Sun Life Financial's (SLF) CEO Dean Connor Presents at Scotiabank Financials Summit 2016 Conference (Transcript)

| About: Sun Life (SLF)

Sun Life Financial Inc. (NYSE:SLF)

Scotiabank Financials Summit 2016

September 8, 2016 9:30 AM ET

Executives

Dean Connor – President and Chief Executive Officer

Analysts

Question-and-Answer Session

Q - Unidentified Analyst

We're very happy to be joined by Mr. Dean Connor, President and Chief Executive Officer of Sun Life Financial. Dean joined the Company in 2006 and was appointed CEO in December of 2011. Sir, good to see you.

Dean Connor

Good to see you.

Unidentified Analyst

Thanks for being here.

Dean Connor

Pleasure.

Unidentified Analyst

When I did my opening intro on what's been happening in the Canadian life insurance sector in 2016, I talked about the fact that operationally it's been a decent year for the group, that was in good shape, a lot of the financial metrics we look at seem okay, but the stocks haven't performed in large part again because macro hasn’t been very friendly. The way we started it off or I want to start with you is to say there are a lot of things that are not necessarily under your control even as a Chief Executive of the company, macro environment sometimes regulatory or actuarial changes. In the business or the parts of the business that you actually do have an impact on, what are the areas that you feel the market has maybe not fully appreciated the resilience or potential that Sun Life has in some of these businesses.

Dean Connor

Well [indiscernible] I’d say first of all that we – you're right, there's always extraneous factors like interest rates that we cannot control, but we have derisked the Company significantly over the past five years. So that more of what you see coming through in our quarterly results is under our control. And we feel good about that. If you look at the investments we started to make back in 2009 and 2010. 2009 we’ve launched the defined benefit solutions business in Canada to buy out obligations of defined benefit pension plans. In 2010, we launched Sun Life Global Investments a brand new mutual fund company that’s now up to $13 billion, $14 billion dollars of AUM.

So I think one element that as you look ahead over the next five years, are these investments that we made in the most difficult time in the cycle to actually put money into those things should start to generate net income for our shareholders as we look at over the next five years. So Sun Life Global Investments for example will break even this year. The investments we've made to grow Asia, Asia has grown from 8% to 14% of our earnings over the past four years and it's on a steep earnings curve that we see will continue.

We expect will continue, lots of organic growth opportunity there. And that's part of our story that historically investors have not spent a lot of time focused on. I think investors are starting to pay more attention to Asia and ask about our growth in Asia. And then the last thing I'd comment on is if you look at our asset management pillar. And we've added as you know in the last 24 months, Sun Life Investment Management starting with a Greenfield and complementing that with three acquisitions.

We now have a $50 billion alternative asset manager that we think has really good growth legs doesn't generate a lot of net income at this red hot moment, but as we look ahead, we're expecting to see nice growth good revenue synergy across the piece and that should generate some good growth. The one last thing I would add is when you look at our U.S. pillar and the group business, we've acquired Assurant, we're integrating the Assurant employee benefits business that's going very well.

We're on track to achieve the expense synergies and within the expense budget that we put out there. And to achieve the accretion targets that we put out there. What we didn't put out there was all the revenue synergies that we expect from that. And we're very pleased with what we see in these early days. And what's not also not out there is what does it look like when we get to top quartile margins in the U.S. group business, which is clearly where we're driving towards and there is clearly a prize to be earned there in terms of net income left. We haven't actually put that out there, but if you look ahead over the next five years, that's clearly in our sights.

Unidentified Analyst

Let's start right there because it was just one year ago just, I think the night before you spoke at conference you announced the Assurant deal. It's been in the Sun Life results for one full quarter I believe, right. So early days, you talked about a few things there in terms of being on track in the integration. I wanted to talk a little bit behind the scenes has there been any issues in terms of retention, in terms of the client base of Assurant, as you put the two companies together. And when we look at factors such as lapse rate experience, you did have some challenges in the past on your group. What's been the early experience of the two companies, have done together.

Dean Connor

Yes. The early experience on client retention has been better than what we had expected and better than what we've put into the deal model. The experience on the retention of sales advisors and staff is about what we expected and collectively it's actually running a little bit better than where we were at this time last year. And of course those two are – those two are connected to some extent. So we're very pleased with that part of it, its early days and we're – I think I describe it as a healthy sense of paranoia.

