Sun Life Financial Inc (SLF) 2015 Q2 法說會逐字稿

Good morning. My name is Tiffany and I will be your conference operator today. At this time, I would like to welcome everyone to the Sun Life Financial second-quarter 2015 financial results conference call and webcast.

(Operator Instructions)

Thank you. Greg Dilworth, Vice President of Investor Relations, you may begin your conference.

Thank you, Tiffany, and good morning everyone. Welcome to Sun Life Financial's earnings conference call for the second quarter of 2015. 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 second-quarter 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. Steve Peacher, Executive Vice President and Chief Financial Officer, and President of Sun Life Investment Management, will also be on the call this morning to provide an update on Sun Life's asset management pillar. After the prepared remarks, we will move to the question-and-answer portion of the call. Other members of management will also be 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 this morning's remarks. As noted in the slide, forward-looking statements may be rendered inaccurate by subsequent events. With that, I'll now turn things over to Dean.

Thanks, Greg, and good morning everyone.

Turning to slide 4. The Company reported strong underlying net income of CAD615 million, up 23% from the same period last year, and an underlying return on equity of 13.9%. Our expected profit was up 15% from broad growth across our businesses, and our results this quarter benefited from improved mortality and morbidity experience relative to the second quarter of 2014.

Wealth sales in the second quarter were CAD31.9 billion, up 25% over the prior year from higher sales in Individual Wealth and Group Retirement Services in Canada, from mutual funds in India, and the Mandatory Provident Fund in Hong Kong; from higher retail mutual fund sales at MFS, and from the inclusion of Ryan Labs in our sales results. Insurance sales were CAD427 million of new annualized premiums, up 8% over the prior-year period, driven by growth in both Individual and Group Benefits products in SLF Canada and strong growth in insurance sales from our agency channels in Asia.

During the quarter we completed the acquisitions of Ryan Labs and announced the acquisition of Bentall Kennedy and Prime Advisors. In just 18 months, these three acquisitions, plus our start-up in Canada, have created Sun Life Investment Management, an investment manager with over CAD50 billion of assets under management. At this level of AUM, Sun Life Investment Management is well-placed to meet growing client demand for real estate, alternative yield strategies, and liability-driven investing. All of these newly acquired businesses, along with MFS and our general account investment team, report to Steve Peacher, and Steve will spend a few minutes prior to the Q&A portion of this morning's call, to discuss our asset management pillar in more detail.

Turning to slide 5. Our earnings are well diversified across our businesses, both by geography and by type. The benefits of geographic diversification are apparent, with a softer economy in Canada and strengthening economies in the US and Europe and continued growth in the middle class in Asia. We also have good balance between our Wealth and Protection businesses, with double-digit earnings growth from each over the same period last year.

On slide 6, we continue to demonstrate strong execution on our four pillar strategy, one that's focused on higher ROE and strong capital generation through leading positions in attractive markets globally. In Canada, we delivered strong top- and bottom-line growth this quarter. Underlying net income was up 28% over the prior year, and we saw double-digit sales growth in every line of business. Sales in Group Retirement Services were outstanding at CAD3.5 billion, including CAD2 billion in new assets from the University of British Columbia, the largest ever defined-contribution transfer in the Canadian GRS market. Group benefit sales were up 31%, driven by success in the large case market.

In our Individual business, insurance sales were up 13% from growth across our Career Sales Force and third-party distributors. Wealth sales were up 23% from strong growth in our fund business. Sun Life Global Investments, our Canadian mutual fund business, had gross sales of CAD766 million in the quarter, which is pretty good from a standing start just 4.5 years ago. Retail sales of Sun Life Global Investment Funds were up 86% in the second quarter, and were almost on par with SLGI's strong first quarter sales during our RRSP season. In May, we launched our new segregated fund suite of products, and we're off to a fast start, with sales of CAD23 million of these new funds in the quarter.

Turning to our asset management pillar, MFS ended the second quarter with assets under management of $440 billion, and a strong operating margin of 40%, in line with our communicated range. Fund performance remains very strong, with 82%, 88%, and 97% of fund assets ranked in the top half of their Lipper categories for three-, five-, and 10-year performance. Gross sales at MFS of $20.1 billion were up modestly over the same period last year. Overall, MFS had net outflows of $1.8 billion. Institutional flows were soft, reflecting previous decisions to close certain fund styles to protect client returns, and also due to client rebalancing on the back of strong fund performance, as well as industry trends such as the move from active to passive management. MFS continues to focus on generating strong investment performance for its clients and selling exciting newer products such as its line-up of blended research strategies that we expect to drive growth in the future.

Turning to the US, our Group Benefits business continues to execute well, with earnings growth from investment in claims management, which in turn is helping more disabled members to return to work. We're also seeing the results from our ongoing pricing actions and expense reductions. We're pleased with the progress in the Group business, but would re-emphasize it will take a number of quarters before Group Benefits achieves its full earnings potential and experience will fluctuate from quarter to quarter. Sales in Group Benefits were lower, reflecting our repricing strategy. At the same time, business in force has remained stable at $2.5 billion of annual premium.

Turning to Asia, we continued our steep trajectory, with underlying earnings up 82% to CAD71 million. Over the past 12 months, these strong results have generated a 230 basis-point improvement in return on equity, driven by strong sales, favorable business mix, and growth in our In-Force base. During the second quarter, Individual Insurance sales increased by 18%, driven primarily by the Philippines, where we saw the number of agents increase by almost 20% over the prior year. We've had strong agency growth in a number of other markets in Asia, including Indonesia and Hong Kong, and this is driven in part by the continued roll-out of our strategy of building the most respected agency in Asia.

We've been placing particular emphasis on health and accident sales, which increased by 29% over the prior year and accounted for 13% of our total Individual Life sales in Asia during the second quarter. Asian Wealth sales were CAD1.6 billion for the quarter, driven by strong growth in India, China, and Hong Kong. In Hong Kong, we had continued strong sales of our Mandatory Provident Fund; and in India, Birla Sun Life Asset Management recorded its highest ever quarterly average assets under management of CAD25 billion. As a reminder, we own 49% of Birla Sun Life Asset Management, which is the fourth largest mutual fund company in India, a company that's been growing rapidly in the world's second most populous country and a country that has a lot of economic runway ahead of it.

