Sun Life Financial Inc (SLF) 2016 Q1 法說會逐字稿

Good afternoon. My name is Chris and I'll be your conference operator today. At this time I'd like to welcome everyone to the Sun Life Financial Q1 2016 financial results conference call.

(Operator Instructions)

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

Thank you, Chris and good afternoon, everyone. Welcome to Sun Life Financial's earnings conference call for the first quarter of 2016. 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 first-quarter results by Dean Connor, President and Chief Executive Officer of Sun Life Financial. Following Dean's remarks, Colm Freyne, Executive Vice President and Chief Financial Officer, will present the first-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.

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 afternoon's remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events.

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

Thanks, Greg, and good afternoon, everyone.

Turning to slide 4, the Company reported strong underlying net income of CAD582 million, up 13% from the same period last year and an underlying return on equity of 12.4%. In a quarter characterized by volatile equity markets and low interest rates, we grew earnings across all four pillars.

These results speak to the benefits of diversification, both by geography and by business. They also speak to the significant derisking we've done through business mix and product design.

On the wealth side we focused on asset management steering away from long-term guarantees in products like variable annuities. And on the protection side we've intensified our focus on group benefits and other less interest rate-sensitive products.

This is all reflected in ROE, which was 12.4% on an underlying basis, 11.3% on an operating basis. That compares to a weighted average of around 10% for the major companies that reported in North America over the past week.

Our ROE is higher in part because our asset management earnings are proportionately larger than those companies, and in part because we've managed to reduce exposure to interest sensitive businesses. We're currently at the lower end of the range of our medium-term ROE objective of 12% to 14%, so we have room to move up over time.

Today we also announced a CAD0.015, or 4%, increase in our quarterly common share dividend, bringing our dividend per share to CAD0.405 per share per quarter. This increase reflects growth in our underlying earnings, a strong capital position and our outlook for future growth.

This quarter we grew insurance and wealth sales 9% and 1%, respectively over the same period last year. And our total assets under management ended the quarter at CAD861 billion, up 6% from a year ago.

Turning to slide 5 I'll discuss a few key highlights for the quarter. In Canada our individual wealth business had a strong quarter, with retail and institutional sales of Sun Life Global Investment Mutual Funds, up 73% over the same period last year. And our suite of segregated fund products, Sun Life Guaranteed Investment Funds, generated sales of CAD151 million in the quarter, a strong start from a standing start last summer. I'll come back to Sun Life Global Investments in just a few moments.

In Group Retirement Services, sales, excluding last year's CAD5 billion longevity transaction, were up 13% from strong defined contribution planned sales. We continue to invest in technology in the group space with the launch of MAX my money@work, which is our digital enrollment tool that helps members take full advantage of their retirement savings plans at work.

We estimate that Canadian workers are leaving as much as CAD3 billion in company-matching money on the table each year. And our new digital enrollment tool is meant to help improve participation and savings rates for plan members. Early feedback from clients has been very positive, and it's a great example of how we can use technology to help clients feel optimistic about achieving their financial goals.

Turning to our asset management pillar, MFS ended the first quarter with assets under management of $418 billion and an operating margin of 37%. Clients are benefiting from strong relative fund performance with 78%, 93% and 97% of fund assets ranked in the top half of their Lipper category for 3-, 5- and 10-year performance, respectively.

Net outflows of $1.1 billion were improved from last quarter, but flows nonetheless continued to be impacted by market volatility, industry trends, and the prior closing of certain funds to new sales in order to protect client returns. Against the back drop of a challenging environment, we have been gradually picking up share on the retail side of the business. Where many firms experienced sizeable retail outflows, MFS's US retail business has been in a net inflow position over the past year and, in fact, has climbed into the top 10 fund group position in the United States.

At Sun Life Investment Management, which includes the results of Bentall Kennedy, Prime Advisors, Ryan Labs and Sun Life's Institutional investments, we had net inflows of CAD1 billion, and ended the quarter at CAD57 billion in assets under management. We remain optimistic about our ability to help yield-seeking clients through alternative asset classes and LDI opportunities, and continue to build out a strong pipeline of new business. Our goal is to grow Sun Life Investment Management's AUM to CAD100 billion over the next five years.

Turning next to the US, we completed the purchase of the US employee benefits business of Assurant on March 1. The acquired business moves us to a leadership position with $4 billion of business in force, and adds greater breadth, capabilities and talent in one of our strategic pillars for growth. Integration activities are well underway. And while we're still in the early phases of bringing these businesses together, we're pleased with the progress to date.

Sales in US group benefits were up by CAD25 million over the prior year. Sales results reflect strong growth in group life and disability, in voluntary, as well as the sales results of Assurant employee benefits business for the month of March.

In our international life business, we launched our new product, Global Legacy Core. The product is designed to provide clients with more choice and flexibility while retaining appropriate return characteristics for shareholders.

Moving to Asia, overall sales of life insurance products were up 8%. And we saw continued growth year-over-year in agency distribution in nearly all of our markets. Wealth sales were down in the region, reflecting market volatility.

