Sun Life Financial Inc (SLF) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Sun Life Financial second quarter 2014 financial results conference call and webcast.

(Operator Instructions)

Please note that this call is being recorded today, Thursday, August 7, 2014, at 10:00 AM Eastern time. I would now like to turn the meeting over to your host for today's call, Phil Malek, VP, Investor Relations at Sun Life Financial. Please go ahead.

Thank you, Jeremy and good morning, everyone. Welcome to Sun Life Financial's earnings conference call for the second quarter 2014. Our earnings release and the slides for today's call are available on Investor Relations section of your 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 second quarter financial results. 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 slides, forward-looking statements may be rendered inaccurate by subsequent events.

And with that I'll turn things over to Dean.

Tanks, Phil and good morning, everyone. Turning to slide 4, Sun Life has a solid quarter overall underlying net income was strong and CAD499 million up from CAD373 million a year ago. And underlying our ROE was 12.9%.

Expected profit grew significantly, up 21% and earnings on surplus increased 86%. Our results reflected strong business growth and continued execution against our four pillars strategy. Sales results were mixed in the quarter, and I'll comment further on sales, later my remarks. Adjusted premiums and deposits were CAD29 billion and assets under Management reached a record CAD684 billion.

Moving to slide 5, yesterday, the Company reported second-quarter operating net income of CAD488 million or CAD0.80 per share. Underlying net income was CAD499 million or CAD0.81 per share. Slide 6 shows our sales results across our insurance and wealth businesses.

Sales from individual insurance increased 8% over the prior year driven by strong growth in Canada. Sales from group benefits declined 15%, driven by Canada and reflecting the variable nature of group benefits sales, particularly in the larger case market. Sales from wealth products were down 16% driven by lower institutional sales at MFS.

The value of new business amounted to CAD246 million, down from the year ago period reflecting lower sales volumes. Results in Q2 of last year also benefited from asset pricing gains with a large pension risk transfer sale.

Turning to slide 7, we continue to execute on our four pillars strategy. We have a leadership position in our Canadian home markets, arguably one of the best markets for financial services globally. MFS is a best in class International asset manager with an excellent record of performance. Our US business was transformed by the sale of our annuity business last year and has a strong and growing position in the group and voluntary insurance market, a leading medical Stop-loss business and a leading presence in the International high net worth market.

Our footprint in Asia provides exposure exclusively to high-growth markets in the region, and we have plans to make Asia a larger part of the Company over time. By concentrating on higher growth, lower volatility and lower cost of capital businesses, we have built a strong cash position and robust capital generation power. We're taking a disciplined approach to capital management and are focused on providing sustainable and growing returns to investors. Strong execution also means an intense focus on continually upgrading both the customer experience and our talent.

Slide 8 provides an update on our wealth management operations, which represent a significant and growing part of our Company. These businesses are well aligned with our strategy as they generate higher ROEs and have lower capital requirements.

As discussed last quarter, wealth management includes MFS Investment Management, our Individual Wealth and Group Retirement businesses in Canada, International investment products in the US, our assets and wealth management operations in Asia and our new business, Sun Life Investment Management. Together, these businesses represent CAD571 billion in assets under management up from CAD528 billion at the end of 2013. Sales growth has averaged approximately 25% per year from 2011 to 2013 and over the last 12 month period, wealth management sales have contributed 56% of our value of new business.

On slide 9, Canada generated strong sales in the quarter and we continue to make progress towards our goals. Individual insurance sales were up 14% from the prior year. Driven primarily by strong results in the third-party channel. Individual wealth sales were up -- excuse me were CAD1.1 billion up 23% over the prior year due to strong growth in sales of mutual funds and payout annuities. And this was particularly so in the career sales force.

Supporting this was Sun Life Global Investments, where retail sales more than doubled from Q2 of last year. Group retirement services delivered another outstanding sales quarter with sales of CAD1.9 billion up 68%, driven by strong defined contribution sales in retained business in the large case market and pension rollover sales that were up by 18%.

GRS assets under administration finished the quarter at a record CAD71 billion up 24% from a year ago. And for the fifth year in a row, Sun Life was voted the most trusted life insurance company in Canada, by the Reader's Digest trusted brands award program.

Moving to the US on slide 10. Group benefits in-force was CAD2.5 billion an increase of 8% over the prior year. Of this, voluntary benefits business in-force was CAD548 million, up 13%. Our Stop-loss sales were up 43% supported by our ongoing investment in distribution and service. Sales of other group lines declined as we recently increase prices to improve group benefits profitability.

Turning to slide 11, we had an overall strong quarter at MFS with assets under management finishing the quarter at $439 billion. Revenues an average net assets were at record highs due to market growth and net inflows. MFS continued its strong performance with more than 90% of fund assets ranked in the top half of their Lipper categories based on three year performance.

MFS won the Morningstar award for its specialist equity strategy in Europe and was judged as the best asset management firm for global equities by Pensions Week. As a result of this strong performance, MFS has closed some institutional mandates that reached capacity and is realigning distribution towards newer products that have capacity.

Strong performance has also resulted in some client rebalancing. These factors impacted net sales in the quarter, which while positive, did decline year over year. Distributable earnings remained strong at over 75% of operating net income for the last 12 months.

Turning to Asia, on slide 12, we continued to execute well through market volatility. In China, we increased our individual life sales 36% on a local currency basis. In Indonesia sales were up 9% driven by growth in the agency channel. We recently announced an investment and distribution in productivity in Indonesia to fuel further growth.