So to conclude, we're very pleased with the results this quarter and the momentum across all four pillars in the first six months of 2015. We've delivered strong top and bottom line growth and we continue to make significant investments in growing existing and new businesses. We continue to improve the customer experience and we continue to allocate capital efficiently in ways that drive value for our shareholders.

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

Thank you, Dean, and good morning everyone.

Turning to slide 8. We take a look at some of the financial results from the second quarter of 2015. As Dean noted, we had a strong top-line and bottom-line performance across all of our businesses this quarter. Our operating net income for the quarter was CAD731 million, up from CAD488 million in the second quarter last year. Underlying net income, which excludes the net impact of market factors and assumption changes, amounted to CAD615 million, driven by strong earnings in SLF Canada and MFS, continued progress in our Group business in SLF US, and a significant increase in underlying earnings in SLF Asia. Our underlying return on equity was 13.9% for the quarter, an improvement of 100 basis points over the same period last year. Second quarter adjusted premiums and deposits were up 12% over the prior year to CAD33.7 billion, and assets under management ended the quarter at CAD808 billion.

We maintained a strong capital position, ending the quarter with a minimum continuing capital and surplus requirements ratio for Sun Life Assurance Company of Canada of 223%, and a cash level of CAD1.7 billion at the holding company, SLF Inc. We continue to focus on the prudent deployment of our excess capital. We repurchased 2.2 million common shares during the quarter. We also announced the acquisitions of Bentall Kennedy and of Prime Advisors during the quarter, as we expand our asset management pillar.

Turning to slide 9, the net impact of market factors increased earnings in the quarter by CAD97 million after tax. By the impact of assumption changes in management actions, increased net income by CAD19 million after tax. Favorable net impact of market factors was primarily due to higher interest rates in Canada and the US. Losses from equity markets in the quarter and gains from increases in the fair value of real estate were largely offsetting. Further details on the impacts of market factors have been provided in the Appendix. Underlying net income of CAD615 million benefited from CAD69 million of notable items that included positive impacts from investing activity, as well as favorable mortality, morbidity, and credit experience. These items were partially offset by adverse experience related to expenses, lapse in policyholder behavior, and other experience.

At the bottom of slide 9, we break down our earnings contribution by business group. Our results this quarter reflect strong business performance across all four pillars. In Canada, underlying earnings for the second quarter were positively impacted by favorable disability results in Group Benefits, and investing activity gains. We continue to see elevated drug claim costs in Group Benefits, adverse lapse in policyholder behavior, experience in Individual Insurance & Wealth, and elevated expense levels from the build-out of our retail wealth platform.

In the US, we benefited from favorable credit experience and from improved results in our Group Benefits business, reflecting progress on pricing, continued investment in disability claims management, and expense management initiatives. Underlying results at MFS were driven by higher average assets under management and strong operating profit margins. In Asia, underlying results reflect strong business growth momentum across a number of markets, most notably in the Philippines and Hong Kong, as well as investing activity gains during the quarter.

Turning next to slide 10, we provide details on our sources of earnings presentation. Expected profit of CAD672 million increased by CAD90 million from a year ago. The increase over the same period last year is attributable to business growth across the enterprise, particularly in SLF Asia and MFS, and positive impacts from movements in exchange rates. Excluding the impact of currency and results of MFS, expected profit was up 5% year over year. New business strain was CAD39 million for the quarter. This represents an increase of CAD11 million over the same period last year, driven primarily by a reduction in gains in Canada due to the lower level of interest rates relative to a year ago, as well as higher levels of new business strain in the US due to currency changes.

Experience gains of CAD252 million were driven by a combination of interest rate and other market movements in the second quarter and the positive impact of the notable items described on the previous slide. Assumption changes and management actions contributed CAD22 million pre-tax, or CAD19 million after-tax to results in the quarter. In the second half of 2015, we will complete our annual review of actuarial methods and assumptions, with the majority of the changes being reflected in the third quarter. We note that our review requires that we assess assumptions across a large number of products, businesses, and geographies, and it is not possible to determine the overall impact of these reviews on net income at this time.

Earnings on surplus of CAD126 million were CAD16 million higher than in the second quarter of 2014, as we benefited from higher investment income, including currency translation gains and the impact of mark-to-market on real estate. Income taxes of CAD259 million represent an effective tax rate of 25%, which is above our expected range of 18% to 22%. The higher rate reflects increased level of earnings in higher tax jurisdictions and lower earnings in lower tax jurisdictions. On an underlying earnings basis, the tax rate was 21% and in line with our expectations.

Slide 11 shows sales results across our Insurance & Wealth businesses. Sales from insurance products increased 8% over the prior year, driven by strong sales in Canada and Asia. In Canada, we saw increases in Individual Insurance sales sold through third-party advisors and our Career Sales Force, and higher large case sales in Group Benefits. In Asia, we benefited from continued strength in agency sales in a number of markets. Sales in SLF US were lower as we continued to adhere to a disciplined pricing strategy in International Life and Group. Total Wealth sales were up 25% over the prior year.

MFS sales were up 16%, reflecting higher retail mutual fund sales and the benefit of currency. Wealth sales, excluding MFS and Sun Life Investment Management, were up 58%. In Canada, higher sales were driven by the CAD2 billion asset transfer from the University of British Columbia pension plan, and strong mutual fund sales at Sun Life Global Investments. In Asia, we saw higher mutual fund sales in India and increased subscriptions to the Mandatory Provident Fund in Hong Kong.

As previously noted, we completed the acquisition of Ryan Labs in the quarter. Although institutional flows can be volatile in the institutional asset management business, we are pleased to report that Sun Life Investment Management, our third-party asset management business, had gross sales of CAD619 million, mainly driven by our acquisition of Ryan Labs.

