Sun Life Financial Inc (SLF) 2015 Q3 法說會逐字稿

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

(Operator Instructions)

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

Thank you, Melissa, and good morning, everyone. Welcome to Sun Life Financial's earnings conference call for the third quarter of 2015. Our earnings release and the slides for today's call are available on the Investor Relations section of our website sunlife.com. We will begin today's presentation with an overview of our third-quarter results by Dean Connor, President and Chief Executive Officer of Sun Life Financial. Steve Peacher, Executive Vice President and Chief Investment Officer and President of Sunlight's Investment Management, will provide an update on Sunlight's asset management pillar. Following Steve's remarks, Colm Freyne, Executive Vice President and Chief Financial Officer, will present the third-quarter financial results.

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 a draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures which form part of this mornings remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events. With that, I will now turn things over to Dean.

Thanks, Greg, and good morning, everyone. Turning to slide 4, the Company reported solid results in a quarter of challenging and volatile economic conditions. Underlying net income was $528 million up from $517 million in the same period last year and our underlying return on equity was 11.6%. Expected profit grew 9%. Assets under management grew to $846 billion and our MCCSR ratio for Sun Life Assurance increased to a strong 229%. I am pleased to report that we have announced a $0.01 increase in our quarterly common share dividend, bringing our quarterly dividend per share to $0.39. This, together with the increase announced in the first quarter, represents a total increase of 8% in the dividend this year. This increase reflects our business momentum, our strong capital position and is in line with our target dividend payout range of 40% to 50%.

We continued to demonstrate strong execution on our for pillar strategy. We announced the acquisition of the US Employee Benefits of Assurant and correlated Bentall Kennedy and Prime Advisors. We believe that these acquisitions, when combined with strong execution on organic growth across all of our four pillars, will help deliver on our medium-term objectives for EPS growth and ROE set out at our March 2015 Investor Day.

Turning to slide 5, our earnings are well diversified across our businesses both by geography and by type. The benefits of this balanced business model, combined with the considerable derisking we have done ever the past few years, are apparent in our results this quarter, which show resilience in a challenging environment. In Canada, we demonstrated strong top-line growth. However, our underlying earnings reflected lower pricing gains from new business, a function of the low interest environment.

In the US, we continue to drive forward with our performance improvement plans in group benefits. We are progressing well and have seen good improvements in our results over the prior year. At MFS, the pretax operating margin remains strong at 40% despite equity market declines and net outflows that reduced assets under management. Our Asian operations continue to grow year over year as we build up the base of enforced premium and assets through strong sales and client retention.

On slide 6, we continue to demonstrate strong execution on our four pillar strategy, one that is focused on higher ROE and strong capital generation through leading positions in attractive markets globally. In Canada, we delivered very strong top line growth with insurance and wealth sales up 52% and 44%, respectively. In individual insurance, we recorded our highest ever quarterly insurance sales at $98 million of annual premium, driven by growth in all distribution channels and by a number of large case sales.

In individual wealth, Sun Life Global Investments retail mutual fund sales grew 45% over the prior year to $288 million. Sales of segregated funds grew 54% to $152 million, with three-quarters of those sales directed to our new Sun Life Guaranteed Investment funds seg fund products launched in Q2. GRS sales were up 71% from higher levels of defined contribution sales and group benefit sales were up 72%, driven by continued success in the large case market.

During the quarter, we announced the launch of our Digital Benefits Assistant, an innovative technology-based capability being developed to proactively engage group plan members and deliver personalized and timely interactions to them across multiple digital channels. Digital Benefits Assistant is the newest addition to the long line of innovations such as Total Benefits and the industry's first mobile apps. Our leadership and technology helps plan members appreciate the benefits that their employers provide and it helps them get good value from their plans while achieving their financial goals.

Turning to asset management, this quarter we completed the acquisitions of Prime Advisors and Bentall Kennedy and Sun Life Investment Management is now focused on leveraging revenue synergies across these four businesses, and with MFS, to accelerate growth in asset management. MFS ended the third quarter with assets under management of US $404 billion, down from $440 billion last quarter. Lower asset levels were driven by equity market declines, redemptions and rebalancing activity, all of which led to higher levels of net outflows. In the first month of Q4, we have seen an improvement in equity markets and MFS's AUM increased to US $427 billion as at October 31. Fund performance remained strong, with 74%, 86% and 97% of fund assets ranked in the top half of their Lipper categories for 3-, 5- and 10-year performance, respectively. Steve Peacher will say more about our asset management pillar at MFS in a few minutes.

Turning to the US, we took a major step forward this quarter in expanding the scale and capabilities of US group benefits with the announcement of the acquisition of Assurance Employee Benefits business. The transaction is expected to close in the first quarter of 2016, subject to the regulatory approval process, which is well underway. We have been working closely on planning for integration with Assurance leaders in Kansas City and their other locations and we are very impressed with their capabilities and the enthusiasm they have for coming together. And while as Torontonian, I am disappointed the Blue Jays did not prevail this year, our friends in Kansas City have every right to be proud of their World Series champs.

Our group benefits business continues to see progress from the actions we have taken to restore profitability and we see that in the improvement in our underlying earnings year over year. Sales in group benefits were higher by 10% over the same quarter last year, with strong results in stop-loss, which were up 63% in the quarter and 24% on a year-to-date basis. Business in force remains stable at US $2.5 billion of annual premium as we continue to work through the repricing of our group book. In international, sales were lower in both the life and wealth businesses where we have been taking a disciplined approach to new business in this low interest rate environment.

Turning to Asia, our underlying earnings were up 40% to $67 million from growth in our in force base, a favorable business mix and the benefit of currency. Asian wealth sales were $1.6 billion for the quarter, up from $1.1 billion last year, driven by strong fund performance in sales at Birla Sun Life Asset Management in India and higher levels of mandatory provident fund sales in Hong Kong. On a constant currency basis, individual insurance sales decreased by 5% over the prior year but are higher by 6% for the first nine months of 2015. We saw strong growth in health and accident sales this quarter, which were up 27% over the prior year and we continue to see good progress on the execution of our most respected agency initiative in Asia. Agency sales increased in the Philippines, Indonesia, India, China and Vietnam, reflecting greater productivity and increased advisor count in a number of our markets.