We continue to invest in our ability to grow and strengthen our presence in Asia, most recently increasing our ownership position in our JVs in India, Vietnam and Indonesia. In the Philippines we maintained our number one position in the market for the fifth consecutive year based on new business premiums.

Complementing our success in the Philippines we've also seen our market share increase in other markets, including Indonesia, Malaysia and Vietnam. And all of this activity will help make Asia a larger part of Sun Life.

On slide 6 I'd like to take a few minutes to talk about our mutual fund business in Canada. As you know, we launched Sun Life Global Investments, or SLGI, five years ago, and today the business is a CAD13 billion mutual fund company with over half a million clients and an offering of over 100 funds. SLGI provides managed solutions to clients who were seeking access to world-class asset managers and the opportunity to invest confidently.

Our Granite funds are unique because they combine many of the best asset managers around the world into one solution. This allows managers with specific skills in a particular asset class to solely focus on that asset class and manage to their strength.

Further, the Granite funds bring pension style asset management to the retail investor, giving them access to asset classes like infrastructure, real estate, and emerging market debt. This approach also includes a variety of investment styles like active and passive, growth and value. And whereas most managed solutions utilize a strategic asset mix, our Portfolio manager of the SLGI Granite funds can tactically change the fund composition to adjust for market volatility.

These managed solutions are gaining traction in the Canadian mutual fund industry. In fact, in 2015, approximately 80% of the industry net flows were directed towards managed solutions. This has been a strong part of SLGI 's success.

In the first quarter of 2016, total net sales of SLGI mutual funds were up 73% against the back drop of a 57% decrease for the industry as a whole. There are two key drivers of success here -- first, the strong investment performance that SLGI has been able to deliver for clients, and, second, the engagement of Sun Life Advisors.

So, we've come a long way in just five years, and we're beginning to see our presence felt in a more meaningful way in the Canadian mutual fund market. As the bulk of the buildout in this area has now been made, and as asset levels grow, we expect SLGI to move from the investment phase to a net contributor to SLF Canada's income growth in the years ahead.

To close, Sun Life is off to a strong start in 2016. Our earnings performance reflects continued momentum in our businesses, and our confidence in the future is highlighted by our dividend increase. In this low rate environment we know our clients need us more than ever, and that's why we're intensifying our focus on adding value, on deepening relationships, and on helping them achieve lifetime financial security.

I'll now turn the call over to Colm Freyne who will take us through the financial results.

Thank you, Dean, and good afternoon, everyone.

Turning to slide 8 we take a look at some of the financial results for the first quarter of 2016. Our operating net income for the quarter was CAD531 million, up from CAD446 million in the first quarter last year. Underlying net income, which excludes the net impact of market factors and assumption changes, amounted to CAD582 million. Our underlying return on equity was 12.4%.

In a quarter where we saw lower bond yields and mixed equity performance, equity market performance, our results reflect the resiliency and diversification of our business model. First-quarter adjusted premiums and deposits were CAD35.9 billion, and assets under management ended the quarter at CAD861 billion.

We maintained a strong capital position, ending the first quarter with a minimum continuing capital and surplus requirements ratio for Sun Life Assurance Company of Canada of 216%. As a reminder, our MCCSR for Sun Life Assurant as of December 31, 2015 of 240% included approximately 20 points related to the funding of the Assurant transaction that closed on March 1.

The MCCSR ratio for the Holding Company Sun Life Financial Inc. ended the first quarter at a strong level of 231%. The higher ratio at the SLF level largely reflects the excess cash level of approximately CAD1 billion held by SLF Inc. And our leverage ratio of 23.7% is below our long-term target of 25%, providing us with additional financial flexibility.

During the first quarter the Office of the Superintendent of Financial Institutions released its new draft capital guideline, the life insurance capital adequacy test, that will replace the current MCCSR framework beginning in 2018. The public consultation process is now under way and a final guideline will be issued later this year.

We are working closely with OSFI and the industry to prepare for the implementation of the new framework, including participation in quantitative impact studies and providing feedback to OSFI on specific aspects of the framework. However, as OSFI has noted, the light cap guideline is not expected to increase the amount of capital in the industry compared to the current MCCSR framework but rather to better align risk exposures of various businesses with capital requirements.

Turning to slide 9, we had strong growth in underlying earnings with higher levels of earnings across all of our businesses. In SLF Canada underlying earnings reflect favorable investing activity and net gains on available for sale assets. We continue to invest in our wealth businesses where we see excellent opportunities for future growth.

In SLF US, underlying earnings included one month of Assurant's employee benefits business and benefited from favorable morbidity experience in the group business. Our expense management initiatives continue to make progress and improve our levels of profitability in the US.

SLF asset management performed well in a challenging market environment. At MFS net outflows amounted to $1.1 billion. And operating margins declined sequentially from 38% to 37% on lower average net assets for the quarter.