Turning next to slide 12, we present a breakdown of the change in our year-to-date operating expenses over the prior year. Our overall operating expenses for the six months ended June 30, 2015, were CAD2.4 billion, up CAD162 million, or 7% over the prior-year period. Excluding the impact of currency and MFS, expenses were CAD1.4 billion, an increase of CAD39 million, or 3%. Total year-to-date volume-related expenses, which are directly driven by sales and asset levels, increased by CAD41 million over the prior year. The net impact of inflation, investments in growth net of productivity gains, and other year-over-year adjustments, reduced operating expenses by CAD2 million compared to last year, demonstrating solid expense management performance on a year-to-date basis.

Before turning the call over to Steve Peacher to discuss our asset management pillar, I would like to leave you with a couple of key messages for the quarter. First, we had a strong quarter with broad-based contributions from each of our business groups. Strong execution across each of our four pillars is reflected in good sales results this quarter and underlying earnings growth. Second, we continue to efficiently manage our capital and our financial position remains strong. We've been disciplined in our deployment of capital. Our actions this quarter reinforced our balanced approach to capital management, supporting long-term business growth, earnings and ROE improvement, while retaining flexibility for growth opportunities.

With that, I will turn the call over to Steve.

Thank you, Colm, and good morning everyone.

Turning to slide 14, when we established Sun Life Investment Management last year, our goal was to add a new dimension to our asset management pillar by extending the same core investment capabilities that we've used to manage Sun Life's general account to other institutional investors. In particular, we set out to offer customized liability-driven investment strategies, and alternative yield strategies to institutional investors across North America. Over the past 18 months, through both organic growth and acquisitions, we've established Sun Life Investment Management as third-party asset manager, with over CAD50 billion of assets under management and hundreds of institutional clients.

Just over a year ago, Sun Life Investment Management, Inc. launched a series of alternative yield strategies for Canadian defined-benefit pension plans. We're extremely pleased with the response to date, and in the second quarter, we garnered almost CAD500 million of new commitments to these funds. And these commitments will be funded over coming quarters as we source the individual investments.

In April this year, we closed on the acquisition of Ryan Labs, a tenured institutional fixed-income manager in the US, with outstanding investment performance and a particular expertise in liability-driven investing. Ryan Labs had gross flows of over CAD500 million in the second quarter. Prime Advisors, which closed on July 31, is a natural addition to Sun Life Investment Management, as it focuses on customized fixed income strategies for insurance companies that outsource the management of their assets. And Bentall Kennedy provides a premier platform in real estate investment management in both Canada and the US, with assets under management of CAD28 billion. The Bentall Kennedy transaction is expected to close in the third quarter. We will be disclosing more detailed financial information on these businesses on a combined basis in coming quarters.

Turning to slide 15, MFS and Sun Life Investment Management, together comprise our asset management pillar in North America, and we believe the two businesses complement each other well. MFS is a well-established manager of retail and institutional products and focuses its investment activity in the public markets. Sun Life Investment Management is centered on customized fixed-income solutions for institutional investors and alternative yield-oriented assets in private markets. The combination of MFS and Sun Life Investment Management positions the Company to benefit from the growth in traditional asset management as well as trends toward liability-driven investing and alternative asset classes.

With that, I'll turn it back over to Greg before moving to the Q&A portion of the call.

Great. Thank you, Steve.

To help ensure that all of our participants have an opportunity to ask questions on today's call, I would ask each of you to please limit yourself to one or two questions and then to re-queue with any additional questions. With that, I'll now ask Tiffany to please poll the participants for questions.

At this time --

Tiffany, are we polling the participants for questions?

(Operator Instructions)

Your first question comes from the line of Humphrey Lee.

Good morning. Thank you for taking my call. I want to ask about your appetite in M&A. Given some of the recent transactions you have done, do you still have any bandwidth for further acquisitions? Specifically, since there are a lot of insurance-related activities here in the US, how do you think about Group Insurance M&A market in the US? And then on the flip side, would you consider divesting any non-core or subscale business given the increased interest in the US?

Humphrey, it's Dean. Thank you for your question. As we've said before, we continue to turn the soil over on acquisition opportunities in all four of our pillars and that would include the US Group market. Some investors have lowered their long-term ROE expectations and I'm thinking of pension funds and notable acquisitions by Japanese buyers, but we have not lowered our long-term ROE expectations and you'll recall that earlier this year, we stated our medium-term financial objectives to include a 12% to 14% ROE.

So as we evaluate acquisition opportunities, they do have to be on strategy and obviously, they have to clear the hurdle in terms of expected ROE over the lifetime of the business. And certainly, the acquisitions you've seen us do, the acquisition in Malaysia two years ago and all three of our asset management acquisitions that Steve talked about, have met these criteria.

So I won't comment specifically on the US Group market beyond that. Coming back to your opening question, do we have the bandwidth? We certainly do. As Colm said, we're in a fortunate position of having excess capital at the holdco and well-capitalized in SLA. Would we consider divestitures?

Again, I won't comment on any specific parts of our business but we continue to look at all parts of the business and how to convey and create the most value for shareholders and you've seen us divest as well in terms of our -- the A business in the United States. But I would say to you today we're happy with the mix of businesses we've got and we're looking to add.

Okay. Thanks. And then switching gears to MFS, we continue to seek good retail flows in MFS but managed fund flows continue to be weak. You cited some of the reasons related to your actions and customer rebalancing and the industry trend. When do you expect to see an inflection point related to the management flows and can you talk about the progress that you have made in terms of product introduction to your managed profile fund platform?

That's a good question. We're working pretty hard specifically on the blended research products that were previously mentioned on the call which we've talked about in the past. All of those strategies, and there are close to 10 of them, have very strong track records, significantly ahead of the benchmarks of which they're measured.

And we sell that against mostly passive strategies in the marketplace. And the sales time, because it's a unique product, is much longer. But we -- last year, I think we did about 300 meetings with institutions and consultants and we're going to do about 1350 meetings this year and I can tell you that we are in finals as we speak.