In the Philippines, we were recently recognized as the employer of the year. Sun Life is the first insurance company to be honored with this award since its inception 38 years ago. Earlier this week, at the Asia Insurance Industry Awards, Sun Life Philippines won Life Insurance Company of the year for all of Asia. These awards reflect a strong leadership team, an employee and advisor base in the Philippines who do a great job for our clients, which in turn has led to our number-one market position.

To conclude, I am pleased with the progress that we have made over the first nine months of 2015. The volatility in global markets is an important reminder of the value of the work that our employees, advisors and distributors provide to our clients, giving them some peace of mind and helping them achieve lifetime financial security. Sun Life faces the challenges of today's economic environment from a position of strength, from the management and deployment of capital to the resiliency of our business model and to the alignment and ambition of our people. With that, I will now turn the call over to Steve Peacher to discuss asset management.

Thank you, Dean, and good morning, everyone. Turning to slide 8, since early 2014, we have been building out Sun Life Investment Management taking our core investment capabilities and bringing them to institutional clients. During the third quarter, we closed on the acquisitions of both Bentall Kennedy and Prime Advisors and now, through both organic growth and acquisitions, we have established Sun Life Investment Management is a third-party asset manager with $56 billion of assets under management and over 700 institutional clients. With a focus on liability-driven investing and alternative assets, Sun Life Investment Management broadens our asset management pillar and is complementary to MFS.

Beginning this quarter, we renamed our MFS segment to SLF Asset Management to reflect the increased growth and diversification of our asset management pillar. SLF Asset Management includes the results of MFS, as well as the operations of Sun Life Investment Management, consisting of Bentall Kennedy, Prime Advisors, Ryan Labs Asset Management and Sun Life Investment Management Inc., our new asset manager in Canada. We're still in the early days of bringing our recent acquisitions onto Sun Life Investment Management platform, but I am pleased with the progress to date. All of the acquisitions are tracking in line with our business plans. In the third quarter, the asset managers underlying Sun Life Investment Management had gross inflows of $1.2 billion and net inflows of $612 million.

Turning to slide 9, I will spend a moment on MFS. The operating environment for asset managers has been challenging, but the third quarter was particularly acute, with volatility in equity markets, lower interest rates and declines in emerging markets. As Dean noted a moment ago, MFS's fund performance continues to be strong, with 97% of MFS funds outperforming their Lipper peer group over a ten-year period. Despite strong investment performance, near-term headwinds in the third quarter resulted in elevated levels of net outflows.

On the retail side, market volatility and the largest quarterly decline in US equity markets since 2011 have softened demand for mutual funds which resulted in net outflows for the industry as a whole. MFS has fared well relative to the industry, but still experienced modest outflows compared to the quarter. The institutional business had net outflows of $8.7 billion. These flows are larger than MFS has experienced in recent quarters and included some large outflows from certain sovereign wealth clients. MFS also experience outflows from variable and annuity platforms, consistent with industry trends. As Rob and Mike has highlighted in past calls, MFS has closed certain of his most successful products to new sales in order to protect client's returns from capacity constraints.

Markets have obviously improved since the beginning of the fourth quarter and so far this quarter, net flows have been markedly better than the third quarter. But of course, flows can be lumpy and I will let Rob and Mike expand on their expectations for the fourth quarter during the Q&A. Driven by its strong investment performance and attention to client needs, the value of MFS remains firmly intact. In fact, we believe that the recent volatility in market declines could be beneficial for firms like MFS who are able to demonstrate the value of active management over the long run. With that, I will turn the call over to Colm to walk through the financial highlights of the quarter.

Thank you, Steve, and good morning, everybody. Turning to slide 11, we take a look at some of the financial results from the third quarter of 2015. Our operating net income for the quarter was $478 million, up from $467 million in the third quarter a year ago. Underlying net income, which excludes the net impact of market factors and assumption changes, was up slightly to $528 million. Our underlying return on equity was 11.6% for the quarter.

Third-quarter adjusted premiums and deposits were $27.9 billion. Assets under management were $846 billion, an increase of 5% from the second quarter, which reflects the benefit of currency and the addition of assets from our Bentall Kennedy and Prime Advisors acquisitions. We maintain a strong capital position and end the quarter with a minimum continuing capital and surplus requirements ratio for Sun Life Assurance Company of Canada of 229% and a cash level of $1.7 billion at the holding company, SLF Inc. This level of cash includes $500 million in proceeds from subordinated debt issued during the quarter, which will be used to partially fund the Assurant acquisition.

Turning to slide 12, the net impact of market factors reduced earnings in the quarter by $82 million after tax. Unfavorable market impacts were primarily due to the decline in equity markets. Lower interest rates were more than offset by gains from movements in credit spread and swap spreads. Further details on the impacts of market factors have been provided in the appendix. Assumption changes in management actions increased earnings by $32 million after tax in the quarter. I will provide more detail on this in the sources of earning slide that follows. Other notable items reduced earnings by a net $4 million after tax as adverse experience in morbidity, mortality and expenses were partially offset by lapse in policyholder behavior, favorable investing activity and positive credit experience.

At the bottom of slide 12, we break down our earnings by business group. In SLF Canada, underlying earnings reflect lower gains from new business in group retirement services., unfavorable mortality and our payout annuity blocks and continued investment in growing our wealth business. In SLF US, underlying earnings benefited from gains on the sale of AFS assets and favorable tax adjustments related to prior years. Group benefits results were impacted by unfavorable morbidity but are benefiting from the impact of price increases and expense management initiatives.

