Sun Life Financial Inc. (SLF) Q4 2015 Earnings Report, Transcript and Summary

Good morning. My name is Chris and I will be your conference operator today. At this time, I would like to welcome everyone to the Sun Life Financial Q4 2015 Financial Results Conference Call. [Operator Instructions] Thank you. Gregory Dilworth, Vice President, Investor Relations, you may begin your conference.

Thank you, Chris and good morning everyone. Welcome to Sun Life Financial's earnings conference call for the fourth quarter of 2015. 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 fourth quarter and full year results by Dean Connor, President and Chief Executive Officer of Sun Life Financial. Colm Freyne, Executive Vice President and Chief Financial Officer will present the fourth quarter financial results. Following Colm's remarks. Steve Peacher, Executive Vice President and President of Sun Life Investment Management will provide an update on Sun Life's investment portfolio. After the prepared remarks, we will move to the question-and-answer portion of the call. Other members of management will also be 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. And with that, I will now turn things over to Dean.

Thanks, Greg and good morning everyone. Turning to Slide 4, the company reported strong results for both the fourth quarter and the full year in 2015. Underlying net income for the fourth quarter C$646 million up from C$360 million in the same period last year and our underlying return on equity was 13.8%. Underlying net income for the full year was C$2.3 billion, up 27% from the C$1.8 billion underlying net income, we reported last year. Earnings were higher across all four pillars. Including a 12% increase in expected profit and the benefit of currency that comes from our geographically diversified business model. Growth was balanced between wealth and protection. With double-digit earnings growth each over the same period last year. Insurance sales were C$2.2 billion of annualized premium and sales of wealth products totaled C$123 billion in 2015. Assets under management grew to C$891 billion. Over the course of the year, we deployed a substantial amount of capital to drive long-term earnings growth and ROE improvement, to both organic and inorganic initiatives. We also increased our quarterly common share dividend by 8% and repurchased and cancelled over 5 million common shares. The value of our four pillar strategy, diversified business mix, de-risking actions and investment in growth, were quite evident in 2015. On the one hand, commodity prices fell, the TSX declined and interest rates were lower, all creating headwinds for SLF Canada. On the other hand, our businesses in the US and Asia benefited from stronger economic growth in those markets and in currency that appreciated against the Canadian Dollar. Turning to Slide 5, I'll discuss a few key highlights for the quarter. In Canada, our Defined Benefit Solutions business continued to bring innovative client solutions to the market, with a groundbreaking C$530 million combined annuity buy-in transaction, the largest group annuity transaction in Canadian history. Together, with C$5.3 billion longevity transaction with BCE earlier in 2015, we've established ourselves as the clear leader in the pension de-risking market in Canada. In our Individual Wealth business, Sun Life Global Investments completed its fifth full year of operations, with 15 out of 17 funds with five-year performance records exceeding the peer median. Retail sales of SLGI mutual funds were C$383 million in the quarter, an increase of 88% over the same period last year. And our new suite of segregated fund products Sun Life Guaranteed Investment funds generated sales of C$125 million representing over 80% of our total seg fund sales for the quarter. In individual insurance, our career salesforce grew to 4,100 strong surpassing our 2015 objective and Q4 insurance sales reached C$100 million of new annual premium for the first time. Turning to asset management, Sun Life Investment Management completed its first full quarter following the completion of the acquisition made in 2015. Generating gross sales of C$2.2 billion and ending the year with assets under management of C$58 billion. This business has come a long way in just under two years. MFS ended the year with assets under management of US$413 billion and achieved an operating margin of 38% in the fourth quarter, in line with our communicated range. The volatile markets of 2015 once again demonstrated the power of MFS's investment style, which is to focus on alpha generation over longer horizons, while managing downside risk for clients. This strong performance was recognized this past weekend, when Barron's ranked MFS number five out of 67 mutual fund families in its Annual Ranking of US Asset Managers. And not only was MFS ranked number five for one-year results, but it was ranked number one for five-year results and number two for 10-year results. This remarkable result is a team effort and one that speaks to MFS's long-term focus and unique culture. Net outflows of US$4.7 billion were improved from last quarter, but flows nonetheless continued to be impacted by industry trends and the prior closing of certain funds to new sales in order to protect client's returns. Turning next to the US, we continued to make good progress in improving the profitability of our group life and disability business. And we see that in the significant improvement in underlying earnings year-over-year. Sales and group benefits overall were lower by 9% reflecting repricing in this business to balance business growth and profitability. With our most recent January 1, renewals we've now repriced just over half of our group life and disability business and we're well positioned to begin the integration of Assurance Employee Benefits business when the transaction closes in the first quarter of 2016. In December, we ceased sales in our international wealth business, where we were subscale. In order to accelerate our efforts on international life insurance, where we have a leading position serving high net worth clients outside of North America. For global high net worth clients, accessing life insurance solutions that safely and efficiently support estate planning needs is a key priority and we're committed to growing this business. Moving to Asia, we strengthened our presence in the region, this quarter signing agreements to increase our joint venture ownership positions in India and Vietnam. These investments are directly on strategy and support our intent to make Asia, a larger part of Sun Life. Overall sales of individual insurance products in Asia were up 11% reflecting currency higher agency sales in most markets and strong growth in health and accident sales. Asian wealth sales were down primarily in India and China, where we had benefited from higher sales in the fourth quarter of the previous year. In Slide 6, I'll make a few remarks on our performance for the year, overall. I'm pleased to report, that we've not only delivered, but well exceeded our Investor Day objective of C$1.8 billion of net income in 2015. And have achieved a return on equity that was at the top end of the range. We achieved these results in the phase of a challenging economic environment, all while strengthening our businesses and continuing to invest in our future growth. In 2015, we committed C$2.4 billion in capital through six acquisitions, adding both heft and capabilities in asset management, US Group benefits and our Asian pillars. The investments we've made to drive organic growth, also benefitted from strong execution in 2015. In Canada, Sun Life Global Investments delivered C$1.1 billion of retail net sales for the year, up 75% over prior and pretty remarkable from a standing start just five years ago. The new Seg fund platform was well executed, with C$259 million of sales, since the launch last May. Defined Benefit Solutions had a fine year. With the large sales that I described a moment ago. We launched a Digital Benefits Assistant and more recently, we rolled out something called MAX my Money @ Work in group retirement and this is a digital enrollment tool that nudges and helps plan members to take full advantage of their retirement savings at work. In the US, the investments we made in disability management along with pricing and expense actions led to significant improvements in the profitability of our Group business. And in Asia, we delivered on one of our most ambitious 2015 net income objectives. Underlying earnings in 2015, grew by 45% over the prior year from growth in our in-force based, a favorable business mix and the benefit of currency. We continue to see good progress on our most respected agency initiative, which is being reflected in greater productivity and an increased number of advisors in several markets. We've also executed well on growing higher value, health and accident benefits to be a greater share of our sales. So as we close the books on 2015. I'm proud of what we accomplished in this milestone year of our 150th Birthday. We're making real progress in each of the four pillars and maintaining a strong focus on growing the right businesses in the right markets. In January, 2016 Sun Life was one of 12 Canadian companies and the only North American life insurer to be included in the newly launched Standard & Poor's long-term value creation global index. The index is comprised of 246 companies globally, that have demonstrated a sustained history of financial quality and a focus on long-term strategy, innovation and productivity. We're six weeks into 2016 and volatility and uncertainty permeate the markets. But the steps we've taken in recent years to de-risk the company, to shape the four pillar strategy. To acquire strategic assets and to invest in the right talent, have positioned us well with growth options in each of our four pillars. I'll now turn the call over to Colm Freyne, who'll take us through the financial results.