Sun Life Investment Management had solid net inflows of CAD1 billion from strong sales activity of Bentall Kennedy and Prime Advisors. In Asia we continued to maintain momentum as underlying earnings grew 10% over last year, reflecting business growth across a number of markets.

Turning next to slide 10 we provide details on our sources of earnings presentation. Expected profit of CAD674 million increased by CAD35 million from the same period last year. Excluding the impact of currency and the results of SLF asset management, expected profit was flat to last year as business growth in SLF Asia and our stop-loss business in the US was offset by lower levels of expected profit from our US in-force management business and in SLF Canada.

New business strain was CAD62 million for the quarter, an increase of CAD12 million over the same period a year ago. The higher levels of strain this quarter reflect the unfavorable impact of currency and lower levels of pricing gains in our Canadian business due to business mix and low interest rates.

We believe that our expected range for new business strain of CAD40 million to CAD50 million per quarter remains appropriate. But, as we've mentioned before, experience will fluctuate quarter to quarter.

Experience losses of CAD54 million primarily reflect the unfavorable impact of interest rates and equity markets. Equity market impacts this quarter included CAD16 million of basis risk from the fund underperformance in the legacy segregated fund block in Canada.

Other notable experience items this quarter include strong investing activity gains reflecting higher levels of tactical investing activity and ongoing portfolio repositioning. We experienced favorable morbidity results in the US group business and a small favorable result in the Company's overall mortality.

Assumption changes and management actions resulted in a strengthening of reserves by CAD17 million. Earnings on surplus of CAD123 million were CAD14 million higher than the first quarter a year ago and benefited from higher levels of realized gains on available for sale securities.

Income taxes of CAD97 million represent an effective tax rate of 14.6% on an operating net income basis, which is below our expected range of 18% to 22%. The lower tax rate is primarily the result of high level tax-exempt investment income. And on an underlying earnings basis the effective tax rate for the quarter was 20.9%, which is in line with our expectations.

Slide 11 shows sales results across our insurance and wealth businesses. Total insurance sales were up 9%, which includes the benefit of currency movements. On a constant currency basis our total insurance sales were up 4%, with strong growth in US group and solid growth in sales of individual life products in Canada.

Total wealth sales of CAD33.6 billion were higher by 1% and also benefited from currency movements. On a constant currency basis sales were lower by 7%. And the decline in wealth sales were primarily driven by lower mutual and managed fund sales at MFS and in Asia.

Turning next to slide 12 we present a change in our first-quarter operating expenses over the prior year. Overall operating expenses for the first quarter were up CAD189 million from a year ago. The increase in expenses was driven primarily by currency movements and the inclusion of expenses of recently acquired businesses. When we adjust for these items our controllable expense growth accounted for 3% of the change in our total expenses, as our investments in growth have been partially funded through productivity gains generated through our Brighter Way program.

Turning next to slide 13, I'll spend a moment on the topic of our energy exposure. Our total debt securities and corporate loans exposure to the energy sector is CAD5.4 billion, down slightly from CAD5.6 billion last quarter. The assets we hold are of high quality, with 93% being rated in investment grade as at March 31, 2016.

We had a modest negative credit impact from our oil and gas portfolio this quarter. However, our overall credit experience in the quarter remained positive, despite an increase in downgrades from rating agencies.

While we did see some downward migration in our portfolio, our exposure remains predominantly investment grade, and the bulk of that exposure is to sub sectors such as pipelines and transportation that are more insulated from volatility in oil and gas prices.

To wrap up, we achieved strong results for the quarter and continued to grow our earnings in a changing environment for equity markets against the continued back drop of the low interest rates. At the same time, we're investing in businesses to generate future growth for our shareholders. These results highlight once again the resiliency of our operations and the diversification that our balanced business model offers.

And with that I'll turn the call back to Greg before the Q&A portion.

Thank you, Colm.

To help insure that all of our participants have an opportunity to ask question on today's call I would ask each of to please limit yourself to one or two questions and then to requeue with any additional questions.

With that, I'll now ask Chris to please poll the participants for questions.

(Operator Instructions)

The first question is from Gabriel Dechaine with Canaccord Genuity.

Good afternoon. Just a quick question on the new business strain. You gave some guidance there, Colm. I just wanted to just touch upon a little product announcement you made in the release. You're relaunching some of your offshore life insurance products in the US. Is that going to generate some new business gain activity for you?

Yes, Gabriel, Generally speaking, the international life product does have that characteristic. And you're right, we've announced that new product has been launched. However, we did not see sales from the product in the current quarter, and that is partly contributing to the fact that the new business strain in the quarter was a little bit on the high side.

Right. I think you were, on an annual basis, running about CAD40 million or so -- CAD40 million, CAD50 million -- higher than you were a couple years ago in terms of new business strain. Is that the delta you're expecting roughly, to come back down?

When we revised our guidance around the level of strain, I think it's probably a year or so ago, we did take account of exchange rates. Exchange rates have been difficult to estimate. Frankly, there's quite a bit of volatility in the Canadian Dollar. So, when we look at it we feel comfortable with the CAD40 million to CAD50 million.

