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Executives

Dean Connor - President and Chief Executive Officer

Analysts

Joanne Smith - Scotia Capital

Sun Life Financial Inc. (SLF) Scotiabank Financials Summit Conference Call September 5, 2013 9:25 AM ET

Joanne Smith - Scotia Capital

Okay. So next up, will be Dean Connor, President and Chief Executive Officer of Sun Life Financial Inc., a role that he has held since December of 2011. He is also a member of the Board of Directors. Dean joined Sun Life in 2006 as Executive Vice President, heading the company’s United Kingdom and reinsurance operations, strategic international efforts and corporate functions. In 2008, he was appointed President of Sun Life Canadian operations and in 2010 became Chief Operating Officer with responsibility for the company’s Canadian and UK operations, MFS, marketing, HR, IT, and other shared business services.

Prior to Sun Life, Mr. Connor was with Mercer Human Resource Consulting for 28 years, where his tenure included President for the Americas region. Dean is a Fellow of the Society of Actuaries in the Canadian Institute of Actuaries and holds Honors Business Administration degree from the Richard Ivey School of Business at Western University. So welcome to the conference, Dean. Thank you.

Dean Connor

Well, thanks Joanne and good morning everyone. It’s great pleasure to be here. I will draw your attention to the usual cautionary language on the use of forward-looking statements and then jump into the agenda. The main message I want to deliver this morning is really around the growth opportunities of this company and the fact that everywhere we look and all of the businesses in which we operate and all of the markets in which we operate, we see very strong growth opportunities for what we do.

As you know, we have a broad footprint around the world. It’s a broad and diversified business model. Half of our business is outside of Canada, and that’s something I will come back to and that’s true even after the disposition of our U.S. annuity business. We are a global financial services company. It’s very well diversified. I won’t read you all these lines of business, but the main point again is that in every single bucket, in every single category of line of business, we see really interesting growth opportunities that are driven by the three big drivers of demand for what we do, which is the baby boom population coming up to retirement, the downloading of responsibility from governments and employers to individuals and the really astonishing growth of the middle class in Asia. And those three trends, those mega trends which we see persisting for decades to come drive through all of our businesses that we operate in around the world.

We do have a balanced and diversified business. We see this as very important to be balanced and diversified. It’s allowed us to weather the financial crisis in good shape. As you know, one of the reasons we were able to keep our dividend unchanged through the financial crisis. And as we look ahead, the mix of business will shift and we will come to our 2015 goals in a minute, but you will see Asia bigger than the pie shown on this chart. You will see MFS bigger, you will see Canada about the same, and you will see the U.S. somewhat smaller around 20% of our business.

In terms of executing on our growth strategy, we have got our four pillar strategy. We have talked about that before. And the main point I really want to focus on here is we have selected these four pillars as areas where we see ourselves having a competitive advantage, areas where we see that we have got enough scale to compete successfully, where we have good economic logic on how to make money in these businesses and how to grow, and all these four pillars share those characteristics.

We are also – and this is a really important filter, we have also picked businesses where we think we can generate higher ROE with less capital and lower volatility. So very big focus on reducing our cost of capital and increasing our ROE and of course that’s a value creation gap as we widen the spread. And the most important part of all is that, that’s all very interesting, but we are actually executing on that. We are actually making and I am pleased with the progress that we have made in the last few years on that front. So a lot of actions to reduce volatility, I won’t read all these. You’ve seen them. These are tough actions, tough decisions that we took and better yet we were able to actually act on them, and it’s positioned the company well as the headwinds have started to turn into more tailwinds, not exclusively, but we are seeing more tailwinds than we were a few years ago, and we have taken a lot of tail risk off of the company and positioned the company well to grow.

So starting with Canada in terms of driving growth, we have been able to increase our share of the individual life insurance business. We have driven 12% CAGR life insurance sales growth in the past three years and that continued in the first half of this year. We have moved from the number three position to the number two position in Canada in individual life insurance sales. On the individual wealth side, you can see we have deliberately deemphasized segregated funds given their risk and capital characteristics and emphasized mutual funds and fixed interest products and have driven very good growth again 12% CAGR over that period.

