuing operations of CAD642 million and ROE of 17.7%. Results reflect business growth, positive market impact and gains from a management action we took to optimize value in our closed block of US life insurance.

The fourth quarter capped off a strong year overall. Operating net income was CAD1.943 billion and ROE was 14.8%. Expected profit grew 20% over the prior year. New business strain was down 57% and the combination of the two improved by 31% reflecting momentum in our underlying earnings power.

Our top-line results for 2013 tell a similar story. On a total company basis, sales of insurance increased 14%, wealth sales were up 15% and the value of new business grew 30%. Adjusted premiums in deposits grew 12% and assets under management reached a record CAD640 billion.

Importantly, 2013 marked the year that we successfully completed the sale of our US annuity business and this transaction reduced risk, reduced our cost of capital and it allows us to concentrate on growing our four pillars.

Moving to slide 5, yesterday, the Company reported fourth-quarter operating net income from continuing operations of CAD642 million, or CAD1.05 per share. Full-year operating net income was CAD1.943 billion, or CAD3.21 per share. Our capital position remains very strong and we ended the fourth quarter with a minimum continuing capital and surplus requirements ratio of 219% at Sun Life Assurance Company, which is well above the regulatory requirements.

Slide 6 shows more detail on our continued sales momentum. Insurance sales increased 16% in the fourth quarter over prior year. Wealth sales declined in the quarter versus prior year due to the CAD6.7 billion mapping of SunCap assets to MFS in 2012, but they were up 15% for 2013 as a whole. Wealth product sales, excluding MFS, were up 9% in the fourth quarter and 19% for the year as we continue to expand our wealth businesses in Canada and Asia. 2013

VNB increased 30%, reflecting our focus on profitability, strong sales growth and improving economic conditions. Our investments in distribution have been driving higher sales. Over the past two years, we have grown agency headcount in our wholly-owned businesses in Asia by 50%. US employee benefits group distribution in client service is also up 50% over that period. And in Canada, we increased our insurance and wealth wholesaling force by over 50% to drive growth in our individual businesses.

Turning to slide 7, you've seen this slide before, but it is worth repeating. We continue to execute on our strategy focusing on higher growth, higher ROE, lower volatility and lower cost of capital across our four pillars of growth.

Slide 8 provides an overview of our progress and successes across the four pillars. In Canada, we were voted the Most Trusted Life Insurance Company in Reader's Digest Trusted Brand Award program for the fourth year in a row and this week, we learned that, in fact, it is a fifth year in a row. We have leadership positions in all of our businesses and continue to build on that strength.

Individual wealth is a key area of focus for us and we posted strong payout annuity and mutual fund sales in the year supported by our Money for Life campaign. Sun Life Global Investments, our new mutual fund company, completed three full years of operations and grew AUM to over CAD7 billion by year-end.

Next are our US businesses. In 2013, we launched new products in voluntary benefits and stoploss. Importantly, we began a major transformation of our group business sales and service model in order to improve distribution productivity, enhance the customer experience and expand our margins. We discussed this approach with you on previous calls and the changes include getting our sales reps closer to the brokers and clients they serve and enhancing our customer and broker support model.

In our high net worth international business, sales were up significantly in 2013, reflecting strong customer demand and expanded distribution. MFS continued to deliver strong performance and asset growth ending 2013 with $413 billion of assets under management. MFS' success comes from a unique culture and investment management approach that focuses on longer-term results and strong risk management. In the recent Barron's Fund Family Rankings, MFS was the only investment manager to finish in the top 10 for one, five and 10-year performance for each of the past three years.

Finally, our business in Asia continues to deliver strong growth. During the year, we launched joint venture operations in Vietnam and Malaysia, expanding our presence now to seven markets. We were successful in attracting top talent to Sun Life Asia and we are pleased with the buildout of distribution, as I mentioned earlier and I can tell you there is a sense of real momentum in the region.

On slide 9, Canada had solid performance in the quarter and we continue to make progress toward our goals. We grew sales and improved profitability in our individual businesses. Individual insurance sales in Q4 were up 34% from the prior year, driven by strong results across both career salesforce and independent channels. Our career salesforce continued to grow, up 115 over last year, reaching total sales power of just over 3800 and the number of third-party advisers now placing business with Sun Life has grown by almost 25% in the past year due to the investments we've made in wholesaling, as well as product.

Fourth-quarter individual wealth sales were up 31% over the prior year due to strong growth in the sale of mutual funds and payout annuities. Supporting this was Sun Life Global Investments, which achieved retail mutual fund sales growth of 153%. We now have a strong three-year investment performance record in SLGI and that sets us up well for future growth.

Sales in group benefits and group retirement services were strong in the quarter, consistent with last year. In group retirement services, fourth-quarter pension rollover sales grew by 9% to CAD394 million and we had sales of almost CAD500 million in our defined benefit solutions business, bringing the full-year total to CAD1.2 billion.