The big issue is really around business mix in a given quarter. Q1 is more of a wealth quarter in Canada. One area where we do see new business gains is on defined benefit solution sales.

That obviously fluctuates quarter to quarter. A year ago we had some sales in that space on the longevity insurance transaction. We didn't have that this quarter.

Mix is also a factor and which quarter in the year. THat CAD40 million to CAD50 million on an annualized basis is a level that we think is reasonable.

Okay. And my next question is for Dean on ROE. You talked about this quarter the 12% running at the low end of your target range, so there's upside. If I just want to play devil's advocate and look at the past few years and what's worked for you, MFS had massive growth. That's normalizing or peaked out anyway, possibly. And that was a big ROE driver for you.

In the past year, FX has been a pretty big or important ROE driver for you, as well, especially since it's tied to the MFS earnings which has low capital attached to it. I'm just wondering, on a go-forward basis what are you seeing that's going to help you take that next leg up towards the 14%? Which parts of the business? What elements of the capital management strategy, acquisitions, things like that?

Gabriel, thanks for your question. First of all, the investments we've been making in organic growth, whether it's building out Sun Life Investment Management, building out SLGI, launching segregated funds, growing sales forces in Asia, as we look ahead we see all of those investments in organic growth really coming through and helping to lift.

They've been big drags on the expense line. On many calls in the past we've talked about the investments we've been making. We're pleased to see that evolving the way we expected. SLGI is a great example of that where we're really at the breakeven spot. And looking forward in the next several years it's going to be a contributor to that lift.

The second thing I'd point out is we've run the last several years, as you know, with a significant amount of excess capital that we have deployed. And as we've done that, and particularly for the larger transactions, specifically the buy up in India, the acquisition of Assurant and the acquisition of Bentall Kennedy, we've disclosed for the latter two the accretion on EPS, but, as well, ROE. Those will help us on the ROE side.

I won't go further than that, but as we look ahead those are two critically important areas. And obviously we have to keep executing on those.

Okay. And as far as the seg fun business, is there an element of running off legacy seg funds in Canada? And is that going to have a near-term impact on your ROE or is that a beyond 2018 kind of thing?

I think the impact on ROE is farther out. But it's fair to say there is a run-off of the legacy seg fund book. It's running off at a decent clip and it's being replaced.

As I said, we had a little over CAD150 million of seg fund sales in the quarter of our new seg funds, the GIF funds, which have much better, much superior risk and return characteristics. So, that's going to help us. But I wouldn't try to model -- I wouldn't fire up your model on ROE accretion from Seg fund moves over the next couple years.

Oh, my model is fired up. Thanks for that answer, Dean.

The next question is from Humphrey Lee with Dowling & Partners.

Good afternoon. Maybe a question for Dean or Colm. Looking at your current dividend payout ratio, it is near the low end of your target range, even though your earnings power may not necessarily be full strength this quarter given the equity markets. So, to me, the pace of the dividend increase seems to carry some level of conservativism. Is it just a timing issue because of the capital deployment that took place in the first quarter because of those acquisitions? Or should we take it as a more cautious approach from management because of the market volatility?

It's Colm here. No, I don't think we would look at it as being a cautious approach. There's many factors, obviously, go into a determination of an increase in the dividend. Clearly, we look at the underlying earnings, we assess the growth trajectory that we see. We look at our overall capital level. We consider the macro environmental. All those factors are discussed and reviewed.

The increase that we see at 4% for the quarter for the increase, very consistent with the objectives that we have for an 8% to 10% earnings per share growth on an annual basis, very consistent with our payout ratio that we've talked about, very consistent with our views around our strong capital position. You heard us mention our SLF capital ratio for the first time. We haven't disclosed that previously.

So no, we feel good about it. I think -- caution isn't the word but caution is obviously a factor that one would always think about in any matter related to capital. So, if you mean it from that point of view, yes. But if you mean it from the point of view of are we holding back because we see more adverse market out there, no, we don't have that view.

So should I take it as it could be a little bit more frequent or proactive revisit of your dividend payout in the subsequent quarters?

Humphrey, it's Dean. We have not specified a frequency of dividend review. It's something that we talk about with the Board of Directors regularly. I think the best guide post for you on that is think about the dividend payout ratio of 40% to 50% and how we're navigating our way through that. That's probably the best guide post you can look at.

Thank you for the color. And then maybe just one question for Mike on MFS. The flows in the managed funds definitely saw a pretty good improvement in the quarter, especially when you look at the recovery in gross sales. Can you provide some color on what you're seeing in that market? And, also, can talk about the progress of some of the new strategy that is being rolled up in terms of attrition?

Yes, if you look at our flow trends, particularly in our institutional business, we have seen a significant improvement in the redemption rate. Now, some of this is tied to our sovereign wealth business, but I think we've seen it really across the board in that business.