But as I mentioned in the past, it's very, very difficult to predict when those RFPs will be converted into wins and it also depends very much on the investment environment. It's been very challenging lately.

You've had Greece and Puerto Rico and a lot of volatility in the markets. So we're working really hard at it and we are very, very confident that we're going to be able to turn the corner at some point down the future but I can't put a specific time frame on it for you.

Okay. And then just one quick follow-up on the retail side. The five-year performance dipped in the second quarter. I think 88% of your funds are in the top half as opposed to 95% last quarter. Can you provide some color of what happened there?

Yes. This is Mike Roberge. I think, if you look at it quarter over quarter, it was a slight reduction from low 90%s to 88%. I think, from our perspective, if you can achieve 88% outperformance relative to peers over a five-year period of time, that's about as good as you're going to do and then over a longer period of time like 10 years, we're up around 100%. So there's nothing meaningful in the quarter that would cause us any alarm.

Okay. Thank you.

Your next question comes from the line of Tom MacKinnon with BMO Capital Markets. Your line is open.

Yes, thanks very much. Good morning. Question for Colm and then one follow-up. Colm, if we look at the impact of investment activity on insurance contract liabilities, trying to get a feel for a run rate. I think you had said several quarters ago that this was probably -- you would benchmark us to about CAD10 million to CAD20 million per quarter. And so what's driving this -- these gains you're getting now and how sustainable are they and are you prepared to update the benchmark?

Thanks, Tom. So you're right. A couple of years ago, we talked about investing gain levels around the CAD10 million to CAD20 million level. We did point out at the time that, that does tend to fluctuate. Of course, it really does impact a lot on what's happening on the sales side and the type of product mix that we're bringing on.

We have good capacity to invest and generate investing gains. So I would say that the CAD33 million that we saw this quarter, while it's strong, it's not out of line with what we've experienced in the past. But I don't think we'd step away from the CAD10 million to CAD20 million level that we talked about previously as being indicative of a sustainable run rate level.

This quarter, I would point out that within investing gains, we did have a little bit in Asia related to some rebalancing as a result of AUM activity and that appeared in that line. That was about CAD5 million. But we feel pretty good about the investing gain capability that we have across the firm and so with those couple of additional comments, I think we'd stand by the type of guidance that we've given previously.

Okay. And maybe just as a follow-up, I can ask about the high level of mortality and morbidity gains that you appeared to get. I think a lot were attributable to the Canadian Group Benefit marketplace. May have actually been a swing from what you saw in the first quarter. Maybe Kevin's there to comment on that and sustainability of that.

Sure. Hi, Tom, it's Kevin speaking. Yes, we saw really, really excellent mortality and morbidity in the Group businesses, the Group business in Canada last quarter. I think you -- probably what I would say to you is to look at the two quarters combined as the best kind of indicator of a normalized and sustainable level.

They were down in the first quarter, above normal levels in Q2 but if you take them combined I think that's representative of where we feel we are, which is quite a healthy level. We've been investing a lot in our disability business around our claims management processes and footprint and focused repricing efforts and management of the block and so we feel quite good about where we are right now.

So are you anticipating -- if I took the blend of the down in the first quarter and above normal level in the second, does that mean that overall, there should be generally zero or just modestly positive?

I think it would be quite positive and I'd say the upside this quarter was half due to volatility and half due to improved underlying profitability.

Okay. And if I could just squeeze one more in with Dan. The weakness in the Voluntary sales in the US, this appears to be a bit of a trend here and they were particularly weak in the second quarter. Just what's going on there?

Sure, Tom. Our sales overall in Group Benefits were down year over year in the comparable quarters and year to date and that of course is due to the pricing actions that we've been taking. So not unexpected.

The component that is Voluntary, especially in the second quarter, just due to seasonality of sales patterns, is a relatively small number. So I wouldn't read too much into that alone, other than it being reflective of the overall moderation in sales.

So you're trying to moderate both Voluntary sales and Group Benefit sales? Are you having pricing issues in both of them or is it just more of a seasonality thing in the Voluntary?

Voluntary sales are really a component typically of bundled sales, so often the employer-sponsored and Voluntary sales go together. So the pricing actions that we've taken have been across the board in both employer-sponsored and Voluntary products.

Okay. Thanks.

Your next question comes from the line of Steve Theriault with Bank of America-Merrill Lynch. Your line is open.

Thanks very much. First question for Colm, please, on the basis reviews. So I think Colm, you made a similar statement last year when you reported your Q2 numbers.

So just wondering, is it fair to assume you haven't uncovered any large positive or negative items so far through the larger annual review and at this point, the ultimate effect looks like it's going to be relatively nominal or would you say there's still some material risk one way or the other on this front?

I'd start off by pointing out that the work is still underway. Now, it is August, so you can imagine we've made good progress. We do choose our words carefully as we look at our disclosure at this time of year relative to the work.

If we were at a point where we had a large negative or a large positive to disclose based on everything we've done, we would be signaling that to you. So the work really, as I say, is underway and it covers a lot of topics.

We clearly are looking at areas where we've had challenges from an experience perspective, so we're taking a close look at that but of course, we also have management actions that we look at as well and they can turn out to be positive. So when we look at everything together, we really don't have a number to put in front of you and that's based on a good level of work done to date but a fair bit still yet to go.

Okay, thanks. That's helpful. And maybe also for you, Colm, on excess capital, so CAD1.7 billion of holdco cash, I think that's unchanged. You've got the pending completion of the Bentall Kennedy deal, about CAD0.5 billion. But Then when you mesh in the MCCSR being higher than probably where it needs to be and some space on debt to total capital. Net of all that, what do you consider to be your excess capital position at quarter end?

You're right to pro forma in the proceeds that we'll be paying out for Bentall Kennedy and as we look at that, we'd still be at above CAD1 billion of cash at the holdco. And we obviously have some excess cash at Sun Life Insurance Company of Canada, if we were to take the -- a larger dividend from SLA based on its strong level.

So we still continue to be in a very good place and you're absolutely right, with a leverage ratio at 22%, we have capacity. We've talked before that we'd like to run normal times at 25%. We will be above or below that, depending on circumstances. So being well below it at this point gives us additional capacity. So we're well positioned if suitable opportunities were to arise.