Moving to slide 10, we continue to generate growth in our US group and voluntary businesses. Total employee benefit group sales for the quarter were up 17% over the prior year, driven by strong voluntary benefit and stoploss sales. Employer-paid benefit sales were flat for the quarter. Total business in force showed moderate 7% growth, similar to last quarter.

Sales in group life and disability for the quarter were up more modestly compared to the prior year as we see the impact of price increases moderating growth in sales. We continue to see opportunities to grow our voluntary benefits business at a faster rate through investments in product and distribution and service. Sales of insurance and wealth products in our international high net worth business declined in the quarter, but were up 85% and 42% respectively for the year, reflecting strong customer demand and distribution expansion.

Turning to slide 11, as I said earlier, we had another exceptional quarter at MFS with assets under management finishing the year at $413 billion. Gross sales were $23 billion for the quarter and net sales were $3.3 billion, down from prior quarters reflecting in part reallocations by institutional clients. MFS continues its strong performance with 92% of fund assets ranked in the top half of their Lipper categories based on three-year performance. MFS also expanded its product set with new low volatility mutual funds for US retail investors. All of this activity has translated into strong earnings growth. Distributable earnings from MFS, represented by the dividends to Sun Life shown on this slide, have increased 82% over the past two years.

Following the quarter, we announced the creation of a new third-party asset management business, Sun Life Investment Management, which will bring our investment capabilities in private fixed income, mortgages and real estate investing to pension plans and other institutional investors. This development further extends our asset management pillar and Steve Peacher, our Chief Investment Officer, will cover this later on the call.

Turning to Asia, on slide 12, our results demonstrate strong execution in the region. Overall individual life insurance sales increased 9% in the fourth quarter from a year ago and wealth sales were flat. Fourth-quarter insurance sales in the Philippines increased by 13% over prior year, maintaining our number one position in that market. We continue to grow distribution, exceeding 5200 advisers in the quarter. Mutual fund sales were down 10% in the quarter versus prior year. In Hong Kong, we increased our individual life sales by 41%. We continue to generate strong growth in our Mandatory Provident Fund business with fourth-quarter sales up 11% over the prior year. In Indonesia, sales were up 9% as we continued to expand our agency force now at over 7100 advisers at year-end. And finally, we generated strong sales in our two new businesses in Asia, in Vietnam and Malaysia and in Vietnam, our salesforce now numbers over 3400.

So in summary, 2013 was a year of real progress across all fronts. The investments we are making in new businesses, in building out distribution and getting closer to our customers are all creating momentum as we drive toward achieving our 2015 objective. I'll now turn the call over to Colm Freyne who will take us through the financial results.

Thank you, Dean and good morning, everyone. Turning to slide 14, we take a look at some of the financial highlights from the fourth quarter of 2013. As noted, we had strong earnings this quarter ending a strong year of top and bottom-line performance. Our fourth-quarter operating net income from continuing operations was CAD642 million. This includes a CAD290 million benefit from the restructuring of an internal reinsurance arrangement used to finance excess reserve requirements for our Universal Life insurance products in the United States. During the quarter, we transitioned to a new captive reinsurer, domiciled in Delaware, which uses a more efficient funding structure. The CAD290 million earnings contribution represents the release of insurance contract liabilities for a portion of the estimated future funding costs and related tax impacts.

We expect further contributions of CAD15 million to CAD20 million per year over the next several years reflecting the release of the remaining future funding costs net of tax impacts and ongoing costs from the previous structure. We capitalized the new arrangement with CAD350 million, CAD100 million of which was released in available capital through the transition and CAD250 million of which was contributed from our holding company.

In total, assumption changes and management actions were CAD230 million in the quarter. We delivered operating net income, excluding market factors, of CAD605 million and I will go into more detail on the positive impacts from market factors on the following slide.

We saw good year-over-year improvements in key lines of the sources of earnings with expected profit on in force business increasing by CAD141 million over last year and new business strain improved by CAD19 million. Fourth-quarter adjusted premiums in deposits were down 9% from the prior year, reflecting the strong levels in the previous period.

Finally, our capital position remains strong. We ended the quarter with a minimum continuing capital and surplus requirements ratio of 219% and a cash level of CAD2.1 billion at the holding company, SLF Inc. Yesterday, we announced our intent to redeem CAD500 million of subordinated debt at the end of the first quarter of this year, which, on a pro forma basis, would reduce our financial leverage ratio to 25.6%, close to our long-term target of 25%.

As you can see on slide 15, the net impact of market factors on continuing operations contributed CAD37 million to earnings in the quarter and to operating net income. Excluding the impact of market factors, operating net income was CAD605 million. The positive impact from market factors was primarily due to higher interest rates and strong equity markets. The net impact from equity markets was CAD22 million and the net impact from interest rates, including swap and credit spread movements, was a contribution of CAD40 million. As previously communicated, we took a charge for the decline in the ultimate reinvestment rate in the quarter, which amounted to CAD37 million, which reduced our net interest rate impact to an overall CAD3 million. We also recognized a gain of CAD12 million from an increase in the fair value of real estate investments in the quarter. We have provided more details on the impacts of market factors in the appendix.

