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Executives

Kevin P. Dougherty - President, Sun Life Financial Canada

Analysts

Robert Sedran - CIBC World Markets

Sun Life Financial Inc. (SLF) CIBC 12th Annual Eastern Institutional Investor Conference Call September 19, 2013 9:10 AM ET

Robert Sedran - CIBC World Markets

Okay, as they have for much of the industry, the times have force changed at Sun Life throughout the company. The change in Canada of course hasn't been as drastic as it has been in the United States, but it has been an active period there as well. So, I am pleased to welcome Kevin Dougherty, President of Sun Life Canada back to the conference to tell us all about it.

He's been with Sun Life since 1994 and assumed his current position in 2010; previously worked at a variety of management positions in wealth, group, and insurance businesses at the company. In his current role, he is responsible for group benefits, group retirement services, individual wealth, insurance and investment management services in Canada. So, welcome back to the conference, Kevin.

Kevin P. Dougherty

Thanks so much, Rob.

Robert Sedran - CIBC World Markets

And I will give you the opportunity to make some opening comments before we start the Q&A.

Kevin P. Dougherty

Okay, great, great, thanks a lot. Good morning, everyone and bonjour tout. So maybe just by way of introduction, lot of exciting things going on in the company, new CEO started about 19 months ago and right away rolled out a new strategy for the company, which we call our 4-pillar strategy, focusing on Canada, U.S. Group, asset management, and Asia.

And I think since he's moved into that position and rolled out that strategy, we've seen tremendous amount of change and momentum in the company. It's a really, really exciting time and if you really look at it, he's already started to reshape the footprint of the company with the sale of our U.S. variable annuity business, which really kind of changes the whole risk character of the company from our peer group.

And some revitalization in Asia, including two joint ventures, one in Malaysia and one in Vietnam, and reinvigorating kind of the whole very, very big focus on high performance and talent, and so it’s an exciting time in the company, and I think if you look you can see we’re getting good traction on our goals, which we've laid out for 2015 across the company and there is a great momentum.

My focus is primarily in Canada. What I would say about that is, we have leading market positions in a number of areas. We’ve been number one in Group Benefits business in Canada, number one in the Group Retirement Services business in Canada. We have the leading career sales force in Canada both in terms of numbers and productivity.

We have the most leading brand in the insurance space in Canada, and we’re frequently cited for things like most trusted brand in the sector in Canada, so we have a great foundation to build on in Canada, and some very, very strong and unique assets to build on as well.

So, I would just add first half of the year, strong momentum in terms of profitability and sales in the business, and we’re very focused on staying on track with that and achieving the goals we set out for ourselves for 2015.

So maybe with those intro remarks, I am happy to…

Question-and-Answer Session

Robert Sedran - CIBC World Markets

And again, any questions from the audience, please do feel free to stop me. So you laid out the 2015 targets initially and on the sale of the annuities business, targets got updated expect yours didn't, but the -- as soon as those targets came out, we immediately began the game of, are they ambitious, are they aggressive, are they sandbagging? And so, nobody’s figures are exactly right.

When you look at your segment and the numbers didn’t change even though the environment arguably did improve. So why didn’t the numbers change in your segment?

Kevin P. Dougherty

Well, there is still a lot of unknowns in terms of the economy and interest rates and how we kind of factor that in, and so we haven't really updated it for that. I mean really what I focused on is core earnings, so margins in the business, fees, underwriting gains, those kinds of things. And if other gains come to us because of market effects or direction of interest rates, then those are all good, but they are not kind of baked into -- I am really focused on core and the earnings power.

Robert Sedran - CIBC World Markets

So it’s not been -- it’s not always exactly possible to get to what those core numbers have been at the segment level in terms of what the impact of rates or what the impact of some experience gains might have been. When you think about the targets that you have for 2015, what kind of growth would you say is inherent in those targets from where you sit today, from just percentage terms?

Kevin P. Dougherty

Well, when we laid those out in 2010 -- sorry 2011, our earnings were about 650 at core and we were trying to get to 900 at core. So that’s a significant lift when you kind of get right back to the core. So that gives you a sense of that, that’s double digit at the core.

And at the same time investing in quite a number of new initiatives, as you know, we've got going on in the company in the mutual fund company and you define benefit solutions business, breakout and wholesale, and something we call client solutions, which is really kind of direct to consumer and plan member businesses.

So, we have got a lot of investment going on inside that number, which will -- which is about really the longer run because there is also the story beyond 2015.

Robert Sedran - CIBC World Markets

So then when you think about what might be the -- give us a sense of what the risks are that might hold you back from the $900 million, and again leaving aside because let’s talk core, so leaving aside what interest rates might do or what markets might do and because nobody knows that one, but what are you kind of counting on to work your way and what might not work your way?