But would you say CAD1 billion of excess cash certainly undershoots what you think you have in terms of excess cash?

Yes, the excess at the holding company, again pro forma, the Bentall Kennedy transaction would be below CAD1 billion because we do like to keep about CAD500 million of excess at the holding company, just to have a buffer against the normal requirements there to cover off interest payments and dividends, et cetera, at the holdco. But I think when you take account of the excess at SLA and you think of the leverage capacity, the number you're talking about is definitely reasonable.

Okay. And just if I could squeak in maybe a follow-up to Dan from Tom's question, looking at the In-Force has treaded water at CAD2.5 billion for a couple of years now. So how long until that starts heading higher and how much of that will be dependent on some of the stuff we've been talking about, getting the book repriced and how much dependent on just the US economy getting better?

Sure. With the pricing actions we've been putting through, we're actually pleased with the fact that the bip is stable. Our mix has changed, of course. We're selling more stop loss and somewhat less Group business than we were before. So that's balancing out nicely.

In terms of the Group pricing, we're about 30% of the way through that in terms of the book of business. So we still have a ways to go. We would expect that we'd be able to maintain the book of business as we complete that repricing and then growth gradually should resume as we get through that process.

Can you remind me the -- in terms of getting it mostly repriced, it's another year, I believe, is it?

Well, we're about a year into the repricing at this point, so we probably have in the range of about a year-and-a-half, in other words, to get you through another two January renewal cycles until we have the vast majority of the business repriced.

Thanks very much for that.

Your next question comes from the line of Robert Sedran with CIBC. Your line is open.

Hi, Dan. If I can just follow up on that. Curious to know, from a competitive marketplace perspective, you've been increasing price. Has the market been moving at all with you or is this -- are you off-market and would you expect the market to move towards you at some point?

No, we've been moving with the market. We've actually seen a number of competitors taking similar actions over the past year or so, so this has turned out to be a favorable time for us to go through a repricing of the book.

And just the underlying earnings on display in that segment this quarter, it bounced quite nicely from the Q4 trough. I know there's some unusual stuff going through there. Colm, I wonder if you can -- or Dan, for that matter, can provide a little bit of a better sense of where that run rate is at this point, removing some of that -- some of the noise that's in the numbers?

Yes, I think you're noting obviously the first two quarters have been quite a bit better for Group Benefits than where we were last year at this time. We're up about CAD40 million in earnings year to date versus the same period last year. The first quarter, we obviously had some -- a number of good things happen, including some likely favorable volatility. We would think of the second quarter as more representative than the first quarter of the current status of the business.

Okay. Colm here with just one follow-up question. If the comment is about the US Group segment in its totality, we also did have a positive impact from credit in the quarter and that was from strong recoveries on structured securities and that was about CAD10 million and we wouldn't expect that to reoccur on a regular basis. We might expect to see some further recoveries over time but we wouldn't bake that in on a regular basis.

Okay, the question was on both so I appreciate the added color. Just one last quick one for Steve Peacher On the Sun Life investment management, there's Ryan, there's Bentall, there's Prime, there's SLGI, are there any synergies between these businesses or are they four standalone businesses that roll up into the same pillar? Revenue or expense synergies.

Right, well, thank you for the question. First, just to clarify, SLGI, Sun Life Global Investments is really not part of Sun Life Investment Management. It's part of the Canadian business.

But if you look at the businesses under Sun Life Investment Management, now there are actually four third-party businesses. There's the business we started in Canada a year ago, Sun Life Investment Management Inc. Now there's Ryan's Labs, Prime Advisors and Bentall Kennedy.

They were very much assembled as a spectrum of capabilities that go together. So while they will maintain their independence, their independent brands, we do think there are -- and we're already seeing joint product development opportunities, cross-marketing opportunities. I think it's not so much an expense synergy story, but it's a revenue synergy story.

So we definitely think these aren't disconnected. We think they're connected. We think they go together. We think that we're going to be able to create growth because they're aligned under Sun Life Investment Management.

Thank you.

Your next question comes from the line of Meny Grauman with Cormark Securities. Your line is open.

Hi, good morning. Just following up on that discussion of Sun Life Investment Management. You talk about the synergies. I'm wondering, you've done a few acquisitions here with different capabilities.

Is there something else, a capability that's on your wish list that would fit in nicely here or would you say that you have what you need in order to move forward? Is there something on the M&A wish list that is still missing from Sun Life Investment Management?

Well, I would say that we've been able to put together a lot in a short period of time. So we feel like now with the spectrum of capabilities and the level of AUM, we've got the core capabilities that we're looking for across both liability-driven investing and a suite of alternative asset classes, which can go together or can be separate.

Over time, if there are opportunities to expand the menu of the alternative asset classes that we could offer, I think the theme would be the things that would work for us, so alternative asset classes with a yield orientation, a high quality bent. If there are capabilities that we encounter over time that would allow us to expand the menu, we might be interested. But I think our focus at this point, at this moment, is to take these entities that we're just closing on and really work to create a coherent entity and then exploit some of the synergies that we think exist to accelerate growth.

Great. Thanks for that. And then just a second question on expected profit growth. Quite strong for the Company as a whole. You noted impacts of MFS and currency. Looking at Canada specifically, though, down year over year and has been sluggish over the last few quarters. I'm wondering if you can just explain what's going on there?

Sure. Meny, it's Kevin speaking. Just note it's down just slightly sequentially by CAD1 million quarter over quarter. The main story here is really investments and growing the business, in particular, more recently, digital, so minor pressure from economics but mostly investments in growth.

I would say you're already seeing some of the benefits of that in places like DB Solutions where a lot of that investment's behind us and you saw CAD400 million of sales this quarter and showing up on a different line, the pricing gains line, some nice new business pricing gains. We would expect that start to see contribution from investments like SLGI as it moves through breakeven early next year and continue to contribute to growing earnings in Canada.