SLF Asset Management, which Steve Peacher discussed a moment ago, includes the results of MFS and Sun Life Investment Management. At MFS, underlying results primarily reflect lower average net assets. Results from Sun Life Investment Management include one month of Bentall Kennedy. In Asia, underlying earnings results continue to be strong, reflecting business growth across a number of markets, most notably in the Philippines and in Hong Kong.

Turning next to slide 13, we provide details on our sources of earnings presentation. Expected profit of $665 million increased by $56 million from the same period a year ago. Excluding the impact of currency and the results of MFS, expected profit was up 1% as business growth in SLF Asia was offset by lower levels of expected profit in Canada and in the US.

New business strain was $63 million for the quarter, an increase of $36 million over the same period last year. Higher levels of strain this quarter were driven primarily by a reduction of gains in Canada due to the lower levels of interest rates relative to a year ago, as well as higher levels of new business strain in the US due to lower sales in our international business and the impact of currency. In light of current interest rate levels and its impact on business mix, together with the impact of currency, new business strain is expected to be higher than our previously communicated range of $30 million to $40 million. While experience will fluctuate quarterly, we expect a range of $40 million to $50 million under current conditions. Experience losses of $98 million reflect the unfavorable impact of market factors and other notable items as described on the previous slide.

The net impact of our 2015 review of actuarial methods and assumptions was modest, contributing $2 million pretax to net income. This year's review included the assessment of many assumptions across a large number of products, businesses and geographies. Lapse in policyholder behavior is one area where we conducted an in-depth review this year and we strengthened our assumptions by $555 million after tax. In Canada, this primarily reflected higher lapses on term life products at renewal and the reduction in lapse rates at longer policy durations for universal life policies. In the US, the main driver of the policyholder behavior strengthening was related to assumed premium patterns in our closed block of enforced policies and lower lapse rates on universal life policies in our international life business. Another area of strengthening in the quarter was expenses, which reflected expense studies completed in both Canada and the US.

Other areas of our review of actuarial assumptions this year include mortality, morbidity and investment assumptions. These changes, together with management actions and model refinements, all contributed positively to net income in the third quarter. Mortality and morbidity updates were broad-based across all geographies. Investment assumptions of benefited from changes in the provisions for investment risk and investment strategies. Management actions and model refinements included a variety of items, including the recapture of certain reinsurance arrangements in our US international business and revisions to investment strategies and asset liability mismatch provisions. Additional information on assumption changes by type can be found in the appendix to today's presentation.

Earnings on surplus of $88 million were $17 million lower than the third quarter a year ago, primarily due to currency translation losses on cross currency swaps and forwards supporting certain US dollar denominated investments. Income taxes at $76 million represent an effective tax rate of 13% on operating net income, which is below our expected range of 18% to 22%. On a year-to-date basis, the effective tax rate is 20% and at the midpoint of our target range. The lower rate in the third quarter reflects higher levels of earnings and lower tax jurisdictions and adjustments related to prior years. On an underlying earnings basis and adjusting for the impact of all notable items, the effective tax rate for the quarter was 17% and generally in line with our expectations.

Slide 14 show sales results across our insurance and wealth businesses. Sales results on a Canadian dollar basis include some notable movements due to currency. On a constant currency basis, our total insurance sales were up 15%, driven by some of the items noted by Dean earlier, including individual and group insurance sales in Canada and stop-loss sales in the United States. Total wealth sales of $27.9 billion were lower by 7% on a constant currency basis, primarily as a result of lower sales of mutual and manage funds at MFS.

Turning next to slide 15, we present a breakdown of the change in our year-to-date operating expenses over the prior year. Our overall operating expenses for the nine months ended September 30 were $3.7 billion, up $308 million, or 9%, over the prior-year period. However, excluding the impact of currency and MFS, expenses were $2.2 billion, an increase of $104 million, or 5%. Total year-to-date volume related expenses, which are directly driven by sales and asset levels, increased by $71 million over the prior year. Therefore, the net impact of inflation and investments in growth, net of productivity gains, increased operating expenses by $33 million, or 2%, compared to a year ago.

To wrap up, our results this quarter were achieved in the context of a challenging environment for equity markets and a continued backdrop of low interest rates. And these results once again highlight the benefits of our balanced and diversified business model. With that, I will turn the call over to Greg before moving to the Q&A portion of the call.

Thank you, Colin. 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 requeue with any additional questions. With that, I will now ask Melissa to please pull the participants for questions.

(Operator Instructions)

Robert Sedran, CIBC.

Good morning. I wanted to ask about Canada. It was touched on, I guess, by both Dean and Colm, but I look at year-to-date declines and expected profit. You have touched on strain, but earnings on surpluses is down a little bit while the sales growth and the business growth metrics actually look fairly strong. I know there is not a direct link between those two, but can you give a sense as to why most of these metrics are kind of pointed in the wrong direction so far this year?

Thanks, Rob. It's Kevin Dougherty speaking. For sure, if you stop at the first half, we were tracking very well year to date and in Q3, I think you saw earnings that really are not representative of the earnings power in Canada or our business momentum. Pricing gains were lower on lower interest rates.

But also, the summer months are slow for things like DB Solutions annuities, which tend to get crowded into Q4, which is a big quarter for those businesses as well as for our life insurance business. We also saw some mortality fluctuation under annuity blocks in the quarter in the normal range but went the wrong way and some noise and I'd just characterize it as noise in our surplus earnings, which do fluctuate from quarter to quarter. So I don't think Q3 was really representative of our earnings power in the same way that Q2 had fluctuations that we were really going the other way and probably the average of the two is more representative.

Business momentum, as you said, is very strong across the board and we are bringing that business in at very good pricing levels really across the board. Insurance sales are up 52%, wealth up 44%. That's really across the board in our core businesses as well as the new strategies like SLGI and seg funds and client solutions, where we have been investing a lot and are starting to see a great deal of traction.

And the expense issue that Colm touched, or expense growth that Colm touched on, would that be flowing through expected profit or would be flowing through experience items?