Kevin P. Dougherty

Yeah, well we’re feeling quite confident about our ability to achieve those numbers in Canada. At the core, we have good strong momentum in all of the businesses. We are subject to economic forces that are kind of beyond your control, but beyond that, I am feeling very good about the business fundamentals and how they are improving.

If you look at the Group Benefits business for example, you can see that the underwriting gains that are coming through there on better and better disability management work and better underwriting practices.

Our DB Solutions business, it feels like there is very strong demand there for that business and that’s an important part of the profit picture. So, I think I would say those are the main things. Regulatory change is always something that you -- we are very, very conscious of and that’s one thing you can’t know for sure.

Robert Sedran - CIBC World Markets

Okay. So I am going to keep trying, one more time and try to pin you down on whether you're sandbagging or aggressive. So, Rob Manning on the conference call, people were poking at the MFS number and you seemed to indicate on the call that you would be disappointed if all MFS does is hit the target that was put out for MFS.

So if you hit your target, is that a disappointment? Is that a mission accomplished? Is it -- how do you view that target in terms of -- I said, I'll try one more time so…?

Kevin P. Dougherty

Yeah, very good.

Robert Sedran - CIBC World Markets

Try it one more time and I will be done.

Kevin P. Dougherty

Well, yeah for sure, one works to over-achieve wherever you can. So yes, we are working hard and one tries to make sure if he is, like you are studying for a test, you over-study and you are working in an environment where you can’t control everything, you try to make sure you’ve got everything working and then some, so hope that helps.

Robert Sedran - CIBC World Markets

All right. So let’s move on, the group businesses, you mentioned Group Benefits and Group Retirement Services, top market share and in some cases buy a lot. How do you grow that business when you’ve already got the top market share and are you vulnerable to the competitors that might want a chunk of it, and because it actually has been a sustainable lead in that market share for some time.

So how do you sustain the lead and how do you sustain the profitability of that business when other people want in, especially in an environment where it's a less capital intensive product in many cases, and so it's become a favorite business for everybody?

Kevin P. Dougherty

Yeah absolutely. Yeah, no it’s a very hotly contested business and attractive for everyone. We’ve managed to -- if you look at the numbers over time, back in -- I mean it's a long-term journey. So if you went back to say 2004 or 2005, you would see that we were neck and neck with number two, and we put about $18 billion of room between us and number two during that period of time.

And so, assets under management are $58 billion today and about 18 of room, so I’ve executed very well on that. It can’t be just about price, because if you make it about price, it ends badly. So we have a lot of strategies to try to bring a lot more to the discussion with customers.

So for example one of the key strategies we have is we call total benefits, which is where we leverage the Group Business and the GRS business, and in fact go to market together with one plan member experience and so one pin, one password, one phone number, one look and feel, one kind of everything, so you've got your whole benefits and pension program in one place.

Competitors have not been able to replicate that with any scale. And even if they can, like a large customer you think about bundling these programs together, the easiest sale, not the easiest, but the most logical sale would be to bundle number one and number one, right, as opposed to bundling number three and number four right.

And so this is something we work very, very hard at raising kind of the stakes and the experience for the plan members, so now we’ve got joint statements across pensions and group and these are very hard things to replicate over time.

So, strategies like that -- we have strategies like in-plan work there -- so we’ve introduced open calling to members to welcome them to these programs and at at key moments of time to get them enrolled and to get them to increase their amount. So we’ll do about $400 million of new sales this year just with plan members inside their plans. So -- which you don’t even see in our total sales results, so it’s another $400 million that's coming through there.

Our 2015 goal is to get that to $1 billion. So that’s -- you imagine, you’ve joined your company, you get a call from Sun Life, may be you haven’t joined in the pension plan or have one, you are leaving money on the table, we reach out to you so to maximize these programs.

And so, these are part of the growth strategy here is to track these customers with this great value proposition, keep them because once you’ve got this total benefits field, you don’t really want to disconnect it. So, it helps us keep them in and to work these programs to help them to grow more quickly.

Robert Sedran - CIBC World Markets

Dean Connor has talked about North American scale in the group businesses and is that now the U.S. borrowing off the Canadian strength, or is it really a North-South cooperation? I mean it’s clearly an established business, much more so in Canada than it is in the United States. So is it just about transferring knowledge and transferring scale down, or is there cooperation between both sides?

Kevin P. Dougherty

No, there is actually a lot more shared infrastructure than you would think so. Things like client billing systems are common across North America. Things like our long-term disability claims management systems are common across North America. Things that are different would be more things like the touch brokers and -- where you get to the compensation and those kind of things.

So that’s enabled the U.S. operation to operate at a different scale than they would otherwise. And if you look at it, our premium in North America in group would be about $10 billion and that would be second only to Metropolitan Life. So, they’re playing at that kind of scale.