Sales in our Hong Kong and Malaysia businesses grew modestly. And agency headcount in Hong Kong reached its highest level since 2006. Second quarter insurance sales in the Philippines were down from the prior year reflecting market volatility.

We continue to grow our distribution, exceeding 5,900 agents in the quarter. And for the third consecutive year, our Philippines business achieved the number one position in the country, based on premium income.

Wealth sales in the region were down from CAD1.9 billion last year to CAD900 million this year, reflecting market uncertainty in the Philippines and lower sales in India.

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

Thank you Dean and good morning, everyone. Turning to slide 14, we take a look at some of the financial results from the second quarter of 2014.

As noted, we had strong bottom line performance in the context of a solid quarter. Our operating net income from continuing operations was CAD488 million. We delivered underlying net income of CAD499 million, which excludes the net impact in the quarter of market factors and assumptions changes.

We also saw good year-over-year improvement in key lines of the sources of earnings. With expected profit in-force business increasing by CAD100 million and earnings on surplus improving by CAD51 million.

As Dean noted earlier, we experienced mixed sales results with life and health sales down 5% year over year, reflecting higher sales of individual insurance offset by lower sales of group benefits products. Overall wealth sales declined 16% driven mainly by lower institutional sales results at MFS.

In addition, our capital position remains strong. We ended the quarter with a minimum continuing capital and surplus requirements ratio of 222% at Sun Life Assurance Company of Canada and with a cash level of CAD1.7 billion at the Holding Company SLF, Inc. On May 8, 2014, we issued CAD250 million of subordinated debt to fully replace the value of preferred shares redeemed on June 30, 2014. As of the end of the second quarter, our financial leverage ratio was 24.8% consistent with our long-term growth target of 25%.

As you can see on slide 15, the net impact of market factors reduced earnings in the quarter at CAD22 million. This was offset by assumption changes, which increased earnings by CAD11 million. Underlying net income, which excludes both of these impacts, was CAD499 million. The negative impact from market factors was due to lower interest rates, offset partially by stronger equity markets. We have provided more detail on the impacts of market factors in the appendix.

As noted in our disclosure material this quarter, in May the Actuarial Standards Board released its final revisions to Actuarial Standards of Practice. Concerning economic reinvestment assumptions with changes to be implemented in the fourth quarter.

We are in the process of modeling these changes and expect an increase to net income of approximately CAD300 million in the fourth quarter, with little impact to reported sensitivities to changes in interest rates.

We also plan to strengthen our assumptions for future mortality improvements in the fourth quarter, to reflect a higher rate of improvement in future years. These two changes are being implemented together, so that the future mortality change is measured with the ASP changes in effect.

Most other Actuarial method and assumption changes will be implemented in the third quarter as part of the annual scheduled review. At this time we cannot determine whether the combined impact of all of these changes to net income will be positive or negative. Other notable items contributed CAD36 million with investing gains and positive credit experience more than offsetting adverse experience related to morbidity and expenses.

Moving to slide 16, we provide details on our sources of earnings presentation. Expected profit of CAD582 million increased by CAD100 million from a year ago. Year-over-year increase is largely attributable to higher income from assets under management at MFS, business growth across the enterprise, and impacts from movements in exchange rates.

New business strain was CAD28 million, within our previously communicated run rate of CAD20 million to CAD30 million on average per quarter. This represents a decline from the CAD15 million reported in the second quarter of 2013, which included the benefit of asset pricing gains from a large defined-benefit solutions sale last quarter.

This quarter, experience gains and losses completely offset each other on a pretax basis. Assumption changes amounted to CAD14 million before taxes, primarily from methodology and modeling improvements. Earnings on surplus of CAD110 million were notably above the second quarter of 2013. And benefited from higher investment income, lower financing costs and higher gains from sales of available for sale securities. Due in part to the low interest rate environment.

Income taxes at CAD145 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 17 and the results from our Canadian operations. SLF Canada reported operating earnings of CAD197 million, down 6% from the second quarter a year ago. Market related impacts reduced earnings by CAD2 million reflecting higher equity markets, offset by interest rate declines. Assumption changes had a positive impact of CAD4 million. Excluding these factors, underlining earnings for CAD195 million down 12% from the prior year.

Underlying results reflected negative morbidity experience in our group benefits long-term disability product line, which was offset partially by investing gains in our individual and group retirement services businesses. Individual insurance sales were up or 14% from last year, due mainly to strong demand for permanent life products in the third-party channel.

Individual wealth sales increased 23% due to higher mutual fund and payout annuity sales. Group benefits sales decreased 32% due to lower activity in the large case market relative to a year ago. Group retirement services sales improved by 68% driven by strong defined contribution sales and retained business in the large case market.

Moving to slide 18 our US business reported operating earnings of $92 million down 25% from year ago. Negative market related impacts of $13 million driven primarily by interest rates, were partially offset by a $4 million positive impact from assumption changes. Excluding these factors, underline earnings were wondered $101 million up 15% from the prior year.

Underlying results reflected gains on the sale of available-for-sale assets, and positive credit experience partially upset by unfavorable underwriting and expense experience improved benefits.

Total group benefits sales decreased 6% reflecting recent price increases. The decline was across all products except Stop-loss, which increased 43% compared to last year. Sales of International investment products declined 10%, while sales of International life products increased 12% driven by growth in large cases.

Looking at the performance of MFS on slide 19, operating earnings were $133 million up 32% from a year ago. Driven largely by higher average net assets under management. Margins were strong at 40% up from 37% a year ago, also due to higher average net assets.