I would tell you that we are expecting a lot more from that segment going forward, including in Sun Life Global Investments. So, just coming up to three years ago, we launched a mutual fund company in Canada, Sun Life Global Investments. We are up to now about this was $6 billion, but about $6.5 billion of AUM at mid year. This is a business that is kind of a sub-advised model. There is some active management inside some of the products, but first and foremost, it’s a solutions business whether its milestone funds, high NAV funds, target-date funds, target risk funds, and importantly, it brings the MFS retail funds to Canada. It’s the only way you can buy in the Canadian market MFS retail products today through Sun Life Global Investments.

So we are pleased with this progress. We have driven these sales. We are only coming up to three years. So, we don’t have a full track record of investment performance through our advisors to show their clients, but nonetheless even with the short track record, we have been able to post some pretty good tails and we are expecting a lot more from this business as we go forward.

Further in Canada on the group retirement services business, you can see good progress in growing AUM. There is a big focus in this business on productivity. There is a lot of fee pressure on the GRS business in Canada. It’s a very competitive market. And so the path to glory in this business is around productivity, it’s around scale. We are the number one player in this business in Canada with $55 billion of AUM. It’s also about and then you can see in the bottom half of this slide, extending what we do into other segments and back in 2009, and I would say that we are little bit early on this, but in 2009, we launched a new business called defined benefit solutions. And this is a pension de-risking business. This is an annuity buy-out and annuity buy-in business. This is us going to pension funds and you would have seen the Canadian Wheat Board as an example of this earlier this year. And taking over their obligations, we haven’t seen transactions yet of the size of the GM or the Verizon deals that you saw in the United States, but we expect there to be enormous demand for this business, major changes in pension accounting rules at the start of this year. Funding gaps are closing. More plans are getting closer to 100% funded. Interest rates are ticking up, so the perception that I don’t want to de-risk now, because I might be giving up something.

You see all these forces coming together to create what we expect will be more demand for this then there is supply in the Canadian marketplace. So, we see that as a natural extension of our GRS part business where a lot of this is sold through existing client relationships. The group benefits business, we are number one in terms of premiums and deposits, although it’s a tightly contested space with some strong competitors. We have been investing in our mobile capabilities, investing in our pharma management capabilities and in wellness. We acquired a small business two years ago, Buffett Worksite Wellness to help build that business.

Very nice growth in our business, in-force, in this business, you don’t make money on sales. Sales are funded with force especially when they are growing, but you really make money on the in-force business. You only make money if you have got the business in-force in premiums and deposits, so we are pleased to see the growth. And we have been investing in this business by growing our sales power.

On top of all the three businesses I mentioned, back in 2009, we launched a new business called client solutions. And this is a business that says we can do more for the 5 million Canadians who are already a Sun Life customer, they are a member of the group benefit plan and group pension plan or an individual customer, and it starts with pension rollover sales. So, this is talking to a plan member when they are leaving their plan and you can see very good progress in the top half of this chart. Last year, $2 billion, $1.168 billion of pension rollover sales. That’s those are assets that otherwise would have left Sun Life as people retired or terminated from their employers. Those are assets that we were able to retain in the company and retain outside the group platform on an individual of product.

Similarly, on the bottom slide, you see insurance sales and very strong growth in insurance sales in this business. Some of this is life and health rollover, so it’s calling up plan members as they leave and retire and maybe it’s easy for them to convert their company coverage to a personal policy right over the phone, PDF that the policy to them really simple products, easily bought presented just at the right moment. And when you do that, you can create good margins in this business. So, this is an important part of our future and it’s really leveraging our brand and our strength in our customer relationships.

In the United States, we have been investing in our employee benefits business. We have a natural competitive advantage. We are the only Canadian life company that has a group benefits operation in the United States and we are the only U.S. life company that has an operation in Canada. There is no other company that on a North American basis has a business and together we are a $10 billion business in terms of premium number two after MetLife in North America. And the reason that’s relevant is there is a lot of technology investment that underpins the group business. And so we are leveraging a lot of the technology from our Canadian operation into our U.S. business, client building systems, disability management systems, enrollment systems, you name it. We have a big investment underway in voluntary benefits. We grow about more new products in the last 24 months and probably in the 10 years prior, think of cancer insurance, personal accident, voluntary disability, and so on. We have added to our distribution strength in the United States and we have built out new enrollment tools.