So we're very focused on that. The work, June 1 was opening day, so June 1, we were out in front of clients with common products and a common sales pitch and that has gone extremely well with clients. The clients have received this integration very positively. And the – and so have brokers and the reason for that is brokers if they can, they'd rather deal with fewer insurance companies. And if they could do more of their business with their local Sun Life group rep not just life and disability, but dental and stop loss and workplace voluntary. It makes the brokers life easier. And there is some tier commission that has a bearing on broker behavior.

So it's been well received by clients. It's been well received by brokers, about well received by our staff and the early indications on these revenue synergies are very positive. So you go to the legacy Sun Life client and you say look at this fantastic dental capability, we now have the second largest dental network in the U.S. and so we're seeing some sales and some wins there and same with voluntary benefits. And then on the legacy Assurant client side, look at these life and disability products that Sun Life has a much better product set, much better experience in terms of getting people back to work. And look at the stop loss capabilities and so we’re able to cross sell into the Assurant base. So early days but we’re pleased with these early steps.

Unidentified Analyst

One direct number is one, where the margins in that business right now and the price you described where do you want it to get.

Dean Connor

Yes, the margins are running circa 4% of premium, 5% of premium, they should be 8%, top quartile would be 8%. So we – it’s going to take time to get there, but we think it’s absolutely doable. We have enough scale in the U.S. Group business. We’re number six in the U.S. group market now. We have enough scale to generate that kind of margin expansion.

Unidentified Analyst

Insurance was the biggest one in this piece, but I don’t know if it has been fully appreciated that since the start of 2015 by my count, you’ve done I think it’s either acquisitions or distribution agreement that you announced last month. It’s pretty busy period of time from a capital deployment perspective. Capital looks – I’ll get into that later. But just from a mindset of putting money to work is there now a pause period for Sun Life as you digest, these various movements, some of them to be fair, were partners that you had an existing relationship with them and increase your stake. But holistically, some Asia, some U.S. some of this new investment management channel, it’s been building on each of those four pillars.

Unidentified Analyst

So there’s the appetite still there for more or is time pause.

Dean Connor

Well I think the just to be clear that there was no deliberate goal to concentrate $2.5 billion of acquisitions in a short period of time. It was really more coincidence in terms of the way these opportunities emerged and the timing of the emergence. The good thing is they’re spread across three of the four pillars. So, and the good thing as you’ve noted some it is that in Asia, a number of them like Indonesia, and Vietnam and India are all under the heading of buying a larger share of business as we already know. And love in and know where the value creation opportunities are. So it doesn’t really require additional integration effort.

So I wouldn’t say we have put a pause on looking for opportunities, I would say the bar continues to be high. These – we’re putting capital to work for decades. So our hurdle rates for M&A continue to fit with the 12% to 14% ROE targets we’ve put out for the company we have not lowered our hurdle rates. And so, we continue to look for opportunities. And we think we have the bandwidth as – and we’ve got really good people doing great jobs integrating these businesses and as we look ahead we think we’ve got the bandwidth to do more. But it’s going to have to – it’ll be episodic, it’s going to have to fit our hurdle rates, it’s going to have to fit the strategic alignment.

Unidentified Analyst

Well I think, when you’ve announced these acquisitions you’ve been very specific in communicating to the street exactly what the EPS accretion, ROE benefits are going to be. So that’s always appreciated when you’re putting shareholder money to work that we get a good idea what your expectation of returns is. And certainly on the assurance you give us a number to look for. I want to come back to some of the pillars, but you brought up the ROE, so let’s go there.

It’s been somewhat, I’ll use that term again, somewhat of a pause here in terms of the ROE expansion for the sector. And you can have volatility and things like policyholder experience, you had some big gains in that regard last year. You’re at that 12% level on your underlying ROE. And as you mentioned you’ve communicated a target of 12% to 14% over the medium-term. You’ve got 12% now what gets you to 14%? What are the key steps now you’re going to let them [ph] whether we’re going to throw anything in for you. Let me just hear, how do you get the 12%, how do you get the 14% from 12%.

Dean Connor

First of all, if you told me 10 years ago that the 30-year Government of Canada would be almost yielding the same as the U.S. 10-year treasury and that it would be in the middle like a 1.5, 1.6. And we could earn 12% ROE I would have said you were crazy. So I actually feel pretty good about earning 12% ROE in this interest rate environment and it reflects the change in business mix and change in risk posture that we’ve executed on.

Having said that, as we look ahead and I come back to my opening comments submit around the maturation of these investments we’ve made, SLGI starting to punch through and deliver net income, Defined Benefit Solutions delivering more income, our seg fund that line up we launched a year and a bit ago should start generating some net income. Sun Life Investment Management that we’ve been investing in should drive some earnings.