More recently we are seeing increase in pipeline in activity within blended research, which we've talked about. We're hopeful that all of the work that we're doing around positioning that product in the marketplace will begin to bear fruit in the quarters ahead. We're beginning to see signs of that and we're hopeful that we've begun to see continual improvement in the institutional business.

I will caution you, though, that business does tend to be pretty lumpy. And one of the things we're seeing around the world is clients, given the challenging return environment, both in rate markets and equity markets, we are seeing considerable movement of assets and moneys within that business.

So, we think the business has gotten better. We can continue to get that better, but we can continue to provide caution given the lumpiness of that business.

And then in terms of the sales in this quarter, my understanding is there's no one big mending win or anything like that that affects the numbers in the quarter. So, do you feel like the gross sales for this quarter would be a decent trendable level assuming no significant outflows in the near term?

As I mentioned, we saw improvement on a net basis in the institutional business. On the contrary -- and this is what we've seen industry-wide -- the retail business continues to be pressured by market volatility.

If you look in US retail year to date, equity funds and outflows, we've seen modest improvement in fixed income flows. But the retail business here in the US, and we've seen this outside of the US, as well, has been pressured by market volatility.

So, while we've seen an improvement from a net basis in our institutional business, the retail business year over year is weaker given what's happening in the marketplace. Having said that, we are picking up share relative to the industry within retail.

So, it's very hard for us to give you a sense of flows not knowing what the environment is going to be like. Our view is, given uncertainty around growth around the world, Brexit, the US election, we would expect that market volatility will remain relatively high. We're not expecting a significant improvement in retail flows. So, we'll just have to see where it goes from an industry perspective.

Got it, thank you.

The next question is from Meny Grauman with Cormark Securities.

Hi, good afternoon. Just following up on Humphrey's question, just wondering what your sense of seasonality was in the improvement in net flows at MFS. How much of a factor was seasonality in Q1?

Yes, seasonality doesn't impact our flow. We tend to get a little bit better flows earlier in the year from the DC business, but on a year-over-year basis that would have been there. But seasonality is not a big impact on the flows.

Okay. And then just as a follow-up, in terms of your outlook on the operating margin, is there any update there in terms of what you're looking for going forward?

Yes, this is Rob. Just to take a step back, when we were around CAD450 billion or so in assets we told you that you should expect a high 30 margin, and that we were going to be spending down some of that in technology, which we are continuing to do. And when the market takes away CAD50 billion of assets in a quarter, which it did in the first quarter, and some of that has come back, you can see the negative effects of our operating margin.

Now, when that happens we do have some discretionary expenses which we can pull back quickly that help temper that. But, as Mike suggested, we view this year to be one that's going to have continued volatility.

So, as we move forward all you really have to do is just look at where average assets are and you can plug it into your model, because you saw the margin improve as we scaled up to CAD450 billion. And as you take that away from us, we have a negative effect, as well. So, as we sit here, the math still works but we're very uncertain about asset levels because of the market conditions.

Thanks for that.

The next question is from Robert Sedran with CIBC.

Hi, good afternoon. Dean, especially now with the India transaction sapping a little bit more of the balance sheet strength or liquidity that you have, is it time to give the corporate development team a bit of a break? Or do you see other pockets that you'd still like to invest in?

Thanks, Rob. I think we've said all along that our first priority is organic growth. We see a lot of opportunities to grow in all four pillars organically and that's exactly what we've been doing, that's our first priority.

But we have also, for years we've been in the deal flow looking for opportunities for businesses that will give us new capabilities -- for example, the Assurant transaction for more scale -- or help buildout a new part of the pillar -- for example, the Investment management acquisitions that we've done. So, we don't need to do acquisitions. We have great scale, we've got great businesses in all four pillars, and we've got really strong organic growth opportunities.

But, at the same time, we are looking for further opportunities. But I would say huge focus this year, in particular, on integrating Assurant and doing it and hitting all of the targets we've set for ourselves and disclosed, and making sure the three businesses we've acquired under SLIM, that we achieve the kinds of revenue synergies we are working on, and that our Asian joint ventures hit all of their targets.

So, lots of focus on making sure that these things that we've done really hit the targets we've set for ourselves. But I wouldn't rule out the possibility of further M&A. We're always looking. The only other thing I would add, Rob, is the but in that is that anything we look at must clear our hurdles in terms of ROE expectations, and that takes you back to the 12% to 14% over the fullness of time.

And those, like the ROE hurdles and the expectations, simplistically, people sometimes say that when there's been too much acquisition activity or a lot of acquisition activity it distracts management from some of the core business. So, what I'm asking more is, are you getting pickier on your acquisitions in terms of are some of those hurdles rising for the next little while as you try to carry on simultaneous integrations as you're going on?

Yes, I would say we've been picky to date. And the nice thing about the transactions we have completed or are soon to complete is that they are nicely spread across three of the four pillars. Any one group, any one pillar has sufficient bandwidth to run the existing business and to integrate the acquisitions. So, that has not been a concern to date.