Thank you, Dean and good morning, everyone. Turning to Slide 8, we take a look at some of the financial results from the fourth quarter of 2015. Our operating net income for the quarter was CC$598 million up from CC$511 million in the fourth quarter last year. Operating net income for the quarter excludes an adjustment of C$66 million, which consists primarily of restructuring cost of C$22 million and assumption changes of C$41 million, to reflect our best estimates on expense and policyholder behavior impacts associated with the decision to close the international wealth business to new sales. We do not expect closing this business to new sales will have a significant impact on our future results. We will continue to generate earnings from managing our in-force block of international wealth business, as it runs off over the next several years, while at the same time growing our international life business. Underlying net income, which excludes the net impact of market factors and assumption changes was up significantly to CC$646 million. Our underlying return on equity was 13.8% for the quarter. Fourth quarter adjusted premiums and deposits were C$30.9 billion. Assets under managements were C$891 billion, an increase of 5% from the third quarter. We maintained a strong capital position, ending the year with a minimum continuing capital and surplus requirements ratio for Sun Life Insurance Company of Canada of 240%. Excluding the impact of C$1.25 billion of preferred shares issued by Sun Life Insurance to Sun Life Financial Inc. in connection with the acquisition of assurance employee benefits business and a partial recapture of the reinsurance agreement in our Canadian Group Benefits business. The MCCSR ratio was largely unchanged from the third quarter. And we close the quarter with a cash level of C$1 billion with the holding company, SLF Inc. Turning to Slide 9, we had solid growth in underlying earnings across all of our businesses. We benefit from diversification in terms of the businesses we manage as well as the geographic regions in which we operate. In the current environment and with over 50% of our earnings generated outside of Canada, this geographic diversification is generating benefits from currency translation. In SLF Canada, underlying earnings reflect favorable investing activity, favorable disability experience in group benefits and gains from new business in Group Retirement Services. Throughout 2015, we made investments to grow our wealth business and enhance our group disability capabilities. In SLF US, underlying earnings also benefitted from favorable investing activity and improved claims experienced in our Group business. Credit experience was positive again this quarter. And we benefited from a one-time adjustment related to modifications to our US post-retirement benefits plan. Sun Life asset management, which includes the results of MFS and Sun Life Investment Management has a strong quarter. At MFS, operating margins remain solid at 38% despite lower average net assets. Sun Life Investment Management generated net income of C$9 million. In Asia, underlying earnings results maintained the momentum reflecting business growth across number of markets. Most notably in the Philippines and in Hong Kong. Turning next to Slide 10, we provide details on our sources of earnings presentations. Expected profit of C$680 million increased by C$83 million from the same period, a year ago. Excluding the impact of currency and the results of SLF Asset Management, expected profit was up 1%. As business growth in Asia and our stop-loss business in the United States was offset by lower levels of expected profit, in Canada. New business gain was C$30 million for the quarter. The improvement of C$13 million over the same period a year ago, was driven by pricing gains and Group Retirement Services, Defined Benefits Solutions business. We believe, that our expected range for new business gain of C$40 million to C$50 million per quarter remains appropriate, but experience will fluctuate, as we solve this quarter. Experience gains of C$84 million for the quarter reflect favorable investing activity positive experience in credit, mortality and morbidity and retiree benefit plan changes in the US. Investing gains of C$73 million were particularly strong reflecting higher level of tactical trading activity and ongoing portfolio repositioning. Offset some of these gains were the unfavorable impact of the market factors and expense experience from higher seasonal cost including compensation expenses related to long-term incentive accruals as a result of strong relative performance of Sun Life. We continue to manage operating expenses tightly achieving a balance between organic growth and productivity improvements. Lapse and policyholder behavior experience in the quarter was largely in line with expectations following management actions and assumption changes made in the third quarter of 2015. Further details on the impacts of market factors and other experience items, have been provided in the appendix. Assumption changes and management actions resulted in the strengthening of reserves by C$20 million. Earnings on surplus of C$112 million were C$8 million higher than the fourth quarter, a year ago and benefited from higher investment income, along with currency translation gains. Income tax is at C$190 million represent an effective tax rate of 23% in operating net income, which is just above our expected range of 18% to 22%. On a year-to-date basis, the effective tax rate is 20.7% and at the midpoint of our target range. The higher rate in the fourth quarter includes the impact of a change in the tax rate in our UK operations. On an underlying earnings basis and adjusting for the impact of all notable items, the effective tax rate for this quarter was 21.5% and in line with our expectations. Slide 11 shows sales results across our insurance and our wealth businesses. Sales for the fourth quarter on a Canadian Dollar basis includes some notable movements to the currency. On a constant currency basis, our total insurance sales were down 16%, as sales growth of individual life and health products in Canada and international life, were more than offset by declines in US Group from our repricing actions and strong sales in the fourth quarter of last year in the Canadian Group business. Total wealth sales of C$29.6 billion were lower by 13% on a constant currency basis, primarily as a result of lower sales of mutual and managed funds at MFS and in Asia. Turning next to Slide 12, we present a breakdown of the change in our year-to-date operating expenses over the prior year. Overall operating expenses for 2015 were C$5 billion up by C$500 million or 11% over the prior year period. Excluding the impact of currency and MFS expenses were C$3.1 billion, an increase of C$150 million or 5%. Total year-to-date volume related expenses which are directly driven by sales and asset levels increased by C$86 million over the prior year. The net impact of inflation and investments in growth net of productivity gains and one-time items increased operating expenses by C$64 million or 2% compared to a year ago. Drop up, we achieved strong results for the quarter and for the full year in 2015. We continue to grow our earnings, while navigating a challenging environment for equity markets and a continued backdrop of low interest rates. At the same time, we're investing in our businesses to generate future growth for our shareholders. And as we look to 2016, we expect market volatility to continue but remain confident in the resilience of our operations and the diversification, that our balanced business model offers. And with that, I would turn the call over to Steve to speak to energy exposure in our investment portfolio.