So I think this is all in line with what we signaled as investments and what we see as big opportunities for growth in Canada and you'll see a positive trajectory emerging early next year. I would also point you to the total underlying earnings picture and strong -- things like productivity gains coming through, investment gains, new business gains, while down a little bit over year over year, still CAD17 million on the quarter, stronger LTD experience gains.

So all of that puts us in a position where underlying earnings are up year over year. They're actually just ahead of tracking towards our Investor Day target which is CAD900 million for the year. So we're feeling good about all of those pieces and how they fit together and how we're managing them.

Thank you very much.

Tiffany, do we have a next question? Tiffany, do we have any more questions?

Your next question comes from the line of Gabriel Dechaine with Canaccord Genuity. Your line is open.

Thanks. Firstly, let's go back to this US Group business. And Dan, I like to hear that you think this is a good run rate representative quarter but it seems to me like you might be understating things there. You've only gone through 30% of the repricing and this is the first time, at least that I've noticed, that you talk about claims management and expense gains, so it sounds like there's more than just the pricing that's driven the big year-over-year improvement in earnings in that business.

So maybe you can go through those other two items, so the claims management and the expense gains that have helped this business and then if those are sources of additional growth, then layer on top of that the rest of the repricing, we could see profits actually move quite a bit higher than the CAD22 million.

Well, you're right that there are three components to this. Pricing is one of them and that's the one that will take the longest simply because of the three-year rates that are typical in this industry. As you've noted, we've also made investments in improved claims management and we've already seen quite a bit of the benefit of that already. Those investments have been in progress for over a year.

Okay.

And we've also been, as you noted, taking expense actions and we're probably quite a bit further along in those than we would be on the pricing. So we're seeing a good deal of the benefit of that earlier in the process here. But overall, I think you're right that we're not yet at the full potential that this business has and we have a ways to go.

Okay. So thanks for that. The -- I guess the claims management, is it safe to say that in prior years when the emphasis was on sales perhaps a bit more than it should have been, you weren't doing as good of a job on claims management and now that you have addressed that you probably could hope to see less volatility in Group?

Well, the nature in Group is inherently volatile. So I don't think we can guarantee no volatility in the future. In fact, I would probably expect that over time. But we have made some meaningful investments in claims management, adding some staff. In the past quarter, we opened a model office for claim management.

Our new Sun Life Center for healthy work in Scarborough, Maine, in the Portland, Maine area which is essentially the focal point for disability insurance in the US. So there's a lot of great talent available there. And we think we've taken the right actions to put us on a good course to do a really good job for our members, helping them get back to work in the future.

Okay. Next -- thanks for that. Next question's on Asia. Big growth. The 80%-plus earnings growth, underlying basis, it doesn't look sustainable but nonetheless, you've had excellent growth in that segment for several years now. So kudos on that. But it's still a business that generates a sub-10% underlying ROE.

Just wondering what you need to get that above the 10% mark, if long term, you expect it to be above the 12% to 14% target range for the consolidated Company, how long it gets -- it takes to get there? I imagine scale is a big part of this progress over time. But what does that scale really mean? What do I have to look for in your numbers? Just sales going a lot higher than they already are?

Gabriel, it's Kevin Strain. I think you see the combination of the good sales growth we've had in the past, focus on the persistency of the business, so building the In-Force business. The fundamental of VNB is also strong. You heard Dean talk about health and accident being up 29% and health and accident has a strong VNB. It's reflected in our expected profit.

So the expected profit grew CAD20 million in the quarter, which was up 37%. About half of that was from currency and about half of that was from business growth. So there's definitely a currency tailwind in the Asia numbers, that's probably adding about CAD10 million in income for the quarter. But what you need to do is watch us continue to build our distribution and our sales momentum.

We're seeing very strong growth in agency, which Dean referred to. We're also seeing very strong growth in our Wealth businesses, which also have good VNB and are building expected profits. I think this is broad-based and our focus is on delivering that growth on a consistent basis. And so the number is -- it's a big jump in the quarter to the CAD70 million but it was CAD60 million last quarter and I think the focus is on making sure we continue to deliver the VNB and expected profit growth.

Gabriel, it's Dean. If I could add one piece to that which is when you look at the profitability of the products, they're fundamentally profitable products, such that when you layer them on top of the In-Force and you think about Asia for us, where the ratio of new sales to the In-Force is higher than you would find in more mature markets like Canada, you do see a pattern of improving ROE over time, as the new products we're writing come into the In-Force and lift it up. And certainly, that's what you've seen in this more recent period and that's what we see when we look ahead.

You do expect Asia to be above the 12% to 14% target range or no?

That's going to take a long time to build out your In-Force and build out your scale and build your business. We're focused on fundamentally improving the businesses in each of the countries, each and every quarter, building the ROE on a very sustainable, strong basis that's based on the fundamentals.

And I think, if I had to point at one thing, I'd look at the agency growth and Dean referred to this, that we've had across the board and these are in Canadian dollars. So there is a currency lift to these.

But the Philippines was up 72%, Hong Kong was up 14%, Vietnam was up 71%, Indonesia was up 54%, India was up 16% and Everbright was up 48% -- Sun Life Everbright in China was up 48%. So you can see the type of growth you can create when you get the model right and you get the right people. And as Dean mentioned, these are fundamentally profitable businesses. So I think what you want to watch, Gabriel, is how we continue to grow with a focus on persistency and VNB which should come to an expected profit.

Sure. Thank you.

Your next question comes from the line of Peter Routledge with National Bank. Your line is open.

Just to follow-up on Gabriel's question. In what countries in Asia are you over 12% ROE?

We're not disclosing the earnings by country or the ROE by country at this point. So the overall focus is to make sure we're building the businesses. We're seeing good momentum, as I gave you across the board on the agency side and we're seeing a lot of momentum in our MFS business which was up 20% in the quarter.

Dean referred to our India Asset Management business and we've had really strong performance in our equity fund and our fixed income funds there and very good growth in that business. And the Philippines Mutual Fund business which is the number two mutual fund business, also had solid growth on the wealth side. The factor is bringing all of these together and focusing on growth of each of them but we're not disclosing the earnings or the ROE by country.