Total assets under management as of June 30, 2014 amounted to $439 billion compared to $413 billion at the end of 2014. The increase was primarily driven by gross sales of $42 billion and asset appreciation of $21 billion partially offset by redemptions of $37 billion.

Turning next to Asia on slide 20. Operating income was CAD37 million compared income of CAD46 million a year ago. Market related impacts reduced earnings by CAD1 million, driven by lower interest rates and partially offset by a positive equity market impact. Assumption changes had a negative impact of CAD1 million. Underlining earnings were CAD39 million up 44% over the prior year.

Total individual life sales in the fourth quarter increased 1% from the second quarter of 2013, as higher sales in China and Indonesia on a local currency basis were partially offset by lower sales in the Philippines and India. Hong Kong and Malaysia experienced modest sales growth.

Wealth sales in Asia decreased 52% from the second quarter of 2013. The decline was due largely to market uncertainty in the Philippines and to lower sales in India.

Turning next to slide 21, we present a breakdown of increase in our year-to-date operating expenses. Overall, operating expenses for the six months ended June 30, 2014 were CAD2.2 billion, up 15% over the prior year period. Excluding the impact of currency and of MFS, expenses were CAD1.4 billion, up 9%.

The remaining expense growth divides fairly evenly across two categories. Volume related expenses are directly driven by sales and asset levels. Investments in growth, inflation and other items include our items include our investments in various initiatives such as expanded wealth distribution in Canada, the buildout of Sun Life Global Investments and of Sun Life Investment Management. Development of the US group benefit business and growth in our distributions capabilities in Asia.

Turning to slide 22, I would like to leave you with a few key messages for the quarter. First, Sun Life had a solid quarter with strong bottom line performance and we continue to grow our earnings power. Next, we continue to take actions to efficiently manage our capital and our financial position is strong. And lastly, we continue to execute well on our strategy and on achieving our 2015 objectives.

With that I will turn the call back to Phil for Q&A.

Thank you, Colm. We'd like to ensure that all of our participants have an opportunity to ask questions, so we'd asked each of you to please limit yourselves to one or two questions and then to requeue with any additional questions.

With that, I'll now as Jeremy to please poll the participants for their questions.

(Operator Instructions)

And we'll pause for just a moment to compile the Q&A roster. Steve Theirault, Bank of America.

Thanks very much, good morning, everyone. If I could start with Rob Manning please. Rob you highlighted previously that expenses should ramp in the second half of this year but we're seen a decent creep up maybe a little earlier than I'd expected in Q2. So can we hold you still to the notion that the operating margin will be held at 40 and to manage expenses around that?

And I did want to ask, as well, on flows. The retail flows continue to be solid. I was hoping you could give us an update on how some of the quant initiatives maybe are progressing? And in general, do you think you can get back to positive net flows in institutional this year?

Thanks for the question, Steve. In terms of margin at the current asset levels where we're hovering right now, we do feel that high 30%s, low 40%s margin is sort of where we're going to be. And it will move around like flows it's very difficult to predict month-to-month, quarter-to-quarter because expenses for technology and some of the branding work that we're doing isn't exactly a straight-line.

So I do think that these levels and the caveat is at these asset levels about the reasonable expectation for the margin going forward. And from our point of view that balance is producing good returns for the shareholders, but also reinvesting in the business to keep the franchise strong the future.

In terms of the flows on the last call, I believe, we talked about lowering our long-term growth rate. We had been organically growing 7% to 10% over the last five years. And if you looked at that growth you would have seen that the flows quarter-to-quarter were very volatile.

We had some quarters where we grew 15% and some quarters where we grew 1% or 2%, organically. And so just like our margin nothing goes in a straight path. What I will tell you is that we slowed the business down and indicated going forward that a 3% to 5% organic growth rate in the long run is the target that we believe is achievable for MFS.

And in the last quarter it was a big transition quarter four us because the capacity constrained products that we pulled out the marketplace. And were shifting as you pointed out to other strategies like domestic US equities, some fixed income strategies, emerging markets, regional equity products that we have to sell, as obviously well as some of the quantitative products.

What I can tell you is that the activity level around MFS is very high. Lots of conversations with clients around the world and where we believe in the statement that we do think that our growth rate, in the long run, can hit that 3% to 5% target.

But it will be volatile quarter-to-quarter and oftentimes market turmoil, as we have today, affects the psyche of our customers particularly in the retail space, as well as institutional. And so quarter-to-quarter it's difficult to predict.

Thanks for the color, Rob. If I could, quickly for Dan. I was surprised to see voluntary sales down given it's been such a high-growth business for you. I think Dean mentioned, competition, so could you talk maybe a bit to the competitive environment on this front? And any new riders or offerings you have coming on stream in the second half of this year?

Good morning, Steve. Yes, let me give a little color on our sales results in the quarter.

We deliberately started to re-balance our sales in the quarter amongst our (inaudible) benefits products. So as you heard Stop-loss sales were up significantly and group benefit sales were down somewhat. And that is a product of the price increases that we put through on group benefits.

Most of our voluntary sales are in the group disability and life category, so as sales of those product moderated so too did the voluntary sales as well. The second quarter also was a somewhat modest, the sales quarter for voluntary it picks up especially in the third and fourth quarters. But through the year we do think we'll see some moderation continuing in our group benefit sales and a continued momentum in Stop-loss.

We are also paying a lot of attention to and making investments in private exchanges. We think private exchanges are the next areas that will really spur the development of voluntary sales. So that is an important new dimension for us. And we did not have any new products come online in the second quarter, but we're currently exploring a number of new voluntary products to potentially bring online in the future.