A great example of other places where we’ve been able to leverage it would be in product development. So as they've gone out to try to penetrate the voluntary worksite business, we’ve taken teams and technology from Canada to say being able to rapidly execute on product development, would have taken three times as long if they weren’t able to reach into Canada.

So things that are commonly -- we use in our group business up here like critical illness, for example, accident those kinds of things, they were able to reach into our people for product development, and then the platform already runs these products, so it was pretty easy to adapt.

Robert Sedran - CIBC World Markets

So are you seeing any unit cost benefits into the Canadian operation then or is most of the benefits are showing up in the U.S. business?

Kevin P. Dougherty

Yeah. And I think the benefits show up in the U.S. business. In theory, there is unit cost for Canada, but I wouldn’t say it’s part of what we’re really executing on. I think we’re trying to help them to execute as quickly as they can.

Robert Sedran - CIBC World Markets

Okay. Maybe just give us a sense of the mutual fund business and how it’s going against plan, what’s going right, what’s going wrong?

Kevin P. Dougherty

Yeah, good, good. So Sun Life Global Investments is our mutual fund business. We started in October 2011 and -- sorry, 2010, and it’s actually just coming up on its third year anniversary at the beginning of October 6th through 7th and at that point, we’ll have our first three-year track records on our funds.

And so that’s pretty exciting because by -- depending on what happens in the last couple of weeks of September, it looks like we’ve got some really fantastic track records coming through with our initial offering of products. Two of the funds will be in the top 5% in their respective categories. Not surprisingly they’re actually MFS funds that are wrapped within SLGI.

So I think we’re off to a good start where the firm itself has about $6.5 billion under management already, another $6 billion of general fund assets is inside this construct. So $6.5 billion in just under three years feels like it’s off to a great start.

Distribution is -- really comes out -- comes added through four kind of sources. So one is our GRS business in Canada where we've mapped out a lot of funds into SLGI funds. Our roll-over business in Canada, which is people leaving GRS plans, going into private accounts, we do about $1.2 billion of sales in that category every year.

So a lot of SLGI flows from there, our career sales force and more recently, we’ve started to build out a footprint around wholesale distribution into IIROC and MFDA channels. So more recently, we’ve gotten on the -- actually ahead of things, we’ve gotten on the Raymond James platform, Canaccord and Edward Jones personal platform in late June. So all of these things are I think are really, really good signs for where we could be at this point in time.

We’ll do our -- sorry can’t really say we’re going to do this here of kind -- but we’re on track with our plans. I would say, we are quite happy with how it’s developing. The Career Sales Force is kind of brick-by-brick where it kind of bringing -- every week there is another three or four advisors that have starting to use SLGI. The penetration is about 70% of the Career Sales Force is now using SLGI for their clients for place tickets and as I said, this is ahead of three-year track records and this is still early going so…

Robert Sedran - CIBC World Markets

Yes, so especially those last two channels, the MFDA channel and the Career Sales Force is it really a tipping point, three year track record that you should expect to see sales improve a lot further or is it…

Kevin P. Dougherty

Yes, I know -- I think three year track record will be very important in the third-party channels in particular. There is another things like we just launched the corporate class construct which is -- enables investors to switch across funds without creating a tax event and we just launched that in late summer.

And what’s interesting about that construct is that we’ve got a number of different managers inside that construct such that usually if you got money with the manager, you have to sell their fund to move to another manager. And so you are either stuck with that manager or you've got a tax event and so this is a pretty unique construct. We think it will be very, very attractive in the Iiroc channels in particular MFDA.

So anyway those are the things -- I think we would say that we’re at a good place right now. We’ll continue to see increasing momentum on this. This is a big initiative for the company and it will take -- takes time to build a mutual fund company. But I think we’ve got all the pieces that work.

Robert Sedran - CIBC World Markets

Is the Career Sales Force kind of get treated as an arms-length type compensation, there is no difference to them whether they sell an SLGI Fund or whether they sell a CI Fund or anything else, or is there any incentive for them to sort of direct the sales in-house?

Kevin P. Dougherty

Yeah, pretty well -- the rules are pretty clear on -- you are creating conflicts of interest for advisors and those kinds of things. So there is lots of things you can do around how you present products on the shelf, how you present solutions on the shelf, how you make things simpler administratively to do things. And of course the message about the home team is very, very important.

And so these are the big -- these are the kind of levers that we try to pull.

Robert Sedran - CIBC World Markets

Okay. Just to talk a little bit about the proprietary channel because I know it’s one of the things that you view as a differentiator for Sun Life.

Kevin P. Dougherty

Yes.

