15-feb-2018 sun life financial, inc. · sun life financial, inc. (slf)q4 2017 earnings call...
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15-Feb-2018
Sun Life Financial, Inc. (SLF)
Q4 2017 Earnings Call
Sun Life Financial, Inc. (SLF) Q4 2017 Earnings Call
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CORPORATE PARTICIPANTS
Gregory A. Dilworth Vice President-Investor Relations, Sun Life Financial, Inc.
Dean A. Connor President, Chief Executive Officer & Director, Sun Life Financial, Inc.
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc.
Daniel Richard Fishbein President-Sun Life Financial U.S., Sun Life Financial, Inc.
Kevin P. Dougherty President-Sun Life Financial Canada, Sun Life Financial, Inc.
Claude A. Accum President, Sun Life Financial, Inc.
Michael W. Roberge Chief Executive Officer, MFS Investment Management, Sun Life Financial, Inc.
......................................................................................................................................................................................................................................................
OTHER PARTICIPANTS
Gabriel Dechaine Analyst, National Bank Financial, Inc.
Doug Young Analyst, Desjardins Securities, Inc.
Nick Stogdill Analyst, Credit Suisse Securities (Canada), Inc
Meny Grauman Analyst, Cormark Securities, Inc.
Humphrey Hung Fai Lee Analyst, Dowling & Partners Securities LLC
Steve Theriault Analyst, Eight Capital
Tom MacKinnon Analyst, BMO Capital Markets (Canada)
Kevin Morrissey Senior Vice President & Chief Actuary, Sun Life Financial, Inc.
Sumit Malhotra Analyst, Scotiabank
Mario Mendonca Analyst, TD Securities, Inc.
Paul Holden Analyst, CIBC World Markets, Inc.
Darko Mihelic Analyst, RBC Dominion Securities, Inc.
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MANAGEMENT DISCUSSION SECTION
Operator: Good morning. My name is Dan, and I will be your conference operator today. At this time, I would
like to welcome everyone to the Sun Life Financial Q4 2017 Financial Results Conference Call. All lines have
been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-
answer session. [Operator Instructions] Thank you.
Greg Dilworth, Vice President of Investor Relations, you may begin your conference. ......................................................................................................................................................................................................................................................
Gregory A. Dilworth Vice President-Investor Relations, Sun Life Financial, Inc.
Thank you, Dan, and good morning, everyone. Welcome to Sun Life Financial's earnings conference call for the
fourth quarter of 2017. 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. Following Dean's remarks, Kevin Strain, Executive
Vice President and Chief Financial Officer, will present the fourth quarter financial results. 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 slide,
forward-looking statements may be rendered inaccurate by subsequent events.
And, with that, I'll now turn things over to Dean. ......................................................................................................................................................................................................................................................
Dean A. Connor President, Chief Executive Officer & Director, Sun Life Financial, Inc.
Thanks, Greg, and good morning, everyone. Turning to slide 4, the company reported underlying earnings for
CAD 641 million for the quarter, a strong finish to 2017 where we grew underlying earnings by 9% for the full year,
11% on a constant currency basis.
Underlying ROE for the quarter and the year were also strong at 12.7%. Over the year, we increased the dividend
by 8%, repurchased 3.5 million shares, reduced leverage and maintained a strong MCCSR ratio including CAD 2
billion of cash at the holding company.
Sales results in the fourth quarter were mixed across our four pillars. Asia insurance sales were up 3% and wealth
sales were up 21%, generating VNB growth of 19%, all on a constant currency basis. SLF U.S. sales were very
strong. Individual insurance sales in Canada were down relative to very strong sales in Q4 of 2016 from the lead
up to tax changes.
For the year, insurance sales across the company were up 12% and wealth sales were up 7% on a constant
currency basis and we finished the year with CAD 975 billion of assets under management. Our results, this
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quarter and for the year, reflects strong execution on the drivers of profitable growth for Sun Life in the coming
years.
In Canada, we made good progress in building our wealth business. Sun Life Global Investments had positive net
flows of approximately CAD 600 million for the quarter, three quarters of that in retail and finished the year with
over CAD 20 billion in AUM. Following the quarter, we completed the acquisition of Excel Funds, a Canadian
investment manager specializing in emerging market funds with nearly CAD 800 million in the AUM.
Group Benefits in Canada also hit a milestone in the fourth quarter, reaching CAD 10 billion of business in force
and extending our market leadership position in 2017. In U.S. Group Benefits, our continued focus on the AEB
integration and good execution on pricing, renewals, claims management and expenses continued to pay off. We
achieved an after-tax profit margin in U.S. Group of 5% on a trailing 12-month basis, reaching our targeted 5% to
6% range two years earlier than we had previously indicated. U.S. finished the year with strong sales, particularly,
in stop-loss and international life.
In Asia, Aditya Birla Sun Life Asset Management moved from number four to number three in the fast growing
Indian mutual fund market, ending the year with almost CAD 50 billion of AUM, up from CAD 30 billion just two
years ago. We closed the acquisition of FWD's mandatory provident fund business in Hong Kong and signed a
15-year distribution agreement. In Malaysia, we launched a distribution relationship with CIMB-Principal Asset
Management, allowing their network of 8,000 agents to offer our insurance solutions alongside their wealth
solutions. And with this new partnership in Malaysia, we now have agency distribution in all seven of our Asian
markets.
In Asset Management, we delivered strong investment performance across our global platform. Sun Life
Investment Management, our alternatives business generated net flows of CAD 1.6 billion for the quarter and
CAD 6.1 billion for the year, driven by strong investment performance and improved distribution. SLIM's Canadian
LDI and alternative fixed income team was named the fastest growing asset money manager by Benefits Canada
in the CAD 1 billion to CAD 10 billion of AUM category.
At MFS, 84%, 79% and 92% of fund assets were in the top half of their Lipper categories over 3-year, 5-year and
10-year periods, respectively. We were pleased to see retail net flows turn positive in the fourth quarter and
overall net outflow of $4 billion improved over the same period last year.
MFS continued to make progress on the build out of international fixed income capabilities, increasing the number
of fixed income portfolio managers by 40% over the past two years. Out of the nine MFS U.S. retail mutual funds
that had over CAD 1 billion of sales in 2017, four of them were fixed income. We believe that MFS' ability to
generate alpha with carefully managed risk will be particularly valuable to clients given the recent reappearance of
volatility to equity markets around the globe.
As you know, we have a relentless drive to make it easier for clients to do business with us to resolve their
problems better and faster, to be more personalized and proactive with them and to deliver value. Our net
promoter and client index scores increased again last year and we are seeing that coming through in terms of
clients doing more business with us, staying longer and referring more friends and family. And here are just a few
examples of how we're making that happen.
In Canada, our new interactive digital coach, Ella, has had nearly 2 million touch points with clients, resulting in
engagement rates with group clients that have increased by more than 50%. Adding to her capabilities,
Canadians can now talk to Ella through Google Home to search for top rated health professionals such as
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dentists, physiotherapists, chiropractors and so on, using over 3 million ratings provided by the patients who are
our clients. This is one of the reasons our Group Benefits business is growing faster than the market. These
capabilities help us win new clients, keep them with us longer and helps us to compete on a basis that goes well
beyond price.
In Client Solutions, our Digital Benefits Assistant is technology that nudges clients to engage with and get more
from their pension and benefit plans. Last year, these digital nudges in some cases aided by phone contact
generated over CAD 700 million in additional GRS deposits and that's in addition to the CAD 2.5 billion of rollover
sales. That's one of the reasons, GRS AUM is growing at double-digit rates and one of the reasons, GRS net
income crafted CAD 200 million for the first time in 2017.
Our Canadian business also announced the collaboration with SecureKey, a leading identity and authentication
provider to verify client information using block chain technology, another step forward in ease of doing business.
In the U.S., we've created a strategic partnership with Collective Health, a remarkable health tech firm that is
transforming healthcare in the workplace for innovative employer clients and their employees.