So in Asia – so a lot of the organic growth that we started six years ago is going to be one element. The accretion from Bentall Kennedy and Assurant, which we guided around 40 points, I think of 40 basis points of ROE accretion from those two transactions combined should be an element of that. And we’ll see what we do on other capital deployment. I mean I – we’ve also got somewhere in the mix in the next five years at one, one eighteen we’ve got LICAT and those rules will be announced as you know next week. So we’re going to have to figure out how that factors into the whole thing.

One thing I would say to you is that we’re – the way we run the business we are not planning for interest rates to make a big jump up in the next five years. We’re kind of planning for war and praying for peace. So we’re trying to make our own fun notwithstanding where the yield curve is.

Unidentified Analyst

That’s a good line. Like that you brought it up so I don’t know how you can tell us in advance. As investors should we be overly concerned about what the introduction will do to the capital position of the company and your ability to continue to make investments in the near-term.

Dean Connor

No I don’t think you should be overly concerned. You know that, Aussie has said that in their eyes the industry has enough capital in aggregate. You know that this new system, the LICAT system is more risk-based. You know that we have derisked the company. And you know that we have a very strong starting position in terms of capital. I mean when you think about it if the yield curve drops another 50 basis points having for bid. And in fact the markets drop 10 basis points that hits our MCCSR by only five points. I mean that’s hardly any exposure to that.

So I think lots to be done on LICAT, lots of questions as to how we have to rethink our product mix and re-price products and change products and probably new ways to optimize capital, every capital regime has a set of opportunities around how you optimize around it, these reinsurance, investment asset mix, and so on. And we got to figure all that out between now and 2018 [ph] there is a lot of work to do to do that. But no you should not be worried about Sun Life.

Unidentified Analyst

Okay. Let’s, as I said, go back to some of the actual business drivers. Your comments on Asia were interesting in that it has become a larger contributor to Sun Life’s overall profitability, still the smallest of the four pillars. And you said, in your view it starting to get more appreciation from the market. So one of them are going to get your take on what exactly you’re thinking in making that statement. And maybe more importantly we call it Asia holistically, but you’ve got many different businesses in there. And as you say you just added scale to some of them, your partnerships.

What are the areas of your aggregate franchise in Asia that you are more bullish on in driving increased profit contribution?

Dean Connor

Well every – so we’re in seven markets as you know, China, in India, Indonesia, Malaysia, Philippines, Vietnam and Hong Kong. We are very deliberately not in Japan ultra-low rate, saturated market pockets of opportunity but lots of competition. We’re not in Taiwan for the same reason we’re not in South Korea. So we’re in markets represents 70% of the population of Asia and we think 90% of the growth in the next decade.

Within that each country has its own dynamics. So for example the Philippines, we are number one in the Philippines we’ve been there since 1895 and it’s a country of 100 million people and yet we only have about 800,000 retail clients. So the opportunity to grow that as the country grows and people move into the middle class out of poverty is just, that’s one of the things you see driving growth in Asia.

And that story is repeated in most of our markets Hong Kong is a more mature market. It’s got a different dynamic, it’s got a lot of people coming from Mainland China seeking more modern Western products that are sold in Hong Kong and that’s been driving strong sales growth for us in Hong Kong.

In our case, when we declared Asia as one of our four pillars our sales of accident and health benefits we are low relative to the market. And those products I should backup and say that when you speak to Asian clients what’s on their minds, two things, saving for their kids’ education and health. They’re not thinking about I need $1 million of term life. They want products where they can pay a premium but they don’t need it to get their money back.

So the kind of savings products we sell are – they got assets behind them and then there’s something so they’re saving for their kids’ education but if something happens to them they might have $100,000 in their account but there might be $500,000 death benefit if something happens. But the death benefit is kind of attached to – as a rider almost what’s fundamentally a savings product.

And the health products are very simple products like if you end up in the hospital there is $100 a day for four days hospital cash, or if you diagnosed with cancer here is a lump sum. So these two sets of products are really a key in Asia. We’ve been way under represented on accident and health. And a big part of the growth you’ve seen from us there has been just executing on that strategy really executing well on that and there is a lot more runway. We’re still under represented there.

The other thing you’re seeing from us is much stronger execution just on the quality of agents. So more qualifiers in the Million Dollar Round Table, more MDRT qualifiers in most of our markets where the top four or five in terms of agent quality and productivity and that’s very much our focus is to create there to the extend we can what we have here in Canada, which is a very high quality sales force.

So those are the drivers of growth in Asia. The wealth businesses in Hong Kong is a part of it. We’re going to run out of time there is so much to talk about.

