Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Life Financial's Fourth Quarter 2013 Conference Call. [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'll 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 Investment Management, our new institutional asset management business. Following the prepared remarks, we'll have a question-and-answer session. Other members of the 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 remark. 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. Turning to Slide 4. In the fourth quarter, Sun Life had strong operating net income from continuing operations of $642 million and ROE of 17.7%. The results reflect business growth, positive market impact and gains from a management action we took to optimize value in our closed block of U.S. life insurance. The fourth quarter capped off a strong year overall. Operating net income was $1,943,000,000, and ROE was 14.8%. Expected profit grew 20% over the prior year. New business strain was down 57%, and the combination of the 2 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 and deposits grew 12%, and assets under management reached a record $640 billion. Importantly, 2013 marked the year that we successfully completed the sale of our U.S. Annuity business, and this transaction reduced risk, reduced our cost of capital, and it allows us to concentrate on growing our 4 pillars. Moving to Slide 5. Yesterday, the company reported fourth quarter operating net income from continuing operations of $642 million, or $1.05 per share. Full year operating net income was $1,943,000,000, or $3.21 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 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 $6.7 billion mapping of Sun Cap assets to…

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 a strong earnings -- 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 $642 million. This includes a $290 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 $290 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 $15 million to $20 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 $350 million, $100 million of which was released in available capital through the transition and $250 million of which was contributed from our holding company. In total, assumption changes and management actions were $230 million in the quarter. We delivered operating net income, excluding market factors of $605 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 improvement in key lines of the sources of earnings, with expected profit on in-force business increasing by $141 million over last year, and new business strain improved by $19 million. Fourth quarter adjusted premiums and deposits were down 9% from the prior year, reflecting the strong levels in…

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'm 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 2 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 funding 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 longstanding 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 of what we do every day, as we manage our $110 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've…

Thank you, Steve. [Operator Instructions] With that, I'll now ask the operator to please pool the participants for their questions.

Operator, do we have any questions?

Ladies and gentlemen, our first question comes from the line of Robert Sedran with CIBC.

Colm, between the action, I guess, on the closed block in the U.S. and the debt redemption that you announced yesterday as well, I guess you've allocated about $750 million of the holding company cash. I just -- can you first confirm, I guess, the amount of deployable cash? So the $2.1 billion number you quoted doesn't include the $500 million, but it does include the $250 million from the actions you took during the quarter?

Yes, Rob, that's correct. So the funding of the captive took place in the fourth quarter, so it's -- the reduction in cash was reflected in the fourth quarter, $2.1 billion. I mentioned then, of course, the $500 million debt redemption will take place at the end of this quarter.

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 $1 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 we should assume capital deployment in other ways? Or should we think of perhaps now that the leverage ratio was 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're undertaking, and you're absolute 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're in for that type of activity, and you saw a good example of that in the fourth quarter. Obviously, I would say it's 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 spend a lot time on that. As you know, we have been actively deploying capital: the $500 million to pay down debt this quarter, the restructuring of our U.S. reinsurance arrangement using $350 million of capital altogether. We see a number of opportunities to reinvest in our -- 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 and bolt-on acquisitions ahead of buybacks. So it's -- capital deployment is an important topic. We've been taking action to manage the capital and deploy it, and we will certainly be returning to this on future calls.

I guess, Dean, you mentioned some of investors kind of are supportive and some would prefer to see a more active buyback. Fair to say that management, though, is more inclined as 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're looking to use this cash as opposed to giving it back.

Well, I would say we're being planful [sic] about it. And we see many opportunities to grow our business. And the company has done buybacks in the past, so it's 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'm telling you it's just one of several things that we think about.

Our next question comes from the line of Tom MacKinnon with BMO Capital.

A couple of questions. The first, can you just elaborate a little bit on the hitch you had in the quarter in terms of experience-related losses in mortality and morbidity and lapse, where they were and specifically, what they were about? And I've got a follow-up.

Yes, Tom, it's Colm here. So on the experience side, on the mortality, morbidity, primarily morbidity related to the U.S. and within our Group Benefits business, and I'd say about $17 million -- $15 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's really related to segregated funds delay and start dates for segregated funds with guaranteed minimum withdrawal benefits in Canada. We had about $15 million related to that. And then we had a number of other smaller items across a number of different products and spread across U.S. 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're 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 results for morbidity for the year should be reflected.