Their digital platform connects and administers the entire Benefits' ecosystem, health networks, benefit programs,
spending accounts, and employee support and they are bending the cost curve for employers while generating
net promoter scores in excess of 70% by integrating our leading stop-loss capabilities with Collective Health,
clients and their employees will benefit from an even better experience.
So to wrap up, and turning to slide 5, 2017 was another year of strong growth and progress at Sun Life. Our
financial performance was strong with underlying earnings of CAD 2.5 billion and we continue to deliver on our
medium-term financial objectives while investing for future growth. 2017 was also a year where we saw the whole
organization kick into a new gear on client obsession with their relentless focus centered on doing more for
clients. We're really excited about 2018. We have terrific momentum and we're making real progress towards our
ambition to become one of the best insurance and asset management companies in the world.
And with that, I'll turn the call over to Kevin Strain, who will take us through the financials. ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc.
Okay. Thank you, Dean, and good morning, everyone. Turning to slide 7, we take a look at some of the financial
results on the fourth quarter of 2017. Underlying net income was CAD 641 million, up from CAD 560 million in the
same quarter last year. Underlying results in the quarter reflected strong growth in expected profit as well as
favorable morbidity and mortality experience. These strong results were achieved against the backdrop of a
strengthening Canadian dollar, which reduced underlying net income by $22 million relative to the same period a
year ago. Our reported net income for the quarter was $207 million, down from $728 million in the fourth quarter
of 2016.
Fourth quarter 2017 reported results were largely impacted by a net charge of CAD 251 million related to U.S. tax
reform, the unfavorable impact of interest rate movements and a previously announced restructuring charge of
CAD 44 million after tax. We maintained a strong capital position with a minimum continuing capital and surplus
requirement ratio for Sun Life Insurance Company of Canada of 221%.
Our SLA MCCSR ratio declined by 11 points from the third quarter, largely reflecting the recapture of a
reinsurance treaty and lower reported net income. This was a unique treaty in place in our Canadian group
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business. This treaty was less effective under LICAT and given our overall risk profile and the strength of our
capital position, we believe we could create greater value through the recapture of this reinsurance arrangement.
The MCCSR for the holding company, Sun Life Financial, Inc., is also strong at 246%. The higher ratio at the SLF
level largely reflects the excess cash of CAD 2 billion held by SLF, Inc. Our leverage ratio of 23.6%, which
includes preferred share capital remains below our long-term target of 25%. We redeemed CAD 400 million of
subordinated debt in January of this year and adjusting for this, our pro forma leverage for the Q4 2017 would be
22.4% and our excess cash position would be CAD 1.6 billion.
OSFI released the final LICAT Guideline on November 24, 2017, effective January 1, 2018, Sun Life will be
measured under the new Life Insurance Capital Adequacy Test, LICAT capital regime. We have a strong capital
position under MCCSR today and we expect that strong capital position to continue under LICAT. We will provide
more details on LICAT, including our initial disclosures with our first quarter results in May of this year.
Turning to slide 8, we provide details for underlying net income by business group for the quarter. We saw a
double-digit year-over-year underlying earnings growth across three of our four pillars, SLF U.S., SLF Asia, and
Asset Management. In SLF Canada, underlying net income of CAD 232 million reflected growth in fee income on
our wealth businesses and favorable investment activity. Prior year results included a net benefit from the release
of a litigation provision. Results in SLF Canada continue to be strong where we generated an ROE of 12.2%.
In SLF U.S., underlying net income was up 45% from the fourth quarter of 2016 as we have made strong
progress on our Group Benefits business. Our Group Benefits' after-tax profit margin increase from 3.5% in 2016
to 5% in 2017 on improved underwriting experience, pricing actions, investments and claims management,
expense initiatives and the employee benefits business acquired in 2016.
SLF Asset Management had underlying earnings growth of 20% from higher average net assets at MFS. MFS
pre-tax operating profit margin improved to 40% from 35% in the prior year. MFS had net outflows of $4 billion, as
retail inflows of $0.5 billion were offset by institutional outflows of $4.5 billion. Sun Life Investment Management
had inflows of CAD 1.6 billion and generated net income of CAD 6 million. In Asia, underlying net income grew by
29% over last year, on strong growth in our wealth businesses and strong earnings contributions from our joint
venture partnerships.
Turning next to slide 9, we provide details on our sources of earnings presentation. Expected profit of CAD 758
million increased by CAD 79 million from the same period last year with business growth across all four pillars,
particularly, SLF Asset Management and SLF Canada. Excluding the impact of currency and the result of SLF
Asset Management, expected profit grew by 10%. We had new business gains this quarter of CAD 14 million, an
improvement of CAD 5 million over the same period last year.
New business gains were driven by SLF Canada from improved product profitability and individual insurance, and
strong sales in our international business in SLF U.S. Experience losses of CAD 152 million for the quarter,
primarily reflect the net unfavorable impact of interest rates. Positive contributions from credit, investment activity,
mortality and morbidity experience was offset by lapse, policyholder behavior and expense experience.
Expense experience includes continued investment in our business such as distribution expansion and strategic
spend as well as annual incentive compensation costs from a strong performance in 2017. Assumption changes
in management actions primarily reflect an increase in actuarial liabilities including updates to lapse and
policyholder behavior assumptions in SLF Canada.
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Other, which amounted to a negative CAD 137 million in our sources of earnings disclosure, includes a
restructuring charge announced in the third quarter to support our clients strategy, as well as acquisition and
integration costs, fair value adjustments on MFS share-based compensation awards and the impact of hedges in
SLF Canada that do not qualify for hedge accounting. Earnings on surplus of CAD 128 million was CAD 37 million
higher than the fourth quarter last year, reflecting higher levels of investment income and mark-to-market on real
estate.
We've isolated the impact of U.S. tax reform in our sources of earnings disclosure on the slide. A net after-tax
charge of CAD 251 million reflects the impact of U.S. tax reform and actuarial liability, a one-time charge on
deemed repatriation of foreign earnings, partially offset by the revaluation of deferred tax balances.
Our effective tax rate on reported net income basis was negative 36.7%. This tax rate was primarily reflective of
the enactment of the U.S. tax reform. On an underlying net income basis, which adjusts for these impacts, our
effective tax rate was 21.5% and in line with our expected range of 18% to 22% in 2017.
As a result of U.S. tax reform, we're revising the expected range of our effective tax rate to 15% to 20%. This new
range is based on our current understanding of base broadening measures and U.S. tax interpretive guidance.
This new range aligns with our previous disclosures on U.S. tax reform, whereby we expect the tax expense
included in 2018 underlying net income to decrease by approximately CAD 130 million.
Slide 10 shows sales results across our insurance and wealth businesses. Total insurance sales were up 3% and
7% on a constant currency basis. The higher sales were primarily in SLF U.S. from strong sales in stop-loss and
were partially offset by lower sales in individual insurance in SLF Canada, which benefited in the prior year ahead
of product level tax changes. Canadian individual insurance sales have been strong in 2017. We achieved the
number one spot in life insurance sales for the past three quarters.
Total wealth sales of CAD 35.3 billion were down 5% and 1% on a constant currency basis over the prior year.
The lower sales results were primarily in Group Retirement Services in SLF Canada, as a few large sales
contributed to the prior year results.
In SLF Asset Management, MFS sales rose 2% on a constant currency basis. However, we're down 3% after the
headwinds of currency. In Asia, we continue to see strong sales growth in our asset management company in the
Philippines, our pensions business in Hong Kong, and our Indian joint venture mutual fund company.
So to conclude, we achieved strong results this quarter contributing to a strong year and reported net income of
CAD 2.1 billion, supported our strong capital position and book value growth. We saw a double-digit underlying
earnings growth across three of our four pillars. We generated 50 basis points of ROE improvement over the
course of the year and we deployed capital in a balanced and diversified way. We enter 2018 from a position of
strength as we continue to deliver on organic initiatives, execute loan acquisitions and leverage our robust capital
position, as we implement the LICAT capital framework this year.
With that, I'll turn the call over to Greg to begin the Q&A portion of the call. ......................................................................................................................................................................................................................................................