Thank you, Colm and good morning. Turning to Slide 14, I'll spend a few moments on the topic of our energy exposure. The energy sector is been drawing a lot of interest, as oil prices have hit multi-year lows. As a large financial institution with a diversified investment portfolio, we have investments across all major sectors including energy. Our total debt securities and corporate loan's exposure to energy is C$5.6 billion, which accounts for 4% of our total invested assets. The assets we hold are of high quality with 93% being rated investment grade as at December 31, 2015. Our largest energy sub sector exposure in our portfolio was pipeline at 44%. Pipeline facilitate the transpiration of crude oil, natural gas and refined petroleum products from the producer to the end user. And the majority of our exposure is with a few of the largest pipeline operators. These pipelines make their money by charging set fees for transporting energy products from one place to another and then storing them. Most of their profits are insulated from oil and gas prices. These pipeline operators tend to be heavily regulated and have stable cash flows from long-term contracts. We do have exposure to other energy sub sectors such as exploration and production and drilling and servicing that are more directly impacted by the price of oil. However, these firms make up a smaller percentage of our portfolio. We have actively managed our energy holdings. And last year, we reduced our exposure to issuers that we deemed to have heightened credit risk. We will continue to assess our portfolio and the market, looking for opportunities to further reduce risks as appropriate, while also looking for attractive opportunities created by the recent market turmoil. Our stress test continue to indicate that our biggest risk, is that of issuers falling to below investment grade or moving down within the investment grade category. Although, we do anticipate that some investment grade holdings will be downgraded. We believe, these companies have the financial flexibility to weather a period of sustained to low prices. Our real estate and commercial mortgage holdings in Alberta are approximately C$1.4 billion and C$1.2 billion respectively. The region continues to see real estate and economic fundamentals deteriorate, however our portfolio remains solid. There have been no material increases in receivables. Our vacancy levels remain similar to last quarter. No mortgages are in default and construction loans are being paid. Well we have not experienced a meaningful decline and value of our Alberta real estate portfolio to-date. A prolonged economic downturn in the region would likely lead to weaker prices for commercial real estate. To conclude, while we may experience further credit downgrades in coming quarters. We have a manageable exposure energy that we constantly risk managed. And with that, I'll turn the call over to Greg. Before the Q&A portion of the call.

Thank you, Steve. To help ensure that all of our participants have an opportunity to ask questions on today's call, I would ask each of you to please limit yourselves to one or two questions and then to re-queue with any additional questions. With that, I will now ask Chris to please pull the participants for questions.

[Operator Instructions] and the first question is from Steve Theriault with Bank of America Merrill Lynch. Your line is open.

So if I could start with MFS. Mike, question on expenses. I noted, your expense line is actually down slightly in 2015. So can you talk a bit about the sustainability of that type of expense control looking ahead to this year. And you've talked about in the past, the necessary expenses like new order entry system and I think some compliant systems. Are you thinking of slowing these expenditures in the current environment or is it still full steam ahead, with what you'd probably call necessary spend over time.

Good morning, Steve. This is Mike. Yes, if we think about expenses. Later in the year, I mean some of that was tax spend which we had budgeted for, which did not get made in 2015. As we look into 2016, obviously with the market environment, as it is currently. We're being very careful and controllable expenses. At the same time, investing in some of the larger and longer term infrastructure projects as you mentioned. We are certainly sensitive to the market environment and what that means for margins. But, we've also got clients we're managing money on behalf of over the long-term. So we think about investing in the business that way as well. So we say, those things are controllable. We're being very careful with, those things that are very long lasting, we are going to continue to invest in the business.

Is it realistic to think? You can keep it flattered, does it drift higher necessarily. In terms of just absolute spend or can you contain discretionary expenses efficiently.

I mean, if you think about some of the expenses that do flex. There are expenses that do flex, as revenues come down. System of our asset-based fees with our distributors. Clearly compensation is a line item that will flex down, given the environment that we're in. But, we're not providing any guidance on expenditure. We'll see what it looks like, as a year goes on. We've had a couple of instances over the last couple of years. Where we've got into market correction and the market has bounced back and so, you don't want to over react to a slight downtick in the marketplace, having said that. We're obviously going to be sensitive to the P&L, if we do in fact continue to see pressure in the market.

Okay and then just quickly on profitability. You've been pretty clear with your target of a margin in high 30% to 40% range. This is the first quarter, we've seen a dip below 40%. I think in a year or so, so can we still hold you to that target in this challenging environment or is there a chance of some slippage with AUM likely coming down and getting Q1 and who knows what is in store for the rest of the year.

The guidance that we put out there and Rob's reiterated over a number of quarters. In a normal environment, we think that we can hold high 30% to 40% margin. I would caution people that, we don't think this is the normal market, where you've seen a pretty significant correction in the marketplace. If you look at other asset managers in the fourth quarter. You begin to see it. You're going to see it in the first quarter. As you're going to see margin contraction in the industry as the markets come down. And so we're not providing margin guidance at this point in time, given what's going on in the marketplace. But you should expect industry margins and asset management to contract some, given the environment that we're in.