Overall, in 2013, we incurred CAD86 million in charges related to declines in the ultimate reinvestment rate. Based on the level of interest rates at the end of the fourth quarter, we expect a CAD40 million charge in 2014. Note that changes under consideration by the Actuarial Standards Board are likely to remove the expected impacts beyond 2014.

Other notable items increased earnings by CAD167 million in Q4 reflecting assumption changes and management actions of CAD230 million, in particular the CAD290 million benefit from the restructuring of the previously mentioned internal reinsurance arrangement offset by negative impacts from experience related to lapse on policyholder behavior, mortality and morbidity and expenses.

Our Q4 operating expenses were up 12% or CAD128 million over the prior year. Excluding the impacts of currency and of expenses at MFS, including share-based compensation, expenses increased 5% or CAD40 million primarily reflecting increased volumes and growth-related investments in roughly equal amounts.

Finally, gains from investing activity in the fourth quarter were CAD11 million within our expectations of CAD10 million to CAD20 million as a normal run rate. I would note that the level of these gains can vary from quarter to quarter.

Moving to slide 16, we provide details on our sources of earnings from continuing operations. Expected profit of CAD591 million increased by CAD141 million from a year ago. The year-over-year increase is largely attributable to higher income from assets under management at MFS, business growth in the United States and in Asia and favorable currency impacts. New business strain was CAD8 million representing an improvement over the CAD27 million reported in the fourth quarter a year ago. This was mostly due to impacts from SLF Canada, specifically product repricing and design changes in individual insurance and investments, higher sales in individual insurance and in our defined benefit solutions business, as well as the impact of higher interest rates. We benefited from the better mix of International Life products at SLF US.

We have updated our outlook on new business strain and now believe that a normal run rate of strain going forward is in the range of CAD20 million to CAD30 million per quarter, an improvement from the CAD30 million to CAD40 million range discussed last year. We experienced losses of CAD143 million reflecting the impact of market factors and other notable items described on the previous slide.

Assumption changes and management actions generated CAD213 million before taxes primarily from the restructuring of the internal reinsurance arrangement mentioned previously. Earnings on surplus of CAD92 million were higher than the fourth quarter of 2012 and benefited from higher investment income in the quarter. Income taxes at CAD58 million are below our expected range for our effective tax rate of 18% to 22% due largely to a tax benefit of CAD79 million from the restructuring of the internal reinsurance arrangement previously noted.

Adjusting for all notable items, our tax rate is at the high end of the range of 18% to 22% and we anticipate that the rate will continue at the higher end of this range in 2014.

Turning to slide 17 and the results for our Canadian operations, SLF Canada reported operating earnings of CAD137 million, down 8% from the fourth quarter of 2012. Earnings in the quarter benefited from higher equity markets and new business gains from improvements in pricing and mix in our individual insurance and wealth businesses and gains on defined benefit solutions sales. Results also reflected gains from investment activity in our insurance contract liabilities and positive real estate and credit experience. These were offset by charges related to declines in the ultimate reinvestment rate, updates to actuarial assumptions and unfavorable nonmarket experience.

Individual insurance sales were up 34% from last year due mainly to strong demand for permanent life products on higher term and health sales in the career salesforce channel. Individual wealth sales increased 31% as higher mutual fund and fixed product sales were offset by lower segregated fund sales following our actions to deemphasize sales of segregated fund products with guaranteed minimum withdrawal benefits. Group benefit sales declined marginally due to lower activity in the large case market relative to a year ago. Group retirement services sales were up slightly, which strengthened the defined benefit solutions.

Moving to slide 18, our US business reported operating earnings of $326 million, significantly higher than a year ago. This improvement included the benefits from the restructuring of the internal reinsurance arrangement mentioned previously and also reflected the impact of higher interest rates and net realized gains on the sale of AFS assets, partially offset by a refinement to the claims liability in employee benefits group. Total EBG sales in the quarter increased 17% compared to a year ago. Within EBG, voluntary benefit sales increased 15% compared to last year. Sales of international investment and life products declined 15% and 5% respectively reflecting strong international sales a year ago.

Looking at the performance at MFS on slide 19, operating earnings were $148 million, up 74% from a year ago driven largely by higher average net assets under management and a one-time reduction in compensation expense recognized in the quarter. Margins were very strong at 45% and up from 35% a year ago due to higher average net assets. Excluding the adjustments to compensation costs in the quarter, margins would have been approximately [30%].