Unidentified Analyst

Let me back in a minute on this because we can see the growth drivers, one thing we haven’t seen a lot of yet is ROE expansion in Asia. I think that business is still been even with the net income increase over the last few years has been running high single-digits, some quarters low double-digit in ROE is that a result of the outlays that have been made acquisition wise or are there other factors that you think is constrained in ROE expansion?

Dean Connor

Yes, there are two things. One is the acquisitions we’ve made. So we bought a business in Malaysia, we’ve turned it into a fantastic business. It’s meeting our original sort of business case but as you know the ROE in year – the cash on cash ROE in early years is suppressed. But it’s creating value and it’s going to be a great business over time. And you’ll see that with our buy-up in India and our buy-up in Indonesia and Vietnam. So there is – at the front end there is a dragged ROE. There's also a scale issue in some of our markets. So in Indonesia we're still not at scale and to that extent.

We're selling products that when we got the expenses at scale the products themselves have margins in the 20s and they're very strong margins. We have to grow our way through that expense gap. So those two things when we project Asia ahead. We see improving ROE. We see it punching into double-digit territory. So the question is to the extent we do other acquisitions there. How does that change that glide path. But our view on Asia right now is there's so much growth opportunity in the business as profitable growth.

I'm okay, given the size of Asia relative to the overall Sun Life. I'm okay, if the ROE in the short run is lower than the 12% to 14% as long as the capital we're deploying in acquisitions and products will get us to that 12% to 14% over time. But I don't want to sacrifice the growth opportunity that's there. And I think it actually works within the overall Sun Life given the mix of businesses.

Unidentified Analyst

That's fair, by and for the time a couple things I want to make sure we touch on. The investment management build up I know you're having a drag and you were [ph] putting together Investor Day brief one for us next month. You kind of got this collection of businesses that you've been putting together then talk kind of the Ryan Labs a few other things in there. As you mentioned it’s a relatively small, very small contributor to profit right now. What’s the strategic mindset you’ve obviously got a world-class asset manager that we are going to talk about in a minute. But you seem to be actively trying to build out some alternative capabilities.

Dean Connor

Yes.

Unidentified Analyst

What's your thinking in this regard and what exactly is this collection of businesses going to represent for Sun Life?

Dean Connor

So we – this is in the direct response to client need in a low return world, clients seeking alternative asset classes that have higher spreads and yields and that started with our private fixed income capabilities. And I'm happy to say we're up to about $2 billion of AUM which is not bad from a standing start two years ago and that's the model that we want to take to the U.S. market as well. And real estate and commercial mortgages obviously spread your assets categories. And so we see pension funds around the world looking for these asset categories. You would have seen as a press release a new relationship with the Australian superannuation plan this week with Bentall Kennedy. That's going to drive close Bentall Kennedy. It's becoming a global business, the clients coming from around the world.

So we have been buying and building capabilities where we have expertise like real estate, the LDI business at Ryan Labs that’s we know that that's in the DNA of our company and same with Prime in managing assets of insurance company. So alternative platform we think is going to be some really good synergy opportunities across those pieces and we're already invoking and invest – making some of those happen and $50 billion is a good start but that business needs to be much bigger than it is and organically we've got plans to, we’ll be talking about this at that October 20, Investor Day. We got plans to double that business over the next 10 years and you'll hear about that. And we'll look for other inorganic opportunities.

Unidentified Analyst

And let's go to the bigger part of your asset management strategy which is MFS. It feels like a few years ago that would have been the only issue we would have touched on and we're going to save and sending it to the end here. Just maybe a bigger picture here, asset management trends are globally have been somewhat choppier not only as a result of market conditions but clearly some of the change and move towards passive products in the industry. Before we get into the numbers and what's been going on with MFS, your view on how this active managed asset manager a key part of your valuation in growth is positioned for some of the changes we've seen structurally in the business.

Dean Connor

I think MFS is positioned exceptionally well relative to active managers. And absolutely there's pressure on active management and money moving to passive and money moving to LDI strategies Having said that there's still a large pool of alpha seeking assets and alpha seeking investors and increasingly though we see those assets being concentrated in the hands of managers like MFS where there's high conviction that they can add alpha. And then they've got a system of kind of a methodology and a process for investing assets in managing the firm that has that has longevity and high conviction that they can keep that up. MFS has indeed done that.

So within the pool of assets that are alpha seeking we see MFS' chance is at capturing a larger share of that pool is being awfully good. And that – and I don't – I won’t repeat in the units of time how they're doing that, but the intent is to keep that up.