I would say to you that we will continue to be very deliberate -- picky, to use your word -- and discriminating in the way we deploy capital because we're very focused on these medium-term objectives of EPS growth and 12% to 14% ROE.

Thank you.

The next question is from Tom MacKinnon with BMO Capital.

Thanks very much. Good afternoon, everyone. Just a couple of questions here, probably for Colm. With respect to the HoldCo cash, I think we started around CAD990 million and ended around CAD1.04 billion. I know there was sub debt raised. And I don't think you've paid for Birla yet. So, maybe if you could just walk through how we should be thinking about that.

Yes, Tom, the major movements in the cash waterfall at the HoldCo, with the dividends up to the HoldCo from Sun Life Assurant and from MFS, the receipt of the sub debt issuance, and you're right, that closed in Q2 so the cash was downstreamed from SLF to SLA after the quarter end. When you think about the CAD1 billion at Q1 pro forma that transferred down to Sun Life Assurant, you're at CAD700 million on a pro forma basis.

And then of course we have the regular income and the dividends paid to shareholders. Those would be the major components. We did repay a little bit of the -- we took out a short-term loan. I mentioned that last quarter, which we repaid a portion of that this quarter. And there's a few other smaller movements, but would be the key items, Tom.

So then what about Birla, the payment for Birla, was that CAD340 million? That hasn't taken place yet. Is that coming out of the HoldCo?

Not as of March 31. When I say pro forma, we moved that money down after the quarter end and that payment has now happened.

Okay, all right. Now just a question on the goodwill. It went up by about CAD900 million quarter over quarter. Is that all due to Assurant or is there Birla in there, as well?

No, the transaction on Birla happens after the quarter end. There is a little piece related to Vietnam because that also happened in the quarter, and that's an increase in the ownership interest there. But the goodwill on Assurant is at the high side because we haven't finalized the purchase price equation. And when we finalize that, and we will do that over the next quarter or two, you'll likely see some reallocation from the goodwill to intangible assets within that overall purchase price.

But how do we look at that in context to the CAD1.25 billion that was spent? Are we to look at that, that around CAD900 million of that is the combination of goodwill and intangibles as it stands now?

The purchase price is a separate exercise. The acquired assets, we assume liabilities, the difference between what we pay. You know how it works. You allocate that out to everything and a good portion of the net payment is in respect of goodwill and intangibles for this type of business. You'll see that in the finalized purchase price equation next quarter.

How much of the CAD340 million on the Birla is goodwill?

I haven't finalized that, we haven't finalized that purchase price equation yet. That happened after the quarter so we'll have an update for you on that next quarter.

Okay. And just squeeze one quick one here, the Assurant, I think you'd talked about $100 million pretax in terms of synergies by 2019. How should we look at that for 2016 and 2017?

Maybe I can just make a comment about that and perhaps Dan to amplify. Obviously early days in terms of that overall program spent. There's a lot of pieces to that. We just closed on the transaction, but we're underway with respect to that work. Dan, did you want to add a few comments?

Yes. We'll see a bigger portion of that in years one and two than in year three. It's not completely smooth. And at this point, although it is early days, we still feel confident in the number we have committed to. And we have increasingly detailed plans in place to achieve the synergies.

We've already started some of that work. For example, since March 1 we've integrated our sales organizations, account management and underwriting. And as part of that realized the synergies that we planned for those areas.

Tom, just to add a comment around that, too, when we put out the information with respect to Assurant, we talked about the accretion that we would anticipate in the current year, and then it grows over the next couple of years. We see the results of Assurant for the one month and, together with our views around the amounts that we'll need to incur to realize those synergies, we're still conformable with that accretion guidance that we provided at the time of the transaction. If you recall, that was CAD0.08 for the full year.

That's right. So, we look at it as CAD0.06 -- or a little over CAD0.06 -- because it was a March 1 close? Is that the way we should be looking at that?

Yes, you would think that. It's not a full year because we closed a little bit --.

And the transaction integration cost of $150 million pretax are they largely in the 2016 and 2017, as well?

It is more front loaded into 2016 and 2017, but it does also extend into 2018.

Okay, that's great. The disclosure is good, but if we had a wish list I'd like the notable items split into the divisions, both pre and post tax. And any tax rates on what you're putting in for the underlying earnings by division, that would be great, too. But you've got a lot of other things to work on but that's my wish list. Thanks.

The next question is from Peter Routledge with National Bank Financial.

Hi, thanks. A question on the Canadian division. See seven consecutive quarters of declining expected profit but general fund assets and AUM are rising. So, what's behind that?

Hi, Peter, it's Kevin Dougherty speaking. As you point out, AUM is rising. We've had really excellent traction on flows relating to various components of our new wealth initiatives in retail and group, so you're seeing it on that line. That's very much giving us the confidence to press on with investing in these initiatives.

What you're seeing are essentially investments in future growth. If I pick it apart a bit for you, the new seg fund platform, for example, didn't exist at this time last year. It's a brand new line of business. We're off to a great start but we're still less than a year old in that business.