Total assets under management as of December 31, 2013 amounted to $413 billion compared to $323 billion at the end of 2012. The increase was primarily driven by 2013 gross sales of $96 billion and asset appreciation of $67 billion, partially offset by redemptions of $72 billion.

Turning next to Asia, slide 20 highlights the performance of this business for the quarter. Operating income was CAD42 million compared to income of CAD50 million a year ago. Net income in the quarter reflected favorable impacts from assumption changes, business growth and tax related items partially offset by unfavorable nonmarket-related experience. Total individual life sales in the fourth quarter increased 9% from the first quarter a year ago as higher sales in the Philippines, Hong Kong and Indonesia were partially offset by lower sales in India and China. Sales also benefited from the inclusion of Vietnam and Malaysia this year. Sales in the Philippines grew 13% with growth across all channels. Sales in Hong Kong increased 41% driven by strong performance in the broker channel. Sales in Indonesia were up 9% year over year due to growth in our career salesforce. Wealth sales in Asia continue to be robust, coming in at about the same level as the prior year.

Turning to slide 21, I would like to leave you with a few key messages for the quarter. First, Sun Life had a strong quarter capping off a strong year. We continue to strengthen our underlying earnings power, we continue to take actions to efficiently manage our capital and our financial position is strong. And lastly, we continue to execute well on our strategy and our 2015 objectives. And with that, I will turn it over to Steve Peacher, who will discuss our new third-party asset management business announced last week.

Thank you, Colm and good morning. As mentioned, last week, we announced the launch of Sun Life Investment Management, our new institutional asset management business. This announcement comes as a result of many months of hard work and I am very pleased to have an opportunity to discuss this new business and the growth potential we see in the market.

On slide 23, we highlight two trends that we see among defined benefit pension plans. First, in the current low yield environment, DB pension plans have demonstrated an increasing interest in alternative asset classes as a means of achieving higher yields and returns.

Second, we've seen a significant improvement in the funded status in defined benefit pension plans across North America as equity markets have recovered and interest rates have moved off their lows. As solvency ratios improve, pension plans are increasingly likely to pursue derisking strategies, including full liability-driven investment strategies in which the plan's assets are better managed to match their liabilities.

At Sun Life, we have the core capabilities that directly address both of these trends. That is we have long-standing expertise in asset-liability management, as well as leading positions in alternative asset classes such as private fixed income, commercial mortgages and real estate. Sun Life Investment Management is being formed to bring these capabilities to Canadian DB plans and other institutional investors.

Slide 24 takes a closer look at the attributes and capabilities that give us confidence that Sun Life is particularly well-positioned to establish a new institutional asset manager and capitalize on these opportunities. Asset liability management is core to what we do every day as we manage our CAD110 billion general account. We understand how to evaluate complex liabilities and manage portfolios to meet those liabilities in the most efficient fashion.

For decades, we have looked for opportunities outside of the public securities markets as a means of accessing extra yield and return and today, Sun Life is a leading investor with large experienced teams in Canada's private fixed income, commercial mortgage and real estate markets.

Within Sun Life's Canadian business, our defined benefit solutions team is seen as a leader in risk transfer solutions for defined benefit plans and has well-established contacts across the pension industry. And of course, the Sun Life brand is extremely strong in Canada and our position as a large and stable financial institution with highly developed governance and risk management culture should be attractive to institutional investors.

Slide 25 depicts the range of solutions that we'll now be able to offer the defined benefit plans to the new Sun Life Investment Management business and our existing DB solutions business. This spectrum of product is key to our strategy because it corresponds with a journey that many pension plans are on. If a plan sponsor is looking for opportunities to increase yield and reduce risk through better diversification, we will now be able to offer products that focus on private fixed income, commercial mortgages and real estate based on our leading position in these asset classes. If a plan sponsor is interested in derisking their portfolio and managing it in a liability-driven fashion, we can offer custom liability-driven investment strategies and include private asset classes in these portfolios that many other asset managers can't offer. For those plans who are interested in taking the final step of transferring the risk of their plan, our DB solutions team offers both longevity risk products and annuity buyouts and buy-ins. The ability to offer these risk transfer solutions also sets us apart from traditional asset managers.

On slide 26, you can see the initial lineup of products that we will be offering to the marketplace. The Sun Life Private Fixed Income Plus Fund will focus on private fixed income investments with a layer of public corporate bonds in order to provide liquidity. The Sun Life Canadian Commercial Mortgage Fund will be a diversified portfolio of first mortgages secured by high-quality office, retail, industrial and multifamily properties located across Canada.

The Sun Life Canadian Real Estate Fund is targeted to be a diversified portfolio of income-producing commercial real estate assets in growing urban areas across Canada. And as mentioned, we will also offer customized liability-driven investment strategies. These products will be targeted to Canadian DB plans and other institutional investors. And each of these products will be managed by the same experienced professionals that are responsible for investing Sun Life's general account.