Gregory A. Dilworth Vice President-Investor Relations, Sun Life Financial, Inc.
Thanks, Kevin. To help ensure that all of our participants have an opportunity to ask questions on today's call, I
would ask that each of you please limit yourself to one or two questions and then to re-queue with any additional
questions. With that, I'll now ask Dan to please poll the participants for questions.
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QUESTION AND ANSWER SECTION
Operator: [Operator Instructions] Your first question comes from the line of Gabriel Dechaine with National Bank
Financial. Please go ahead. ......................................................................................................................................................................................................................................................
Gabriel Dechaine Analyst, National Bank Financial, Inc. Q Good morning. I've got a quick numbers, one and then one related to the – your tax reform on the first one. The
reinsurance recapture, I believe you've done this in two phases. When you were originally reinsured back in 2010,
there was an earnings hit. So in recapturing it, you're getting some earnings back. Is that a decent size number? ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A That's correct. We will have a positive impact on the earnings front after the recapture. ......................................................................................................................................................................................................................................................
Gabriel Dechaine Analyst, National Bank Financial, Inc. Q In the amount of? ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A Roughly a few cents per share or just under a few cents per share. ......................................................................................................................................................................................................................................................
Gabriel Dechaine Analyst, National Bank Financial, Inc. Q Nothing major then. Okay. Then I guess, the more thoughtful question on the tax reform. So, what I've – reading
your discussion on the updated guidance. Are you – like the 15% to 20%, are you being conservative there that
maybe at the higher end of the range, you might see some of the benefits dialed back like the base erosion stuff.
And then, what I'm also hearing from U.S. companies, particularly, on the group side is that they're planning on,
passing on some of these benefits to their customers via lower premiums. I'm just wondering how that could affect
the group business in the coming year. Do we eat into some of the re-pricing benefits we're starting to see now? ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A So, Gabriel, I'll take that first part of the question and Dan will take the second part. The guidance of 15% to 20%,
it reflects the positive impact of the tax reform, but the impact will – of the overall range depends on the
jurisdiction of our – the geography of the income, right, so that would be an impact. And then there will be impact
from base erosion measures, limitations to the interest expense reductions, FDII, those types of things will also
have an impact on it. So, we expect to be inside of that range and we expect that that the benefit of that is roughly
the CAD 130 million we talked about, which would put us inside of that range as well. ......................................................................................................................................................................................................................................................
Gabriel Dechaine Analyst, National Bank Financial, Inc. Q So, you're – you did contemplate some of the offset that might be coming in that arrangement?
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Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A Sorry. There will be some offsets in that range as well. Yes. ......................................................................................................................................................................................................................................................
Gabriel Dechaine Analyst, National Bank Financial, Inc. Q Okay. ......................................................................................................................................................................................................................................................
Daniel Richard Fishbein President-Sun Life Financial U.S., Sun Life Financial, Inc. A Good morning. This is Dan. I'll address the issue about competing the way of the benefit. We don't really expect
to see much of that in the short-to-medium term. First of all, a lot of the group business is written on three-year
rates, so certainly any effect like that would take some time to play out. Also a number of the rates in the group
business are filed with state insurance departments so that would also take some time to play out. Well, probably
more importantly, most of the insurers active in the group market today are not yet at their target margins, and we
expect that most players will use tax reform as a way to get closer to their target margins in the short to medium
term. ......................................................................................................................................................................................................................................................
Gabriel Dechaine Analyst, National Bank Financial, Inc. Q Okay. Thanks, Dan. ......................................................................................................................................................................................................................................................
Operator: Your next question comes from the line of Doug Young with Desjardins Capital. Please go ahead. ......................................................................................................................................................................................................................................................
Doug Young Analyst, Desjardins Securities, Inc. Q Sorry, I was unmute there. Sorry. Just – first question on Canada, underlying earnings were down year-over-year,
and I think Kevin you alluded to a litigation provision last year and if I recall it was CAD 15 million to CAD 20
million. But if I go in and I look at the market impact or if I look at experience excluding the market impact, it looks
like it was slightly positive last year, it looks like it was negative this year, so that maybe that's expense lapse. I'm
just trying to get a sense of why the delta in experience, excluding market impact last year versus this year, can
you kind of delve a little bit into that? ......................................................................................................................................................................................................................................................
Kevin P. Dougherty President-Sun Life Financial Canada, Sun Life Financial, Inc. A Yeah, sure. I think the MET provision last year, the legal provision was about CAD 28 million. So just as a
benchmark – if you look at earnings and our expected profit was up really nicely year-over-year, and new
business came through very, very solid. In terms of the experience gains – sorry, the actual experience, we saw
some incidents push in the disability block, but most of that was offset by good overall health experience. ......................................................................................................................................................................................................................................................
Doug Young Analyst, Desjardins Securities, Inc. Q Was there any lapse items or issues from the experience side? ......................................................................................................................................................................................................................................................
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Kevin P. Dougherty President-Sun Life Financial Canada, Sun Life Financial, Inc. A No. ......................................................................................................................................................................................................................................................
Doug Young Analyst, Desjardins Securities, Inc. Q Okay. And then just maybe turning to Asia, Hong Kong insurance sales were down 25% year-over-year. I know
you're doing well in the mandatory provident fund, but just wanted a little color. And I know expected profits was
up 5% year-over-year this quarter, but it's been gravitating down over the last two years. I mean I think one or two
years ago, it was up, it was growing about 20%. So just trying to get a sense of what's happening within expected
profit growth in Asia, and then sales in Hong Kong, but also the ROE, it seems it range bound in the mid-7%
range. I thought the goal was to try to move this above 10% over time, so just want to get a bit of an update on
that as well. Thanks. ......................................................................................................................................................................................................................................................
Claude A. Accum President, Sun Life Financial, Inc. A Hi, it's Claude Accum here. With regards to Hong Kong sales, on a composite basis of constant currency, it is
down 15%, but you need to tease apart that business. They actually have three really good engines of growth,
two of them are doing very well. So agency is up 16%. I believe that's the second highest growth rate in the
industry. The MPF business is also doing quite well. It ranks number five moving to number four by assets, but on
net sales, it ranks number two, so one of the strongest MPF growing platforms in Hong Kong. And the slower spot
is the MCV sales are off and we haven't replaced that contribution. If you look at the whole contribution across
Asia, our thesis is that the seven countries combined should be able to produce 15% to 20% growth rate.
And so if you look at life sales, which are a bit soft and combine that with wealth sales, which are very strong,
showing 21% growth rates or 50% growth rates on a full-year on a constant currency basis. On a composite
basis, we're seeing growth rates in Asia of 17% and so that's in the middle of that thesis of 15% to 20% growth
rate. So we feel good about the growth trajectory in Asia and notwithstanding where Hong Kong is.
If we look at all the other businesses combined excluding Hong Kong, the other six businesses being Philippines,
India, Indonesia, China, Vietnam, Malaysia, they're generating a 22% growth rate. So again, when you look
across the whole book, we see some robustness in sales growth rate. If you look at expected profit, you really
need to adjust for currency. So on expected profit full year, it looks like it's up 4%. We'd like to see it grow faster
than that and we tend to manage it on a local currency basis. We don't hedge this income. It's all on its natural
local currency.
So if we adjust for FX, it's another 6 points of growth. So expected profit is actually 10 points, and we think that's
pretty decent. And if you look at where that's coming from the seven businesses, the seven countries are
generating 13% growth in expected profit. So we feel good about that on a constant currency basis. And then,
there's a bit of drag coming from the regional office which takes about 3 percentage points off that growth rate,
where we have some project expansion in the [ph] ROE (28:52) special projects.
If we come to the ROE, the return on equity, we would normally expect to see the return on equity increase 50
bps per annum or more over the three-year, four-year, five-year period. And we are carrying some extra capital in
some of the subsidiaries. We did a capital injection in one of our subsidiaries, and so that's tempered the growth
in ROE this year. ......................................................................................................................................................................................................................................................
