Sun Life Financial Inc (SLF) 2014 Q1 法說會逐字稿

Good afternoon. My name is Melissa and I will be your conference operator today. At this time I would like to welcome everyone to the Sun Life Financial's Q1 2014 earnings conference call. (Operator Instructions) Thank you.

I would now like to turn the call over to your host, Mr. Phil Malek, Vice President of Investor Relations. You may begin your conference.

Thank you, Melissa, and good afternoon, everyone. Welcome to Sun Life Financial's earnings conference call for the first quarter of 2014.

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 results by Dean Connor, President and Chief Executive Officer of Sun Life Financial.

Following those remarks, Colm Freyne, Executive Vice President and Chief Financial Officer, will present the first-quarter financial results. Following that, Kevin Strain, President, Sun Life Financial Asia, will provide an update on our businesses in Asia.

Following the prepared remarks we will have a question-and-answer session. Other members of management are also 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 today's remarks. As noted in the slide, forward-looking statements may be rendered inaccurate by subsequent events.

With that, I will now turn things over to Dean.

Thanks, Phil, and good afternoon, everyone. Turning to slide 4, Sun Life delivered a strong quarter. Operating net income was CAD454 million and operating ROE was 12%.

Beginning this quarter we are introducing a new measure, underlying net income, which excludes the net impact of market factors and assumption changes. We feel this measure will provide investors with better visibility into our business performance.

For the first quarter of 2014, underlying net income was CAD440 million, up from CAD385 million in the year-ago period, and underlying ROE was 11.6%. Expected profit grew 24% year-over-year, and new business strain was down 20%.

Results reflect strong business growth, improving core earnings power, and continued execution against our four-pillar strategy. Top-line growth was very strong, with sales of life and health products up 19% and Wealth sales up 12%. Adjusted premiums and deposits were CAD32 billion, and assets under management reached a record CAD671 billion.

Moving to slide 5, yesterday the Company reported first-quarter operating net income of CAD454 million or CAD0.74 per share. Underlying net income was CAD440 million or CAD0.72 per share. Our capital position remains very strong, and our Minimum Continuing Capital and Surplus Requirements ratio at Sun Life Assurance Company increased to 221% in the quarter, well above the regulatory requirements.

Slide 6 shows our continued sales momentum, with growth in both insurance and Wealth. As I noted, sales from insurance products increased 19%; sales from Wealth products were up 12% over the prior year.

Wealth product sales excluding MFS were up 33%, led by Individual Wealth and Group Retirement savings in Canada. The value of new business totaled CAD297 million, up 13%, reflecting our strong sales growth and focus on profitability.

Turning to slide 7, we continue to execute on our strategy, focusing on higher growth, higher ROE, lower volatility, and lower cost of capital businesses across our four pillars of growth.

On slide 8, Canada experienced strong growth in the quarter as we continue to make progress toward our 2015 goals. We grew sales significantly across our Individual businesses.

Insurance sales in Q1 were up 38% from the prior year, driven primarily by strong results in the third-party channel. Our career salesforce continue to grow, up 130 advisors over last year, exceeding total sales power of 3,800.

First-quarter Individual Wealth sales were up 30% over the prior year due to strong growth in sales of mutual funds and payout annuities. Supporting this was Sun Life Global Investments, which achieved Retail Mutual Fund sales growth of 130%. We continue to extend our reach in SLGI and launched a private client offering at the end of the quarter.

We extended our lead in both Group businesses, with Group Benefits sales up 19% and Group Retirement sales more than tripling, driven by strong defined contribution sales and pension rollover sales up by 19%. Assets under administration finished the quarter at a record CAD68 billion, up 20% from a year ago.

Moving to slide 9, I would like to take a minute to welcome Dr. Dan Fishbein, our new President of Sun Life U.S. Dan is a 25-year veteran in the employee benefits and group life industry, and succeeded Wes Thompson who announced his retirement in the first quarter. We thank Wes for his leadership in fundamentally repositioning and growing our U.S. operations over the past several years.

In the quarter, we continued to generate growth in our US Group and Voluntary businesses. Total Group Benefits sales for the quarter were up 25% over the prior year, led by Voluntary Benefits sales and stop-loss sales. Total business in-force grew 8%.

Turning to slide 10, we had another exceptional quarter at MFS, with assets under management finishing the year at $421 billion -- excuse me, finishing the quarter at $421 billion. Gross sales were $22 billion for the quarter and net sales were $3.7 billion.

MFS continued its strong performance with 86% of fund assets ranked in the top half of their Lipper categories, based on three-year performance. MFS was ranked among the top 10 in Barron's Fund Family 1-, 5-, and 10-year categories.

Distributable earnings remain strong at over 75% of operating net income for the last 12 months. During the quarter, MFS launched a global advertising campaign that highlights the essence of MFS's investment success; and that is, collaboration among professionals across geographies and across sectors.

Turning to Asia on slide 11, we are making good progress toward our 2015 Investor Day objectives. Kevin Strain will update us on specific actions and results later in the call.

Shifting gears from the quarter, and in response to increased interest from investors, we have included a few slides to provide additional context on our Wealth Management operations. Slide 12 provides an overview of our Wealth Management, which represent a significant and growing part of the Company.

These include MFS Investment Management; our Individual Wealth and Group Retirement Service businesses in Canada; International Investment Products in Sun Life U.S.; and our asset and wealth management operations in Asia. They also include Sun Life Investment Management, our newly launched third-party asset management business focused on pension plans and other institutional investors. Together, these businesses represent CAD559 billion in assets under management.

Slide 13 shows our continued sales momentum in our Wealth businesses, with average annual growth exceeding 25% since 2011. Over the last 12-month period, Sun Life has generated CAD1.15 billion of value of new business, or VNB, overall for the Company, and Wealth Management sales have contributed 56% of that total.