Turning to slide 27, by targeting institutional investors and focusing on private asset classes, this business is a good complement to our other asset management businesses in Canada. In short, we believe that many of the investment strategies that Sun Life has successfully pursued for decades for its own balance sheet can also help other institutional investors to meet their goals and we are excited to now be able to offer these unique capabilities through Sun Life Investment Management. With that, I'll turn it back to Phil.

Thank you, Steve. We'd like to ensure that all our participants have an opportunity to ask questions, 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 the operator to please poll the participants for their questions.

(Operator Instructions). Robert Sedran, CIBC.

Hi, good morning. Colm, between the action I guess on the closed block in the US and the debt redemption that you announced yesterday as well, I guess you have allocated about CAD750 million of the holding company cash. Can you first confirm I guess the amount of deployable cash? So the CAD2.1 billion number you quoted doesn't include the CAD500 million, but it does include the CAD250 million from the actions you took during the quarter?

Yes, Rob, that is correct. So the funding of the captive took place in the fourth quarter. So the reduction in cash is reflected in the fourth quarter, CAD2.1 billion I mentioned and of course, the CAD500 million debt redemption will take place at the end of this quarter.

So -- sorry, go ahead.

No, I was simply going to say so our capital cash position I should say at the holding company level continues to be at a very strong level.

So I would assume somewhere north of CAD1 billion still of deployable cash assuming you want to keep some liquidity on hand. And it sounds like the leverage ratio has kind of gotten to where you wanted to get it to. So should we assume more actions like the one taken in the quarter to optimize the book or should we assume capital deployment in other ways or should we think of perhaps now that the leverage ratio is where you'd like it, that perhaps you'd return some of that excess cash?

Well, I'll start on the broader question of the types of activities that we are undertaking and you are absolutely right. We have commented in the past about taking actions to maximize the efficiency of the balance sheet to use the strong capital position we are in for that type of activity. And you saw a good example of that in the fourth quarter. Obviously, outsized relative to the general types of opportunities that exist, but a good example, as I say, and it does position us quite well. So we are in a strong position and considering how to deploy the cash and capital that we have and perhaps I'd ask Dean to make a few comments around that as well.

Yes, thanks, Colm. Rob, the whole question of capital deployment is obviously a big question; we have spent a lot of time on that. As you note, we have been actively deploying capital -- the CAD500 million to pay down debt this quarter, the restructuring of our US reinsurance arrangement, using CAD350 million of capital altogether. We see a number of opportunities to reinvest in and invest in our businesses. So the new business that Steve Peacher just referred to, Sun Life Investment Management, is an example of that, but there are a number of others.

We continue to look at acquisition opportunities, not of the transformational kind, but more of the bolt-on kind and certainly when we speak to investors, some are supportive of buybacks and others place other items like organic growth, debt reduction, bolt-on acquisitions ahead of buybacks. So capital deployment is an important topic. We have been taking action to manage the capital and deploy it, and we will certainly be returning to this on future calls.

I guess, Dean, though you mentioned some investors kind of are supportive and some would prefer to see a more active buyback. Is it fair to say that management though is more inclined to use the cash and to wait for the opportunity for it to arrive rather than thinking about returning it at this point, right? I mean you are looking to use this cash as opposed to giving it back.

Well, I would say that we are being planful about it and we see many opportunities to grow our business and the Company has done buybacks in the past, so it is still one of the things on the list and one of the potential ways to deploy capital. So I wouldn't rule it out, but I am telling you it is just one of several things that we think about.

Okay, thank you.

Tom MacKinnon, BMO Capital.

Yes, thanks very much. Good morning. A couple questions. The first, if you could just elaborate a little bit on the hit you had in the quarter in terms of experience-related losses in the mortality and morbidity and lapse, where they were and specifically what they were about and I have got a follow-up.

Yes, Tom, it's Colm here. So on the experience side, on the mortality, morbidity, primarily morbidity related to the US and within our group benefits business and I'd say about CAD17 million, CAD15 million of the total was related to that and in fairness, it was more related to refinements to the previous quarters. So all within the year, but the previous quarters. So we don't see it as being a true indication of the earnings in the fourth quarter. And of course, we have taken pricing action on the block over the course of the year and we see good prospects there to improve that profile.

On the lapse side, it really related to segregated funds delay in start dates for segregated funds with guaranteed minimum withdrawal benefits in Canada. We had about CAD15 million related to that and then we had a number of other smaller items across a number of different products and spread across the US and Asia. So as you recall, we had a strengthening of our lapse assumptions in the third quarter and so we didn't see anything in the fourth quarter that indicated that that was insufficient, but obviously we are keeping a close eye on that.

And when you talk about refinements, that doesn't sound like an experience loss. That sounds like something you did.

Well, it was related to morbidity and it was -- it would have resulted in a higher morbidity charge in the second and third quarter. So by correcting it in the fourth quarter, we reflected where the overall result for morbidity for the year should be reflected.