Doing a lot of work on the dealer to help our advisors consolidate and grow their assets, so investments there. And considerable investments in digital. You would have seen, in September we announced the launch of the digital benefits assistant, which is a very significant differentiator in our group and GRS business. It will show up, I think, in wins there.

The GRS digital enrollment, the MAX my money that Dean mentioned in his remarks, is going to help us in two ways -- one, win more GRS business, but also increase contributions that are being left on the table; and also digital investments in our total benefits platform, which has been a big differentiator and a big part of our growth story in those core businesses.

These are important new areas to increase our leadership in the digital space in particular. Previous investments are now coming on stream. You would see that in the inflection of our SLGI business, which is moving out of the investment phase into the contribution phase.

The defined benefits solutions business, where we continue to build out the platform, you didn't see much impact on earnings this quarter. Q1 tends to be quiet, but you would have seen through last year significant contribution to new business gains through the year. I think we're at different phases with these different investments. So that's what's flowing through.

That's what's causing the decline in expected profit --?

Showing through that line. At the same time, it's all a big balancing act to get to our overall earnings growth targets. And we have really many tools and paths, such as pricing gains and investment gains, underwriting gains in group. You've seen they continue to improve and we have ambitions around that, timing of investments.

So, hopefully that gives you some color on what's flowing through that particular line. But we're committed overall to continue to grow the earnings while we invest in these important areas that will pay off in future quarters.

How much of the decline, or flatness, let's call it, in expected profit is just related to the simple fact that as interest rates stayed this low for a lot longer than anyone thought, at least five years ago, that the return on whatever measure of business volume you want to use, whether gross measure, whether it's assets, or whether it's the liability, that the return on your historic, your in-force business is just lower, and that just permanently is going to blunt earnings growth and ROE accretion in this business. That's the concern. Maybe you can address that.

I think over recent quarters you've seen decline in interest rates and very poor performance in the Canadian markets. So, that means assets inside those particular products that are profitable have been growing at a slower rate than they would have otherwise. Maybe Larry might want to add something to that?

Not much to add to that other than some of the business that is where we have funds on deposit, some of those margins are a little bit squeezed on the lower end.

Okay. And then just a quick question, maybe for Colm. Can you explain the difference, if possible, briefly, between the effective tax rate for underlying and the effective tax rate for operating? Why is there that gap this quarter?

It's a bit of an unusual feature this quarter in terms of its size. It has been a feature before but it's a little amplified this quarter. We have certain assets that back our liabilities and those assets are tax exempt. And the interest rate hedging that we do in those assets is performed on an after-tax basis.

So, if you only look at the results pre-tax you're going to get an unusually low tax rate in a quarter such as this. But when you adjust for the impact of the interest rates on the liability side, you'll see that it comes back in line.

It's probably best looked at on slide 15, and you see that the after-tax amount, if you add back on the interest rates, is quite low at CAD19 million on CAD69 million pretax. So that's really the offset to the tax line.

When you adjust for those, you get back to 20.9%, which is right in line with our range. It's not a new feature around our tax structure. It just happened to be a little amplified given interest rate movements and their impact on this portfolio that we had this quarter.

Was it the interest rates or was it swap spreads?

It was interest rates.

Okay, thanks.

The next question is from Dan Bergman with UBS.

Good afternoon. US group benefit sales were up pretty sharply in the quarter. I wanted to see if there's any additional color you could provide on what drove the sales strength. And maybe any sense on how much was due to the contribution from the Assurant acquisition versus organic growth. And then maybe, more big picture, any color you can provide on the feedback or response you're getting from clients in terms of that acquisition and the impact it's having on your sales and renewal discussions. Thanks.

In the first quarter there definitely was some impact from AEB sales in March. We just had one month of sales but that's part of why you're seeing the big quarter over comparable quarter increase there.

If you take out the AEB sales, group and voluntary sales were up by 17%, and stop loss was up by 20%. So, not quite as dramatic if you look at the total. But we are getting good momentum with our sales now.

As you know, we've been going through a repricing effort the past two years. As we're much further into that process we're starting to see improved results, improved sales effectiveness and improved close ratios.

As to your second question as to the reaction we're getting, so far it has been very positive. A couple of points there.

On both the Sun Life and AEB side we've seen no decrease in sales, as I just said. In fact, on Sun Life legacy we're seeing an increase in sales. And Assurant had very good sales through really all of last year when it was well known that they were for sale, and continuing into the first quarter.

We're looking forward to June 1, which we characterized as opening day. That's the first day that we'll face the market together with a combined product suite under the Sun Life brand. There's quite a bit of excitement from our own salespeople as well as from the brokers we're talking to about that launch point and being able to offer the stronger combined suite of products.

Great. That's very helpful. And maybe just staying with US group benefits, it looked like there was some favorable morbidity in that line this quarter. Just want to see if you could give a little more color on what drove that result in the first quarter, and how much of an impact you're seeing from your repricing actions and how those are progressing. Thanks.