Unidentified Analyst

Well, that’s – and this goes some of the near-term trends. Going back a couple years when flows after very strong periods were negative, there was a lot of sensitivity in the market around that. Institutional has continued to remain outflow that had been floated at the level. And then you talked about some of the pressure and your retail mutual funds have actually turned positive. So we maybe holistically my two questions are going to be regarding recent results. Flows have been – some good, some bad. Margin has been the one that you do have more control over and I think the market was surprised to see the debt, back down to the mid-30% range last quarter. Is there a larger level of investments spend happening with MFS and we may have appreciated? Or do you think it was a one quarter blip that should revert in the near term?

Dean Connor

Well, as we said on the call summit, the second half of the year we expect to see margins go up and be higher. We said that when the margins were in the low-40%s we did say, look, these are pretty strong margins and you shouldn't expect those to persist forever and you should be thinking more in the 30%s. We are indeed making these investments for replacing the trading system, putting in a CRM system, then MFS are big investments, but those investments will be made and then come back. And we've also been investing in advertising and that is something that we’ll dial back a little bit in the second half and will make a difference in margins.

So look I think MFS is a very strong franchise. It was not the driver, but an important contributor to the growth in earnings from $1.2 billion to $2.2 billion over the last four years. And as we look ahead and we talk about 8% to 10% EPS growth over the medium-term for the company, we're not going to – clearly, we're not going to get the kind of growth we have in MFS, but it will be a contributor, it will be a contributor to our 8% to 10% EPS growth. And obviously big chunk of that is tied up with asset levels, the $425 billion at the U.S. at the end of Q2 is up to $440 billion at the end of August and that'll also have an effect on margins.

Unidentified Analyst

Constant currency basis, do you feel the 8% to 10% target for the company as a whole will be matched by MFS?

Dean Connor

No, MFS will probably be a little bit lower than that.

Unidentified Analyst

So the other investments are going to make up to it?

Dean Connor

Yes, that's right.

Unidentified Analyst

Last question I want to leave with you is, is when I ended the previous session with as well. We spent a lot of time talking about what are the margins going to be next quarter or where is the capital deployment, somebody invested in the business. The theme I feel like we've heard more about from the banks in terms of changing distribution channels, how they interact with customers; in their case it would be branches, and your case obviously it's been through agents and brokers over time. How is Sun Life investing in the business in a way – in such a way that you're interacting with your customers perhaps differently and would have five years ago?

Dean Connor

Well, this is another example summit of where we – back in 2009 we started a major investment down this path with something we call client solutions. And we set up a fourth business unit in Canada to go direct to plan members. And remember 2009, and it was a tough time to make a decision to start up this new thing, but we did it, and thank God we did it. In the first half of this year we sold $1.4 billion of assets over the phone. Over the phone, $1.4 billion in six months of flows to – by licensed call center reps and $15 million of new Insurance premium over the phone. And it's taken us a while to get there and there's a lot more to do on that front.

We've been investing in mobile apps. So today a member of a Sun Life Group plan can take a picture of their claim, you don’t have to fill any forms, just take a photo on your smartphone, submit it, it’s adjudicated real time, the money is dropped in your bank account within 24 hours. Soon you'll be able to – we've actually rolled out a pilot of this. If you need a physio, kairo, or whatever paramedical person; we put a rating on Uber style rating engine on to the mobile app. So our $6 million plan members will soon be rating, paramedical people around the country, so you can – if you need a physio and you're in downtown Toronto and you're looking at on our app and you see where they all you see the Uber ratings and then you ultimately grab the book an appointment with them. So we have been investing in all of these stuff, we've been building it out.

The one thing that you'll be hearing us, spend a lot more time on in the next years to come is the client. And I'll end on this point because I see we're out of time. Our whole industry talks about – this going to sound like a small point, but it's an important one. Our whole industry talks about the N person as a customer. And in our mind a customer is somebody comes into your shop and buys a piece of cheese or you see them once, you buy them, and you deal with them across the counter and that's it. We are rewiring the company to talk about clients.

Clients meeting an ongoing professional relationship, where we might sell you a term life policy at the age of 28 today, but we've got enough data, capability, predictive modeling, digital outreach, ways to contact you, click to chat, omnichannel, wrap around that we can create an ongoing and lifetime relationship. So this journey from customers to lifetime clients, we think is it got huge potential for us and we think we're well on the way to achieving that. And it goes back to that frankly it goes back to that business we started in 2009.

Unidentified Analyst

Okay. Thank you for that color. And thank you for your time today.

Dean Connor

Thank you. Pleasure. Thanks.

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