Okay. And then a follow-up with respect to Asia. We've looked 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 fees should be up considerably, up over 30% in Asia. So -- and then the wealth management sales where the momentum seems to have slowed a little bit. I mean, you were thoroughly behind. I know you can't keep up kind of doubling your sales all the time here, but we do have them kind of flat year-over-year. So can you elaborate on what's going on in Asia, the additional spends you're doing there and what we could -- when we can start to see some a little bit better momentum in terms of the bottom line?

Sure, Tom, it's Dean. I'll start and then Kevin Strain will jump in. First thing I'd say is that when you look at expected profit stream and the combination of the 2, 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're seeing very good growth, high-teens growth and expected profit and 15% growth in the difference between the expected profit and strain, so where 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.

Well, maybe I'll start, Tom, with the wealth sales, and I think there's nothing I would be particularly concerned about there, the pensions business, as Dean mentioned early on. And Hong Kong had a good year. Some of the ECA contributions, these were the employee contributions. We're still getting about a 1/3, but they slowed down a bit in the quarter, almost cut in half. And then the tranche would 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 a slowdown in the stock market, but year-over-year had a good year and is still a stronger player. And we're seeing some good performance, though. We mentioned 3 awards for customer service in the Hong Kong MPF. And we also have 2 awards, the Lipper with -- which were just announced yesterday. And in India, we were voted Best Fund House for debt schemes. We have a good fixed income shop there. And 2 of the fund managers were awarded for Best Fund Manager, runner-up for best fund manager for equity and debt. We're seeing some good performance. I don't think I would be too concerned about that sliding in the quarter, and the year-over-year was strong overall. On the expense side, I think there's a number of things going on there, right? You're seeing a lot of growth in our wholly-owned businesses. Our sales growth in the Philippines, our 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're related to distribution being picked up. So -- and these are, we noted, the growth in expected profit and which was strong. And we remain committed to our 2015 investor objectives.

Our next question comes from the line of John Aiken with Barclays.

Colm, in terms of the reinsurance restructuring, the release of capital as mentioned in the MD&A of $250 million, is this coincident with the anticipated gains over the next little while? Or I guess, to say it another way, is this dependent on the regulatory review that's ongoing as well? Or should that capital be released regardless of what happens?

Yes. So you're 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 U.S. has the caveat, that it is an area where the NIAC is performing a review. But our stance and positioning around this has been very rigorous, and we think the approach we've taken is very solid. So we do anticipate that $250 million to be returned over time as well.

And a follow-on the Sun Life Investment Management. Has there been any significant increments of cost 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 we -- as we announced last week, we're 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'll turn it over to Steve.

Yes, it is a -- obviously, it's the new business that we're launching, so there are some initial upfront costs, we think, in terms of time frame to breakeven. 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's really the core of the expense, and we have already got that. And that's worth noting.

Our next question comes from the line of Doug Young with Desjardins Capital Market.

I guess the first question I have is just around Canadian Individual Insurance, and I've just been hearing that we're starting to see price reduction, but I think, specifically, in the level cost of insurance universal life product. I just wanted to see some color if that's what you're 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 kind of aspect. At the end of the day, I think our positioning is still 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're well-positioned for continued momentum in growth.

Why is that price cut 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're not seeing signals of any major changes in pricing across the industry.

Do you sell level cost of insurance you owe through the wholesale channel, or is it just through the capital 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 sort of -- some of that would be UL, some of it -- a lot of it would be par and term and critical illness.

Sorry, Doug, it's Dean. Just to add to that, I think 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 available 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're on the line, just if I look at net sales and I look at last year versus this year, they're obviously down. And I know last year, you had $6.7 billion of variable annuity, internal variable annuity floats coming in, which you got to cutting that out. But if I back that out, we still had net flows down. Just wondering, is there anything in there that's concerning? And just, I wanted a bit of an update in terms of what you're seeing from a net flow perspective.

Yes, Doug, thanks for the question. Our business is really 2 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 2 of our largest strategies that we sell around the world, Global equity and International equity. And it takes a quarter or 2 for the sales force to reorient themselves to other products, which we have capacity in to sell. And going forward, the growth of the firm, from a net point of view, is going to slow relative to where it has been in the last 3 to 5 years just because of the size of MFS. As you get bigger, it gets harder to get the growth sales, which leads to the net. So going forward, on average, you're going to see net numbers around $3 billion to $5 billion and it depends on what's 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'll see the first quarter jump around relative to the fourth. But on average, $3 billion to $5 billion is what you should look at.

