Sun Life Financial Inc. (SLF) Q4 2013 Earnings Report, Transcript and Summary

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 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 2 years, we have grown agency headcount in our wholly-owned businesses in Asia by 50%. U.S. Employee Benefits Group distribution and 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 4 pillars of growth. Slide 8 provides an overview of our progress and successes across the 4 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's the 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 3 full years of operations and grew AUM to over $7 billion by year end. Next, to our U.S. businesses. In 2013, we launched new products in voluntary benefits and stop loss. 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 USD 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 1-, 5- and 10-year performance for each of the past 3 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 7 markets. We were successful in attracting top talent to Sun Life Asia. And we're pleased with the build-out of distribution, as I mentioned earlier, and I can tell you, there's 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 across both Career Sales Force and independent channels. Our Career Sales Force continued to grow, up 115 over last year, reaching total sales power of just over 3,800. And the number of third-party advisors 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 3-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 $394 million, and we had sales of almost $500 million in our Defined Benefit Solutions business, bringing the full year total to $1.2 billion. Moving to Slide 10. We continue to generate growth in our U.S. 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 stop loss 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 businesses 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 USD 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 3-year performance. MFS also expanded its product set with new low-volatility mutual funds for U.S. retail investors. All of this activity has translated into strong earnings growth. Distributable earnings from MFS, represented by the dividends that Sun Life has shown on this slide, have increased 82% over the past 2 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 #1 position in that market. We continue to grow distribution, exceeding 5,200 advisors 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 continue to expand our agency force, now at over 7,100 advisors at year end. And finally, we generated strong sales in our 2 new businesses in Asia, in Vietnam and Malaysia. And in Vietnam, our sales force now numbers over 3,400. 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, in getting closer to our customers, are all creating momentum as we drive toward achieving our 2015 objectives. 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 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 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 $2.1 billion at the holding company, SLF Inc. Yesterday, we announced our intent to redeem $500 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 $37 million to earnings in the quarter and to operating net income. Excluding the impact of market factors, operating net income was $605 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 $22 million, and the net impact from interest rates, including swap and credit spread movement, was a contribution of $40 million. As previously communicated, we took a charge for the decline in the ultimate reinvestment rate in the quarter which amounted to $37 million, which reduced our net interest rate impact to an overall $3 million. We also recognized a gain of $12 million from an increase in the fair value of real estate investments in the quarter. We have provided more details on the impacts of the market factors in the appendix. Overall, in 2013, we incurred $86 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 $40 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 $167 million in Q4, reflecting assumption changes and management actions of $230 million, in particular the $290 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. At Q4, operating expenses were up 12%, or $128 million, over the prior year. Excluding the impacts of currency and of expenses at MFS, including share-based compensation, expenses increased 5%, or $40 million, primarily reflecting increased volumes and growth-related investments in roughly equal amounts. Finally, gains from investing activity in the fourth quarter were $11 million, within our expectation of $10 million to $20 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 for continuing operations. Expected profit of $591 million increased by $141 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 $8 million, representing an improvement of over $27 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 & Investments, higher sales on Individual Insurance and in our Defined Benefit Solutions business, as well as the impact of higher interest rates. We benefited from a better mix of international life products at SLF U.S. 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 $20 million to $30 million per quarter, an improvement from the $30 million to $40 million range discussed last year. We experienced losses of $143 million, which reflect the impact of market factors and other notable items described on the previous slide. Assumption changes and management actions generated $213 million before taxes, primarily from the restructuring of the internal reinsurance arrangement mentioned previously. Earnings on surplus of $92 million were higher than the fourth quarter of 2012 and benefited from higher investment income in the quarter. Income taxes of $58 million are below our expected range for our effective tax rate of 18% to 22%, due largely to a tax benefit of $79 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 $137 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 reflect the 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 and higher term and health sales in the Career Sales Force 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 Benefits sales declined marginally due to lower activity in the large case market relative to a year ago. Group Retirement Services sales were up slightly, with strength in Defined Benefit Solutions. Moving to Slide 18. Our U.S. business reported operating earnings of USD 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 of the claims liability in the Employee Benefits Group. Total EBG sales in the quarter increased 17% compared to a year ago. Within EBG, voluntary benefits 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 USD 148 million, up 74% from a year ago, driven largely by higher average net assets under management and a onetime 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 40%. Total assets under management as of December 31, 2013, amounted to USD 413 billion compared to USD 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 $42 million compared to income of $50 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 fourth 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 Sales Force. Wealth sales in Asia continued 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'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 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 for 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 the 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'll 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 would 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'll 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 had successfully pursued for decades for its own balance sheet can also help other institutional investors to meet their goals. And we're 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. [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.