I think the question behind the question is a skeptic might say this is just a Hong Kong franchise. The other franchises are not earning, and will some day, but that's going to be five-plus years away. How would you respond to that, that skeptic?

The skeptic would be quite wrong because I think we're seeing very good growth. Philippines has been a very strong performer for us. Colm mentioned Hong Kong. Hong Kong has been a strong performer so the Hong Kong business has done well over the last few years. The addition of Malaysia has been quite a profitable business for us.

In the case of India, it's always been profitable to us. It's a profitable business to us and the growth they're having in the Wealth Management business, in particular, is helping. And in fact, in this quarter, every -- I can't promise this in every quarter because we are making investments and there's a number of reasons but in this quarter, every country made a profit for Asia.

Great. Great. And just on India, you mentioned it. I think you own 49% of the Investment Management but 26% of the insurance company, Sun Life Birla -- Birla Sun Life, pardon me. If you went to 49%, assuming you stayed within your ROIC guidelines for acquisitions, how accretive would it be immediately if you went to 49% from 26%? Would that make a big difference or would it just be a rounding error?

It's going to depend on the price we pay, if we do buy up.

I'm saying assuming you stay at your -- you stay within your disciplined acquisition ROIC targets which you've done quite well the last several years.

I don't really want to talk about hypotheticals on the call. I think we do like the India business. I mentioned that it's profitable. We like the partner there. We know the business. We like the management team. But when we have something to announce, if we ever do have something to announce on an acquisition, you'd get that at that point in time.

Okay. Fair enough. Thanks for taking my questions.

Your next question comes from the line of Sumit Malhotra with Scotia Capital. Your line is open.

Thanks. Good morning. First question is for Colm or Larry. I understand that you probably don't want to go too much into specific details, but as far as the actuarial review is concerned for next quarter, Larry's talked in the past few quarters about the consistent negative lapse experience that Sun Life has had, and when we think about the fact that, that's been discussed as something that likely is part of that review, shouldn't -- am I wrong to say that, that would be the dominant factor as far as the review is concerned and we're likely setting up for a charge to come through here for the Company? Didn't seem like that was the way you were thinking about it.

Well, it is true that we do expect to strengthen in some areas and lapse in policyholder behavior would be one to address the recent experience. However, as Colm mentioned, we are reviewing a number of assumptions across many businesses and in particular, are considering some management actions. So there are some items that are leaning the other way. So at this point, the net impact isn't clear.

Isn't clear, but just as in previous years, I think we've had this discussion continually over Q2 and it ends up being relatively non-event. Is that the way you would be leaning right now that you have some offsets to areas that are more clear to be strengthened?

There are some items going each way but because there's so many items in play, we're just not in a position to be able to give you guidance one way or another on the total at this point.

All right. Thank you. I'll move to my second question, which is around the M&A theme. And it may be for Dean or for Kevin Strain. So firstly, on the wealth management side, so on the three acquisitions the Company's undertaken in 2015, I believe there was only one where you had to disclose the purchase price immediately and as far as I know, that's a reflection of size.

As you contemplate your acquisition appetite, is it fair to say that the Bentall Kennedy deal is representative of where you'd be willing to go on the high end or is crossing the CAD1 billion mark something that's feasible for Sun Life?

Thanks, Sumit. We haven't really narrowed or limited the size of transactions. I guess three or four years ago, given our then current capital position and our then current risk position including our VA business, we did talk in terms of smaller acquisitions and since then, as you know, we sold the US VA business, significantly derisked the Company, built a sizable capital position and have paid down a lot of debt.

So as Colm said earlier, we have a fair bit of financial flexibility. So we haven't limited ourselves in terms of size and we're more interested in strategic fit. We're more interested in businesses that when in -- under our ownership, we can accelerate their growth. Coming back to Steve's point around synergies, we've got some very exciting ideas that we're working on with each of the three companies in Steve's bailiwick in terms of how to grow them more quickly.

And I know the partners of those companies are excited about that as well. So that's our first strategic fit and ability to accelerate growth and of course, the second source is around the economics, particularly the long-term ROE, the lifetime ROE from the business has to create value for shareholders.

And I'll stop here. So at least the recent announcements have all been in the asset management space. It's never been the easiest place to acquire but just going back to some of Kevin's comments, where does the Asia opportunity look in terms of partnerships or distribution agreements for Sun Life? Is that something that's still on the radar or has this become even more organically centered in the near term?

Well, Sumit, we -- as I said earlier, we continue to turn the soil over in all four pillars and that would include Asia, looking for opportunities. The nice thing is, we have very strong organic growth opportunities right in front of us. And so it gives us time and it gives us the ability to not reach for the pitch. In other words, to swing at things and swing hard at things that we think will really make a difference to the business.

There are opportunities all the time that we're looking at in Asia and I expect that will be true for some time to come. Having said all that, none of it's easy. Because there's a lot of capital in the world chasing a lot of properties. So we continue to be disciplined around that.

Thanks for your time.

Your next question comes from the line of Doug Young with Desjardins Capital Markets. Your line is open.

I'll keep this quick. Most of my questions have been asked and answered. So just one that I wanted to go back to, Colm, and that's the SLA, MCCSR. I don't think you've ever put a fine point on what you think a reasonable MCCSR is at the SLA level would be but obviously, as you mentioned, you derisked the Company over the last little while and so just wondering what's a reasonable level? Do you still want to have a buffer above 200% to protect in case of market downturn? Just wanted to get a better sense of that. Thank you.

Yes, so I think you're absolutely right. 200% is the level that we operate above and having a reasonable buffer above that in the event of interest rate movements, equity movements in the quarter is always very helpful. So I think if you think of somewhere in the 210% range, it's reasonable that we would want to be at that level and 223% is obviously a strong level for the reasons we've talked about.

Great. Thank you very much.

Your next question comes from the line of Mario Mendonca with TD Securities. Your line is open.