The demand for Wealth Management solutions from Sun Life comes from the three long-term drivers of demand that underpin our four-pillar strategy. And that is the baby-boom generation shifting from accumulation to decumulation; the downloading of responsibility to individuals; and the rapid growth of middle-class savers and investors in Asia. We will continue to focus on growing these businesses, with their higher ROE and lower capital requirements, as we have strong capabilities and see significant opportunities.

On slide 14, you can see the growth of fee income and assets under management for our Wealth businesses from 2011 to 2013. Assets under management and fee income increased notably, driven by robust sales and rising equity markets.

I will now turn the call over to Colm Freyne, who will take us through the financials.

Thank you, Dean, and good afternoon, everyone. Turning to slide 16, we take a look at some of the financial highlights from the first quarter of 2014.

As noted, we had a strong quarter with strong top-line and solid bottom-line performance. Our operating net income from continuing operations was CAD454 million. We delivered underlying net income of CAD440 million which, as discussed, excludes the net impact in the quarter of market factors and assumption changes.

We also saw good year-over-year improvements in key lines of the sources of earnings, with expected profit on in-force business increasing by CAD111 million over last year and new business strain improving by CAD9 million. In the first quarter, we experienced strong sales growth, with life and health sales up 19% and wealth sales up 12% year-over-year. Adjusted premiums and deposits were CAD32 billion, which is flat from a year ago.

Finally, our capital position remains strong. We ended the quarter with a Minimum Continuing Capital and Surplus Requirements ratio of 221% at Sun Life Assurance Company of Canada and with a cash level of CAD1.5 billion at the Holding Company, SLF Inc.

We redeemed CAD500 million of subordinated debt at the end of the first quarter of the year, which reduced our financial leverage ratio to 24.9%, consistent with our long-term target of 25%. Yesterday, we announced the planned redemption of CAD250 million of preferred shares on June 30. With leverage now at our target level, we expect to issue replacement securities at a more favorable rate.

As you can see on slide 17, the net impact of market factors reduced earnings in the quarter by CAD26 million. This was offset by assumption changes which increased earnings by CAD40 million.

Underlying net income, which excludes both of these impacts, was CAD440 million. The negative impact from market factors was due to lower interest rates, offset partially by stronger equity markets.

As noted in our disclosure material this quarter, we expect the anticipated charge of CAD40 million in 2014 from the decline in the ultimate reinvestment rate to come through in the fourth quarter, and to be offset at that time by the impacts of changes proposed by the Actuarial Standards Board. We have provided more detail on the impacts of market factors in the appendix.

Other notable items largely offset in the first quarter, with adverse experience related to mortality and morbidity, lapse and policyholder behavior, and expense experience, offset by investing gains and positive credit experience.

Moving to slide 18, we provide details on our sources of earnings presentation. Expected profit of CAD578 million increased by CAD111 million from a year ago. The year-over-year increase is largely attributable to higher income from assets under management at MFS; business growth in Canada, the US, and in Asia; and favorable currency impacts.

New business strain was CAD37 million, representing an improvement over the CAD46 million reported in the first quarter of 2013. This was mostly due to reductions hat SLF U.S. across both the Group Benefits and International businesses as well as lower strain in Asia. We continue to see our normal run rate of strain going forward in the range of CAD20 million to CAD30 million per quarter, with some seasonality to be expected.

The experience losses of CAD46 million reflect the impact of market factors and other notable items described on the previous slide. Assumption changes amounted to CAD56 million before taxes, primarily from reinvestment assumption changes and modeling improvements.

Earnings on surplus of CAD77 million were higher than the first quarter of 2013 and benefited from higher investment income and lower financing costs. Income taxes at CAD131 million are within our expected range for our effective tax rate of 18% to 22%. As noted in our last earnings call, we anticipate that the rate will continue at the higher end of this range in 2014.

Turning to slide 19 and the results from our Canadian operations. SLF Canada reported earnings of CAD238 million, down 10% from the first quarter of 2013. Market-related impacts benefited earnings by CAD12 million, reflecting higher equity markets, offset partially by interest rate declines. Assumption changes had a positive impact of CAD16 million.

Excluding these factors, underlying earnings were CAD210 million, up 1% from the prior year. Results also reflected investing gains which were partially offset by negative morbidity experience in our Group Benefits long-term disability product line.

Individual Insurance sales were up 38% from last year, due mainly to strong demand for permanent life products in the third-party channel and from expanded distribution. Individual Wealth sales increased 30%, reflecting a strong RRSP season and sales growth across all products.

Group Benefits sales increased 19% due to higher activity in the large-case market relative to a year ago. Group Retirement Services sales more than tripled, driven by strong defined contribution sales and retained business in the large-case market.

Moving to slide 20, our U.S. business reported operating earnings of $70 million, up 8% from a year ago. Negative market-related impacts of $34 million, driven by primarily by interest rates, were partially offset by a $19 million positive impact from assumption changes.

Excluding these factors, underlying earnings were $85 million, up 35% from the prior year. Results also reflected gains on the sale of AFS assets and losses from mortality experience across Group Benefits and our closed life block.

Total Group Benefits sales in the quarter increased 25% compared to a year ago. Within Group Benefits, Voluntary Benefits sales increased 73% compared to last year. Sales of International investment products declined 39%, reflecting market volatility, while sales of International life products increased 26%, driven by favorable positioning versus our competitors and by market growth.

Looking at the performance of MFS on slide 21, operating earnings were $133 million, up 33% from a year ago, driven largely by higher average net assets under management. Margins were very strong at 42%, up from 38% a year ago, due to higher average net assets.