Rob, it is Colm here. On the expense side, there was a unfavorable in Canada in the expense experience in the quarter. And that is continued investment in our wealth and on the group side, some additional hires in our disability area.

And then just a quick one for Larry. One of your competitors yesterday mentioned the CIA study on lapse. Was that part of the reason that the policyholder theater and lapse charge was so large this quarter is that still something that needs to be digested?

Yes, that new study from the CIA, we did take that into consideration as we did our reviews this quarter. So that is behind us, although that was not the major reason for the assumption changes that we had. Our biggest change in Canada was actually related to the term business and the lapses that term renewal and then we had some changes in the US as well.

Thank you.

Steve Theriault, Bank of American Merrill Lynch

Thanks very much. If I can start for Colm or maybe Larry on the actuarial assumption update, most of the items I follow, but can you just take a couple of minutes to walk me through a couple of the items? I am looking for a bit of an explanation on the investment risk provision in the par account. Can you describe that a bit and the size? The other component was investment strategy changes at SLF Canada. Can you give us a little bit more detail on is that going down the quality curve a little? If you could explain that a little bit, that would be helpful.

Okay. So starting with the par account, we do hold provisions for average deviation in the shareholder accounts to address the risk of investment experience being negative in the par accounts because dividends can't go below zero. So we reviewed the size of that provision and we were able to reduce it.

And then in the second one, the investment strategy changes, yes, that one is about increasing the net asset yield and that fund. However, the strategy changes were really pretty minor modifications. They just end up having a relatively large impact when you present value them over a long duration.

Does that second component, does that replace the potential for yield enhancement in any way? I think of it like that.

When we look forward, we don't see any changes as a result of that in terms of our ability to produce investment gains in the future.

Okay. And then maybe one more, probably for Colm, a quick question on the impact of the market factors. The equity impact appeared in line, to me at any rate, but it looked like on the -- when you look at the net impact of the benefit from rates, corporate and swap spread, the tax rate looked to me like it was well over 50%. Please correct me if I am wrong. Could you explain that, please?

I think on the overall changes you have to look at where the changes are being impacted. And if the changes are coming through in a tax advantaged area, it can have an impact on the after-tax numbers. So I think that is really all I would say on that. There was nothing unusual from our perspective. When we look at the overall impact of rates, credit spreads, swap spreads, et cetera, I think they were fairly much in line. They may, on the credit spreads side, they may have been a little out of line with sensitivities but again, sensitivities are based on the broad index of credit and the actual portfolio holdings are going to be a little different.

So maybe when you say higher impact -- or higher tax rate geographies, more of the impact may be in the US this quarter?

Well, on the credit side, certainly there's an impact in the US, but I don't have that actual number in front of me.

Thanks very much.

Humphrey Lee, UBS

Good morning. Just a question about MFS flows, especially in the institutional side. Can you give us an update in the terms of turnaround process in terms of the flows, and also maybe comment on the reception and the traction in terms of your new blend of product in MFS?

Good morning, Humphrey. This is Mike Roberge. Third quarter was tough both from a market environment perspective, but when you look at the industry and you look at flows across the industry was also relatively challenging. Focused on it two ways. First on the retail side, the industry digger negative in retail flows in third quarter, both in fixed income and equity sales. We were slightly negative. Having said that, we did pick up share so if you look year to date, we are picking up share in retail in a more challenging environment. When you look at the majority of flows being on the institutional side, we've talked a lot about our closing of strategies to protect existing clients. That clearly is having an impact on our ability to sell a piece of our business.

The biggest issue in the quarter of what clients decided to do with their money on the redemption side. We saw a number of large redemptions. The vast minority of that was performance related, because if you look across and you can see the performance numbers, it was not performance related in the quarter. They were decisions clients made around moving from active to passive, derisking and a variety of other client decisions around rebalancing that hit us in the quarter. As we think about repositioning that business and we've talk about it is we are growing our global fixed-income capabilities. That is going to take some time. We are building a team, we're launching products and that's an ongoing process.

On the blended research side, we are seeing a lot of interest in the strategies. We are positioning those in markets with clients. The third quarter, again in particular, was not a quarter where clients were putting net new money to work. And so we are in the process of transitioning that business. It is going to take some time. What we're hopeful, I think from an industry perspective, is you do begin to see some of the redemptions come down across the industry.

I think early this year at the Investor Day, you talked about how as you continue to put on new products to replace these closed funds, you are hoping to at least stabilize the net flows, especially on the institutional side and maybe seeing some turnaround next year. Does that expectation change, given the more recent developments? How should we think about the flows, the overall flows capacity kind of looking forward?

I think you have to think -- the one thing we do control, when you think of net flows, is sales. So we are picking up share, particularly in retail. On the institutional side, sales are lower because of products we have closed. The other part of the equation is redemptions. What we don't control is what clients decide to do from an asset allocation perspective with their own. We are hesitant, particularly with what the industry has seen in last quarter, we are hesitant to try to predict with what clients may do with their money in next last quarters. We think we're well-positioned to sell into the marketplace with products we have brought. What we don't know is what clients are going to do on the redemption side.

Thank you for the color. Maybe a question for Kevin Dougherty. The prescription drugs remains a headwind in Canada but it seems to be improving. What is your outlook for the block's performance and where you are in terms of repricing for that block?

Thanks, Humphrey. As you noted, specialty drugs continue to be a big factor in Canada. On the Hep C, the Sovaldi and the Harvoni, they are working their way through the target population and in fact, we saw probably about a 30% decrease in claims in Q3, suggesting that they are running their course. We've introduced pricing changes and pulling level changes. We've got new drug review processes, prior authorization, all kinds of strategies in place, including exploring agreements with pharmacies and also with manufacturers to get better pricing. So we think we'll continue to see this improve over time. It will take a few more quarters to work its way all the way through. I think the industry is kind of moving to another level in terms of how we price for these things and expect this will continue to improve in future quarters.

Can you repeat that improvement in Q2 three in terms of claims? What was the percentage?