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Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A And Doug, I would add that the ROE is based on a 100% equity still in those numbers? ......................................................................................................................................................................................................................................................
Doug Young Analyst, Desjardins Securities, Inc. Q That's right, yeah. Very thorough. Thank you very much. ......................................................................................................................................................................................................................................................
Operator: Your next question comes from the line of Nick Stogdill with Credit Suisse. Please go ahead. ......................................................................................................................................................................................................................................................
Nick Stogdill Analyst, Credit Suisse Securities (Canada), Inc Q Hi. Good morning. Just sticking with Asia to elaborate on that, I think earnings for the full year were up 18% on an
FX adjusted basis. In last quarter, you did offer growth maybe low double digits on earnings. Does that feel
achievable for 2018, just because we look at the core numbers? Throughout the year, they averaged about CAD
80 million a quarter this year. So, we didn't really see that trend up, and I'm just wondering if you feel confident
that can grow in the double digits in 2018? ......................................................................................................................................................................................................................................................
Claude A. Accum President, Sun Life Financial, Inc. A Yes, when we look around in constant currency basis, full year is at 17%. Q4 is quite strong, it's at 38% growth
and so looking forward we think Asia is still on thesis that we can generate a 15% to 20% growth rate on earnings
going forward. ......................................................................................................................................................................................................................................................
Nick Stogdill Analyst, Credit Suisse Securities (Canada), Inc Q Okay. Thank you. My second question on MFS, I just wanted to get some color on the sustainability of the
margins this quarter. I know the asset growth has been important. Was there anything and I know the received
gains in some items last quarters [indiscernible] (30:33) there and maybe just your thoughts on the margins of
asset growth is now as robust in 2018? ......................................................................................................................................................................................................................................................
Michael W. Roberge Chief Executive Officer, MFS Investment Management, Sun Life Financial, Inc. A Yeah. If you look at the quarter and I'd say a couple of things. One is you've got to look at prior years too and
what you'll see is seasonality in the first half versus the second half. So there are more few days in the second
half. We accelerate some of the vesting on compensation in Q1 and Q2. So you would expect the first half of the
year like we've seen in prior years to be somewhat lower. So – but when you get a big ramp in the market like
we've seen in last six months, you are going to see the market expand that will be harder to sustain as we look
into next year. And we would expect the same headwinds, which we've talked about on prior calls, which is
continued slight fee erosion over time to continue to weigh on results of asset managers. ......................................................................................................................................................................................................................................................
Nick Stogdill Analyst, Credit Suisse Securities (Canada), Inc Q And will MiFID II you have a noticeable impact, I guess, in early 2018? ......................................................................................................................................................................................................................................................
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Michael W. Roberge Chief Executive Officer, MFS Investment Management, Sun Life Financial, Inc. A Yeah. As we disclosed last quarter, it's not material. We don't think its material through financial results. It's clearly
going to have some impact this year, but as it rolls up to the Sun Life from our perspective and that is not material. ......................................................................................................................................................................................................................................................
Nick Stogdill Analyst, Credit Suisse Securities (Canada), Inc Q Okay. Thank you. ......................................................................................................................................................................................................................................................
Operator: Your next question comes from the line of Meny Grauman from Cormark Securities. Please go ahead. ......................................................................................................................................................................................................................................................
Meny Grauman Analyst, Cormark Securities, Inc. Q Hi. Good morning. You did the recapture of the reinsurance agreement to deal with LICAT. I'm wondering that
we're in Q1, but are there any other changes that you expect that are motivated by LICAT in Q1 or farther down
the field? ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A Meny, it's Kevin. This was a unique agreement we had in our Group Benefits in the U.S., so we don't see other
similar types of agreements. ......................................................................................................................................................................................................................................................
Meny Grauman Analyst, Cormark Securities, Inc. Q Okay. ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A Sorry, in Canada – Group Benefits in Canada. ......................................................................................................................................................................................................................................................
Meny Grauman Analyst, Cormark Securities, Inc. Q Okay. And then, I just want to ask on the employee benefits business in the U.S., it was touched on sort of the
impact of tax legislation at the top of the house, but in terms of how you see the business unfolding in the U.S.
employee benefits business, could you go into a little bit more detail in terms of the impacts of the tax legislation
on that business from a demand perspective in particular? And then, how that could impact your outlook in terms
of after-tax margins, does that give a little bit more upside to the 5% to 6% that you've been targeting? ......................................................................................................................................................................................................................................................
Daniel Richard Fishbein President-Sun Life Financial U.S., Sun Life Financial, Inc. A Yeah. Thanks, Meny. In terms of demand, I think the overall U.S. economy is moving along quite nicely and
certainly tax reform is going to be another catalyst for that. So we are starting to see employment growth in the
overall market and we expect to start to see that as a contributor to our growth going forward. We're also starting
to see some wage inflation in the U.S. and obviously that means multiples of salary which some of our coverages
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are based on also will increase. As far as the impact in margins, obviously, there will be an impact in after-tax
margins from a lower tax rate, give or take we estimate that to be about 75 basis points going forward. ......................................................................................................................................................................................................................................................
Meny Grauman Analyst, Cormark Securities, Inc. Q Thank you. ......................................................................................................................................................................................................................................................
Operator: Your next question comes from the line of Humphrey Lee with Dowling & Partners. Please go ahead. ......................................................................................................................................................................................................................................................
Humphrey Hung Fai Lee Analyst, Dowling & Partners Securities LLC Q Good morning, and thank you for taking my question. Looking at your holding company excess cash position kind
of adjusted for the debt repayments of CAD 1.6 billion, at the same time, you have quite a bit of debt capacity,
whereas the 25% long-term target or the 30% kind of upward threshold that you feel comfortable to be on the
interim basis hitting there, like the last – so you're kind of looking at maybe like close to CAD 2 billion of capacity.
And when I look back at the last time you have such flexibility, you went into a little bit of a shopping spree. So as
I think about capital management, if you were to do some acquisitions, what would be on your wish list? ......................................................................................................................................................................................................................................................
Dean A. Connor President, Chief Executive Officer & Director, Sun Life Financial, Inc. A Humphrey, it's Dean here. Thanks for your question. You know I'll just say that the approach we've taken, which is
kind of a really balanced, thoughtful, disciplined approach to allocating capital continues to apply. So that's share
buybacks, supporting – first of all supporting organic growth and acquisitions and share buybacks, as you know
we have a non-course issuer bid in flights 11.5 million shares. We've bought back 3.5 million of that piece. We've
just announced the next leg of 3.2 million shares. In terms of acquisitions, our approach remains the same. We
are focused on acquisitions that build strategic capacity in each of our four pillars.
So it's not one or two, but it's – we're looking for opportunities in all four. Clearly, there are fewer of those in
Canada of size, but the acquisition of the Excel business that we closed in January is an example of that. Looking
for opportunities in all four pillars, opportunity is that either bring us new capabilities or help us grow faster. In
other words, we're bringing more than just a check book to the story. We're actually able to put businesses
together and accelerate growth beyond what would otherwise be possible.
We continue to take a very disciplined approach to this, and clearly, a, it has to be on strategy, and b, it has to
clear our long-term hurdle rates in terms of ROE, and that's challenging in this market given there's a lot of capital
swimming around. So what I would say to you is that we're as aggressive as ever at talking with people about
those opportunities. And as you know, we're in a very favorable position in terms of the firepower on our balance
sheet for when we do find those opportunities. ......................................................................................................................................................................................................................................................
Humphrey Hung Fai Lee Analyst, Dowling & Partners Securities LLC Q I understand you have a balanced approach towards the four pillars, but I guess if you have to rank them like all –
if everything is on the table or for your choosing, like what area would you like to invest first if you have the
choice? ......................................................................................................................................................................................................................................................
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Dean A. Connor President, Chief Executive Officer & Director, Sun Life Financial, Inc. A I don't think there is any one preferred pillar in that sense. And as a more pragmatic answer, the reality is it
depends on what actually becomes available at prices that make sense economically. So we would like to – so let
me just take you around the company and this isn't in any particular order, but in Asset Management, Sun Life
Investment Management has grown from 0 to CAD 60 billion in the last four years, we're on a path to get that to
CAD 100 billion organically. We would like to find other opportunities to get SLIM even bigger than that. So that's
one category.