The total assets under management as of March 31 amounted to $421 billion, compared to $413 billion at the end of 2013. The increase was primarily driven by gross sales of $22 billion and asset appreciation of $4 billion, partially offset by redemptions of $19 billion.

Turning next to Asia on slide 22, operating income was CAD32 million compared to income of CAD51 million a year ago. Market-related impacts reduced earnings by CAD6 million, driven by lower interest rates and partially offset by a positive equity market impact. Underlying earnings were CAD37 million, up 9% from the prior-year quarter.

Turning to slide 23, I would like to leave you with a few key messages for the quarter. First, Sun Life had a strong first quarter to start the year. We delivered good growth on the top line and achieved a solid bottom-line performance.

We continue to take actions to efficiently manage our capital and our financial position is strong. Lastly, we continue to execute well on our strategy and on our 2015 objectives.

With that, I will turn the call to Kevin Strain who will discuss SLF Asia.

Thanks, Colm. Asia continues to grow profits towards achieving our CAD225 million Investor Day target. For the quarter, expected profit was up 16% to CAD52 million, and new business strain was down 24% to CAD16 million. Market impacts were less favorable, with losses in the first quarter of this year of CAD6 million versus gains the first quarter of last year of CAD17 million.

Underlying net income in the first quarter was CAD37 million. Included in our underlying earnings were net AFS losses of CAD7 million. Adjusted for this write-down, earnings for the quarter would have been CAD44 million.

Sales were a mixture of positive and negative for the quarter, with Hong Kong and Indonesia ahead of last year, and the Philippines, India, and China behind last year. Hong Kong was up 13% in local currency for the quarter led by higher agency sales. Hong Kong agency exceeded 1,400 agents, the highest number of agents since 2006.

Indonesia was off to a strong start, finishing the quarter with over 7,500 agents, the highest number of agents we have ever had in Indonesia. Sales were up 36% in local currency, led by agency and telemarketing.

Philippine sales were down 18% in local currency after significant growth in 2012 and 2013, driven by volatile equity markets. The management team in the Philippines is confident in their ability to turn the sales growth positive again for the year.

India continues to adjust to the recent regulatory changes to product which began in October 2013. And China continues to shift towards a more profitable mix of business, purposely slowing down sales of single-pay Wealth Management products. Malaysia and Vietnam were both off to a good start.

Hong Kong, Philippines, Indonesia, and Malaysia have started implementing their health and accident plans, increasing rider attachment rates, and developing new products. Health and accident sales were up almost 50% in the quarter.

Wealth sales for the region were down from CAD2 billion last year to CAD1.3 billion this year. This reflects market uncertainty in the Philippines and exceptionally strong MPF sales in the first quarter of 2013 due to the introduction of the Employee Choice Arrangement plan.

Now I want to highlight the longer trend for top- and bottom-line performance for Asia. In the following slides we have compared the 2009 sales and earnings to 2013.

Turning to slide 25, you can see the strong growth in 2013. In fact, 2013 was a record year for sales in Asia.

At the same time, you can see the drop in sales from India and China between 2009 and 2013. India makes up the vast majority of the decline in sales; and this decline was primarily due to the changing regulatory environment which impacted the entire industry.

In China, sales grew until 2012 as the business focused on growth and scale. Starting in 2012, the Company focused on profitable growth, slowing the rate of sales.

Turning to slide 26, you see the balancing of the pie across the geographies since 2009 as well as our commitment to a multichannel distribution strategy. In the Philippines, the top line has grown at a compound annual growth rate of 40% from 2009 to 2013, with growth in both the agency and the bancassurance channel.

In 2009 the Philippines had 2,500 agents and in 2013 grew to over 6,000 agents. Bancassurance was added in 2011 with the acquisition of 49% of Grepa Life and the establishment of our bancassurance distribution with RCBC bank.

Hong Kong also began to accelerate its growth in 2013 with higher agency and broker sales. Last year's acquisition in Malaysia and the establishment of our business in Vietnam are starting to have an impact on top line as well. Indonesia has grown both agency and bancassurance.

Building on the recent success in Indonesia, we announced last week a significant expansion in our agency force over the next three years. This investment will be aimed at creating the most respected agents in the country as well as building out our shariah capabilities with investment in people, technology, and brand.

The target is to double the size of the agency to 15,000 agents over the next three years and, at the same time, double the productivity of the agents. With strong execution, this investment can make us a top-five player in agency for Indonesia.

Turning to earnings on slide 27, you can see the positive trend in earnings since 2009. Growth over this period, 2009 to 2013, has a CAGR of 18%.

On slide 28, you can see the earnings growth for this period has been led by growth in expected profit and surplus earnings and reductions in new business strain. Fundamentally, the business across Asia generates strong VNB, which means that as we continue to grow our top line we will see the bottom line grow.

There is new business strain in the business, but new sales become profitable in the second year. Our focus is therefore finding ways to grow our distribution while holding expenses.

The elimination of expense gaps from investments in the business and distribution will pay dividends and earnings with this growth. Our Asia strategy is advancing well, with extensions into health and accident, our new agency strategy in Indonesia, the addition of Malaysia, and Vietnam.

With that, I will turn the call back to Phil.

Thanks, Kevin. We would like to ensure that all our participants have an opportunity to ask questions today, so I would ask each of you to please limit yourself to one or two questions and then to requeue with any additional questions. With that I will now ask Melissa to please poll the participants for their questions.

(Operator Instructions) Peter Routledge, National Bank Financial.

Thanks. Just -- I will start with a quick one. Big drop in the contribution from new business in Canada. I wonder if you could just tell us why you had that big a drop.