Robert Sedran - CIBC World Markets

When we've had a period like we’ve gone through where there has been regular price increases on basic insurance and a lot of our people in the industry generally and how has that sales force responded to all the product changes, has there has been frustration from all the changes and pulling out of some product, raising prices on a lot of others, how it’s been -- what’s been the experience with the individual advisors?

Kevin P. Dougherty

Yeah, well I think as we sit here today the Career Sales Force would say things are better than ever. And so that may be a surprising answer for you but -- so a recent survey by Investment Executive which is sort of their, one of their key trade newspapers would show our ratings even higher than they were last year and the top Career Sales Force in the country in terms of satisfaction. And that’s across a wide range of criteria like technology and like brand support and like training and those kinds of things.

The shift in product mix we’ve managed very carefully with the sales force. So they have access to some products that we don’t sell in the wholesale channel. And so for example our GMWB Seg Fund product, we don’t sell currently in the third party channels, but we’ve kept it live for our Career Sales Force along with a number of other solutions. So they can offer that if they want, but they’ve got other options as well.

So I think that Career Sales Force is -- it is one of the most important parts of our strategy in Canada. I call it, kind of the jewel in the company and it really is. We’ve done things like for example our Client Solutions Business is not only reaching up to client members to help them to use their group plans better, but also taking those opportunities to determine if somebody could benefit from meeting with an advisor.

And we will generate -- last year we generated about 50,000 leads for our Career Sales Force -- sorry, last year, it was 45,000, this year over 50,000. We’re trying to get to 70,000 leads for our Career Sales Force in 2015. And that’s really incredible like when you just come into the office and there's a group plan member who -- an appointment set up for you and you can just kind of meet with them and start a conversation.

And so we work very hard at making sure we’ve got their hearts and souls.

Robert Sedran - CIBC World Markets

Yeah. So can you talk about the demographics of that Career Sales Force, is it getting older? I mean are you attracting new right out of school or like what kind of intake do you have, what you aim and what kind of turnover do you have on it?

Kevin P. Dougherty

Yeah. It’s been growing in the range of 50, 70, I think we had over 100 last year, but 50 to 70 is kind of the right growth rate we believe. The average age is 46. The major -- it’s really interesting, we do a fair amount of university recruiting, but the major sources of talent are actually three other places.

So one would be mid-career managers who are changing jobs, somehow they are experienced business people, they are company disappeared or industry changed or whatever. And so we've got a lot of mid-career managers, teachers, those kinds of people that are really ideally suited.

The second would be ethnic Canadian. So a lot of first generation immigrants who’ve come to Canada. They have professional designations and degrees in other countries, not recognized here, they need to get to work, they have families. They find their way into our Career Sales Force and wealthy ethnic communities in Canada and it’s been an incredible strategy for us. And in their communities, they are regarded as engineers or accountants or lawyers or whatever if not in the professional designation in Canada.

And then the third would be women coming back into the workforce after raising families and this is a great source as well. And of course these are people that have -- understand financial security, they run a household, they understand all about our business, which is about financial security and they connect with people very well.

So about half of our sales force is -- would be female now and that’s a great source as well.

Robert Sedran - CIBC World Markets

Okay. I want to close, you mentioned off the top one of the potential risks I guess to the outlook, is the regulatory outlook, which we never know what’s going to happen, but as you look out over the landscape right now, we've kind of come through some pretty tough times. Does it feel like regulatory risk is meaningful or is it there is some tweaks to the edges that is not going to change the business all that much? Where in terms of things to worry about, where is this right now?

Kevin P. Dougherty

You probably have to parse it off into kind of the different pieces. Obviously there is a lot of discussion about capital and everybody’s footprint is different in terms of how that will play out. We’ve de-risked the company very significantly. So that’s one of the things we’ve been doing in anticipation of that. But no one knows where -- how that will play out.

You know at the consumer level, there is a lot of discussion about wealth management and commissions and disclosures and fiduciary interest, all of those kinds of issues and they have yet to play out as well.

I think we are confident that those are going to get to the right place, but one worries to make sure that they do. This is a great place where the Career Sales Force is I think very, very well positioned because we’ve got our arms around something where we have a lot of confidence in the quality and we manage the shelf or we manage what's there and our compensation if it were more transparent, it would look very good.

And for example we use level commissions for insurance as opposed to heaped. And that’s a big difference in the third party channels and pretty well -- well everywhere else you got these heaped commissions that might be difficult to sustain in a more transparent environment and ours is -- it’s leveled through the lifetime of the contract.

It aligns the interest of the customer and the advisor and us in a long term relationship. And so there are places where this could actually work very well, but it’s an unknown.

Robert Sedran - CIBC World Markets

Okay, we are out of time. Kevin, thank you very much for participating in the conference.

Kevin P. Dougherty

Thanks for having us, yeah.

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