Okay. And then a follow-up with respect to Asia, if we look sort of at just expected profit impact on new business and earnings on surplus, we do get -- on a pretax basis, we do get a modest 7% increase in those figures. But I know that the operating expense plan seems to be up considerably, up over 30% in Asia. And then the wealth management sales were -- the momentum seems to have slowed a little bit. I mean we were solidly -- I know you can't keep up doubling your sales all the time here, but we do have them kind of flat year over year. So can you elaborate on what is going on in Asia, the additional spend you are doing there and what we could -- when we could start to see some a little bit better momentum in terms of the bottom line?

Tom, it's Dean. I'll start and then Kevin Strain will jump in. The first thing I'd say is that when you look at expected profit strain and the combination of the two, it does jump around a little bit from quarter to quarter and I think, on a year-to-date basis versus the prior year, you've seen very good growth, high teens growth in expected profit and 15% growth in the difference between expected profit and strain. So we look at those numbers and we see good progress and good momentum. In terms of the specifics around expense growth, currency-related aspects and wealth sales in Asia, I'll flip that over to Kevin Strain who will comment on that.

So maybe I will start, Tom, with the wealth sales and I think there is nothing I would be particularly concerned about there. The pensions business, as Dean mentioned earlier on, Hong Kong had a good year. Some of the ECA contributions, these would be employee contributions, we are still getting about a third, but they have slowed down a bit in the quarter, almost cut in half and then the transfers then tend to be a little bit lumpy, but, for the year, it was well up and the mutual fund business in the Philippines impacted a little bit by the slowdown in the stock market, but year over year had a good year and it is still a strong player. And we are seeing some good performance. So we mentioned three awards for basically customer service in the Hong Kong MPF. We also had two awards from Lipper, which were just announced yesterday and in India, we were voted best [on house] for debt schemes. We have a good fixed income shot there and two of the fund managers were awarded for best fund manager or runner-up for best fund manager for equity and debt. So we are seeing some good performance. I don't think I would be too concerned about that flattening in the quarter and the year over year was strong overall.

On the expense side, I think there is a number of things going on there, right? You are seeing a lot of growth in our wholly-owned businesses, sales growth in the Philippines, sales growth in Hong Kong, sales growth in the piece of our Indonesian business, which is wholly-owned and a lot of the expenses are controllable expenses that have gone up, but they are related to distribution being picked up. And Dean has already noted the growth in expected profit, which was strong and we remain committed to our 2015 investor (inaudible).

Okay, thanks for the color.

John Aiken, Barclays.

Good morning. Colm, in terms of the reinsurance restructuring, the release of capital, as mentioned in the MD&A, of the CAD250 million, is this coincident with the anticipated gains over the next little while? Or I guess said another way, is this dependent on the regulatory review that is ongoing as well or should that capital be released regardless of what happens?

Yes, so you are referencing the fact that we've contributed capital to the structure and over time, we do expect to see capital return. So that is expected and anticipated. I mean the whole topic around the structures in the US has the caveat that it is an area where the NAIC is performing a review, but our stance and positioning around this has been very rigorous and we think the approach we have taken is very solid. So we do anticipate that CAD250 million to be returned over time as well.

Thanks, Colm. And a follow-on, the Sun Life Investment Management, has there been any significant incurrence of costs to develop the platform and what are the expectations going forward and presumably, this is not a huge capital drawdown for you?

Yes, that's correct. I'll just start out by saying that we have been investing to get ready to launch and as we announced last week, we are in that mode. So there have been internal costs as we dedicate people to the effort, but in terms of the ongoing expectations around that, I will turn it over to Steve.

Yes, obviously, it's a new business that we are launching, so there are some initial upfront costs. We think in terms of timeframe to break even, it will take a few years to get there. But I would emphasize that the core of the business is built on the investment teams that we already have in place and so we don't have incremental -- we have incremental costs that we have to incur to develop capabilities for client reporting, client servicing, all the things you have to do as a top-notch institutional asset manager, but our investment teams are in place and that is really the core of the expense and we have already got that. And that is worth noting.

Great, thank you.

Doug Young, Desjardins Capital Markets.

Hi, good morning. I guess the first question I have is just around the Canadian individual insurance and I have just been hearing that we are starting to see price reductions. I think specifically in the level cost of insurance universal life product, and just wanted to see some color if that is what you are seeing at Sun Life if you are pursuing that. Just some color around that.

Sure, Doug, it's Kevin Dougherty speaking. We saw some -- I would actually characterize it more as sort of minor tweaking and pricing around that net aspect. At the end of the day, I think our positioning is still very, very competitive and we didn't see that as a big kind of change in terms of the market and relative positioning. So looking forward, we think we are well-positioned for continued momentum and growth.

So you are not seeing widespread price cuts in terms of competitive trends at this point?