Sure, Peter. It's Kevin Dougherty speaking. So, as you noted, lower than normal new business gains in Canada this quarter. Driven mostly by product mix; there is some seasonality and, in particular, lower defined-benefit solution sales, which tend to be lumpy from quarter to quarter. We have a very, very big pipeline in the DB solutions business going forward and expect that over the course of the year you will see gains return to more normalized levels.

Okay, okay, thanks. Then maybe a broader question for Dean. On page 12 and 13, you have given us a picture of your Wealth Management business.

Broad numbers, because I am sure you don't want to disclose the precise numbers, what percent of Sun Life's earnings comes from the Wealth Management businesses on page 12? And then three or five years from today, what would you like that percentage to be?

Well, Peter, thanks for the question; and I am sure it is triggered in part by noting that the share of VNB that comes from the Wealth businesses is in the mid-50s. And right now the share of net income that comes from the Wealth businesses is in the mid-40s. Part of that reflects the investments we are making in Sun Life Global Investments and building out Sun Life Investment Management and other parts of the Wealth business.

But where will it be over time? It has to catch up with VNB at some point, as a starter. But the one thing I would -- so we expect it to be larger; and I won't actually put a pin in it and specify a number.

The one thing I will say is that the foundation of our four-pillar strategy, which is around a balanced and diversified business model, will continue to be an important part of the mix. So you should expect to see Wealth playing a larger part, but it won't be the only part of the Company.

Okay. Thank you.

John Aiken, Barclays Capital.

Good afternoon. Kevin, quick question for you. First of all, thank you for the additional disclosure.

In your commentary you talked about new business strain within your segment, and talking about how the sales do generate new business strain. We have seen a marked decline from 2009 to 2013. Based on your commentary, can we assume that we have essentially flattened out and new business strain is probably going to uptick from these levels as you increase sales going forward?

The biggest impact in the shift between last year and this year was Malaysia. So the addition of Malaysia had a big impact.

Overall, as we continue to build the scale of the business, it should have a positive impact on the new business strain. But that will take some time, as we build it out. So the single biggest impact between last year and this year was Malaysia.

And, Kevin, if I can just continue to pick on you, bancassurance within the region, you have been successful in rolling that out. But can you discuss the economics between bancassurance and the agency force, and how much you may want to increase going forward your level of bancassurance business coming in through the channels?

Yes. We strongly believe in a multichannel distribution model. So we have agency in all the countries except for one and bancassurance in all the countries except for one. We're building out telemarketing and building out Group.

So we believe you have to be good at all of them. Bancassurance is very important for scale in many of the markets and of course as our primary distribution model in Malaysia.

The profitability of bancassurance is in line with the profitability of agency, and so we don't see a big difference between the different distribution channels. So our goal would be to continue to grow both at the same time and finding ways to do that.

We have a great partnership with CIMB Bank in Malaysia and CIMB Niaga in Indonesia, and a strong relationship of course with Everbright Bank in China. So those would be some of the key bancassurance. We also have bancassurance relationships in -- sorry, RCBC, of course, in the Philippines as well.

So we have got some strong bank partners. We want to continue to see that grow.

The structure where we have built them with a joint venture with a bank is actually quite effective, because it keeps the bank interested in the results of the organization, keeps then interested in growth and growing profitably. So we've found that to be a good model, and it is a model that we have run in all four of those locations with RCBC, Everbright, CIMB Niaga and CIMB.

So we like the bancassurance business. We like it in the structure that we have put it in, and we want to continue to see it grow.

Great. Thanks for the color.

Robert Sedran, CIBC.

Good afternoon. I would like to better understand the sequential decline at MFS in terms of the earnings. I gather -- and maybe I should've asked this question last quarter, but I didn't realize that the comp item in Q4 was quite as large as it appears to have been.

So was it indeed a comp reversal, like an accrual reversal? I can't imagine MFS could have had a better year last year than it actually had. So what would have led to the reversal of a comp accrual in Q4 of last year? Is this something that happens annually?

Hey, Robert; it's Rob Manning. It was basically increasing bonus deferrals for our investment teams. So we had done it probably five or six years ago, and we decided to increase that deferral from a retention point of view.

We benchmark how we pay our people and what percentage of the pay should be deferred versus cash. So it was just truing up and working with the management resources committee on the Sun Life Board to appropriately pay people and benchmark them versus the industry.

So I wouldn't expect a comp reversal like this in the next year or two, certainly on the investment side of the Firm.

So, Rob, that comp is due to the employees; it is just not due last year. It will be coming in coming years, I guess?

Yes. It vests over time. So basically what happens is you get the benefit in one year or one quarter; and then it smoothes out as time goes by, because you have old deferrals that are vesting in and it catches up.

Okay. Just a second one related to the upcoming changes to the actuarial standards on reinvestment risk, I guess you have noted in your materials that the interest rate sensitivity is going to go up as a result of these changes. I know you don't quantify it yet.

But my question is, is this the kind of thing that will require remedial action to return those sensitivities to where they are today? And might they carry a cost to earnings power if you were to do that?

Yes, it's Colm here, Rob. So we don't see the underlying sensitivity as having changed; it is more how we portray the sensitivity. And it depends of course on the modeling required under the version of the standards that we'll be implementing.

So it is not the type of action that would require us to take remedial action. We are more focused on the economics here, and we feel we have a good grasp on the underlying nature of the sensitivities today, regardless of how they are portrayed in the reporting.

But of course we will take a look at it as we finalize the standard. But at this stage, we are not signaling that we will need to take further remedial action.

So it might create a little bit more volatility in the headline numbers, but you are comfortable with the risk profile of the Firm so aren't going to do anything about that. Is that the right way to characterize it?

That's correct.

Okay, thank you.

Humphrey Lee, UBS.