More like next year or second half of the year?

More like next year.

Okay, thanks very much.

Robert Sedran, CIBC.

Hi good morning. Just I would like to come back to Rob Manning if I may. I know Rob the firm is built to focus on longer-term performance. But I'm curious to have -- to get your thoughts in terms of how important the one-year performance is to flows in your experience?

I mean, is there any link between the deceleration of net sales and shorter-term performance or is this just product mix, as you were mentioning?

It's all product mix, our clients understand our style of investing which is out of favor, by the way, at the moment. What's rallying in the market's low-quality leverage companies, companies that pay high dividends even if they don't earn those high dividends.

And so our style goes in and out of favor during different parts of the market cycle. And I can just point back to 2009 when we came out of the financial crisis we had a tough year, but we start to our guns and invested in the style that you're familiar with what we've described. And ultimately over the cycle that's what works and we think we're in the same position today.

So, I looked at the book of redemptions that we've had and in no circumstance could I actually find a client pulling a large amount of money out of here because of performance. Dean commented when he was giving the overview, that we are an equity oriented Company and when the market goes up 30%, pension funds, gatekeepers at brokerage firms, et cetera, re-balance their allocations and take equity money out of the portfolios and add fixed income to keep them in line.

And so we have faced that headwind all of this year actually. And I actually predict it will continue to the rest of the year. But, there's nothing from a fundamental point of view from performance here that bothers me at all.

And Rob, when I see 91% of the funds in the top half of the Lipper category on a three-year basis, what kind of number do you need there? 91% is great and obviously you'd like 100%, but what kind of number do you think you need in that category to continue to have just a robust business going forward?

Our internal goal is 75%. So we're way ahead of that target, but we think if you want to be a world-class asset manager it's got to be around 75%. Believe it or not, not many firms achieve that.

Great. And just a quick one for Colm. Just in the earnings on surplus I know a couple of the items that you mentioned feel like they're more sustainable run ratey type numbers in terms of lower financing costs and such. Can you give us just a sense of what we should be expecting earnings on surplus wise, maybe compared with what previous guidance might've been?

Yes so I think on the earnings on surplus at CAD110 million for the quarter, clearly a very strong result and we wouldn't expect it to continue at that level on a quarterly basis. We called out that available-for-sale securities gains were on the high side.

So on a pretax basis you could think of about CAD15 million coming out of that line as a result of a higher AFS gains, as we took advantage in the quarter of some rebalancing we wanted to do. And taking advantage of some lower interest rates in the quarter. And there were probably one or two other items that contributed CAD5 million.

So you could think of an amount that would be more in the CAD85 million, CAD90 million range. There is a lot of activity that's taking place on surplus, which is driving the improved results. Including of course, reduced leverage. But very importantly, increased investing and deploying cash.

And maybe I'll turn it over to Steve Peacher, who might want to say a word or two on that.

Thanks, Colm. Yes, one or two comments. We've been very focused on the investment of the surplus assets over the last 18 months or so as we've move out of the financial crisis and into more normalized environment. And it seemed appropriate to us to move from had become a very conservative investment stance, extremely conservative, a lot of cash in our surplus portfolio to one that was a bit more reflective of a normalized environment. So we've done over the last year. And practically that's meant basically investing a lot of cash and liquid assets.

And so it's allowed us to pick up what is sustainable run rate yield, which is one of the large drivers of the move up in surplus income. We think we've probably picked off a low hanging fruit. And the only other point I'd make is, we've been able to do that because we had such a conservative profile, without taking the risk in the portfolio, the credit risk up dramatically. So we do think those earnings are sustainable.

And Rob I'd just conclude by mentioning that there is some variability in this line item. Occasionally you've seen real estate mark to market. We've seen changes in provision level so, this is a bit of a moving target. But the reality is that the run rate on surplus earnings has improved in recent quarters.

Fair enough, thank you.

Humphrey Lee, UBS.

Good morning. Just a first question for Dean or maybe Colm. Looking at your kind of earnings profile kind of given the strong earnings kind of like US and MFS and then a good run rate in Canada, it seems like you're kind of -- in a good position to actually exceed your 2015 target. So how should we think about your 2015 objectives given the strong earnings to date?

Humphrey, it's Colm here. So I think your observation is absolutely correct that the underlying results are strong and we've commented on the CAD499 million. I would point out that we have the additional AFS gains, CAD15 million pretax relative to what we might consider a more normal run rate, so CAD10 million after-tax that obviously helped us this quarter.

And, the favorable, the notable items that we call out related to experience, credit, policyholder behavior, invest in gains, et cetera. They, in aggregate, were positive this quarter, CAD36 million.

It's not normal that they're all breaking to a positive balance in aggregate. Some quarters they're positive, some quarters they're flat, some quarters they can be a little bit negative.

So, the reality though is that the underlying results are strong. And I think that most observers would see that we're very well on track with respect to our 2015 objectives. Which of course are around the quarter. And we don't plan to update the 2015 objectives, as we work through the balance of this year.

But at the appropriate time we will be coming back with our objectives as we go forward. And we'll be talking with investors and analysts about that at a future point.

So the balance to the 2014 continues to be on a healthy trajectory would you kind of revisit the objectives towards the end kind of looking at one year ahead kind of timeframe?

Yes we're not at a point yet to announce when we might have our next Investor Day, but we will certainly -- we are giving consideration to that. It's been a little bit of time now since we had our Investor Day and updated you.