About 30% reduction in the total volume of claims that came in. (Multiple speakers)

One of your peers announced recently changing the policies in terms of how they handled new prescription drugs. Do you think the industry as a whole is going to follow suit? You mentioned you're internally changes some of your policies as well. Do you feel like with the repricing and the policy change that should be over within the next few quarters?

I am aware of that one of our competitors has changed their policy on covering some of these. When I say we made some changes, it's more in the process, the approval processes, prior authorization and those kinds of things. What we hear from plan sponsors is that they actually want to cover these things and they are looking for ways and means of doing that, different pulling techniques and help in controlling pricing and use. If you think about, for example, big public sector plans or big union plans, it is quite clear that employers like that, it is in the union agreements already and that coverage will continue into the foreseeable future. I think even other employers are not wanting to get in the middle of kind of the ethical dilemma of not covering some of these things.

I think they are looking to the industry for solutions. We are working through the pricing and pulling techniques to make these things affordable and to spread them across large numbers of employers and to make it work. That's the approach we are taking.

Thank you for the color.

Gabriel Dechaine, Canaccord Genuity.

Good morning. Just a quick question on the MFS flows and then I got a follow-up. How much of your institutional AUM is in the Middle East? I think it was around $9 billion at the end of 2014. Where does it stand today?

We don't disclose by region. Clients are obviously pretty sensitive to us disclosing region of the world and particular asset types. What I would say is when you look at our overall sovereign wealth business it's under 5% of business and our assets. Clearly it had impact in the quarter, but isn't significant piece of the business and one which we worry too much about.

Is that where you had a bit of an exaggeration of the redemptions this quarter? Do you see that continuing?

We were hit some in the sovereign wealth space globally. I will not comment on specific regions.

Right. So with $9 billion of outflows this of this quarter, $4 billion was the average over the prior four, how much of that increase was tied to sovereign redemptions or was it not a big factor?

It was broader than that. We had large allocations away where we've performed well on behalf of the client and the client was diversifying away from MSF because we performed so well. It was really a hodgepodge of a variety of things with performance being the lowest factor in the redemptions in the quarter.

Then just on the lapse or the restrengthening, I don't know, Larry, if you can put it in this kind of perspective, but if industry studies or internal studies, primarily industry studies said lapse rates are X, did you go to Y? Meaning a much more conservative assumption than the industry would suggest you do?

It's hard to make a comment relative to the industry, but I would say that especially on term insurance we did try and get ahead of the trend. The more recent product designs have seen a larger and larger premium jump at the renewal point and when we when we look back we can see that the size of the jump correlates with the size of the lapse rate. So while most of our historical studies are based on older generations of products that didn't have as big a jump, we did make a modification because of the trend in product designed in order to try to get ahead of the potential turn in lapse rates. I would say we have done a thorough job in reviewing that and we feel good about our assumption but I would not necessarily say that it's intentionally conservative. I would say we put it where we think is the right spot.

Is this a moving target kind of thing? Because lapse has been, not just for Sun Life, but and industry-wide reserving issue for a number of years now, a byproduct of the low rate environment. Are we going to have to expect these types of adjustments every year? What are your thoughts on that?

While we really took a very thorough look at what has been happening in our book of business right across all of our businesses this year and this quarter on that basis. We made the changes effective at the start of the quarter so that we do see that this quarter's experience was relative to the new assumptions and we see that we did have a gain, that one quarter is not a trend, but it is the right sign. I would say that we been reviewing and now for a number of years and we feel good about our assumptions. Having said that, at the long durations there still is experience to play out that we have not seen yet, so if you look over the full duration of the contract we may see some variation over time, but if I look out for the next couple of years, I think we've fully reflected the experience we have been seeing and I feel good about where were at.

Thank you, Larry.

Meny Grauman, Cormark Securities.

Good morning. Just wanted to ask about Asian sales and just any read through from what was a difficult market environment. You talk about strong mandatory providence sales in Hong Kong and I'm wonder if you put that in context of what the market did and then also if you can comment on wealth sales in China as well.

It's Kevin Strain. I'll take a broader step. The insurance sales, and Dean mentioned this earlier, they were quite strong in Philippines, Vietnam and Malaysia. Hong Kong was weaker than expected. We are seeing some growth the a number of agents and we are seeing growth in the traditional and the agents are also selling pension sales. So that -- overall, I think the agency performed well.

The sales of the pension funds were very good in Hong Kong. We were at a top three sales we're punching above our sort of asset management position. It has been done on strong performance. The performance of the funds has been very good and we expect to continue to see those flows on the pension side in Hong Kong. I think overall Hong Kong insurance sales were a bit weak but we should see those start to come back up and the pension sales were good.

India, we are seeing good sales on the agency side. Dean mentioned this earlier. We lost the Citibank relationship with the AIA regional deal. That is what dragged the sales down in India, so we don't expect to see that year over year. We expect to see the sales are growing ever time. That should happen over the next little while. That's one thing.

And then on your question on China, on China we were seeing a shift in mix to more regular pay and more regular pay sales, which is something that we've been driving towards and we think that this is a good step for us in terms of the Chinese sales. On the well side, there's been good momentum in China for our sort of almost individual wealth sales and we are selling those through a couple of distributors including WeChat and also a website called 163.com.

Thank you for that. Just a quick question on MFS. You talked about market volatility is raising the profile of active management. Are you seeing any signs of that as you speak to clients or any sign that, that changes happening or is it more sort of looking forward and just thinking it through and hoping that for the best, basically?

This is Rob Manning. We have quite a marketing campaign literally around the globe where we've tried to segregate active management and the power behind that. We do it not only in traditional media but also in digital. The bottom line is this business is all about generating alpha. If you don't have alpha, you can create any product you want or any marketing strategy you want. You will not be successful. So the heart and soul of what we do here is that we very much believe we can add value over a cycle. We have been able to do that and quite frankly, Mike and I spend the majority of our time taking about the investment platform, how to strengthen it and how to position people to add the most amount of value.