Good afternoon. A question for Rob. For MFS, the managed fund net outflows of [$400] million was (inaudible) than expected. I understand institutional flows can be lumpy, but I was just wondering if you can provide some color on the quarter's outflow. And also can you comment on the institutional pipeline?

Yes, I think I heard most of that question; it was a little bit muffled. But if the answer was in our managed fund sales, what is going on there, which is basically our global institutional book, I think as I have mentioned we have restricted the capacity in many of the strategies that we have had success selling over the last few years. So that business is retooling to sell a new suite of products that we do have capacity in, like our quantitative business as well as some domestic and regional equity strategies.

So that business this calendar year will be in transition, which is why both the gross and the net sales have sequentially declined. We are very fortunate that our retail business is offsetting that, which is what we had hoped and expected. But our institutional book of business going forward is going to grow at a slower rate certainly than it has in the past, but we also expect it to grow slower than our retail book.

So we should expect further pressure for at least a few more quarters as you retool the capacity?

Yes, I would expect that business to not have any surprises either positively or negative for this calendar year.

Okay, thanks. Then a question for Dean. So now you have achieved your 2015 leverage ratio target. So with that, how would you think about any kind of incremental capital management going forward? Does it change on your list of priorities?

Well, thanks for the question, Humphrey. I will just remind you that the sale of our US Annuity business closed just nine months ago; it seems like longer, but it is just nine months ago. And we have been actively deploying capital since then in a pretty methodical way.

I'll just remind you that we restructured our US reinsurance arrangements in the fourth quarter and applied 250 million of capital to that. We redeemed 500 million dollars of debt at the end of the first quarter. And as you note, our leverage is in good shape.

We launched Sun Life Investment Management and put some 250 million of cash into that to support the seeding of new products for that business. So we have actually -- we have been actively deploying capital.

We see many opportunities to continue to invest capital to drive organic growth. Everywhere we look we see growth opportunities.

If you listen to or read the remarks from today's Annual General Meeting, you will see a good list of those or a good reminder of those growth engines. We continue to look at acquisition opportunities; and, as I have said before, we continue to consider potential future share buybacks.

So all of those are in the mix, and we will continue to work on this in a very planful and methodical way.

All right, got it. thanks.

Tom MacKinnon, BMO Capital Markets.

Yes, thanks very much. Maybe a question -- maybe Colm might be able to take this one, and then I have a follow-up. The last couple of quarters we have seen some unfavorable policyholder experience losses. How is this quarter unlike the last quarter, where we had sizable policyholder experience losses?

And what can you do to help us understand what is driving this? Do you feel it is a trend?

Yes, so obviously we are taking a very close look at our policyholder experience, and we haven't discerned any fundamental underlying trends that would cause Larry, our Chief Actuary, to want to take any action at this point. But we are taking a look at it.

If you look at the lapse experience this quarter, for example, at CAD19 million, it was spread across a number of businesses. And we took a close look at that obviously against experiences we have seen previously, to see if there was a continuing trend.

But at this stage I think we'd feel that it is just under watch but no particular issue to flag for you, Tom. I might ask Larry to just add a few words.

Sure. So, I guess if you look at the experience over the last couple of quarters, since we last made assumption changes in 2013, you saw the Q4 experience; that was from segregated funds and a particular item that we talked about at the last call. And then this time around we saw experience again across different businesses.

We saw low universal life lapses in both Canada and the US, and we also saw some high annuitization rates in the UK. So it seems to be coming from a variety of different sources, all small.

So we have got our eye on it. But as Colm said, at this point, no particular trends.

I would just add on -- the other item is the morbidity experience, and in Canada that was negative. And that primarily occurred at the early part of the quarter; and I think Kevin might want to add a few remarks around that.

But again, we don't see that as necessarily persisting. We see some improvement.

Sure, Colm; I could give you a little bit more color on that, Tom. Our morbidity results obviously were a little bit lower in Canada than expected. As we look at it, we don't see it as a systemic issue or a secular trend, and it is really within the bounds of normal fluctuations.

I think you've seeing experience go the other way in previous quarters. So we expect it to normalize through the year.

Then with respect to morbidity in the US, is it within the Voluntary space or the EBG? What will be driving that? How would you help us feel on that, as you really grow the top line here, you are not being aggressive?

Yes, so maybe I could just make a comment there overall. So mortality/morbidity overall was negative CAD22 million. That CAD15 million of that was in respect of Canada.

The US experience was more on the mortality side, and it was spread across a couple of businesses. But perhaps Dan might want to comment a bit more on that.

Yes. Hi, this is Dan Fishbein. Overall, we had some unfavorable mortality experience in the in-force life business as well as in the group life business some morbidity, unfavorable experience in disability. But that was largely offset by favorable experience in the stop-loss business during the quarter.

Okay. Then the follow-up is really just with respect to expense growth overall in the Company. It was up maybe 13% excluding MFS, and maybe some of that might have been currency related; but still then up solidly double-digit, excluding the impact of currency.

Dean, is there any need to have a closer look at the expense growth within the organization? Is there an objective to rein this in?

What has been driving it to probably grow almost in par with earnings growth, where it is -- the earnings growth excluding MFS has not been growing this fast. So there is like, to some extent, a little bit of declining operational leverage here. So if you can help us understand what you have to in order to improve that.

Sure, Tom. You are right -- your instincts are right to parse it among the different components, and Colm will do that in a second and give you the breakdown. When you split out currency and when you look at investments we're making in growth, and then what you are left with is residual inflation-linked growth in expenses.

The two areas -- I'm sorry, there is another category in there, which are volume related. So some of the expense growth is volume related. That is not in commissions but is an controllable expenses.