In the United States, we've – through the AEB acquisition, given ourselves terrific additional capability and heft
and you see us executing really well on that. There are other capabilities that we are looking at and sizing up in
the U.S. market as well, things that will accelerate our ability to grow. And then in Asia, there are so many
different places to play. Job one is to get larger in the seven markets in which we already operate and because
those seven markets have something like 90% of the growth in Asia in the next decade, those seven markets
have over 3 billion people in them.
So job one is to get bigger in those markets. And that could mean looking at bancassurance opportunities. It could
mean looking at wholesale acquisitions of other companies. It could mean buying up larger percentages of
businesses we already own that were in joint venture with and you'd seen us quite active in that space in the last
few years. So I hope that answers your question. ......................................................................................................................................................................................................................................................
Humphrey Hung Fai Lee Analyst, Dowling & Partners Securities LLC Q Yes. And then I guess specifically in Asia, there seems to be quite a bit of activities going on. There's a lot of
divestiture by traditional players all from a foreign parents. I guess maybe at a high level, how would you think
about the valuation of those properties or the Asia business in general. Do you feel like it's still a little frothy or do
you feel like there may be – could be some interesting properties in the market? ......................................................................................................................................................................................................................................................
Dean A. Connor President, Chief Executive Officer & Director, Sun Life Financial, Inc. A Well, I think the price – the starting point is that the prices for businesses in Asia look expensive on North
American standards. But when you overlay the kind of growth you see in most of the markets that we're in Asia
and you overlay the kind of operational execution that we're capable of delivering. We see opportunities to make
the economics work, not in every case, but in enough cases to make it interesting. So it is difficult to talk about
specifics. But I think there continues to be some really interesting opportunities in Asia, and we're actively in the
middle of all those discussions. ......................................................................................................................................................................................................................................................
Humphrey Hung Fai Lee Analyst, Dowling & Partners Securities LLC Q Got it. Thank you. ......................................................................................................................................................................................................................................................
Operator: Your next question comes from the line of Steve Theriault with Eight Capital. Please go ahead. ......................................................................................................................................................................................................................................................
Steve Theriault Analyst, Eight Capital Q
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Thanks very much. I have a question on MFS, but first on Canada. I know, may not be a big deal, but I did want to
talk about the SecureKey agreement for a couple of minutes. Probably for Kevin Dougherty, can you talk about
which parts of the business will be touched by this, in particular wondering, will this be more facilitation of
traditional agent sales by Sun Life agents or is this more a function of selling ancillary products to existing
customers like through your mobile app, and is this a big enough deal that you could see meaningful productivity
gains or is this more of incremental smaller project? Love to get a sense for what you envision with that. ......................................................................................................................................................................................................................................................
Kevin P. Dougherty President-Sun Life Financial Canada, Sun Life Financial, Inc. A Sure. Well, with the SecureKey technology, it will enable very rapid at some point kind of instant validation of
things like identity and credentials, which will enable more to happen digitally whether there is an advisor present
or whether we're doing things through, for example, our mobile app. And so there is a fair amount of friction in the
current processes, and in the digital world, friction means drop offs. So we think this has a tremendous amount of
potential for us there. It will take some time to rollout. And SecureKey has ambitions beyond just identity
verification perhaps into areas like healthcare, maybe eventually things like coordination of benefits, which will
speed up a lot of Group Benefits processes. So there is quite a bit of potential and we're quite excited about the
investment and being involved with them. ......................................................................................................................................................................................................................................................
Steve Theriault Analyst, Eight Capital Q And is the rollout, is it first half of this year, first half of next year or sort of first or second half of this year? ......................................................................................................................................................................................................................................................
Kevin P. Dougherty President-Sun Life Financial Canada, Sun Life Financial, Inc. A Yeah. I think we'd start to see things happening in the second half of this year. ......................................................................................................................................................................................................................................................
Steve Theriault Analyst, Eight Capital Q Okay. Thanks for that. And then on MFS, a couple of things there, I can't remember seeing expenses over $550
million. I don't think there's Q4 seasonality. So Mike can you give us a bit of insight on Q4 and a bit of an outlook
for expenses next year. Are you – did you take advantage of the very strong markets and maybe a bump in fees
to front-end some expenses, anything like that? ......................................................................................................................................................................................................................................................
Michael W. Roberge Chief Executive Officer, MFS Investment Management, Sun Life Financial, Inc. A There is nothing abnormal in the quarter from expense perspective, what flex is – what's going to flex is, with
revenue growth is compensation is going to flex some of the asset base fees that we paid some of the
distributors, commissions that we pay based on sales. So there's nothing in there that would be anything
abnormal relative to any other quarter.
With the caution as I mentioned early, just think about seasonality that we'll have in the first quarter is
compensations expense is higher and you can see that if you go back and look at last year. ......................................................................................................................................................................................................................................................
Steve Theriault Analyst, Eight Capital Q
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Okay. And then the last item was a small one again, but the U.S. GAAP net income, which I don't often notice is
normally higher than under IFRS. It's a lot lower this quarter, is there's any quirks there that that you or Kevin can
reflect? ......................................................................................................................................................................................................................................................
Michael W. Roberge Chief Executive Officer, MFS Investment Management, Sun Life Financial, Inc. A Yeah. Maybe I'll leave that to Kevin. We focus on the GAAP number, not the IFRS. So Kevin if you want to just
cover maybe the reconciliation. ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A Yeah. The only difference in the U.S. tax numbers was the U.S. tax reform impact on MFS, which was about $75
million. ......................................................................................................................................................................................................................................................
Steve Theriault Analyst, Eight Capital Q Okay. So just under – that's not an adjusted numbers. That's right. Okay. ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A Right. Right. ......................................................................................................................................................................................................................................................
Steve Theriault Analyst, Eight Capital Q Very good. Thanks a lot. ......................................................................................................................................................................................................................................................
Operator: Your next question comes from the line of Tom MacKinnon with BMO Capital. Please go ahead. ......................................................................................................................................................................................................................................................
Tom MacKinnon Analyst, BMO Capital Markets (Canada) Q Yeah. Thanks. A question on Asia and then a quick one on strain in MFS. So Claude, just looking at Asia, the
expected profit growth that we've seen in 2015 and 2016 was solid double digit, but here in 2017 just 5%, but I
think you're looking at maybe 10% excluding currency. But certainly lower than what we've seen in the past, is
this – do you think this is due to extra spends in Hong Kong and how should we be looking at that, that number
going forward? And what are some of these extra spends you're having in Hong Kong, what are they trying to
achieve? ......................................................................................................................................................................................................................................................
Claude A. Accum President, Sun Life Financial, Inc. A Yeah. So, Tom, it's Claude here. If I look at the contribution from the seven businesses, on a constant currency
basis, their expected profit is up 13%, so I think that's the number you're looking for. And then, if I roll in the
regional office, it takes about 3 points off that and that gets to the 10% that you noted. And so what's in the
regional office are some special projects, where we're trying to do things, not just in Hong Kong, but across the
whole Asia business group. It tends to be special projects, more focused on developing growth in earnings over
the long term. And so we think it will generate lift in earnings in the future but it does cost some drag in the short-
term.
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Tom MacKinnon Analyst, BMO Capital Markets (Canada) Q Is that – would you expect expected profit to be up higher than this 10% excluding currency going forward? More
consistent with the 13% that you're getting in all the other offices? ......................................................................................................................................................................................................................................................
Claude A. Accum President, Sun Life Financial, Inc. A We have some – while we're carrying these special projects, we have opportunities to generate offsets elsewhere.
And so we're seeing some strong growth in earnings on surplus. We are carrying some extra surplus in the
businesses. And we have some opportunities in this environment to take some AFS gains. So we think on a
blended basis, expected profit, all these other things looking at the underlying earnings together, we think we can
drive underlying's earnings growth in the 15% to 20% range per annum. ......................................................................................................................................................................................................................................................