We also have a major waive of activity underway that transform the way we do business and our U.S. group business. And changing the model dramatically from 34 offices, sales offices that are kind of each doing things that are on the way to a new model really a dramatic change in model that would give us a lot more scale to grow the business more quickly. We are also doing a lot to prepare for the Affordable Care Act, which we think is going to present some really interesting opportunities for us going forward. In addition, in the U.S., we report in our U.S. segment, our international high network business and this is a business domiciled in Bermuda. This is a business that sells insurance and investment products, the high network customers, mostly in Latin America and Asia, but also in the Middle East and parts of Europe. These are products. There is not a lot of competition in this space. There the value proposition is Sun Life is a safe place to invest your assets, Bermuda is a safe place to put your assets, and these are value-added products and I will tell you, you can see some of the numbers here. We see a big opportunity. You haven’t talked a lot about this business, but we see and there is not a lot of competition in this space and we see a nice opportunity to grow this going forward.

Well, some to MFS, and obviously a very important part of our growth story. MFS has posted truly outstanding investment results and for those of you who can’t read the numbers from the back of the room, all funds across 10 years, 96% of the assets in the top half of their Lipper ratings and whether it’s 3-year, 5-year, 10-year, whether it’s all funds fixed income global international domestic, I mean, it’s really an amazing track record. And the first question people ask is how is this possible, what is MFS doing is distinctive and unique. They have created something truly unique. They have created a global investment platform by sector, so that analysts in London and Boston and Tokyo and other parts of the world on the phones with each other stay in the financial sector every single day. And this is not just cross equity – its cross equities and fixed income. So, they are comparing notes, they are triangulating, they are planning and they are collaborating.

A third of the bonus of MFS analysts and PMs is based on collaboration based on 360 degree feedback that they collect twice a year, which is very different model. And the other two-thirds based on value-added investment performance, is based on three-year numbers, not one year, but three year numbers. So, it’s a very distinctive model. It’s focused on longer term outcomes. It’s focused on collaboration and it’s focused on very tight risk management. So, it’s a sustainable business model. And you see that driving growth in AUM of the $354 billion at the end of June. So we had excellent growth in the past, but looking ahead, question is how are you going to grow this business further? So, looking ahead, MFS is focused on three big things.

One is client retention, so you sell $80 billion of new sales in a year and $60 billion go out the door in terms of lost clients, lost money, whether clients are rebalancing or insurance companies are bringing mandates in-house. Whatever the reason $60 billion goes out the door, how do you reduce $60 billion to $50 billion, how do you improve client retention? So, MFS is making a big portion, big investment in that area with their client delight program and it’s all about getting closer to clients in understanding where they are going with their pension funds and what they need and broadening the number of products that we have on with each client.

The second one is around building out non-U.S. retail which today is about $20 billion of AUM, which is small in the grand scheme of things. This is a Luxembourg based UCITS platform. And so MFS is investing money in growing that platform more feet on the street in Europe and Latin America and other parts of the world to grow that. Interestingly, MFS has been doing business in Australia and Canada for many years, but it’s really only the last two years through the integration of McLean Budden here in Canada and through the buy-out of a partnership with another company in Australia, where MFS has taken over the lead as lead dog in that market, that MFS looks at these two markets as very large institutional markets with terrific opportunity. So, Canada is the fourth largest DB market in the world, the market frankly that MFS didn’t pay much attention to prior to the integration with the claim button.

Australia, we have got $15 billion of AUM, $18 billion of AUM, it’s growing rapidly, but it’s a peanut relative to superannuation market, that’s $1.4 trillion of assets. So, those are two markets that are terrific opportunities for MFS. They are also going to spend more time on fixed income products and expanding fixed income. 70% of the assets have been equities. They are benefiting from that as money moves out of fixed income and equities, but looking ahead, they plan to broaden their footprint in fixed income. They have shown and demonstrated an ability to grow and improve their business over a long period of time. This takes you back to 2001 and in terms of distribution by channel you can see real big progress in broadening distribution, particularly non-U.S. retail. In terms of diversification by clients, you can see a huge progress here as well in terms of where the clients are based.

I will wrap up and jump to Asia, where it’s our fourth pillar. We are represented in seven markets that represents what we think is 90% of the growth in our industry in the coming decade. We have got a lot underway to drive growth in Asia. We are attracting a lot of top talents. We are very pleased with our progress there. We – these markets are almost all early stage growth markets. There is a lot of runway for us to carve out our position over many, many years. And our recent acquisition in Malaysia and the startup in Vietnam are just examples of that.