Okay, that's fair. If I could ask, for I'm not sure Colm, Steve or Larry. The impact from investment activities was a big driver again this quarter. We now seen a couple quarters of meaningful contribution after. It's been pretty nominal or even negative the last couple of years. I raised this last quarter, but can I get some more detail. Are you taking advantage of the shape of the yield curve or the swap curve or you selling treasury like securities to buy private? What I like to know. Is there a pipeline here of gains or is there any intention here to continue to migrate the portfolio and generate gains here more consistently, which could provide positive surprise looking out next year?

Steve, its Colm here. I think you're right to call out the absolute level of invest in gains, this quarter at C$73 million was that, it was on the high side certainly relative to prior quarters over the last couple of years. I think, if you look back over prior quarters, you've seen us in the C$30 million and on a number of occasions and we think that's a more sustainable level. Now we'd given in the past, we've talked about invested gains in the C$10 million to C$20 million level. So I wouldn't move away from that at this point. But we have attempted to beat that in recent quarter and that C$70 million that's definitely a larger contribution. In terms of the reasons for that or a number of reasons across a variety of areas. You're right to think of it, as being partly tactical. For example, taking advantage of some of the movements in interest rate swaps and maintaining our hedging strategies, but moving into different instruments, would be an example of that. There are some durational lengthening as well, that we've availed off. So in number of areas, I wouldn't call that any one particular one, that's being the big driver, that we certainly caution you, not to expect a level of that magnitude on the recurring basis, but to expect some ongoing level of contribution from this important source of earnings.

Okay, that's helpful. Thanks very much.

The next question is from Meny Grauman with Cormark Securities. Your line is open.

Just wanted to ask about, the buyback no activity this quarter. I'm wondering, what your views on the buyback are in light of the valuation of the shares and just how you think about buyback especially during times like this, where the shares are under pressure?

Meny, its Colm here. So, the buyback the normal course issuer bid did come to an end in November and we did not renew. As you know, we have a number of transitions that were in the midst of closing on most importantly, the Assurance transaction. So we are continuing to deploy capital, just not into share buybacks at this point in time. Now we do intend, over the course of 2016 to settle shares that are offered under the dividend reinvestment plan to settle that through open market purchases. So you can think of that as a form of utilization of our cash and capital. We'll come back to the topic of buybacks to later point, but at this stage we're not in the market. We don't have a normal course issuer bid in trained [ph].

Thanks for that and then if I can just as a follow-up question on credit. You went into detail on the exposure to energy in Alberta. I'm wondering, when you look at credit and how it's unfolding, is there anything unusual that kind of puzzles you given, all this stresses that we're seeing in Alberta in particular or do you view this as just, a normal sort of, the timing is been normal and just kind of more of a way to see approach.

Well, maybe I could [indiscernible] and then I'll turn it over to Steve. In terms of the experiences on the credit, the C$18 million that was quite consistent with the run rate level that we saw over the course of the year. So again the types of things that we're contributing in prior quarters, many were contributing again this quarter. But if you take a look forward into 2016. Obviously, Steve will be in a place, to comment on that.

Yes, the last few years as we all know have been very benign years in the credit markets and with a such a big drop in energy prices and commodity prices. You're now seeing stress amongst some of the largest issuers and you're seeing rating actions. I think the rating agencies will be aggressive in terms of lowering their commodity prices options and factoring that into rating. And so, I don't know if I mean, so we've clearly seen a very large drop in energy prices. You see big moves in certain commodities from time-to-time. So I'm not sure that's unusual, but I think, the impact that we're - that the market will feel in terms of downgrades for instance in the investment grade space or stress in the Alberta real estate markets. Is really going to be a function not if where oil is trading today, but where it trade to a year, two years, three years from now. If we did have some help there projecting bounce back in oil to the C$50, C$60, C$70 level over the next year or two. I think, a lot of the concern in the market will reverse. So I really think it's going to be about the timeframe for declined prices and I think, the impact of that will playout over the course of the next couple years.

So just to clarify, I guess if one assumes that oil is going to stay where they are, then if you look out for 2016. Would you say that you don't expect too much stress in 2016? It's the pain would be felt largely farther out.

I expect, that if we continue to see energy prices at the same level at the end of 2016, that we're seeing today. I expect to see more downgrades across the market. So and I think, as I mentioned in my remarks, I think that's where, we would be most at risk. Our portfolio starts in from a very strong position, the vast majority of our bond holdings in the space are investment grade rated. If you look at our mortgage portfolio and real estate portfolio, we've got a very solid mortgage portfolio in Alberta. We've got very strong real estate holdings. I think on the real estate front, that will clearly lag. So I wouldn't expect to see dramatic impacts there over the course of this year, if energy prices don't improve. I think that would play out over the next two to three years. What I do think, we would see over the course of this year, are credit downgrades.

Thanks for that.

The next question is from Humphrey Lee with Dowling & Partners. Your line is open.

Just a follow-up to Steve, regarding your energy portfolio. How does a one notch downgrade of your energy portfolio will affect your MCCSR ratio?

Well, I don't have an exact number to give you, what we have as we have looked at our stress testing and looked at potential downgrade scenarios. I would say that the impact of on our capital ratios, across the board one, weather downgrade across all of our energy holdings, would not have a meaningful impact on our MCCSR ratio. Colm, may want to comment further. But we have looked at that and we think it is very manageable.

No, I would agree, Steve. Downgrade of that order would not be a significant impact on the probably MCCSR's.

Got it and then maybe a question for Dean. In the US for monetary benefit sales. There were down roughly 23% year-over-year. Even though your decrease in group and health sales were less unfavorable. Any color on what's going on there for your long trade benefits? Is there kind of some pending some impacts from the pending acquisition of Assurant's employee benefits?

Sure, Humphrey. The real issue, the areas that in the first category life and health that also includes our stop loss business. And we've had very strong sales there, sales there actually up year-over-year and that has counterbalance any decrease in group sales. The voluntary category is exclusively a group life and disability category. So, you see some decline there. And we've seen that pattern really throughout the year as we took a more rigorous approach on pricing, over the past 18 months. So there is no impact that's related to the Assurant acquisition or other factors.