We did update you of course last year when we completed the sale of the VA business, the US annuity business. And we'll be looking to do that, as I say, as we work toward 2015.

Okay. And then, given that kind of strong earnings how should we think about your kind of shareholder capital return priority? Especially one of your peers just increased their dividend today. So, how should we think about the dividend going forward?

Humphrey, it's Dean. Well, just to comment on deployment of capital. As you know we've been actively deploying capital in a very sort of plan full, methodical way. And at the risk of repeating, I'll remind you, we restructured our US reinsurance arrangements in the fourth quarter. And put CAD250 million of capital to work there and we think that's producing strong results for investors.

We redeemed CAD500 million of debt at the end of Q1 and got our leverage back to our long-term run rate. And we launched Sun Life Investment Management at the start of the second quarter, and injected that with CAD250 million of cash to get that going. So we have been on a very methodical way over the past 12 months, since the sale of our US annuity business closed, deploying capital.

We see lots of opportunities to reinvest organically. And Colm referred to those under the heading of expenses.

We continue to look at acquisition opportunities in all of our four pillars. And we also continue to think about -- and this is really getting I think centrally to your question around dividends and potentially buybacks.

On the question of dividends, we have a healthy dividend that as you know we've maintained throughout the financial crisis, currently yielding around 3.5%. We've disclosed our payout range of 40% to 50% of earnings. And we're traveling near the top of that range today. And as you would expect, as we look forward, that's a question that we will be coming back to as earnings grow and we move down in that range.

Same with buybacks. It's as I've said before, we've done them before, we continue to think about them, we continue to think about them as a potential way to deploy capital. And we don't have anything to announce on that at this red-hot moment, but it's certainly part of our calculus.

Okay. If I can sneak in one more, this is a question for Dan. US Stop-loss sales were definitely really strong this quarter. Just trying to get a sense of what was the primary driver for the strong sales results?

Especially kind of some of your competitors are talking about their intent to competition in the Stop-loss space in US given some of the medical [first dollar] insurers are getting into this product as well. Can you just kind of comment on the overall kind of market dynamics for Stop-loss? Thanks.

Sure. We've had very good sales momentum year to date on Stop-loss. Our Stop-loss sales are up over 40% year over year. We have a leading position in the Stop-loss business with nearly CAD1 billion of business in-force and leading capabilities. We've also invested in distribution and that has helped us move along.

From a market dynamic standpoint also we're finding that there is increasing adoption of self-insurance and more mid-market and smaller cases. That is partly being driven by some of the dynamics of the Affordable Care Act. So as a result the market itself is growing at the same time that we're growing our share within that market. So, we feel good about the sales momentum year-to-date and expect that to continue.

Got it, is there anyway you can the size the book in terms of the premiums?

I'm sorry, could you repeat that?

Is there anyway you can size your Stop-loss book in terms of premium?

Yes. We have over CAD900 million of Stop-loss premium.

Okay, got it. Thanks.

Joanne Smith, Scotia Capital.

Yes, most of my questions have been asked and answered. But I just wanted to talk about the group life and the group disability businesses where you had some adverse experience. And, can you talk about both Canada and the US what you're seeing there?

Is it -- do you think it's an aberration? Do think that it's a pricing issue? Do you think that there's something there going on in the industry that's driving these results? And it has been somewhat industry-wide. Thanks.

Hi, Joanne, it's Kevin speaking. I'll cover Canada first.

So, I guess at a very high level we don't believe it's a pricing issue. We have seen a spike in both incidence rates and a slight reduction in recovery rates in this last quarter and a little bit earlier in the year as well.

But within the realm of sort of normal fluctuations. And usually these things actually don't move together they move opposite ways in many, many quarters and offset each other.

And in fact this quarter last year was one of our best ever where we saw incidence down and recoveries way up. As we look at this, there isn't anything that we can see that systemic or an economic driver or something of that nature that is causing this. So we expect that this will smooth out over the balance of the year.

This is Dan, I'll comment on the US. We are seeing pressure, as I mentioned, in our group disability business. But the underlying incidence and recoveries are generally in line with our expectations.

Our pressure in the disability business is more on the pricing side and that's why we've made recent adjustments to our pricing, particularly in that business.

Are you seeing more activity in terms of business going out to bid? Does it seem to be more players in the market or is it just more aggressiveness from the existing players?

We're not seeing an increase in the number of competitors. We have noted a number of competitors reported pressure in their disability businesses as well in the past quarter.

There has been a pretty competitive pricing environment over the past couple of years. But we've not seen any notable change in that this year.

And you're not seeing anything in terms of claims management because I know that others -- management is an issue as well?

No at this point are incidence rates, recovery rates, et cetera are generally in line with our expectations and consistent with where they have been.

Okay, thanks, Dan and Kevin.

Gabriel Dechaine, Canaccord Genuity.

Good morning. Just want to ask you about the ASP changes and the CAD300 million net reserve release and I guess you'll be topping up your longevity risk reserves in Q4. What's -- are there any other areas that are potentially concerning for your at this stage? Maybe lapse that's been an issue for the industry?

And then more specifically on the longevity risk that you're exposed to, that's the UK payout annuities and the bulk annuities, are you taking into consideration future sales growth as well and increased exposure to the longevity risk?

Hi, Gabriel it's Colm here. So I'll take the first part of that and ask Larry Madge, our Chief Actuary, to comment further.

So always at this time of year as we head into our Q3 assumption change update process, we take a pretty hard look at where we're at. Obviously a fair amount of work has been done to date, but not enough that we're putting the pen in and completing everything.