In expenses, that relates to wholesaler bonuses and fees for -- subadvisor fees for assets under management. That all comes through that expense line.

So some of that is good expense growth and we get -- we expect to see more of that as we grow the business. Some of it is investment; importantly, investment and gross, investment in businesses.

You have heard us talking about building out distribution in Asia. We have been building out distribution in the US. We have been building Wealth distribution in Canada and building our defined-benefit solutions business.

So these things all do take investments, and we are monitoring those investments and the payback on those very tightly.

The other thing I would say is we have a significant program underway in the Company called the Brighter Way, which is a Lean Six Sigma program which is all about helping to do it -- do the work better and cheaper and faster for our customers and segregating, identifying the gains that come from that and, for the most part, reinvesting those gains in growth. So that is very much tracked carefully and closely and it's part of our operating system.

But, Colm, you can comment further.

Yes, Tom, just a quick couple of highlights. So you are absolutely right; year-over-year, ex-MFS, ex-currency, the growth is about CAD70 million or 11.5%. And the volume type of growth that Dean referred to would account for CAD31 million or 5% of that; and growth initiatives would account for CAD21 million or 3%; and inflation would account for CAD15 million or 2.5%. So that pretty well accounts for the growth, ex-currency, ex-MFS.

The growth initiatives, as Dean referred to them, include distribution in Canada, technology developments, Sun Life Global Investment buildout, Sun Life Investment Management buildout, and a bit of growth in Asia. So looking at it year-over-year, substantial but again very tightly linked to the initiatives that we have that are driving top line and are driving profitable sales.

Okay. Then just a follow-up with that. You took another expense experience loss; and in which one of those buckets would that have been related to? How does -- what should we be seeing for that going forward?

Yes, there was an expense experience loss for the quarter, and a portion of that related to an expense accrual that was recorded in the first quarter, around CAD10 million, which really relates to the prior year. But for a variety of reasons, the decision around that doesn't get finalized until the first quarter, and that is a large portion of the piece that is coming through the expense experience in the first quarter.

I think the expense experience overall for the quarter was CAD14 million negative. So that would account for a good portion of that; and a piece related to the buildout of distribution, etc., in Canada.

But in terms of what are the impacts and what should we think about that for Q3 when we do our annual assumption changes, I will ask Larry to say a few words.

Sure. So the expense experience loss, as Colm said, was partly a one-time item; so that piece we wouldn't see going forward. And the remainder was related to the investment in growth and Individual Wealth in Canada, and those are two items that don't impact the maintenance unit cost, which is what we reserved for in the actuarial liabilities.

So they won't really impact our view of future maintenance costs. And to the extent we continue throughout the remainder of 2014 to invest in growth, there could be a little bit of a continued expense loss there; but it would be something that we wouldn't be intending to reserve for in the actuarial liabilities.

Okay, thanks.

Mario Mendonca, TD Securities.

Good afternoon. The direction Tom was going was the same sort of thing I was thinking; if I could just take it a little further. Are you suggesting that because the investment spending isn't maintenance, it doesn't -- it's not booked in the reserve? So any kind of investment spending going forward would always appear then as an experience loss; is that a fair characterization?

Well, there can be a couple of different places that we could put it. So if we saw it as continuing on for a long period of time, I think we would need to consider putting it up in expected profit. But to the extent that we see it as a temporary phenomenon that is going to run down, we are okay with having that in the experience loss category.

So can I -- sorry, by virtue of being then in the experience loss category, can we assume that the expense experience losses would end at the end of 2014?

At this point we have looked as far as the end of 2014. As we do our planning, we will review that assumption again and decide, both in terms of how much investment continues but also where it would be appropriately categorized.

And Mario, it's Colm here. Maybe I could just add a point, that we have invested quite significantly in quite a variety of initiatives as we have embarked on the four-pillar strategy that we laid out at March Investor Day 2012. So we don't expect that piece of spend to continue at the level that we have seen.

And as Dean mentioned, we have initiatives underway that are focused on customer focus, productivity, the Brighter Way initiative that he mentioned. So I think what we are going through is a period of repositioning the enterprise as we dispose of certain businesses, reemphasize other businesses. So we feel that we have a pretty good handle on how we are shifting and moving here, and we will obviously keep you informed as to how that is playing out.

Yes, the challenge is just trying to assess what real earnings power is, and it kind of depends on how long these things persist. If I could just get one other thing in, the Q4 seemed to have an especially large expense experience loss. What is it about the Q4s that would cause those expense experience losses to be so significant?

Well, testing my memory a little bit here with Q4. But what does tend to happen is, if you have a particularly strong year, as we did last year, that there are certain incentive comp accruals that will be firmed up in the fourth quarter because they depend on the full-year performance. And so that would be one factor.

And I think there is also a bit of an inevitable drift in expenses toward the end of a year, where projects that might be underway get a burst of energy to try to conclude them before the end of the year. So there is a bit of that as well.

So I think it is a feature I have seen at other companies, and I don't think we are unique in that regard.

Thank you very much.

Steve Theriault, Bank of America Merrill Lynch.

Thanks very much. Maybe starting, going back to Rob. Rob, are you in a bit of a better position now? You've said expenses will be higher in the second half of this year. Can you give us now maybe a better sense of the magnitude?

And just to be clear, should we think of this as a temporary increase in half-two? Or is the run rate spend affected longer-term? I ask that because I think some of this is compliance related, and I wonder if it might be a little bit sticky.

Yes, good question. All of the -- the one caveat I will say is, this is all dependent upon what happens to the market. So let's just assume our asset levels stay where they are things pace along in a normal fashion.

You should expect to see our margin, which is around 42%, slip down to 40%. So there is going to be a 200 basis point impact in the second half of the year on spend.