Good morning. More of a broad philosophical-type question. For several years, reviewing Sun Life's experience gains, and I'm referring more to policyholder experience gains, it was clear that there were mostly losses and that seems to have turned the corner.

And what I would appreciate hearing from you is whether I've characterized that correctly and maybe perhaps why has it turned the corner? Is it just all the management actions? Is it stronger reserving practices? Is it mix of business? If you could -- maybe Colm, if you could address that broadly, or Larry?

Well, I think it's -- you're right to characterize it as a little bit of a philosophical question. It's one that we clearly grapple with, given the nature of our business, and the assumptions that we have to make about events and frankly, layering in the economics of the last few years, which have been quite challenging in a low rate environment.

I would point out that one aspect of the charges you've seen is that they are magnified by a low rate environment when you reflect everything at these ultra low rates, the amount that you see coming through in experience are larger and similarly with assumption changes. But I think management activity is a very important point. We've talked about that a fair bit, both Kevin and Dan talked about the ongoing investing to really manage our businesses, which has been in place for a while.

The policyholder behavior, we've talked about before, and Larry commented on that as an area where he's taking a hard look. That is a tougher one in the sense that, again, economics have been a factor -- as we think about the economic environment has been a factor as we think about that one.

So I think all of the above, Mario. You've really touched on the types of things that drive it. I think we'd be very cautious as a management team to say that it's behind us. I think this is the essence of insurance and protection businesses that we have to manage all of these items extremely carefully. We do make a lot of assumptions about how the future will unfold and the one thing we do know is that it rarely unfolds as we expect.

And then more specifically, with respect to expense experience, each Q4 that's been a bit of a -- it's been high and it's somewhat disappointing, particularly in Q4 2014. What -- has the Company done anything to address that? Essentially building in the higher expenses into the reserving and therefore, expected profit so that we don't see that sort of experience loss in Q4.

Well, I think a couple of things. First of all, for sure, we really do watch the expenses carefully and you're right that we've had spikes in the fourth quarter. I don't think we're unique in that regard but they've been higher than we would like to see and we have taken actions to make sure that we've got all of the pieces in place to manage that quarterly process as tightly as we can.

But I think the broader topic around expense management at large is really the key. Again, philosophical question, and we're very focused on that. Perhaps Dean would like to say a few words about that.

Yes. Thanks, Colm. I think you've heard us speak about the Brighter Way which is our Lean Six Sigma Program that we launched around two years ago. And you would see, and Colm took you through the expense experience year to date, you'd see that controllable expenses, i.e., setting aside the volume-related expenses and adjusting for currency and so on, we're essentially flat versus the prior year.

We're very pleased with that because what it means is we are generating productivity gains through the Brighter Way that we are reinvesting in growth. And Dan talked about expense management in the US but I would say to you that all of our businesses and our corporate functions, I think, are doing a fine job embracing the Brighter Way. People are lined up to do these Brighter Way projects, these continuous improvement projects in their parts of the business.

We have more demand than we have ability to actually get to them and so that's -- it's been a very important part of the change in culture here that has legs and it's not a kind of a one-quarter or one-year expense cutting exercise. It's really being infused into the way we work. So we're pleased with that, Mario, and stay tuned for more of that to come.

Would it be fair to say that in Q4, we're still going to see expense experience losses, just perhaps not as large as they've been in the past?

Yes, I think just a couple points there. Clearly, the fourth quarter does tend to have a bit of seasonality around it. There are one or two items, frankly, that are difficult to budget for. I think in Q4 of last year, we had some incentive compensation amounts that were very much related to the final outcome for the year and you cannot accrue in advance of actually seeing those outcomes and some of those awards were also market based.

So again, it wasn't just what was happening within our shop, it was what was happening more broadly so we take all that into account. I won't promise you a certain level but you can be assured that we're very focused on it.

Thank you.

Tiffany, it's Greg. We have time for one more question before we end today's call.

Your last question comes from the line of Dan Bergman with UBS. Your line is open.

Good morning. Maybe following up on an earlier question. US sales levels have been subdued lately. It seems like it's likely due to your pricing actions, your benefits and pressure from lower rates in the international subsegments. Any thoughts you can give around the overall outlook for US sales and whether you feel we've started to see a positive inflection? And if not, when that might occur?

Sure. Thanks, Dan. You correctly pointed out that we've definitely seen some moderation in sales in the Group Benefits business and that's related to our pricing actions. As we head into the second half of the year, that's typically the most active part of the year as we make sales for January 1. And we aren't seeing increased activity right now in the business.

So we're optimistic that we'll start to see some improvement in our sales results as we head into the second half of the year. I would say a similar commentary for the International business. We've been seeing sequential quarter-over-quarter increases in sales there and there's some continued momentum there, particularly as we turn on new distributor relationships.

That's great. Thank you. And then finally, maybe switching gears, is there any update you can provide on the ongoing elevated specialty drug claims in Canada? Any color on how much that impacted earnings this quarter and updated thoughts on how soon this source of pressure may abate would be helpful. Thank you.

Sure. It's Kevin Dougherty. Well, we see it as it will continue to be a headwind, at least in the short term, probably impacted earnings in the range of about CAD9 million. There's a lot of quick action that we are taking that's underway, including repricing this exposure.

We've put in enhanced reviews of new drugs coming on the market and our processes around that and prior authorizations for Plan members to use them. Some of it will kind of be mitigated over time, as drugs like the Hep C drugs work their way through the population and that will play its way out over time.

We're exploring a number of longer-term structural strategies, agreements with manufacturers, special agreements with pharmacies as well around mark-ups and pricing, and indeed the industry is getting together on a lot of this, these issues, to make sure that we're kind of well-positioned for the future. I think it's a combination of all these things. I think it's hard to give you any specific guidance but we're working hard on it and we expect it will get under control over the next few quarters.

Great. That's very helpful. Thank you.

I'd like to thank all of our participants on the call today. If there are any additional questions, we will be available after the call. Should you wish to listen to the rebroadcast, it will be available on our website later this afternoon. Thank you and have a good day.

This concludes today's conference call. You may now disconnect.