I will wrap up with a couple of last comments. Some basic changes in how the company runs and a lot higher bar on talent and a high performance focus, a lot more time spent on customers in understanding what customers want in expanding what we do for our customers and a big focus on productivity and expenses. We have as you know strong capital and cash position, $1.950 billion of cash estimated post the close of the sale or not estimated but post the close of our sale of our U.S. annuity business, very strong MCCSR ratio that for the Canadian the SLF – the SLA business, that doesn’t include that cash at the Holdco.

We have posted some very strong earnings growth and part of this is actions we take and part of this is as I said earlier some of the headwinds are flipping around and showing up is more tailwinds, but very good progress on VND expected profit and a lot of heavy lifting to get new business strain down significantly. We have updated as you know our 2015 objectives. I won’t repeat them here. I would describe these as ambitious, but achievable. These were based on economic conditions at the end of 2012. And if we finish out 2013, 2014, 2015 with the kind of tick up in interest rates than markets we have seen this year that will be a tailwind for us.

So key takeaways, we are executing on growth, lower risk, higher ROE businesses, a disciplined approach to capital deployment and as I said ambitious, but achievable objectives. So I will stop there.

Question-and-Answer Session

Joanne Smith - Scotia Capital

Okay, questions from the audience. Okay, well I will start off. You mentioned the pension risk transfer business in Canada, and that’s my understanding is that it’s a relatively capital intense business. So, how does that match with your objectives to reduce your exposure to this capital intense product? And is there any appeals moving that strategy into the United States and compete with the life of credential?

Dean Connor

I think the part of the spectrum we have been really moving away from is long-dated, unmatched business, where you can’t actually hedge interest rates in equity markets, so for example, VA business and the Universal Life business. In contrast, the annuity business, you can hedge out interest rate risk and what you are left with is credit risk, which we are comfortable taking. We have a whole risk and we think we can make money on that. And longevity risk, and the way we manage longevity risk is through our risk appetite for the whole enterprise, we can use reinsurance to release some of the pressure on that if we want to push that out. And there is actually underwriting of these large cases. It’s not just quoting kind of standard mortality rates off of mortality table. So, there is some underwriting around it. So we are comfortable with it on that basis.

On the U.S. side at this red hot moment, we do not plan to enter that market. We don’t have a large base and in-force base. We have got a small one, but we don’t have large in-force base of existing mortality business. It’s important to have that. So, you can price off of it, and you have got a sense of mortality improvement direction and trend and we don’t have that in the U.S. right now. And it’s a competitive market. So, we – the thing we like about the Canadian market is we see as I said more demand than supply and therefore we can pick our spots, we don’t have to swing at every pitch and we can really shoot for higher ROEs.

Joanne Smith - Scotia Capital

In the back?

Unidentified Analyst

So could you give us a rough idea of what you think your assets, liabilities, and earnings will look like in terms of our global split?

Dean Connor

Well, yes, just to clarify 90% of the growth in Asian markets, within Asian markets will take place in the seven markets that we operate in, so China, India, Malaysia, Indonesia, Hong Kong, Philippines, Vietnam. So that was the point around the 90%. I think the estimates that I have seen something like 50% of the growth in the global insurance industry in the next decade will be in Asia. So either way you cut it there is lots of growth opportunity. Where do we look like going forward? Well, on the Asian business, from 8% of net income of the company to 12%, we think by 2015, I would tell you 12% is still too small, right. It’s not relevant yet to investors. It’s big enough to compete in those markets, but it’s not a big enough part of Sun Life to be relevant to our investors. We think the Asian business needs to be 15% to 20% of the company, so that it becomes more relevant to our investors. And so that’s our goal is to get it at the 15% to 20% and we will do that over time through a combination of organic growth and acquisitions. The thing, the nice thing about where we are at in our business back to the growth theme is none of our 2015 targets assume any acquisitions. That’s all organic growth. And coming back to the theme of growth, we see a lot of demand for what we do.

Joanne Smith - Scotia Capital

Unfortunately, we are out of time. Thank you very much Dean.

Dean Connor

Thanks very much.

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