And that spend is multiyear, so a lot of the things that we are spending on, particularly branding, software, and upgrading our systems, and our client-driven operations that we are building here at the Firm, will have not only permanent people attached to them but ongoing maintenance and costs associated with running those.

We think that running a 40% pretax margin is really the sweet spot for our Firm, given where we are and the future growth opportunities of the Company. It is a balancing act, where you want to make sure that the margins are high enough so that we are generating good returns and we can pay all of our people and keep talent at the Company; but you don't want the margins obviously to go too high because that means you are not reinvesting in the business and investing in the infrastructure around the Company.

Okay; that's helpful. I was hoping you would put it in the context of margins. Perfect.

Then just another quick follow-up on MFS, and maybe this is for Colm. But I noticed the tax rate I think was quite a bit lower, like in the range of 500 to 700 basis points lower.

I know segmented tax rates are a little tricky, but that had been quite stable. So is there any tax gains maybe coming through that line this quarter that we haven't flagged?

No, the tax rate is -- at the total Company level, and that is the best way to think of it -- is remarkably stable. On an underlying basis our effective tax rate was 22%; and we have signaled that that is the range you should expect it to be in, at the top end of our previously disclosed range.

I think with the mix of business, with the strong performance of MFS and the US of course being a higher tax jurisdiction, we do expect it to continue at that higher end of the range.

Then maybe just lastly, Colm, while I have you, the growth in the US on underlying earnings, very strong even in US dollar terms, up over 30%. Could you give me a sense how that growth splits versus employee benefits, international, and the in-force run-off?

Yes, I think you are right to call out the strong growth on the underlying. And at $85 million, up 35% from a year ago, we would consider that to be a little bit bonused by some factors.

I mean, the underlying earnings is a great construct, but it doesn't adjust for all notable items. And when you think of the available-for-sale security gains, while at the total Company level they are managed to a certain level, they can appear in different segments and that can have a bit of an impact. So I think the underlying at $85 million is running a little bit hot if you adjust for some of those items.

When you think about where that was, I think the in-force management was particularly strong in the quarter. And I think you see the segmented -- or the disclosure we provide at the business unit level, so I think we feel pretty good about the trajectory on the International business, both life and investment products, and don't really have any additional color other than that.

Thanks much.

Joanne Smith, Scotia Capital.

Good afternoon. Most of my questions have been asked and answered, but I do have a couple of follow-ups. The first one was you said that there was a bit of a mortality issue in the US. And as we have seen that it has been across the industry this quarter, was it a frequency issue or was it a severity issue?

The mortality issues are more of a frequency issue than a severity issue this quarter.

Okay. Thank you. Then just for Kevin, just on the India distribution system; I was wondering. When I spoke to you last we were talking about the fact that you were trying to change some of the characteristics of the distribution, and I was wondering where you were in that endeavor.

Just give us a little bit more color on what is going on in India and when you expect things to really improve.

India underwent quite a bit of regulatory change in the last year. In fact, every product had to be redone by regulatory requirements. Ours were done at the end of October; a lot of the industry was done at the end of December.

So first quarter, the whole industry was adjusting to the new product suite, and we started to see some better results in March. It is a bit seasonal there. March is their year-end, and so we often get a tick up in March.

But we did start to see some better things happening. We put a new CEO in place about four months ago, and a very distribution-focused guy, very agency-distribution-focused guy, and has the same attitudes towards distribution that we do, of improving the quality of our agents and improving the training, improving the activity ratios.

And it gives us a fair bit of confidence that going forward we will start to see this get a little better. As the agents get more used to the new products, as he rolls out some changes inside of the distribution system, that should really help.

We did lose Citibank as a partner on the bancassurance side, so that will have an impact probably midyear. As you know, AIA won the Citibank business in the region, and Citibank was one of our key bancassurance partners in India. So that will work a little bit against us as we see the agency hopefully start to come back up next year.

What about initiatives to improve agent productivity?

They are undertaking a number of initiatives on the productivity and the quality side, including better training, some better tools. They have just put out a new tool that does a point-of-sale system on a mobile app that has combination products, to give you an example.

So there's a number of initiatives that give me confidence on the agency side. As they adjust to the new products it should be positive.

Thanks very much.

Joanne, it's Dean. Just one other thing around the bancassurance rules in India. The insurance regulator has been discussing changing the bancassurance distribution rules to require banks to use multiple insurance company partners, which I think net-net would benefit our business.

And it is not, obviously -- as with many things in India -- it is by no means certain, and it will take time as this works its way through. But if that does come to bear or come to pass, that would be a positive development for the business.

Thanks for that color, Dean. That just reminded me, I have one follow-up question -- I'm sorry -- just on the bancassurance deals that you are doing in Asia. And I know that there is going to be a difference between those that are exclusive and those that are just getting on the shelf. What is the average breakeven period for one of those deals?

Well, I can give you Malaysia as a perfect example, because we are 12 months in and we are making profit in Malaysia. That is not what all of the deals are, and there are some plus or minuses. Some of them can take a few years to become profitable.

But at this point in time, Malaysia is off to a good start and we like the way it is developing. So that gives you an example of one that has probably come on the quick side. And the others can -- it obviously depends on the deal; it can take two to three years about to start to turn a profit if you are pushing it out.

Thanks very much.

Darko Mihelic, RBC Capital Markets.

Hi, thank you. I thought I would also continue on the line of the discussion with Kevin Strain on Asia. I am interested in two things that you said during your remarks.

The first is you were making progress towards CAD225 million target; and at the end you talked about doubling your agency force, doubling the efficiency. Wondering how the two of those can actually happen.

