Sun Life Financial Earnings Call Insights: Hedging Program, Canada

On Thursday, Sun Life Financial Inc (NYSE:SLF) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared with analysts and investors.

Hedging Program

Stephen Theriault – Bank of America Merrill Lynch: First question for Colm or for Dean, the temporarily unhedged position, was that unknown until the end of the quarter? How much of the hedging program was affected if that makes sense? Is it something the regulator would take issue with and be a talking point as you negotiate for hedging credit at some point?

Colm J. Freyne – EVP and CFO: It’s Colm here. So let me explain a little bit around this, so in terms of the impact on the quarter. It was both implemented the new hedge system was implemented in the quarter and the impact of this was detected approximately two months into of the quarter detective controls picked that up and we’ve resolved the issue, we put the additional hedges in place. In terms of the impact overall, I think one has to recall that we were changing our profile here as we changed with respect to the reserves, the treatment of hedges in the reserves, so we’ve been changing our profile, so this is not a problem that has been in place for a prior period. This was all related to the changes that we put in place in the quarter. So while we’re disappointed that the testing controls that we had in place on the new software and the technology we’re using failed to detect flaw in the monitoring process we did correct it in the quarter, so we have spoken to the regulators you would imagine on the quarter’s results and they are aware this is true, but they have not raised any points with us around this and we don’t see this as being a financial reporting issue but I think your broader point around the credit to be given to hedges in the capital structure is a point that we take seriously the regulator is obviously serious about as well and controls over hedging systems are a key part of the process that will be if a check credit is permitted.

Stephen Theriault – Bank of America Merrill Lynch: One more if I could for Wes please. Wes, at the Investor Day you talked about a strain declining from around C$160 million last year to somewhere between C$80 million and C$90 million for this year, if I look at the first quarter screen and annualized to something in the range of C$130 million, so I guess the question for you is, are you still confident that you’ll get the decline that you’d anticipated and will see strain come pretty aggressively over the next three quarters or something change there with respect to your look?

Westley V. Thompson – President, Sun Life Financial U.S.: This is Wes. So if you think about our group business or the really two key impacts in the quarter’s strain. One is that we do expense the acquisition and distribution costs up front in group due to the short-term nature of those contract, so these costs are and do come through a strain, so in the quarter we did have an increased result in sales of 16% increase in sales versus Q1 ’11, which is reflected in that increased strain and then secondly, which is I think more to the point you’re making is that the investment in voluntary was quite significant in the quarter, with the bringing on of distribution talent, and we will see that revenue trailing a bit through the course of this year and then picking up, so at some point, those two will converge, and we would expect a more normalized view of strength at the Group business.

Stephen Theriault – Bank of America Merrill Lynch: Though strength could be higher, just based on higher sales?

Colm J. Freyne – EVP and CFO: Both higher sales and while we make the additional investment in distribution for voluntary.

Stephen Theriault – Bank of America Merrill Lynch: So Dean mentioned 14 sales reps hired. From what I am hearing, we just start to see the benefit pretty quickly. Can you tell us, give a sense on, I know you often think in terms of years worth of experience, are they relatively seasoned people that you hired away?

Colm J. Freyne – EVP and CFO: The 14 voluntary benefit reps, and in fact, in the second quarter, we already added several more to that. Our target was by the time that we launch our voluntary capabilities in June, that we’d have a cadre of about 20 representatives, 17 actually in the field, in the marketplace, with an internal sales desk supporting that group. The capabilities that we are rolling out in June, will dramatically increase what we have had historically both in product enrolment capabilities and other areas, and they will be working closely with our existing group representatives across the 34 offices in the United States. So we are very optimistic and excited about this rollout, and more to come.

Dean A. Connor – President and CEO: I would say they are experienced. For the most part, they are experienced capable people, who have been in the business, not just the benefits business, but in particular, the voluntary business in United States.

Canada

Peter Routledge – National Bank Financial: Just two questions on Canada. One, can you explain or give some more color on the spike and expected profit in that line of business? Two and maybe its related; wealth sales in Canada were strong, particularly the sales of your proprietary funds, the SLGI. So I mean those are big increases, I understand it’s off a low base but can you give us more color what’s happening?

Kevin P. Dougherty – President, Sun Life Financial Canada: Sure Peter. It’s Kevin Dougherty speaking. So we saw an uptick in incidents in LTD and LTD incidence rates in Q1 think and I think that’s pretty well leasing right across the industry. There was sort of a slow rise that we detected over the last few quarters, but bit of an uptick in Q1. Beyond that, I would say the recovery rates have been quite strong and so that’s kind of the other side of it. We started to introduce some price increases for economic conditions at the beginning of last year and they will start to flow through our results this year and also some price increases in our manual rate tables in March of this year. So we see those as the sort of the appropriate response and we’re focused on pricing and underwriting at this time.

Peter Routledge – National Bank Financial: Is that just LTD across your products?

Kevin P. Dougherty – President, Sun Life Financial Canada: It’s just LTD.

Peter Routledge – National Bank Financial: So that’s behind the increase in expected profit?

Colm J. Freyne – EVP and CFO: I can perhaps take the question on the expected profit, Peter. So when you look at our expected profit overall at the total company level and I’ll come back to Canada. Year-over-year, we’re up $21 million and that’s really a mix story across the business groups and in the source of earnings by business group that you have, you’ll see that Canada as you’ve quite rightly point out is up $29 million, that’s really the benefit from the hedges in the reserves methodology that’s coming through in Canada and in the case of the United States, you might say, we’re not seeing the same level come through in the U.S., in fact you’re seeing a decrease in expected profit in the U.S. and we had change in methodology with respect to expected profit on the Employee Benefits Group, whereby we updated our expected loss ratios to reflect recent trends, so that resulted in a shift in geography on the source of earnings, so we see a decrease in expected profit and a better result and experience related to morbidity, mortality and we’ve also have some exchange related movement on the expected profit line on the U.S. So really two different factors that are driving that, but the expected profit in Canada is really around the change in the methodology.

Peter Routledge – National Bank Financial: Kevin on the sale growth of SLGI in Canada.

Kevin P. Dougherty – President, Sun Life Financial Canada: We continue to see good take-up from accrued sales force in Canada and if you recall in Q4 I think we’re around 8.6% of flows moved to 11.4% in RRSP season, which is great. This reflects just we continue to broaden the product shelf and so that’s part of the story there and we’re having good success in bringing advisors into SLGI product mix and so well over half the advisors in accrued channel are using SLGI products now and that we see this continuing through the year.

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