No, no, just a little bit of repositioning and minor adjustments and we wouldn't anticipate that going forward. One never knows for sure, but we are not seeing signals of any major changes in pricing across the industry.

Do you sell level cost of insurance UL through the wholesale channel, or is it just through the captive side?

Yes, we sell it through both channels. We manage our product mix very, very carefully. And so we have a certain appetite for level cost of insurance UL in both channels. And so we manage towards a mix and really a VNB target. And you know, some of that would be UL, some of it -- a lot of it would be par and term and critical (inaudible).

Sorry, Doug, it's Dean. Just to add to that, I think -- and to link that back to the improvement in strain and new business gain strain in Canada in particular, I think Kevin and his team have done a terrific job managing that mix and you see that coming through the strain number. And it helps to have the scale and the breadth of products to be able to make that happen and do a good job for customers and for the advisors.

Great. And just a follow-up question on MFS, Rob. I'm sure you are on the line. Just if I look at net sales and I look at last year versus this year, they are obviously down. And I know last year you had CAD6.7 billion of variable annuity, internal variable annuity flows coming in, which you have got to kind of net out. But if I back that out, we still had net flows down. Just wondering is there anything in there that is concerning? And just I wanted a bit of an update in terms of what you are seeing from a net flow perspective.

Yes, Doug, thanks for the question. You know, our business is really two components. One is our retail business, both offshore and onshore, and our global institutional business. And the global institutional business is very, very lumpy where you tend to have big withdrawals or big sales that come in in any one given quarter. And part of what happened in the fourth quarter is that we closed two of our largest strategies that we sell around the world, global equity and international equity.

And it takes a quarter or two for the sales force to reorient themselves to other products, which we have capacity in and to sell. And going forward, the growth of the firm from a net point of view is going to slow relative to where it had been in the last three to five years. Just because of the size of MFS, as you get bigger it gets harder to get the gross sales, which leads to the net.

So going forward, on average you are going to see net numbers around CAD3 billion to CAD5 billion. And it depends on what is going on with the quarter, particularly with our institutional businesses. So the business is very healthy, very well-diversified by channel, by product and by geography. And I will just give you a little bit of a heads up that January is a seasonally strong month, obviously, for our business. So you will see the first quarter jump around relative to the fourth. But on average, CAD3 billion to CAD5 billion is what you should look at.

Great, thanks for the color.

Peter Routledge, National Bank Financial.

Hi, just some more questions on the captive. I think you have about CAD350 million in Delaware. Can you tell us how much capital you have in Vermont?

I don't have that number at hand. We don't have any plans to change the capital arrangements or the reinsurance arrangements, internal reinsurance arrangements, with respect to Vermont.

Okay. Do you have the notional sizes of the capital balance sheets; like how much liabilities are they offsetting?

Well, the absolute amount of the arrangement currently is CAD2.1 billion of excess reserves that are funded by senior debt, and that is what will (multiple speakers) the ongoing arrangement, the new arrangement.

And that's for both Delaware and Vermont?

No, no. Vermont is separate. Vermont is -- from the top of my head I think it is more in the CAD1 billion range.

Okay. And then is there any MCCSR impact? I guess if all of a sudden you had to change the rules because the US regulators prompted that, would there possibly be an MCCSR or is this neutral?

Yes, I don't see an impact on MCCSR. This structure is all entirely to do with the excess reserves from a stat perspective. So the reserves are really a US stat issue.

And then I understand you'll probably get this capital out as the block matures. Worst-case scenario, is the capital invested sort of a reasonable downside assumption, assuming something really unexpected happens?

I don't think we would think about it from the point of view of the capital invested. I mean it is a block of business that's on our books. We reserve for it and we account for it just in accordance with IFRS. So it might delay the time over which that capital comes back, but I would think of it, Peter, as simply a more efficient way of setting aside reserves and the funding cost that goes along with that.

Fair enough. Thanks for your insight.

Mario Mendonca, TD Securities.

Good morning. Colm, think through the benefits of the debt paydown. There is the benefit of a lower interest cost, of course, but there is the offsetting effect of lower investment income on that CAD500 million. Given where rates are and where that debt is priced, what is sort of the net ongoing impact you would [kick it off for]?

Well, I think I have seen a couple of people have estimated around CAD0.05 would be the impact. I think that is a reasonable guesstimate. I mean if you think about the coupon, it is very significant at the moment and the opportunity to deploy cash on our balance sheet with the current low interest rate environment I think gets you to a figure around that CAD0.05.

For the year?

Yes.

And then a quick follow-up. On the strain, the CAD20 million to CAD30 million, that caught me a little off guard just looking at the numbers over the last year or so. That would be taking us back to numbers we hadn't seen since say early 2013 and 2012. What is the logic in seeing that number move back up again?