And that resonates with our clients and if you look at our unaided awareness in the industry, as an active manager it continues to climb so a lot of the investments that we have made are gaining traction. This intermediation between passive has something we have been dealing with our whole careers. I have been dealing with this for over 30 years. It is acutely intense at the moment because many active managers over the last cycle did not perform well. MFS is an outlier on that. If you look at our performance, we felt comfortable that we're continue to be successful. The flow issues that Mike talked about will resolve themselves over time. We just have to extend that timeline because we do not know how uncertain the environment's going to remain.

Thank you very much.

Sumit Malhotra, Scotia Capital.

Good morning. Just to pick up there for Mike or Rob, it was mentioned that the flows had been markedly better than us far in Q4. I know we are only a month in, but obviously markets have been better as well. Is that in both the mutual fund and the managed side.

Yes, we have seen -- at this point in the quarter we have seen that. Again, we caution a little bit because we don't know what clients are going to do as we make our way into the end of the year. We do think that the third quarter, again, if you look across the industry in the third quarter, you saw outflows go up dramatically in the third quarter. Clients were doing a lot on the redemption side in the third quarter. For the industry, it looks outsized relative to history. That would be our expectation as we look into the future.

And more specifically on the managed side, I think we've gotten somewhat accustomed to the outflow level being there over the past year in and around the $4 billion range. Now, you mentioned some of the sovereign wealth fund activity and obviously markets were poor. Is it your expectation, Rob, that $4 billion level for the managed side is a more is a more reasonable run rate expectation and this was a sizable blip in Q3?

Again, what I would say is when you look at the industry, outflows ticked up in the industry in the third quarter. If that is in fact the case, than we would expect something more normal on a go-forward basis. What we don't know is whether the industry is going to have a higher redemption rate over the next couple of quarters. We are being very cautious to give any guidance because we don't know what industry flows will look like.

I understand. Thanks for that. Just to go back to Asia, I think this was answered somewhat in one of the previous questions is, there was certainly a lot of focus on equity market volatility over the last few months and what that may have done to Asia. It does not seem like there was any noticeable impacting your business from equities. Is there any comment on economic growth as a whole in Asia, especially starting from China? It certainly seems like there's a view that we have taken a step down. Do you think it's reasonable to expect a slow down in the run rate on sales that you have had in your core insurance products in the region as a result of slower economic growth?

It's Kevin again. The equity market slowdown particularly impacted the results in the Philippines and in China, so it was a bit of a negative in the overall earnings and that was offset in ACMA. When you look at the underlying earnings, it would be taken out. But I would say overall, the team in China has done a good job of managing that book of business and we were profitable in China again this quarter, so I think that's a positive. It does have an impact. We saw a lot of unit-linked product in the Philippines and it has a negative impact there.

We're not seeing the overall economic conditions have a significant impact yet on our insurance sales. It is a bit of a drag, but I think if you look long term, we've done a lot of potential to continue to sell health and accident. We saw health and accident grow a lot in the quarter. We've got a new sales distribution model with Minsheng Bank, which is a top-15 bank in China that is selling regular paid critical illness insurance. So we are pivoting a bit in terms of mix.

I think the fundamentals of distribution are good. Our agency distribution has grown and all of the countries where we have agency. Our bank assurance has done very well in Malaysia and we have added bank assurance in Indonesia with Commonwealth Bank and we added bank assurance in China with Minsheng. We have just added three new telcoms in Malaysia. I think there are still lots of potential for growth. I think it is a bit of a headwind for us, but I think with good distribution, execution we can work our way through that headwind and we are seeing that with the growth we are getting in most of the countries.

The biggest impact on sales has been shifting mix for us, which took sales down but actually increased VMB. Our VMB in the quarter was up over 40% despite the fact that the were sales down. It has been a very focused execution philosophy on distribution to grow the VMB and grow the profitability. I think we will continue to work through that and continue to see growth in Asia.

That is very helpful. Thanks for the detail.

It's Dean Connor. I just wanted to add one other point there when you look across economies in Asia, they may be slowing down a little bit relative to what they have in growing at in the past but in terms of real GDP growth, the numbers, they are posting very strong real GDP growth. You look at India, Vietnam, Indonesia, Malaysia and so on. In terms of places in the world where we want to do business and grow and have growth opportunity, as Kevin said, we think we've got great potential there and when you look at the growth of those economies, they are doing quite well in absolute terms.

I appreciate that, Dean. I know there was a lot of focus more so on the equities side of the equation, but I think for your business in particular, it really comes back to how those economies are doing and the growth of the middle-class population that you folks have talked about quite often. I will wrap it up here. Just a very quick here numbers one for Colm and that is on the earnings on surplus and the SOE. I apologize if I missed this in your remarks, but it did seem to tick down this quarter compared to the run rate you had. Anything specific on the investment side that may have impacted this? Any color you could provide there would be appreciated.

I did comment on it. Just to summarize, we had some adverse impacts from currency. We have hedges in place against some foreign currency denominated assets, but those are economic hedges and from an accounting perspective it has given rise to a bit of noise. In the second quarter, it actually bonused earnings on surplus (multiple speakers) and this quarter that reversed, which is what you would expect if it works out economically, which it does. So I think the run rate you could think of it being approximately $10 million higher than what we posted this quarter.

Thanks for that.

Peter Routledge, National Bank Financial.

Just a follow up on MFS. In terms of fund flows, is the Guggenheim impact out of that now? I know after you sold the business there may have been the potential for runoff. I wonder if that is impacting your results at all.

That business sit with our variable annuity business. We continue to sub-advise those assets and those assets are performing from a flow perspective like the rest of the industry.

Okay. So they are not giving rise to any noise?

No.

They are inconsistent outflows?

The VA is in outflows, as a category across the industry. We do continue to sub-advise those assets.

I noticed in the sub pack, the liability per share-based compensation keeps going down in value. I understand part of that is just based on the valuation method you use. Are folks putting the shares back and cashing out?