And at this stage the way we've drafted our language and our disclosure around how we think things will break overall is our best way of describing it. So that we don't have any Q3 items that we want to call out to you as being big positive or big negatives. And lots of work going on to land all of that.

And the two the guidance of course are the ASP changes where we did quantify an estimate at this point. And we also called out the mortality improvement. And you've had your further question on that.

So with that I'll hand over to Larry and he can comment further.

Thanks, Colm.

With respect to the mortality improvement assumption. Certainly you questioned the sales going forward and definitely part of the reason that we wanted to take a good hard look at this assumption is that we are a leader in the market, in particular in Canada for payout annuities sales both in group and in individual. So we felt it was important to have a strong assumption so that when we look forward we can be confident that the business we're going to grow is going to be profitable.

And so we've looked at the recent trends in population mortality improvement and we're also looking at some of the emerging best practice in terms of how to set the assumption. And in particular the continuous mortality investigation work that's gone on in the UK. And so when we took all of those into consideration, we've come to the conclusion that we need to strengthen the assumption.

So it does take into account business growth?

Yes certainly that's part of our thinking for why we want to make a change.

And just nothing to say on lapse, I guess?

Colm here. I think your question, Gabriel is the quantification of that at this point?

You're not going to quantify I don't think, but it's another area that has been a bit problematic for the industry. Aside from mortality, is there another bucket of reserves that might need some addressing or the fact that you're not calling out means that you don't think it's an issue?

Yes I think we wanted to call out the motility improvement because while we're not in a position to quantify it yet, it is not insignificant. And it is a new item for discussion the weight of mortality improvement. I don't recall us having a detailed discussion on that in previous calls.

We have of course talked about incident mortality incident. And Larry commented on that on an ongoing basis. But no, there are no other big items that we wanted to call out. I think you're particularly referencing lapse experience and whether we need to strengthen around that, but we don't have any item to call out on that.

The other issue with mortality I guess and maybe you can help me think about this a bit, is on the capital charge for mortality risk. How -- if [ASP] reduced the capital charge for mortality, would that be good or bad for you? Considering your exposure to mortality that's different from some of your peers?

Well certainly any time that ASP reduces required capital it's good for all of us in the industry. But I think if you're talking specifically about the special consideration ASP put in place when mortality improvement was first allowed in the life insurance side of the book, which they put in place in 2011, that particular item didn't impact us to any great extent. So that particular item wouldn't have a great impact in us.

And just to wrap up on a separate topic actually. For the earnings on surplus and Steve, we've actually talked about this in the past and some of the strategies you're putting in place. And you're taking on a bit more risk I guess on the surplus.

What areas could be potentially problematic for you? Because when I hear taking on additional risk of this stage of the cycle in this type of rate environment and spread environment, things could change in a hurry. Like how are you addressing the risk of spreads widening or rates moving higher?

Gabriel, much of what we've done is to move from cash, which earns you almost nothing, to investment grade rated, highly rated investment grade securities that give you more yield than cash. So when those move, moving into things like AAA CMBS for instance from cash, we haven't taken on we don't think a lot of credit risk.

We have had some, what I would consider to be very, fairly modest is within surplus to take initial positions in areas like BB high-yield bonds. But those of very modest relative to surplus. And frankly we want to be positioned so that if we do get a big widening of spreads in areas like that, that we're positioned to add to those positions.

So I would say that when you go from -- in this kind of yield curve environment, when you go from cash positions that yield nothing to highly rated fixed income positions, you end up picking up a lot of yields without taking a lot of credit risk. But as I also said I think a lot of that low hanging fruit is -- we've picked.

Okay so there's not much of a cash reallocation left?

We're going it's still a major focus for us, so we're going to continue to look for opportunities. But I think the opportunities going forward will be more tactical to take advantage of opportunities in the marketplace, as opposed to big shifts in asset allocations. Taking advantage of a more conservative posture that we had before, a very conservative posture that we had going back a couple of years.

All right, thank you. Appreciate it.

Peter Routledge, National Bank Financial.

Hi, most of my questions have been answered. But on leverage you referenced you're back to your long-term target for leverage ratio. No good deed goes unpunished, your acquisition strategy might be fueled by a willingness to take on additional leverage, take it back up to 30. Why not do that? Or would you be open to doing that?

It's Colm here, Peter. So, I think you're exactly right that when an acquisition opportunity presents itself, we would look at all aspects of the opportunity including the financing. And that of course would include consideration of leverage and that's a practice that we have undertaken in the past.

So, it's very difficult to comment on a hypothetical situation in any detail. But we're not doctrinaire about the 25% it is a long-term average and if we were to increase it, with a clear path to be able to bring it down over time back to the 25%, we would be comfortable with that.

Okay. And on -- in terms of targets you mentioned Asia I wonder if in Canada you're open to acquisitions and where you might be looking?

Peter, it's Dean. I mentioned we're looking for acquisitions in all four pillars and that would include Canada. If you stand back and say where are we trying to grow the business we are trying to grow our individual wealth business. And so the organic investments we've been making in Sun Life Global Investments and building out wealth wholesaling and expanding our annuity products and so on.

And you see that coming through in the sales this quarter and this year. If there were acquisition opportunities in those spaces, those would be areas of interest to us. We're, as you know, we've launched Sun Life Investment Management, which is taking our private fixed income, commercial mortgage, and real estate investment capabilities to third-party clients.