So we look at this over the course of a year, so we want to be careful that we don't extrapolate from a seasonal impact. So Q4 is a very strong strain level of CAD8 million. So when you hear me talk about CAD20 million to CAD30 million, you might say that is building in a fair bit of conservatism, but it is subject to seasonality. So we don't want to extrapolate from that. But I think we are certainly giving ourselves a little bit of a margin there, but we think that that is an appropriate number to think about and we've talked about levels of strain, Mario, over the last year and we've talked about the CAD30 million to CAD40 million. We're now talking about CAD20 million to CAD30 million. We are keeping a close eye on this because to the extent that we are taking terrific actions around product design and repricing, etc., we may be able to bring this lower and we will report further as we see the year progress.

And then on seasonality, you'd say a little high in Q1 and then migrating down throughout the year, is that a fair assessment of seasonality?

Yes, and it depends on -- you see some strain in Asia, for example, when there are sales programs and targets there. So given that things can move around a bit, I'm most confident that the fourth quarter is the low period, but other quarters can jump around a bit.

Thanks very much.

Steve Theriault, Bank of America-Merrill Lynch.

Thanks very much. A couple of follow-up questions. Maybe just starting with Kevin Dougherty, if I could. Career sales for individual insurance were I noticed a little sluggish through the year. So maybe you could talk a bit about what is driving that and your outlook for next year. I noted your agent count is up pretty significantly and I am remembering when you used to give an agent count for more seasoned agents. Do you have something like that that you can share with us?

Sure. Well, I think, through the year, Q4 was particularly strong and we saw a little bit sluggish results, as you mentioned, in Q1. That was actually because our wealth sales were so strong and one of the keys here is to try to manage the mix between growing protection sales and wealth sales. And over the course of a year, you can do it, but it can be challenging quarter to quarter. So by the end of the year, I think we got very close to our targets for the career salesforce and of course, you saw what happened in wholesale; it was very, very strong as well.

Our agent count on the year, yes, it was up 115 and that is actually the sixth year of growth in our career salesforce. So if you go back in time to 2008, we were around 3300 and we closed the year at 3828. So very, very strong growth in our career salesforce over an extended period of time. And this is showing up in both growth and protection sales and in wealth sales with a higher growth rate on the wealth side.

Do you have that statistic that you used to give agents with -- I can't remember if it was three years experience or a certain level of seasoning?

Yes, I don't have that at hand, but we can get that for you, but that continues to go up as we -- and one of the things we have been doing is we have been moving people into mutual fund licensing earlier in their career and that has helped us with both retention and the growth on the wealth side.

Okay, thanks for that. I wanted to ask also a follow-up on the reinsurance restructuring. Lots of moving parts. You highlight the CAD2.1 billion of outstanding debt that is not related to the legacy US funding structure. I am not sure what the -- if these have callable features. If you could talk to us a little bit about the duration of those senior debt instruments and what I'm thinking about is the runoff of that CAD2.1 billion. Is there potentially the ability to accelerate it? Is the rundown in that sort of implied within your CAD15 million to CAD25 million of annual earnings or is there a chance that that rolls off and the interest costs can contribute a little more incrementally to the bottom line?

Yes, so just on the question of the maturity profile, so, in 2015, there is about CAD600 million of that that comes due. In 2016, there is CAD950 million and then in 2019, there is a further CAD300 million and in 2021, a final CAD300 million. So you can see that it runs off over a period of time. Now we don't expect to call early. There are now futures that would permit that. It is possible that this could be repurchased in the open market if the economics were to support that, but we haven't factored that into our analysis and when we think about the benefits that we've determined here, it really is -- assuming that these pay off over the periods that I've just mentioned and that don't get refinanced and we have a more effective cost structure going forward.

That's helpful. Thank you.

Darko Mihelic, RBC Capital Markets.

Hi, thank you. Good morning. A simple question for Colm. What is causing or why are you suggesting that the tax rate will be at the high end of your range? And specifically, I just want to make sure there isn't anything structurally that has changed on the tax side.

No, Darko, there is no particular structural issue. I mean, clearly, we have performed better than the range in recent quarters and recent times and as we project out and do our planning for 2014, 2015, we have to determine a tax rate and the tax rate that we are thinking of is more at the higher end of that range, still within that 18% to 22%. And we are simply giving you that sort of update, but, clearly, we look to ways to make sure that if we can be within that range at the lower end and possibly even below that. So just providing you with that color as we think about 2014.

So it's more like a business mix issue rather than tax structures running off or the reinsurance alteration? It is really just a business mix, is that what I'm --?

Well, I think all of that and tax is complex. Obviously, with the sale of the US business, that affects our US tax profile. We are always looking for ways to be the most efficient we can be and that is probably the color I'd like to give you around that.

Okay, fair enough. Thank you very much.

I am showing no further questions in the queue at this time. I'd like to turn the call back over to management for closing remarks.

Thank you, operator. I'd like to thank all our participants today and if there are any additional questions, we will be available after the call. With that, I'll say thank you and good day.

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