We have an active plan at MFS and I think we talked about this in the past. Part of peoples comp is equity in MFS the vessel over a four-year period. It is very cyclical in nature and over time, people sell, they don't sell, it just depends on their personal circumstances what percentage of MFS is a part of their net worth. And so quarter to quarter, it is pretty volatile and almost impossible to predict but it's a pretty fluid plan where we award shares every year and we do get shares back. We still have strong ownership by employees here and it continues to be a core to our culture and our performance-based system over time.

And they're still settled in cash or are they settled shares of Sun Life?

They are settled in cash.

Thanks very much.

Doug Young, Desjardins Capital.

Good morning. A first question, maybe back to Kevin on Asia. Obviously the growth you have seen in Asia has been surprising and I get the FX side of it. I am just wondering, because all we see is kind of the high level, can you give a little bit more detail from a regional perspective? Is this just you're gaining scale outside of the Philippines into different regions? Is that the key driver or can you talk about one or two of the key drivers? And also, can you talk a bit about how wealth has been to the earnings growth? Is this mostly wealth driven or is it mostly insurance?

I think, Doug, that the key factor is that the VMBs Asia on the products are by and large quite good. If you can get the mix right, and you can drive your distribution to grow with the right types of mix and keep your persistency good, build the enforce, you will drive profits because the products by and large are fundamentally profitable. I talked the amount we grew VMB in the quarter. We have had significant growth in VMB for the last number of years. We've had significant growth in enforce the business in both insurance and wealth. It is not one or the other. I would say it's both. We've seen really good growth in our asset management company in India, in the Philippines, in China and in the Hong Kong pension business and we have seen significant growth in our insurance operations.

This quarter, six of the seven countries were profitable. Of course the bigger enforce businesses like the Philippines and Hong Kong are driving a big chunk of the profits. We are seeing Malaysia, after acquisition, coming on and being quite profitable. We actually had a substantial dividend paid out of our Malaysian business earlier this year and we are seeing India continue to grow, particularly on the asset management side. I would say it is broad based and it really relates down to getting distribution right, getting the sales right and then getting the sales in a way that you can have good persistency, so building the enforce. If you look at our expected profit growth has been significant and Colm mentioned that in the early numbers, that we have been a big provider of that growth and expected profit and that is something we will continue to focus on. It by and large comes down to getting the distribution right.

And where do you think -- what inning are you and in terms of this? It sounds like this is an ongoing process. Are you still in the second, third inning or are you getting close to earning the right mix of distribution and product?

It varies by country. We literally basically just entered Vietnam in the past three years and we have been in Hong Kong for 123 years. I would say by a large, there is still a lot of work to do and there's a lot of opportunity. I think we have grown the business substantially since we set out our Investor Day target. We've grown the brand substantially. In 2012, Sun Life was not one of the top 1,000 brands in Asia. Now we are in the top 500. We were the fastest growing insurance brand in Asia. We are now the number-six insurance brand.

So we are getting a lot of traction, but there's still a lot to do. We are not at scale in a lot of countries and we need to keep driving the sales growth in both insurance and wealth and drive ourselves toward scale and sustainable profitability. In the innings, I would say overall for Asia we are still maybe in the second or third inning. And there's still a lot of work to do, but I think we're seeing some good momentum a the number of the businesses.

Just on the US group side, obviously, there was poor mortality and morbidity. I wondered if there is additional color you can provide. Is there anything from a new claims development perspective that concerns you? In the same breath, just looking for an update in terms of the percentage of your business that has been repriced so far in this latest iteration of price increases.

This is Dan Fishbein. As you noted, in the third quarter we had some unfavorable disability morbidity and that was driven by mostly new claims incidents and severity but this was generally within our range for volatility. On a year-to-date basis, the disability experience is near our expectations and significantly improved over 2014. In fact, group benefits earnings in the third quarter were substantially better than the same order last year as well as year to date. Overall, we are pleased with that progress.

On the repricing of the business, as of the end of the third quarter we've repriced approximately 40% of the book. And that began around this time, actually around September of last year. We expect to have about 50% of the business repriced as of January 1.

Thank you.

Dan Bergman, UBS.

Good morning. With the January renewal season around the corner, I just wanted to see if you had any updated thoughts on the stop-loss market in the US and what you're expecting in terms of the upcoming renewals. I know sales were quite strong in Q3 2015, but some peers have recently mentioned some signs of increased competition in this market. I was curious to hear your thoughts on the level of competition you are seeing in the US stop-loss market and maybe the outlook for sales and how pricing and returns are holding up.

As you've noted, we've seen better sales this year than last year and last year was a record year for sales in the stop-loss business. So we are expecting the momentum to continue. From a competitive standpoint, where not seeing this year as being more competitive than last year. In fact, in some ways even more a little less than this time last year. We are generally getting the renewals that we're seeking to get on an overall basis. And expect that overall we should have a strong January 1 both in terms of sales and renewals.

Very helpful. Thanks Maybe switching gears then to MFS. In terms of the margin, it looked like it held up quite well in the quarter. I think it was near the upper end of your expected range despite the elevated outflows and the market weakness. I wanted to see if there is any color you can provide on what factors have allowed you to hold the strong margin levels despite the tough market environment and any updated thoughts on whether these current margin levels are sustainable ahead. That would be great. Thanks.

In terms of the margin, we anticipated actually the environment was going to be tough this year so we've been very vigilant around controlling discretionary expenses at the Company and really investing in things that are necessary but not nice, is a good way to put it. But some of the projects we have ongoing at the Company are ramping, particularly in our CRM system for the sales teams to help reinvigorate institutional sales as well as some of the digital spend. We are also putting in a substantial order entry system and compliance system at the firm that is absolutely necessary for us to do.