Our next question comes from the line of Peter Routledge with National Bank Financial.

Just similar questions on the captive. I think you have about $350 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 captive's balance sheet, like, how much liabilities are they offsetting?

Well, the absolute amount of the arrangement currently is $2.1 billion of excess reserves that are funded by senior debt, and that's what drove 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's more in the $1 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 U.S. 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 it is a U.S. 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?

No, I don't think we would think about it from the point of view of the capital invested. I mean, it's a block of business, it's on our books. We reserve for it and we account for it and that -- 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.

Our next question comes on the line of Mario Mendonca with TD Securities.

Colm, help think through the benefits of the debt paydown. There's the benefit of lower interest cost, of course, but there's the offsetting effect of lower investment income on that $500 million. Given where rates are and where that debt is priced, what is the sort of the net ongoing impact you would take an offer?

Well, I think I've seen a couple of people have estimated around $0.05, would be the impact. I think that's a reasonable guesstimate. And if you think about the coupon, it's very significant at the moment. And the opportunity to deploy cash on our balance sheets with the current low interest rate environment, I think, gets you to a figure around that $0.05.

For the year?

Yes.

And then a quick follow-up. On the strain, the $20 million to $30 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 '13 and 2012. What was the logic in seeing that number move back up again?

Well, we look at this over the course of the 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 $8 million. So when you hear me talking about $20 million to $30 million, you might say that's 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're 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 $30 million to $40 million. We're now talking about $20 million to $30 million. We're keeping a close eye on this because to the extent that we're taking terrific actions around product design and repricing, et cetera, we may be able to bring those lower and we'll 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, it depends on -- you see some strain in Asia, for example, with their 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.

Our next question comes from the line of Steve Theriault with Bank of America Merrill Lynch.

A couple of follow-up questions, maybe just starting with Kevin Dougherty, if I could. Career sales for individual insurance were -- that's a little sluggish through the year, so maybe you could talk a bit about what's driving that and your outlook for next year. I noted your agent count's up pretty significantly, and I'm 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 result, 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 that mix between growing protection sales and wealth sales. And over the course of the 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 Sales Force. And of course, you saw what would happen in wholesale. It's very, very strong as well. Our agent count on the year, yes, it was up 115 and that's actually the sixth year of growth in our Career Sales Force. And so if you go back in time to 2008, we're around 3,300. And we closed the year at 3,828. So very, very strong growth in our Career Sales Force over extended period of time. And this is showing up in both growth and protection sales and in wealth sales with 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 3 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've been doing is we've been moving people into mutual fund licensing more earlier in their career and that's helped us with both retention and the growth on the wealth side.

All right, okay. I've wanted to ask also a follow-up on the reinsurance restructuring. Lots of moving parts. You highlighted the $2.1 billion of outstanding debt that's now related to the legacy U.S. funding structure. I'm 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 the -- what I'm thinking about is the run-off of that $2.1 billion. Is there potentially the ability to accelerate it? Is the rundown in that sort of implied within your $15 million to $25 million of annual earnings? Or is there a chance that, that rolls off and the interest cost can contribute a little more incrementally to the bottom line?

Yes, so just on the question of the maturity profile. So in 2015, there's about $600 million of that, that comes due. And 2016, there's $950 million. And then in 2019, there's a further $300 million. And in 2021, a final $300 million. So you can see that it runs off over a period of time. Now, we don't expect to call early. There are no features 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 really is assuming that these payoff over the periods that I just mentioned and that they don't get refinanced, and then we have a more effective cost structure going forward.

Our next question comes from the line of Darko Mihelic with RBC Capital Markets.

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, what I'm -- I just want to make sure there isn't anything structurally that's changed on the tax side.

Well, Darko, there's no particular structural issue. I mean, clearly, we have performed better than the range in recent quarters and recent times. And as we project that and do our planning for 2014, 2015, we have to determine a tax rate, and the tax rate we're thinking of is more at the higher end of that range, still within that 18% to 22%. And we'll certainly be giving you that sort of update. But clearly, we look to ways to make sure that we're -- 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.

And so it's more like a business mix issue rather than tax structures running off or the reinsurance alteration. It's really just about business mix. Is that what I'm...

Well, I think all of that, and tax is complex. We -- obviously, with the sale of the U.S. business, that affects our U.S. tax profile. But we're always looking for ways to be the most efficient we can be and that's probably the color I'd like to give you around that.

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

Thank you, operator. I would like to thank all our participants today. 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.