All right, got it. And then, any update or color in terms of the integration with Assurant's when a deal closes in the first quarter.

Sure, we've had teams working very closely together to plan out the details of the integration and that's going quite well. We're pleased with the progress. We also have obtained nine of 13 regulatory approvals so far and are working through the last few approvals and are optimistic that we should be up close, within the next 30 days to 60 days.

Got it, thank you.

The next question is from Robert Sedran with CIBC Capital Markets. Your line is open.

I just wanted to come back to the credit issue for a moment and really come at it from a procedural perspective. You've been booking experience gains for the past many quarters. Is there anything, I guess procedurally that might allow you to rather than run the game to earnings to build your reserves and or is based exclusively on ratings actions, either internal or external, on what you're holding? Can you layer in conservatism just because you've been having good credit experience?

Steve, perhaps I'll take the first part of that question around the accounting and you could speak to the piece around the conservatism of approaches. I think from an accounting perspective. We follow the methodologies that are well laid out in our material. So it's not a question of setting something aside, without taking an action. You have to take a commensurate action and we have been taking action to deal with particular credits that we may not be as comfortable with, so that would be coming through and you'd see that, if therefore in the credit experience will be a net number reflective of actions that we've taken. If we were to take more actions obviously that net number would be reduced number. And so that's what I would say from the accounting perspective. We haven't taken any kind of general provision against this and circumstances don't want them, out at this stage.

I would just add that, from an investment perspective. As we look at these holdings and we assess the market. We try to take them, we do our stress testing. We try to take in appropriately conservative approach. And so, we're trying to be conservative when we think about the outlook for energy prices. We try to be conservative and we look. When we think about how that may impact certain issuers or impact real estate markets for instance in Alberta. So I get that, we just emphasize that we try to look through a conservative lens as we analyze, our portfolio in this area.

Okay, thank you and well I'm not sure if it's a quick question, but a question on Asia and specifically first, can you confirm or I guess, tell us whether there are any meaningful sales to say in Hong Kong, to coming out mainland China, first off and then just generally because we're hearing so much about Asia these days. Can you talk about the operating environment that now that you're seeing?

It's Kevin Robin and I'll give some color to that. Specific to Hong Kong, we're actually one of the smaller company in terms of percentage of sales, that come from the mainland Chinese market. The industry is running close to 30% and we're running closer to 10%. Do you think that will have an impact with some of the new regulatory rules coming out of China? We don't see that impacting us too greatly and in the quarter, our sales were up 16% and Hong Kong on the local currency. And we're seeing our agency grow there and we still see lots of opportunity in the broker channel and our pension business continues to do quite well. There is no doubt, that you're going to see. The industry is slowing down in Asia for variety of reasons. Market volatility and some economic slowdown. I think that we're still going to see growth overall. And if you looked at our quarter. Dean had mentioned earlier, sales were up 11%, but in constant currency. Hong Kong as I said was up 16%, Indonesia was 6%, Malaysia was up 40%, India was up 4%. Yet the agencies sales in India up and encouraging, 20%. The Philippines is off a little bit and that's after a really strong run for the year and I expect the Philippines will sort of come back in line next year and will show us some good growth. Our China sales were down. And that's primarily refocusing on B&B, higher B&B products. So net B&B for Asia was up 29% in the quarter and our health and accident sales were up 49%. So I see from slowing, occurring. I especially see some slowing from an industry perspective, but I think we have a lot of good initiatives. In particular, we're seeing really strong agency growth. We saw agency growth in Hong Kong, Indonesia, India, China and Vietnam. And if we continue to execute on that ,we should still continue to see strong growth for our business. But I do think there's some headwinds there. And in particular as we head into 2016. And so you saw some of that really strong growth in the first half of the year, slow down a little bit for Asia, in the second half. In addition to, the growth we had, we've been investing back into the business, investing into distribution and investing in digital and that should also have a positive impact next year.

Thank you.

Your next question is from Gabriel Dechaine with Canaccord Genuity. Your line is open.

I've a quick one and then one on the Alberta stuff. The quick one, as you put your offshore seg fund, VA business into run off. I'm wondering if that's going to have any noticeable impact on your earnings. Whether that was generating gains on sales or anything like that. And how much of that's going to be offset by the reinsurance, recapture which is in the Group business in Canada, I believe.

Yes, so. Gabriel, its Colm here. I'll just take the second part of that question. And turn it over to Dan on the international wealth discussion. So on the, Group business in Canada yes, you're correct that is where we did recapture and there will be a benefit from that recapture in 2016 because obviously we've taken back some risk and we put up some additional capital and we are not disclosing the amount of the benefit from recapturing that it will contribute in 2016. The question you had about the earnings contribution. We're not expecting it to be a significant impact on earnings from the wealth business. So I don't think, its right to think of that one item offsetting the other, but I'll turn over to Dan for more discussion on that.

Yes, the closure at the international wealth business to new sales will have a minimal impact, if any on our earnings. That was a relatively small portion of the total business. Most of the business is driven by the Life business, which is where we're really going to be reemphasizing and growing. We also will continue to manage the wealth business as in-force blocks of the earnings would of lying down very slowly. And we would expect any reduction in earnings there to be more than offset, by the growth that we're anticipating in the Life portion of the business.

Okay, the Life portion in the business is where sale would come off and you weren't getting as much new business gains, as you were before, that was the bigger story, I guess, not business right?

In the Life business this year, we have seen some lower sales, that's primarily due to the competitive environment and some aggressive crediting interest rates by competition. We are introducing a new product shortly, which we think will substantially help our sales trajectory in that business. So we think this has been somewhat of a temporary phenomenon and we're very optimistic about the sales prospects going forward.

Okay, then my next question for Steve about more on the real estate and commercial mortgage side. The real estate, you're proportionally and quite a bit bigger than some of your peers. And your comments on the MD&A are that if, vacancy, rates increase and rents go down over timing, maybe you have to take some negative mark-to-market adjustments on that real estate portfolio, is that really two to three year timeframe because we have already seen vacancy rates almost double in the past few years in Calgary and square foot rental rates go down 25% or so. Can you paint the picture of what needs to happen for you to actually take a noticeable mark-to-market on that portfolio?