As we guided in the past, the spend has not caught up to where it is run rate is going to be. So going forward, the 40% number is the top end of the range, as you accurately described. And given asset levels being where they have been throughout the past year, which is around $440 billion to $450 billion, we think we can run a margin in the high 30%s to 40%. But I do want to caution you that we are very heavily weighted toward equities and if we do go through a difficult market, the operating leverage works the other way as well.

We will monitor it. It is easy to model at MFS because it's just AUM and average effective fee and if assets good down, you can see what happens from an operating point of view. But you should know that we do anticipate the environment to be difficult and we are spending a lot of time keeping our headcount low and making sure that we are only investing in things that are necessary.

Very helpful. Thank you.

Mario Mendonca, TD Securities.

Good morning. Colm, a quick numbers question on the tax rate. In your opening comments, you said that reversing all items of note, the effective tax rate was 17%. On a basis consistent with the $0.86 in earnings, that effective tax rate is different. I am coming up with a materially lower number. First, have I got this right?

You are right. If you don't adjust the notable items, the rate is below the 17%. With tax rates, Mario, we are looking at a variety of numbers here between reported, operating and underlying. And of course, were looking at quarter, discrete quarter and we are looking at year to date. We were trying to give you a few data points to show that from our perspective, the real key message is that the 18% to 22% is very much our continuing view of the target range. I would point out that Q3 was on the low side and Q2 was on the high side with an operating tax rate of 25%, which when you adjust it for the various items was 21%. So you get a little bit in one quarter, you give up a little bit in another quarter. We do look at it pretty carefully to see if there's anything about the types of items that came through in the quarter that we think of being as a notable item and we did not see that this quarter.

So again, on a basis consistent with $0.86, it was lower. Can you say that there were no tax gains that would've caused to be materially lower?

There was a recovery. We did mention that there was a recover --

How much was that?

-- with respect to the prior year, but I see that in the normal course. Some years you put up contingencies in respect of prior years, some years you resolve issues in respect of prior years. It comes and goes. (Multiple speakers) We have a large number of tax items that we manage.

Forgive me for not catching that. Did you disclose the size?

We did not disclose the size, but I'm comfortable to let you know it is about $18 million.

Thanks very much. That is all I had.

Tom MacKinnon, BMO Capital.

Thank you very much. A question for Larry and then one follow-up. Larry, you mentioned the strengthening in the lapse assumption, seemed to work in terms of favorable lapse experience in the quarter. But then you released mortality and morbidity reserves and I assume you made those effective at the start of the quarter, and then you had a $44 million after-tax loss on mortality and morbidity and experienced gains in the quarter. How are we to look at that and what does that mean going forward?

A couple of things there. First, mortality does fluctuate quarter to quarter and year to date we have actually mortality gains of $22 million, approximately. We don't want to just look at the one quarter.

(Multiple speakers) has a different assumption than the other quarters (multiple speakers) run off a different base.

That's true. The mortality assumption release that we had, a chunk of that was in our international life business where we changed mortality improvement. Last year, we did a big change for mortality improvement but for the international business we did not have, we were not able to complete the study fully so we completed that this year and ended up releasing some from mortality improvement. That's about mortality rates well out into the future, so it would not really impact the current quarter at all. Most -- we had a number of other smaller changes across the various businesses.

The other point I would make is and one quarter, we -- actually, is that the group businesses, we don't hold the liability relative to future premiums. We only hold for waiver reserves that are incurred but not reported. So to the extent we end up with some group mortality losses, those aren't really -- they don't impact the assumption review.

Okay. Thanks. And then a question for Kevin Dougherty. I assume a lot of the jump in the individual insurance sales in Canada are attributable to increasing par sales. Maybe you just can confirm that. I'm trying to get a handle as to how that impacts strain. The other one is, given that you only get a small portion, probably less than 5% of the profits associated with this par business, why do you see -- what are the benefits of it and what would be ROE on that business?

Sure. First, I'd say that sales were up really right across all of the different product categories. In particular, career sales force had an excellent quarter, up 7% year over year. Big jump on the third-party side and a big portion of that was par. There was a very large contribution from our point of view and a lot of value from par, including along with these sales often come riders, which are very profitable.

As well, there is often related sales of term as you put together a full financial plan for these individuals. And there is tremendous relationship building with the third-party advisers. Finally, there's a nice contribution to expense coverage and so on. There's lots of points of value to this business both for the customer and for shareholders.

What's the impact on strain, though? I assume there has got to be hardly any strain associated with this business. I am trying to figure out what is driving the strain. I guess the reduction in the positive impact of the new business that you're getting in Canada, what is driving that? I would not anticipate it would be increasing par sales.

It's Colm here. You're quite right. It's not related to the par sales. It is really the factors we talked about earlier, which is the lower payout sales and the lumpiness in the defined benefit solution sales. So both of those can impact a quarter so when we look at year over year, that is really where -- it is the change in business mix related around those areas as opposed to anything with the par sales.

So it's really due to expense coverage issues rather than interest rate and strain associated with those businesses. Is that a better way of looking at that?

I would say the mix is driven by interest rate factors, because pay-out annuities are more difficult to sell in this type of an environment. On the defined benefit solution sales, they just happen to be lumpy in terms of when they get recognized. They are complex and they can land in a certain quarter. Last quarter we had a good result they and this quarter was a lower result. So it's more of a mix issues. You have to think of it, again, over the year. These are all the factors that we thought about as we considered the overall level of strain.

And the strain increase, that's a quarterly guidance, from $30 million to $40 million to $40 million to $50 million? What jurisdictions were driving that?

It would really be, in the case of Canada, for some of the reasons we talked about. In the case of the US on the international side, life sales had been lower. Again, we had been quite disciplined in our approach there to crediting rates and some other competitors have not moved on the crediting rates at quite the same level. We think that were still very much in that market but that can be an impact and that has shown a variant year over year. And currency, of course, when we gave that guidance of $30 million to $40 million per quarter the Canadian dollar was quite a bit stronger than where it sits right now.

Okay. Thanks very much for the color.

Melissa, we are out of time for today's call. I would like to thank all of our participants today. If there 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.

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