Tom MacKinnon Analyst, BMO Capital Markets (Canada) Q Okay. Thank you. Then with respect to strain, I think the guidance was negative CAD 10 million to CAD 20 million
a quarter, I think we're positive CAD 14 million here, not a lot in terms of help from DB sales, but is it just – to what
extent is this driven by higher interest rates, would the higher interest rates allow this trend to continue and to
what extent has it helped maybe in each one of their countries? ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A Well, so I'll start off, Tom, and then Kevin Morrissey may dive in with some more detail, but strain of course is
going to depend on the level of the sales and the mix of the sales that we're seeing and the geographies that it's
coming through with Canada having gains in the U.S. and Asia having strain. So this year you saw very good mix
of business and good sales results in Canada, which drove the positive side of that. And so that's kind of the
nature you're looking at as it depends a lot on mix and geography and the overall results. ......................................................................................................................................................................................................................................................
Kevin Morrissey Senior Vice President & Chief Actuary, Sun Life Financial, Inc. Q Tom, it's Kevin Morrissey here. Maybe I'll just add to that. We do expect to see seasonality right on that, so it does
go up and down each quarter. For 2017, we averaged about minus CAD 5 million strain for the year, so that is still
a bit improved versus that outlook that we gave. The other mid key driver though I'll add to what Kevin said is the
quality of the assets back in the news business and we did very well with some of the asset placements and got
quite strong yields this year and that helped contribute to the reduced strain. ......................................................................................................................................................................................................................................................
Tom MacKinnon Analyst, BMO Capital Markets (Canada) Q How should we look at it going forward, you're going to stick with this guidance despite the fact that you crushed
the guidance in 2017? ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A So at this point, we're not going to... ......................................................................................................................................................................................................................................................
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Tom MacKinnon Analyst, BMO Capital Markets (Canada) Q And rates are higher. ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A Yeah. Thanks, Tom. At this point, we're still looking at the CAD 10 million to CAD 20 million of strain per quarter,
but we will give you an update during the year next year. ......................................................................................................................................................................................................................................................
Tom MacKinnon Analyst, BMO Capital Markets (Canada) Q Okay. That's great. And then, the final one is on MFS. If we wanted to look at a tax rate specifically for MFS now
in the new regime, how should we be looking at that rate? And finally, the income on the seed capital was
generally just breaking even in several years ago and/or in the last several years other than 2017 and it seems to
be really high now. So how should we be looking at that one going forward? ......................................................................................................................................................................................................................................................
Michael W. Roberge Chief Executive Officer, MFS Investment Management, Sun Life Financial, Inc. A Well, I'll start with the seed capital. Kevin Strain can take tax rate. ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A Sure. ......................................................................................................................................................................................................................................................
Michael W. Roberge Chief Executive Officer, MFS Investment Management, Sun Life Financial, Inc. A As to seed capital, what's really going to drive that is a couple of things, one is going to be the return that we
generate relative to what we're hedging on that particular seed capital. There are times whatever we're hedging
isn't naturally a perfect hedge, so you can get some slippage relative to benchmark, but if we perfectly hedged it
and we have really strong performance, you're going to get seed capital gains. And last year was a very good
performance year for us, and so there were some gains on seed capital, but that certainly is anything I would look
to try and project into the future. ......................................................................................................................................................................................................................................................
Tom MacKinnon Analyst, BMO Capital Markets (Canada) Q Okay. So some gains, but maybe not the same sizes as what we had in 2017? ......................................................................................................................................................................................................................................................
Michael W. Roberge Chief Executive Officer, MFS Investment Management, Sun Life Financial, Inc. A Yeah. Again, I mean I would try not to project gains or losses on that, because you've got a – there are hedging
issues that... ......................................................................................................................................................................................................................................................
Tom MacKinnon Analyst, BMO Capital Markets (Canada) Q Yeah.
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Michael W. Roberge Chief Executive Officer, MFS Investment Management, Sun Life Financial, Inc. A ...can impact that number and then it's just relative performance as well. ......................................................................................................................................................................................................................................................
Tom MacKinnon Analyst, BMO Capital Markets (Canada) Q Okay. Thanks. ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A And for the CAD 130 million of tax benefit Tom that we see in 2018, it should be split roughly two-thirds to MFS
and most of the rest goes to SLF U.S. ......................................................................................................................................................................................................................................................
Tom MacKinnon Analyst, BMO Capital Markets (Canada) Q And what does that put the tax rate at for MFS [ph] U.S. one (50:26). ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A So, I think you can do a quick calculation on that if you take two-thirds, but it's going to put in the mid-20s. ......................................................................................................................................................................................................................................................
Tom MacKinnon Analyst, BMO Capital Markets (Canada) Q Okay. That's great. Thanks very much. ......................................................................................................................................................................................................................................................
Operator: Your next question comes from the line of Sumit Malhotra with Scotia Capital. Please go ahead. ......................................................................................................................................................................................................................................................
Sumit Malhotra Analyst, Scotiabank Q Thanks. Good morning. First question is likely going to be for Kevin Strain or Kevin Morrissey. Going back to the
assumptions review last quarter, first part of it obviously last quarter you had moved to strength and lapse in some
of the other policyholder assumptions. Usually, you take care of the bulk of that in Q3, but I did know you had a
CAD 30 million to CAD 40 million strengthening for lapse again in Q4. Obviously, lapse has been an issue across
the industry, so I just wanted to get some color for you as to what prompted you to have to step up on this one
again this quarter and somewhat related. I feel like we talk a lot about expense experience in Q4. It wasn't as big
as we've seen in the past, but it was a negative drag, does the adjustment you made last quarter in your view,
does this serve to make the negative expense experience less of a recurring issue in 2018? ......................................................................................................................................................................................................................................................
Kevin Morrissey Senior Vice President & Chief Actuary, Sun Life Financial, Inc. A Hi, Sumit. It's Kevin Morrissey here. I'll take the last question and then I'll hand it over to Kevin to talk about the
expenses. So you're right, we do most of our changes in Q3 and that's where you observe that we had quite a bit
of strengthening. In Q4, the total assumption and method strengthening was $34 million that was in total. We
called out the last strengthening. It was a fairly modest piece, it was only about $10 million. We had a number of
other smaller items, nothing I would call out. It was related to the segregated fund guaranteed products in Canada
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and we used predictive modeling analytics to help inform new assumptions related to withdraw and partial
surrenders.
And I would say that this isn't necessarily addressing something from the past like we saw in Q3 where we're
dealing some negative experience. It's more of a case of just trying to make sure that our models remain robust
and stay tightly aligned for future experience. So it's something that we do review and monitor each quarter
throughout the year, and as I said, this one was a fairly modest change. ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A And on the expense side, we did see experience that was higher in Q4 and as I said in my opening comments, it
was – there was a couple of things happening there. The impact of the annual performance pay cycle and the
strong results of the company came through in the quarter. We also see some seasonality on some of our
initiatives spend in the fourth quarter, so we've seen that for a few years now, where some of those projects step
up in the fourth quarter from a spend perspective.
We are very focused on controlling expenses, but at the same time, investing in future growth in our leadership
position on the technology front. And so sort of balancing the work we do on the restructure charge will have a
positive impact but we will be continuing to invest in growth and growth in the business at the same time. ......................................................................................................................................................................................................................................................
Sumit Malhotra Analyst, Scotiabank Q More specifically I think we talked a little bit about this three months ago, does the adjustment that you made in
the management or the assumptions for expenses, does that make the quarter-to-quarter experience drag less of
an issue in 2018, because that's what I would think the adjustment in that assumption would have done for Sun
Life going forward? ......................................................................................................................................................................................................................................................
Kevin Morrissey Senior Vice President & Chief Actuary, Sun Life Financial, Inc. A Yeah. Sumit, this is Kevin Morrissey again. Yes, that's right. The strengthening we did, it will improve the run rate
going forward and so we do discuss with the sources there. Kevin identified, we do expect to see some negative
experience going forward, but it will be moderated based on the strengthening asset. ......................................................................................................................................................................................................................................................