We're off to a very good start there. And launching that April 1, and we're signing up our first clients in that business. And again as you look forward if there were acquisition opportunities in that space to accelerate us up the growth curve that would be an area of interest as well.

More manufacturing than distribution?

Well, I think I wouldn't rule out distribution in the sense that if you look at our individual wealth business in Canada it's still relatively small, relative to what it could be and what it should be over time. I wouldn't rule that out either. But, I think those would be the areas, individual wealth and investment management in particular.

Okay. I just a final one for Kevin on your par business in Canada. A lot of your peers are talking about the popularity of the par product now. Can you talk about how that product 's growing for you and how profitable is it? Because that's the knock against par, it's not very profitable.

Sure. I can say a few words about that. Well, we've seen obviously good success with our par product and also good success with other products such as UL and critical illness and term. So, really you're seeing growth everywhere.

With the par we're very, very happy with what's happening there. And with respect to that product, adding riders to the product as to the profitability and that's normally part of the sale and that's how you kind of make the numbers work for everyone. We're very pleased with that and I think you see in the Canadian new business gains overall, it's working very nicely.

What sort of the ROE target for par?

We look at our channels for our target across the mix of business and to get to our hurdle rates we shoot for 15% across our channel. So that's -- you should think about that, I think. Okay, thanks.

Doug Young, Desjardins Capital.

Good morning. Just a first question I guess more a clarification Colm or Larry. I think you mentioned in Q3, correct me if I'm wrong, that you're not anticipating any large items, positive or negative, related to your actuarial reserves review?

I just want to make sure that separate than the Q4 what's going on in Q3? And can you call out what businesses in particular that you're doing the deep dive related to the Q3 review?

Yes. So, Doug it's Colm. I'll start out and all ask Larry to say a few words. And I think the additional complexity this year is the fact that the ASP changes are coming in the fourth quarter. And as we've mentioned we want to implement the mortality improvement once the ASP changes have been implemented because there's a knock on effect that will change the measurement around that.

The reality is that the Q3 exercise is the normal, large, substantial exercise that we go through every year and that covers all of our businesses and is a substantial undertaking. So more to come on that, in Q3, when we report.

Normally at this time if there were something that we had an insight on that we said well that the larger item, either positive or negative, we would be thinking about how we might draw that your attention. At this stage we don't have that. But I think the key point is, it's a big exercise, it's inflow and there's a lot of work to do before we can land on a number.

But with that, over to Larry.

Hi, Doug. I don't have a lot to add to that. I mean the two items that we've done the deepest dive on are the ASP changes and the mortality improvement. But as Colm said, just doing the regular experience studies on all of the assumptions is a large undertaking. And there will be ups and downs. Just at this point we can't point to any particular ones or to the overall impact and where that will land.

Okay and I guess Rob on MFS, you talk about the rebalancing may continue. Can you quantify the institutional rebalancing that you had and was it just one account? Was it numerous accounts? Can you give us some quantification around that?

I wish I could. That would be a complicated exercise, that I don't have in front of me.

I would just say as a general theme pension funds around the globe are de-risking in general. And so that theme is a fight that we have to battle every day. And particularly when you get a huge quick run-up in one year in equities, people scramble around and Boards have to vote on it. It takes time and it cycles through and so it's probably going to be out there for the rest of this year.

But as I mentioned earlier, the activity around here is high. And we have a lot of products with capacity to sell and it's just a matter of shifting the sales force and the marketing efforts here at MFS to go out and get the money.

This is more equities going over the fixed income essentially I think, is that correct?

Yes, that is correct.

And then just lastly, Kevin on Canadian individual insurance. We've hear lots of various discussions around the competitive environment and pricing. Any items or any changes that you've seen, apologize if you talked about this already, but around the competitive environment in Canada?

Sure. Well from our point of view we think we're positioned where we want to be. We benefited mostly from very good product and strong distribution both in our career sales force and with new appointed distribution that we've brought online in the last 12 to 18 months.

So we're comfortable with where we're positioned currently in the competitive environment and don't have any plans to make any major changes there.

Okay, great. Thank you.

Tom MacKinnon, BMO Capital.

Thanks, good morning. A question for Kevin Strain with respect to the Asia wealth sales. Down substantially on a year over year basis and a quarter over quarter basis so just trying to get a feel for what's driving that? And what plans are in place to improve some of the momentum with respect to the Asian wealth sales?

Okay, thanks, Tom. The biggest driver has been the Philippines. And we've seen a similar trend in the industry and in our Philippines life business, which is largely unit linked. And with some volatility in the equity markets there, the consumer preference has kind of leaned away from mutual funds. And I expect we're still the number two player in mutual funds in the Philippines that, that will come back in mind.

We also saw some volatility in the India sales results. India's had great performance, really strong equity and fixed income. And I think again this will come around probably as much to do with the election and different things happening in India. So I think you'll see the momentum come back in both the Philippines and India over the next few quarters.

What about in Hong Kong? Was there any kind of MPF noise that if we look this on a year over year basis or was that just largely a first quarter issue?

The pension sales were roughly the same this quarter as they were last quarter. And we continue to have good performance in our pension funds in terms of both the equity and sort of the fixed income performance there.

So I think you'll continue to see the pension business do well and from a sales perspective we're continuing to gain market share.

And in Indonesia how are things trending there?

Well, Indonesia we don't really have a wealth business. If you look at the insurance sales they've been very strong in the business we own 100%, our agency business and in our telemarketing business. The Bancassurance sales on the insurance side have been a little soft. But on a local currency basis you see that we're up in Indonesia and the agency has been up quite a bit this year as have the telemarketing.