Gabriel, we value our properties on a quarterly basis, we do. We have an internal and external process. And so there's, a deep dive of valuation of every property where we look at our rent rules, we look at the tenants we have in our specific properties. We look at the probability of the tenants will or won't renew. We look at the rates at which we think they'll renew. We look at market rates, at each valuation point in time. We look at market cap rates for comparable buildings. And so, all of those the variables are looked in a very specific way to each property and so we're looking at overall market trends, we're also looking at what's very relevant for each particular property. And some of those variables will move, some can move very quickly, some will move more slowly in terms of where you know, depending on the rent rule for example for a given property. And other factor that I think we'll see in Alberta is that, a lot of the larger more investment grade real estate is in very strong hands. It's in the hands of pension funds. In the hands of insurance companies. I don't think you'll see a lot of turnover. I don't think these are institutions that will be selling assets at distressed prices. I think these are institutions that can ride through cyclical fluctuations in the provincial economy. And so, you're certainly I think you're going to see, if this persists, increases in cap rates. But I don't think you're going to see meaningful distressed sales, that will then filter into the valuation of other properties. So as we monitor the market, as we see vacancy rates continue to increase and we apply those to our properties. It could certainly have an impact on our valuations overtime. But it's not an overnight impact, I think it's going to play out over a number of quarters. And I guess what I'm emphasizing is that, we really take a very detailed view property-by-property.

And how would you describe the makeup of the portfolio, is that, Class A office predominantly or how much of it is construction and then the mortgage side of, similar kind of description. I guess 31% of it's, across Canada insured by CMHC, is that similar for the Alberta specific stuff?

I don't have the, in my fingertips the specific percentage to CMHC insured mortgages within Alberta, but I would expect it's consistent to our proportion across Canada. And generally across our real estate and mortgage portfolio, where we're diversified and fairly, evenly split across the three main property types office, retail and industrial. And we're tending to own and lease against stronger properties across the region. So I think it's a very balanced portfolio, a very diversified portfolio. And certainly, our direct real estate holdings are in higher quality real estate.

Okay, thank you.

The next question is from Peter Routledge with National Bank Financial. Your line is open.

A couple follow-ups, just for Dan. On pulling out of the international wealth. We've seen other company struggle with regulatory and your customer risks. So just to confirm, none of that drove that decision?

That was a strategic decision purely. We really looked at both the life and the wealth business. The wealth business as I said was relatively small and we had pretty small scale there. And to grow that business, we would need to continue to invest in global distribution against the backdrop of much bigger firms and a very wide variety of investment choices that people have. In the life business, we have the unique value of proposition a relatively small number of competitors and a very different distribution channel and footprint there. So, this was a really a strategic decision to emphasize the area, where we have core capabilities which is the life business and not to build out a big worldwide distribution footprint for wealth.

How complex are the products in your life business?

They're similar to life products that we sell elsewhere. They're mostly universal life products. But we do have some specialized expertise in dealing high net worth and offshore structures for these products, which gives us a significant market advantage.

Aren't you not worried about regulatory issues in that space?

Well regulatory issues are always important in both the life and the wealth business or any business that we're in and we're very attentive to those and we have invested significantly in resources to support that. In the life business though, we're quite confident that we're able to meet those needs in really across our entire international business.

All right, so just quickly either for Colm or Steve, just back to the real estate issue in Alberta. I think on Page 35 of your press release, you've got sensitivity where you get a 10% decrease in your real estate investments decreases net income by C$175 million, so is that, I mean assume it's 10% down and flat, is that C$175 million one-time or is it year-over-year-over-year.

Yes, so that's the sensitivity that we always disclose. So with the impact in the current year or the one-time change, if you had that all come through in one-time, it's as of course it's very unlikely to happen in that way. It's a bit of stylized presentation, but Larry, you want to comment?

Yes, that's right. So that's assuming lower returns every year. But present valuing the full impact get one-time.

Okay and how close are we to that?

How close are we to it, 10% decline in real estate value?

Yes.

Well, I don't think we're on the precipice of that. And it's a very hard question to answer because implicit in that question is, what is going to be outlook? Not only the level, but also the outlook for energy 12 months from now.

Let's say we're still at C$30 in 18 months, so we had a 10% decline.

It's much - too precise for me to comment on. I think, I think that if we're, if C$30 year from now and the outlook is that, we're going to be C$30, 12 months at the end of 2017, I expect real estate values will be down. And whether they'll be down in a particular portfolio by 10% less or more, will of course depend on the specific properties in that portfolio. Just said in other way, if we have a multi-year period where oil prices for 3 plus years are projected to be at current levels. I think you're going to see, you're certainly going to see an impact on commercial real estate values across Alberta.

Peter just to add, a little point around that. Of course the very low interest rates that we're seeing have obviously provided support to real estate values and in fact over the course of the year, we've seen mark-to-market gains on real estate. So just in board terms across the portfolio. So there's an obvious offset there.

Yes, and so different geographies might get the benefit of lower rates, where other geographies might.

True, that's more of a comment about the overall diversified portfolio, but again that's an obvious driver of value.

That's a fair point. Thank you.

Your next question is from Dan Bergman with UBS. Your line is open.

Starting with MFS, I wanted to see if there was any update or additional color you can provide on the impact of the recent market weakness on the outlook for MFS slows, whether for the first quarter or just more broadly. I mean, how much does this delay the affected inflection and big picture given investment performance remains quite strong, any updated thoughts around how long, it might take into all this translating into improved flows? Thanks.

Well, first I would say we talked a lot about the institutional business where we've closed prior toward transitioning to additional products here at MFS. That's ongoing and we did see flows improved Q3 to Q4, we talked about some of the outside flows in Q3, that were now performance related. So the institutional business continues to look similar to the way that it has looked the last couple of quarters. The challenge really for industry flows in the back half of the year starting in August, with the volatility around the devaluation of the Chinese currency, is we've seen the retail business come under some pressure and if you look, at last year mutual funds last year did, were in outflows of C$50 billion last year. And so the industry and most of that was in the back half. The industry was in outflows, if you take Vanguard, who did 150 net positive last year. Think about the active business and retail being out C$200 billion last year. We were actually net in last year. So our position in the industry is very strong and that we picked up share. We were positive in an environment where most firms were negative organic last year. So as we look into 2016, our view is given the volatility that we're in today. We would expect you're going to continue to see outflows in the business with that is true in January, we saw that in January. Our guess is that, it will continue to be through the balance of the year. If we continue see volatility. Again, what we would say our positioning in industry. We think is strong given the relative performance and so all we can do is trying to outperform the industry and what we think will be a challenging backdrop.