Sumit Malhotra Analyst, Scotiabank Q All right. Thank you for that. Let's move on to something else. Just on expected profit and Kevin Strain, last
quarter, you gave us some details as to maybe some of the behind the scenes factors that had held the total
company growth rate back and it certainly looked a lot better at the top of the house in Q4. Specifically for the
U.S. piece, that number on paper anyway still looks flat, would you be able to tell me in Q4, what the constant
currency expected profit growth for the U.S. was?
And then maybe more importantly, Sun Life and this might be for Dan, you've talked about the repricing that
you've been able to put forth in the group business. I think you had one round of it this year then there might be
another round that came through in 2018. Has that started to benefit the expected profit yet or is that something
that we're going to see in the coming year? ......................................................................................................................................................................................................................................................
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Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A I'll take the first part of the question and let Dan take the second part. So the expected profit on a constant
currency basis for the U.S. grew by CAD 2 million in the quarter. ......................................................................................................................................................................................................................................................
Sumit Malhotra Analyst, Scotiabank Q Sorry, I missed that. It was... ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A CAD 2 million. ......................................................................................................................................................................................................................................................
Sumit Malhotra Analyst, Scotiabank Q It was up CAD 2 million year-over-year? ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A Year-over-year. That's correct. ......................................................................................................................................................................................................................................................
Sumit Malhotra Analyst, Scotiabank Q Okay. ......................................................................................................................................................................................................................................................
Daniel Richard Fishbein President-Sun Life Financial U.S., Sun Life Financial, Inc. A Yeah. And on the re-pricing of the business that's actually phasing in three different portions, so we started about
3 years, 3 1/2 years ago to re-price the disability business, we're largely done with that, where more than 90% of
the business has been re-priced. The group life business began to be re-priced more recently. We're probably
about halfway done with that. The life and disability businesses are both generally done on three-year contracts.
And then, our stop-loss business, we began re-pricing because we saw an underwriting cycle occurring there in
the third quarter of 2016. Now that business is almost all annually renewable, so we've essentially completed that,
that re-pricing as well. In terms of when you see that in expected profit, that's an element that we only reset
annually, so you would start to see the impact for example of the very strong recent stop-loss renewal and new
business results, when we get into the first quarter of this year. ......................................................................................................................................................................................................................................................
Sumit Malhotra Analyst, Scotiabank Q All right. That's helpful. Last one for me, maybe a bit esoteric, so maybe I can tag in Dean here. You mentioned in
your opening comments where you made reference to some of the market volatility that we've experienced in the
last couple of weeks and I think a lot of it at least has been attributed to some of the upward move in bond yields.
One of the questions that comes up for the life cos and maybe in this case specifically to Sun Life is we always
think of these companies as being very interest rate sensitive, especially at the longer end of the curve.
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So as analysts or investors when we see 10-year yields moving 50 basis points since the beginning of the year, if
we turn over to you from a management perspective, how do you view that as in terms of a near-term impact for
the company. We think it's positive, it doesn't seem like it's as positive as it used to be based on your disclosures.
But from a specific product or line item perspective, what do you think the market should be focused on when the
bond yield conversation with the sector comes up? ......................................................................................................................................................................................................................................................
Dean A. Connor President, Chief Executive Officer & Director, Sun Life Financial, Inc. A Thanks, Sumit. It's Dean here. There are first order effects and second order effects. The first order effects of
higher yields show up in better strain. They show up in as well in terms of stronger earnings on surplus and to the
extent that those also show up in terms of equal spreads, corporate spreads or even wider spreads in some
cases. You might see even some lift in investing gains. But the first two, in particular, strain and stronger earnings
on investment income would be features of living in a higher – with a higher yield curve.
The second order affects our demand for a number of our products and the de-risking of defined benefit pension
plans which we've talked about before, there are a number of employers who have been sitting on the sidelines
waiting for two things to happen. One is for their DB plans to get better funded and the equity markets we've just
seen have really done a lot to help DB plans to get back on side in terms of their funding levels.
And second of all, they've been waiting to see higher long-term interest rates. And so we would expect all things
being equal to see higher demand for pension buyouts in our Canadian business. We would expect to see higher
demand for individual payout annuities in our wealth business in Canada and possibly even higher demand for
some of our fixed interest products like GIC and accumulation of annuities. ......................................................................................................................................................................................................................................................
Sumit Malhotra Analyst, Scotiabank Q I appreciate your thoughts. Thanks for your time. ......................................................................................................................................................................................................................................................
Dean A. Connor President, Chief Executive Officer & Director, Sun Life Financial, Inc. A Thanks, Sumit. ......................................................................................................................................................................................................................................................
Operator: And your next question comes from the line of Mario Mendonca with TD Securities. Please go ahead. ......................................................................................................................................................................................................................................................
Mario Mendonca Analyst, TD Securities, Inc. Q Good morning. This question might be best for Dean and Dan as well if you could offer some thoughts. Those
large transaction in U.S. Group Benefits Liberty's business was sold. And as I read about it, it sounded – frankly
sounded perfect for Sun Life, particularly given your low leverage ratio and how this could, as you said before
Dean, improve your strategic capacity. So maybe without commenting specifically on Liberty, because that may
not be appropriate, what is it about the Group Benefits businesses, is this still a business that Dean and Dan,
you're eager to make acquisitions in? Or is there some specific criteria that you're after in that market that would
really inform us about your intentions? ......................................................................................................................................................................................................................................................
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Dean A. Connor President, Chief Executive Officer & Director, Sun Life Financial, Inc. A Well, Mario. It's Dean. I'll start in and then Dan will no doubt want to add. As I said earlier, we have come a long
way in U.S. Group business and the Assurant acquisition has really helped us both in terms of capabilities and
scale, and Dan and the team have done a fine job executing on that. We're not done yet, but it's gone very well.
And it actually is ahead of our expectations. This is a very capital intensive business, it's very technology intensive
business. You see that in our Canadian Group business, you see that in the U.S. Group business, major systems
and technology and that bar is just going up. You see in this investment, in digital and planned member
interaction and proactivity.
So scale does matter in this business and I think you know we're investing in that scale. We think given our
current heft, we're big enough to succeed and compete in the U.S. Group market. But nonetheless, there are
other capabilities that we would be interested in adding. And maybe I'll turn it over to Dan and he can talk about
some of those in terms of the areas where we want to round out and expand our business. ......................................................................................................................................................................................................................................................
Daniel Richard Fishbein President-Sun Life Financial U.S., Sun Life Financial, Inc. A Yeah. Mario, we certainly are interested in adding capabilities and growing scale. We like the business very
much, we like the return profiles of it and we like our position in it. Without commenting on any particular
transaction, of course, what we also need is to have the economics work and work well for us. So that would be a
key criteria to make sure that there's a price that we can get the right kind of return on and we're certainly as
Dean said seeing that on the Assurant transaction. We're very pleased overall with the results there.
I would also point you to the announcement we made as part of our overall announcement of our new strategic
partnership with Collective Health, we view that the business that we're a part of is the entire employee benefits
ecosystem. We already play a significant part in the health space in the U.S. employee benefits world through our
stop-loss business and we have interest really in all parts of the benefits, ecosystem beyond some of the products
that we're in today. ......................................................................................................................................................................................................................................................
Mario Mendonca Analyst, TD Securities, Inc. Q Dan, just – yeah. Please go ahead. ......................................................................................................................................................................................................................................................
Dean A. Connor President, Chief Executive Officer & Director, Sun Life Financial, Inc. A Sorry. Just going to add – it's Dean here. I was going to add one other comment. What you are seeing, when you
stand back from these recent transactions is a consolidation of the market which in the long run is a healthy thing,
we think in terms of competitive behavior. ......................................................................................................................................................................................................................................................