On the Bancassurance side, our Bancassurance partner CIMB Niaga, has been quite focused on its own core business. And we continue to sort of work with them to reopen the doors there and get some more flows coming through the Bancassurance side.

Okay, thank you.

Meny Grauman, Cormark Securities.

Good morning the question was asked on leverage, but I want to ask a similar question on capital. On the MCCSR ratio 222%, wondering whether you'd feel comfortable running with a ratio that was lower than that, below 200%? What's your views in terms of the risk profile of the Company as it relates to your capital ratio?

Hi Meny, it's Colm here. So 222%, we consider that to be a very strong capital level for Sun Life Assurance Company. And of course we have additional capital flexibility above at SLF. I think the question really is around the risk profile and what level of capital we need to hold to buffer against the unexpected.

We think above 200% is the right level. We would not in the normal course be thinking of running the Company at a level below 200%.

So at 222% we're very comfortable. And could be a little bit lower, absolutely. We haven't specified an amount that we would go down to, but we do feel that it's a very strong level of the current range.

Great, thank you.

Darko Mihelic, RBC Capital Markets.

Good morning, thanks very much for taking my question. It's actually been asked and answered. I tried to retrieve it. But it wouldn't allow me to do that, so thanks very much.

Thanks, Darko.

Mario Mendonca, TD Securities.

To the comments about private exchanges in the US, this is obviously a new distribution channel certainly from so far as my understanding is concerned and I expect it's new to Sun LIfe as well.

Is there anything you could tell us about breaking into the private exchanges that would be different from other distribution channels? And if you could sort of think about that in the context of gaining shelf space is it more costly, is it more difficult, what are the opportunities there?

Sure. It is a whole new world and it still sorting itself out. And probably has at least a couple more years to sort itself out.

On the question of shelf space, probably the biggest challenge there is there may not be an unlimited number of shelves. So it's very important for us to make the investments now in partnering with the right private exchanges, those that are aligned with our strategies. And we have a number of private exchange partners that are sponsored by existing brokers who we have relationships with.

We have a very healthy pipeline of private exchange relationships in the works, with the priority being to make sure that we reserve a shelf for ourselves. In some ways the private exchange opportunity is a true opportunity for Sun Life because if we are in a private exchange with a limited number of competitors, that puts us potentially in front of more customers than we might currently be in front of. It's a new distribution channel incremental in some cases for us rather than a replacement of existing distribution.

Right. And that sounds promising but two related -- two follow-up questions then. You referred to getting into that distribution channel, as having to gain the shelf space and making the investments. In the near-term, will this register for us on the expense line? Is it sufficiently large that we would notice? Maybe that's a proper question for Colm.

There are investments involved, but they're fairly modest period to others. We've also made a lot of investments over the past couple of years in IT capabilities that enable us to have the interoperability with exchanges. So I don't think you would see anything substantial, specifically on private exchanges going forward.

And then finally, on the private exchanges. There seems to be so much in flux in the US, specifically related to that bill and challenges continue through the core channels. What does that mean to you? Is this channel, is it worth making those kinds of investments, albeit modest investments, with this much uncertainty on how things will shake out in the US?

The uncertainty around the Affordable Care Act relates to public exchanges. Private exchanges are basically a private-sector imitation of the public exchange.

The Affordable Care Act has spawned that movement. But whether or not there are future obstacles to the Affordable Care Act probably won't change the private exchange world. That world has been started, employers and broker intermediaries are very interested in pursuing that and we think that will continue.

That's helpful, thank you.

Chris Giovanni, Goldman Sachs. Colin Devine, Jefferies.

Yes, quick question for you, Dean and Colm. With respect to capital redeployment, I'm looking at some of the business lines that are not core to Sun anymore and just trying to get a feel for how much capital do you have tied up backing the in-force management business, backing the UK as well?

What could you free up if you're able to dispose of those businesses? And also with respect to capital generation, I would assume the in-force management line, since effectively it's a closed block, should be starting to generate a significant amount of capital. Is that fair?

So, Colin it's Colm here I'll take that. When you think about our businesses that are closed and new business, it's down considerably following last years sale of the VA annuity business in the states. So we've got the UK business, which continues to contribute very nicely to ongoing earnings. And think of approximately CAD1 billion of capital in the United Kingdom for a very good business for us and we see that continuing in the future.

And then for the US business that's closed to new business on in-force side, it's contributing very nicely to earnings in the United States and we see lots of opportunities there. We have the transaction last year where we restructured some reinsurance arrangements, which helped us in that.

So we feel good about the overall business that we have and we don't think about the businesses as being in runoff as been something that we're ready to tap into for other opportunities. We think the mix we have is ideal and we're happy with that.

Colm just a follow-up, what sort of return are you generating off the in-force management and how much excess capital is starting to generate since you're not making new sales?

The overall capital position for the US business is quite good and the transaction that we had last year on the reinsurance side helped with capital efficiency for the US in-force business. We think that will continue. Overall our capital generation is strong. We think of it as in total, Colin we look at it at the total firm level and we see very good ongoing capital generation.

Okay I don't think I'm going to get the ROE number off you then from what you're telling me. Okay, thanks.

This concludes our Q&A session for today. I'd like to turn the call back over to Mr. Phil Malek for closing remarks.

Thank you, Jeremy. I would like to thank all the participants on today's call. And if there are any additional questions we will be available after the call. With that, I'll say thank you and good day.

And this concludes today's conference call. You may now disconnect.