Very helpful color, thank you. Maybe switching gears. I was hoping, you can also provide some color on the results for the January renewal season in US group market. Just in terms of sales volumes, pricing, competition. And maybe also when you updated thoughts on how your price increases are being received by client? Thanks.

Sure, we've been pleased with the results we've been getting really throughout all of 2015 on our renewal actions as well as new business pricing. Now on the sales side, sales have clearly moderated. Although, they're still at robust level and that was something we did quite deliberately with our pricing strategy. On the renewal side, we've generally been getting the increases that we've been looking for. We also have an important phenomenon that the business we're lapsing has a significantly higher loss ratio than the business we're retaining. So that's another tailwind for us in improving the overall health of the block. From a competitive standpoint, we're seeing a pretty rational market right now. There's always strong competition in the US Group benefits market. But I would characterize it as pretty balanced at the moment and so we're generally able to get the increases that we've been looking for.

Great, thanks so much and thanks for taking my question.

The next question is from Doug Young with Desjardins Capital. Your line is open.

I guess first question just for Dean. You made a lot of tough decisions over the many years of getting out of certain businesses and refocusing. And but I look across at the UK operation, we've seen earnings come down. We've seen tougher regulatory capital requirement. Is there a reason, why you would retain this business? Since obviously in run up and it's a why retain it?

Doug, couple of comments on the UK. First of all, you're right to point out the earnings in the fourth quarter, but overall when you stand back and look at the year and you look at the past several years. UK has done a very nice job for us and they continue to do an excellent job for clients running the business, very affectively. It's been a very slow light path as the business declines. We still have over 700,000 clients in the UK that we serve and serve them very profitably. So it's a profitable business, we got to Solvency II successfully, did not have a big impact on our capital ratios in the UK. And so, that aspect of the regulatory change you described really was, really not a big impact. And so the UK has been a source of strong income and strong cash flow since, that form part of the overall, cash generation picture of the Sun Life. Having said that, it's not part of our four pillar strategy as you know and you could think of it as an option for us for the future. But we have no plans at this red hot moment to change what we've got there.

Okay, thanks for the color and then just, Dan. You closed the US international wealth management business, you took some reserves to - I guess properly build in assumptions around lapsation and expenses. My question is, what could wrong or bump in night in this business now that it's in run off, anything concerns you?

I think, we have made certain assumptions about the rate at which business will run off, it obviously could either faster or perhaps slower than those assumptions. So we're working hard to make sure that the distributors we've worked with historically will keep that business with us. We think there's some good opportunities to do that. We think, we also have taken the right reserve actions to mitigate any expense concerns as the size of the block, its smaller. So I would say, we're reasonably comfortable that we've put the business into a good position for a run off block.

And what would those lapsation assumptions that you built in the?

Well we think, it will take in the general range of 7 years to 10 years, as just a directional idea for the business to run off. There could obviously be some customers that would say considerably longer than that. But this will be a multi-year process.

Okay, great. Thank you.

The next question is from Tom MacKinnon with BMO Capital Markets. Your line is open.

Maybe a question for Dean, I believe you guys have talked about an 8% to 10% medium-term objective for underlying earnings, growth or underlying EPS growth. And given this backdrop that we started the year off here, with. I assume you've probably done some stress testing as to what things would look like, what this growth would look like in the medium term, if interest rates came off 30 or 40 basis points. I assume this 8% to 10% assumed rates would be flat and I also assume this 8% to 10% assumed equity markets would go up about 8% a year. So how should we look at this, I know it's a medium-term objective, but how should we look at it, if an equity markets really didn't improve over the next couple of years and the interest rate environment really didn't move from kind of where it is now. What impact, if that was the backdrop what would that 8% to 10% objective look like now?

Well, Tom we're not going to, we give a lot of sort of stress test data on the impacts of interest rates and equity markets and swap curves and so on in our disclosures. We're not going to.

Yes, but those aren't related to underlying earnings, those are just reserve hits, so I'm just really more concerned with the underlying.

In fact, we're not going to add yet another stress sensitivity, but I think it's a fair question. I can't give you - we won't put out there specific numbers. But clearly, if equity markets stay flat from here on out and if interest rates fell, those are the headwinds vis-a-vis against our 8% to 10% medium-term growth objective. Having said that, relative to most insurance companies and investment managers, we think we're in pretty good shape. We've got a premier asset manager in MFS, whose returns for clients tend to thrive in these volatile markets. We've de-risk significantly. We have no VA or long-term care in the United States, especially compared to our North American competitors and the much smaller portion of our earnings are tied to interest rates than before. US economy is growing, Asia may be slowing, but it's still growing much faster than economies in North America. And as we talked early, we got balance in diversified business mix. It stood up very well in 2015 and I've remind you that 2015 was not exactly a walk in the park, with the TSX down 11%. And more of our business is Group business, which is as you know less volatile. And then, I would add that we've created options for growth. You think of Sun Life investment management wealth business in Canada, semi-global investments to find benefit solutions. US Group Benefits, Assurant in Asia. And a lower exposure to energy than North American peers. So I would say over the medium-term, we're optimistic about our business. We're driving hard to connect and convert all these options in growth. One last thing I would say, that I would say that our clients need us more than ever. The things that are driving inflation low are ageing populations, seniors aren't spending as much. Technology, globalization, the shift to work lower cost market. Well, these very drivers are actually things that benefit our business. You think of growth in Asia and you think about demand for insurance and wealth sales, among older clients. So, we've got a strong balance sheet. We've de-risked, we've got growth options. We're - it allows us to play to both the strong offense and a strong defense. So long waited answer, to say I'm not going to actually give you specific sensitivity. In the medium-term objectives. But I hope, what it conveys the sense of optimism about our future over the medium-term notwithstanding volatility.