So maybe perhaps you can provide a little more color on what you intend to do and just more broadly speaking with the entire agency force in Asia, and how you go about doubling the size and doubling the efficiency, which presumably takes cost, and somehow get close to your CAD225 million target.

So to be clear, double the size and double the efficiency was specifically talking about Indonesia, where we have undertaken a strategic initiative, where over the next three years we will be investing in Indonesia and trying to go from 7,500 agents that we have today to 15,000 and doubling the activity ratio and doubling the productivity of those agents. And that is an investment in branding; it is an investment in people; it is an investment in product; it is an investment in technology.

But we made the investment with the awareness that we still had to achieve our CAD225 million. So that was top of our mind, and we knew how much investment we could make and still have confidence in achieving the CAD225 million.

So they are separate things. One of the reasons I called out the underlying earnings is to give you a sense of where we're at on that perspective.

So when you hear me talk about the CAD37 million underlying net income and the net AFS losses of CAD7 million, puts us at CAD44 million. So that gives you a perspective on the quarter.

Okay. That's very -- I missed the Indonesia part, so that's very explanatory. Maybe perhaps then on the same line, is there any other work that you need to do with any other salesforces in the region?

By and large, the sales forces are doing well. In Indonesia, the agency force -- I told you the total for Indonesia on a local currency basis was 36%. The agency force was up close to 70%, and so doing quite well inside of that.

The agency force in Hong Kong is up 28% in local currency for the quarter.

Only in the Philippines was it down, and it was only down 10%. And it was a bit to do with the volatility of the equity markets there. And that team has been growing like crazy the last two years, and so they have full confidence that they will see that turn around.

So I really like what we are seeing in Hong Kong, Indonesia, and in the Philippines on the agency side. We are building on a nice agency force in Vietnam. And as we were speaking earlier with Joan, we are seeing some good momentum and some good initiatives in India, which should really help on agency.

So I am quite bullish on what we are seeing on agency. It's a distribution system that we understand. We know how to make it work, and we are seeing some good progress there.

We are taking the attitude of having the most respected agents in each of the countries, and so we are focusing on the quality of the agents as much as the number of agents. And I think that defines the type of experience our customers get and the type of agents we want.

That message is resonating with agents in each of the countries, and we are attracting people to join us, as you see with the growth in the number of agents in Hong Kong, the number of agents in Indonesia, and the number of agents in the Philippines.

Thanks for your time, Kevin. Great.

Mario Mendonca, TD Securities.

Colm, quickly on the impact of investing activities on insurance; maybe this is for Peacher as well. The number, CAD36 million in the quarter, and the numbers have been high in some quarters, have you ever offered us a bogey there, a threshold over which you would consider that to be a little bit on the high side? Or does the Company not look at it that way?

Well, we do look at it that way, Mario. We have said that we think of it as being CAD10 million to CAD20 million per quarter, but we recognize that it's better to look at that over the course of a year as opposed to being too caught up with it in a given quarter.

So this quarter was a little on the higher side; and Steve might want to comment on some of the reasons why we availed of opportunities to drive that. But I think we would still stay with the 10 CAD10 million to CAD20 million on a quarterly basis, recognizing it's going to be a bit lumpy.

Mario, I would just reiterate that we have had a consistency there. It does fluctuate quarter to quarter based on relative value trading opportunities that we see in the public markets and opportunities we see in the private markets. So it will bounce around a bit.

I don't think there is anything too unusual this quarter, and I do expect that we can generate positive numbers in the future. I think the range that Colm gives is obviously the range we feel comfortable with and it will be -- it will move around a little around that, based on opportunities.

And, Colm, let me just take a stab at one other thing on the tax rate. The ex-MFS tax rate around 8%, is it possible to discuss that number? Or is it just too integrated with the consolidated tax return that you can't really look at it that way?

Yes, it is absolutely integrated in the US; we file a consolidated tax return, and it has been done that way for many years and will continue to be done that way. So it really is very much a part of our overall tax profile that we do it like that.

Do you see any tax risk here, like the Canadian banks are facing a little bit from the last budget? Does your tax department see any risks here on that tax rate?

Yes, I think our tax department is paid to keep an eye out for all sorts of risks, tax risks, budgetary challenges, etc. But we don't see anything in particular that we would call out. We think we have got a fairly clear explanation of our tax profile, and I think it has been fairly consistent.

Thanks very much.

Tom MacKinnon, BMO Capital Markets.

Yes, thank you. Just following up on the impact of investment activity on insurance contract liabilities. When you combine that with credit, CAD52 million in the quarter, looking at a trend of that thing over the last, I don't know, eight quarters, it has certainly averaged about 30, 35, so higher than the CAD10 million to CAD20 million bogey you have been talking about.

Obviously, those boys up on Bay Street have included a portion of this stuff in there, what they deem to be core earnings. Presumably you had some discussion as to whether some portion of this, which you have given us CAD10 million to CAD20 million as a bogey, could be sustainable. Why not have included that in your underlying earnings?

Well, Tom, I think we recognize that there will be a number of notable items that we will want to call out every quarter; and we will continue to do that. The other example is new business strain. We have said that we might expect that to be in the CAD20 million to CAD30 million, but this quarter it came in at a higher level.

So it is inevitable I think that there is going to be some pluses and minuses. And underlying earnings I think is definitely a good advance over what we were reporting previously, to give a lens into the business.

But we do feel we will need to continue to give you some supplemental. And we wouldn't be as comfortable to say, here is the bogey for investing gains, because in some quarters it will be on the low side, others on the higher side. And it's not really how we think about it.

Okay, thank you.

There are no further questions in queue at this time. I turn the call back over to Mr. Phil Malek.

Thank you, Melissa. I would like to thank all of participants today. And if there any additional questions we will be available after the call. With that, I will say thank you and good day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.