Mario Mendonca Analyst, TD Securities, Inc. Q Actually that's exactly where I was going with my second part of this question. On that acquisition, the buyer talks
about improving margins in the target company from 1% to 5% to 7% and suggested that it could happen over
what seemed to me like a short period of time. Does that speak to rather than deterioration and competition, but
actually a more rational market to you? Like when I heard that, when I was reading that from the buyer, it did – it
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struck me as something like the markets becoming more disciplined, not less disciplined. How do you view it Dan
or Dean? ......................................................................................................................................................................................................................................................
Daniel Richard Fishbein President-Sun Life Financial U.S., Sun Life Financial, Inc. A Yeah. I mean I won't really comment on that particular competitor and what they're saying they're going to do,
obviously increasing margins by a significant amount is not something that can happen very quickly. The market
is clearly more rational now than it perhaps was a couple of years ago and obviously, that's a good thing.
But I would also say there's an opportunity right now in the market with two major transactions and the attendant
consolidation and also disruption. We're making significant investments in national accounts, which at least three
of those four players are very active in, and we think these transactions will also bring some of that business to
market as opportunities for us. ......................................................................................................................................................................................................................................................
Mario Mendonca Analyst, TD Securities, Inc. Q Okay. Thanks for your time. ......................................................................................................................................................................................................................................................
Operator: Your next question comes from Paul Holden from CIBC. Please go ahead. ......................................................................................................................................................................................................................................................
Paul Holden Analyst, CIBC World Markets, Inc. Q Thank you. Good morning. Maybe continue that conversation a bit. If we think about Collective Health and then
your agreement with Pareto and we think about them in aggregate. Can you give us a sense of how much scale
that might add to U.S. Group business whether it's on the top line or bottom line? What kind of potential should we
be thinking about here? ......................................................................................................................................................................................................................................................
Daniel Richard Fishbein President-Sun Life Financial U.S., Sun Life Financial, Inc. A Yeah. Thanks. At this point, we're not ready to speculate on what the specific potential for increased business
size with Collective Health would be. Pareto, we did get some sales in the fourth quarter, so we're off to a very
good start there. I guess what I would say is overall, our stop-loss business continues to be an area of great
growth potential for us.
We had a very strong year in stop-loss sale this past year. We're actually well above what our expectations were.
We're seeing a more rational stop-loss market. We made the price adjustments we needed to make over a year
ago. A lot of our competitors are still re-pricing their book to business right now and we're seeing somewhat of a
flight to quality with brokers bringing business to us and others like us, who have scale and capabilities and
stability. And then, we think Collective Health and Pareto will be additional catalysts for growth first in our stop-
loss business, and then more broadly across all of our group products. ......................................................................................................................................................................................................................................................
Paul Holden Analyst, CIBC World Markets, Inc. Q Okay. And then, as we think about everything you've just said and the margins you achieved in the U.S. Group of
5% for 2017 with a very weak start to the year like why shouldn't we think that margins will be somewhere at the
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top end of your guidance range of 5% to 6% or maybe even a little bit higher like is there a scenario where you
can imagine – a realistic scenario you can imagine where margins don't expand year-over-year? ......................................................................................................................................................................................................................................................
Daniel Richard Fishbein President-Sun Life Financial U.S., Sun Life Financial, Inc. A Well, we're very pleased that we got to the margin range that we had targeted earlier than we expected. One
caution on the way we're describing margins, we're doing that on a trailing 12 months basis, so each quarter we
drop a quarter. So if we drop the weaker quarter, the margin will go up. If we drop a stronger quarter, the margins
may temporarily go down. But with that said, we do have a lot of additional tailwinds.
As I've mentioned, the stop-loss business, we had a very good fourth quarter in terms of not just new business,
but the renewal increases that we were able to get. So we should see some lift in the future from that. While we're
over 80% there on our acquisition integration synergies, there's still more room there, and obviously that will come
into play, and then, of course, tax reform. So we're optimistic that we'll continue to see our margins grow in the
group business. ......................................................................................................................................................................................................................................................
Paul Holden Analyst, CIBC World Markets, Inc. Q Okay. Great. And final quick question probably for Kevin Dougherty. In terms of operating expenses in Canada,
looks like they're up 8% in 2017. Does that pace of growth slow in 2018 and what should we expect for expense
growth in Canada in 2018? ......................................................................................................................................................................................................................................................
Kevin P. Dougherty President-Sun Life Financial Canada, Sun Life Financial, Inc. A Yeah. I think in Canada, one of the things that we saw in Q4, in particular, in Canada was incentive compensation
accrual, which was in the range of about $20 million, I think so, that was significant, and a couple of other one-off
kind of items that are nonrecurring. So, you can, kind of, should know about that. I would say through the year
expenses improved, the expense growth rate, and we're – and in spite of significant investment in digital and the
new businesses and so on, I think it will moderate through 2018. We've done some expense work in Q4 and
taken a provision for that, but we'll continue to invest in the business. So, I think it will moderate over 2018. ......................................................................................................................................................................................................................................................
Paul Holden Analyst, CIBC World Markets, Inc. Q Okay. So moderate maybe to a level where it's low-single digits or close to zero, is that a fair assumption? ......................................................................................................................................................................................................................................................
Kevin P. Dougherty President-Sun Life Financial Canada, Sun Life Financial, Inc. A I think low-single digits is the right way to think about it. ......................................................................................................................................................................................................................................................
Paul Holden Analyst, CIBC World Markets, Inc. Q Okay. Thank you. ......................................................................................................................................................................................................................................................
Operator: Your next question comes from Darko Mihelic from RBC Capital Markets. Please go ahead. ......................................................................................................................................................................................................................................................
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Darko Mihelic Analyst, RBC Dominion Securities, Inc. Q Hi. Thank you. Good morning. Maybe in the interest of time, I'll just stick to one simple question and ask a bunch
later with the IR folks. But just a question for Kevin Strain, life insurance modeling is pretty difficult and the
Corporate segment, the underlying it was a loss again, what should we expect from Corporate? Just if you can
give us a hand with our expectations for Corporate in 2018 that would be a real help. ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A As you know Darko, there's a few things in the Corporate segment. There's the UK, the Run-off reinsurance and
the Corporate support. This quarter the UK had a one-time tax charge as well. There was an autumn budget in
the UK that impacted that Corporate line by CAD 13 million and there was also some ACMA that came to the UK
line. So if you are thinking about sort of this quarter versus prior quarters, you get some impact from that.
I'm just looking full-year Corporate segment this year was negative $52 million on an underlying basis, UK positive
and Run-off positive and then the Corporate cost. The thing about the UK it's been running at a level of around
CAD 100 million, maybe a little bit over CAD 100 million and you can expect that that it will continue to be strong
in the UK results and we expect to continue to get lots of cash out of the UK, the Run-off has been then smaller
piece, and then, the Corporate segment does bounce around quite a bit. ......................................................................................................................................................................................................................................................
Darko Mihelic Analyst, RBC Dominion Securities, Inc. Q Okay. I guess, that helps, Kevin. Thanks very much. ......................................................................................................................................................................................................................................................
Kevin D. Strain Executive Vice President and Chief Financial Officer, Sun Life Financial, Inc. A Well, you got a shot at the U.K. and the Run-off. I think the Corporate ones are harder to give a sort of the number
where that would end up. ......................................................................................................................................................................................................................................................
Darko Mihelic Analyst, RBC Dominion Securities, Inc. Q Yeah. No. I appreciate that. It's just from 7% to minus 52%, it's just one more difficult part of the model, I was
hoping to get some color on. Thanks a lot. Appreciate it. ......................................................................................................................................................................................................................................................
Operator: There are no further questions at this time. I'll turn the call back over to Greg Dilworth. ......................................................................................................................................................................................................................................................
Gregory A. Dilworth Vice President-Investor Relations, Sun Life Financial, Inc.
Thank you, Dan. I'd like to thank all of our participants on today's call. If there are any additional questions, we will
be available. Should you wish to listen to the rebroadcast that will be on our website later this afternoon. Thank
you and have a good day. ......................................................................................................................................................................................................................................................
Operator: This concludes today's conference call. You may now disconnect.
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