Okay, thanks for that. And just a quick follow-up, Colm if I kind of walk through the whole co-capital. I'm short about C$500 million, was there something going on there. And if we kind of work through the MCCSR after the Assurant acquisition is paid which, will likely come out of SLA. I'm kind of in the low 220-ish range. Do you have any kind of target that you would be able to share with us for SLA's, MCCSR?

Yes, pick that in the order. So on the SLF side, I think you said capital, but I think you know the way I think of that is, cash.

Yes, pardon me, hold co-cash.

Yes, so we started the quarter with C$1.75 billion. And then we moved C$1.25 billion to SLA, as I mentioned in my remarks. We obviously pay a dividend and pay our interest expense out of SLF and that's offset by the dividends we receive from Sun Life Assurance and from MFS in the quarter. And we also repaid the sub-debt that came due in the quarter that was US$150 million, so C$200 million. So you're right, there's a gap there of about C$500 million and that was a short-term financing that we put in place in the quarter and it will be repaid over the course of 2016 and that's how you get to the C$0.99 billion, well approximately C$1 billion cash at the end of the quarter. And if you recall, when we said that how we would be financing Assurant. We said that, it would be approximately 60% of the seeding commission would be finance through sub-debt and we did C$500 million previously. So there's a bit more to come. We obviously have some flexibility around the timing on that. And when you mentioned the Sun Life Assurance MCCSR ratio. It's at 240 and when we pay the seeding commission to close on the transaction that will come down to approximately the 220 range, which will be reflective of the transaction and the capital requirement. So I think that's the number you should be thinking of around pro forma 220 at Sun Life Assurance after we closed on the transaction.

And where do you feel comfortable with some sort of target there. Just 210, 215-ish range.

Yes, so 220 is obviously very comfortable. 200 and above is obviously, we want to be above 200, so 210, 215 is very good place to be 220, a very strong place.

Okay, thanks for that.

The final question is from Mario Mendonca with TD Securities. Your line is open.

First, a question just going back to Asia. The regulatory changes or potential regulatory changes in relation to moving capital out of the country, China specifically. People have discussed it in the context of insurance, but can you see any wealth management impact specifically, wealth management sales for Sun Life and how that could be impacted by changes?

Mario, it's Kevin. I think in terms of our wealth management business. I don't see it having significant impact. If you look at where our businesses are, our Hong Kong business is an MPF business, our Philippines business is a retail mutual fund business. In India we have, sort of cash management business/a business that relates to what retail mutual fund and institutional investment. And then in China, we have an insurance asset management company, that in fact is doing some couple of different sort of things. It's doing asset management for insurance companies and it's doing, what they would call sort of channel business. Which sits in between bank, so it's not going to be directly impacted by the regulatory changes related to cash flows leaving the company? So I don't see it having a big impact on our wealth businesses.

Different type of question. Just looking at where rates are, we're clearly headed into some unprecedented territory especially in Canada. We didn't see rates this slow even during the crisis or in 2011 or 2012, when things really got low. So what I'm trying to understand for myself is and hopefully you've done some of this work already. Is there anything that happens from a policyholder behaviour perspective and I should be clear, I'm not just referring to things like lapsation. I'm just talking generally including sales patterns, what people buy, what they don't buy. Have you started thinking about what that could mean to the company?

Yes, I think. It's Colm here. So really, it's two part question. It's interesting, a year ago as we saw rates that we started the year last year, also start off in pretty rocky territory. We were thinking about this exact issue, this little bit of recovery but not much over the year. We're back to as you said, very low rate. I do think we see a shift in consumer preferences and maybe Kevin, would want to say a few words about that.

Hi, Mario. It's Kevin Dougherty speaking, so we would see things like for example, there is been a decline in demand for some of our guaranteed products having said that, with market volatility it maybe well come back. Through the year, we saw some of that, so decline in payout annuity sales at least as to where we would like them to be and guaranteed funds. Products like par look particularly good in times like this and [indiscernible] with the dividends on our par products and they look particularly attractive at these times and that's an opportunity to really open up new relationships and new customers. And so while there is some fall off of demand for guaranteed products, the right kind of fund products do attract a lot of interest and so our managed solutions like our granted funds have done extremely well, even as interest rates fallen in. Even as Canadian market have fallen in, so you see all of these things and as at the end of the day as Dean said, these times are challenging for average Canadians and they need a lot of help and they need a lot of advice and we've g to a lot of powerful tools to help them with these challenges. So at the core of the demand side of our business remains quite strong.

Is there any risk that lapse behaviour the change in material way?

Well, certainly there is two forces. So one being that contracts that policyholders have continued to be high value to them. So that were tempt to work toward hold your contract, but on the other hand. If people need cash, they have to pay for other way. At this point, we have some experience in the low interest rate environment and I would say, I'm still confident that our assumptions are good where they are, but as you said the longer it goes, we'll continue to stay on top of any trends that might develop.

And then finally, the sensitivity to declining rates. We all know that those sensitivities are not linear and I think you provided some sense for us on, how the sensitivity accelerates as rates decline, but again we're seeing some unprecedentedly low rates. Is there anything you can offer? Is there some level here of long-term rates? And say, Canada or the US where the sensitivity provided needs to really be revisited because it's bill change so much.

It's Claude Accum here, what you should look at is, that most of our interest rate exposure is actually out to quite long rates. So don't think one year rates stretching towards zero. Think of a lot of these interest rate contracts are 10 years to 20 years longer. Particularly the annuity contract, so they're quite far away from the zero boundary and quite far away from that expansion in the sensitivity.

Okay, but the Canadian 10 years might even, might sink below 100 basis points any day now, if it hasn't already this morning. Doesn't that have some kind of near-term effect as well?

We're invested longer than even a 10-year on the products that are particularly sensitive. A lot of it, will be the long life products and so the exposure is out beyond 10 years.

Okay, thanks.

We're showing no further questions at this time. We'll turn the call back over to Mr. Dilworth for any closing remarks.

Thank you, Chris. I would like to thank all of our participants today. And if there are any additional questions we will be available after the call. Should you wishing to listen to the rebroadcast, it will be available on our website later this afternoon. Thank you very much and have a great day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.