Sure. Most of the favorable morbidity that we saw in the first quarter, in this particular quarter, was due to favorable stop-loss results. Disability results were in line with our expectations and somewhat unfavorable mortality in life.

We had a very favorable first-quarter 2015 in disability, so we're comparing it to an unusually good quarter there. But most of the favorability this quarter was in stop-loss.

But overall we're continuing to see good results from the repricing. And probably most significantly the business we're retaining is significantly better performing than the business that we're lapsing.

That's great, thank you.

The next question is from Mario Mendonca with TD Securities.

Good afternoon. A question probably for Steve Peacher. Is Steve Peacher on the line?

I am.

The last couple of quarters, the investment, or what we refer to as the yield enhancement gains, have been stronger than what you'd anticipate. What would be helpful to understand is what investing activity is driving this. Really, it would be helpful to understand it from the context of its sustainability.

I would say every quarter it's a mix of some of the same things but then some one-time opportunities that present themselves in a particular quarter. If you look at what some of the basic underlying drivers of that number are, it's relative value trading in our corporate bond portfolio, and that can be dependent upon market conditions. It's our ability to invest in private fixed income securities or commercial mortgages, which give rise to those gains, depending on how they are placed behind liability segments. From time to time there can be ALM activities, which give rise to investing gains, which are more one-time in nature based on changes in how we're structuring the assets behind the liabilities.

I think the last few quarters have been given us opportunities that I think are on the high side, higher than we would say is sustainable, because every quarter there have been a few things which we would say was unique to that quarter and isn't necessarily recurring. What is recurring, I think we've always demonstrated an ability to generate some relative value trading gains and to put non-marketable assets on the books at attractive spreads.

Now, these yield enhancement gains, they arise from the trading activity you're talking about. And presumably you make assumptions about what these assets will generate over time. Is there any risk that the assumptions behind these invested assets will not be realized and ultimately result in this going the other way one day, where we actually have charges -- the opposite of yield enhancement gain?

Obviously some of the things we're doing on the relative value side that gives rise to these gains is if we can find bonds, for instance, in the market that have higher yields, higher spreads for a given rating than something we would sell, that's going to give rise to a trading gain. There's always the risk that you pick the wrong security, you end up with credit issues, or that you end up selling a bond at a lower price and a wider spread and have to reinvest at a lower spread, and that would work against you. That's just the risk of being in the bond markets, but we've been able to avoid that, for the most part.

So, the assumed returns, you are really confident in those assumed returns because you're not talking about any special asset classes where you have to make very long-term assumptions about those returns.

No, the return assumptions are really baked into the kind of securities we're buying. We're buying long-dated fixed-income investment-grade securities where the returns are based on the contractual interest rate, which is generally fixed rate, and the amount that's due to us at maturity. So, there's very little guesswork in projecting the returns on this kind of investment grade securities that we're investing in.

That's helpful. Let me drive on to another topic, and this one perhaps for Colm. The expense experience, there was a modest loss this quarter, and I do recall how Q4, that expense experience does become somewhat higher, or the loss, that is. I was a little surprised to see how modest these expense experience losses are emerging, because it's my understanding that a life Insurance company can't help but have some kind of expense gap. So, what would be helpful to understand from you is why does Sun Life not appear to have much of an expense gap? And if there is one, where? Where would the expense gap normally reside?

Maybe just a comment about our overall expense management, and then maybe I'll ask Larry to comment on the expense gap and where it appears and sources of earnings. Clearly, for the reasons that Kevin Dougherty and others have outlined, we're investing in growth. We have an approach, when we set our targets, our budgets each year that we would say we're going to have somewhat elevated expense levels but over time we expect that to get down to a flat position, and we expect it to be covered within the product side. During that period you can have an elevated negative expense experience, and you've seen that over the last couple of years in particular quarters.

Now, I would caution against focusing on a quarter. Q4 for reasons we've talked about previously, Mario, there can be sometimes a bit of an expense bulge in the fourth quarter. But, in general, yes, there has been a negative expense experience. But that's a little different from an expense gap paradigm.

Clearly that expense experience is something we track very carefully. And by being quite open about it we're putting, I think, appropriate spotlight on the fact that we are investing. We would expect, and you're right to ask us, about what is the trajectory to see that come down.

In a big organization like ours there's always going to be initiatives across the organization. It could be in Canada at a particular time or it could be in Asia, could be elsewhere. But that is a number we track quite carefully. But on the expense gap topic, Larry, I'll ask you to say a few words.

Sure. Our business leaders often do set expense targets, which would be lower than the current levels that they're achieving. That helps them drive performance in the business. But for a source of earnings perspective, we generally allocate the full expenses to either new business gains if it's more distribution related, or to expected if it's other types of expenses.

Typically you wouldn't see the expense gap showing up in the experience gain loss line, and rather the expense gap would be something that would be an internal measure that the business leaders are using to drive performance. There have been a couple of exceptions, and Colm talked about one of them.

Where we have a large spend that is temporary in nature, we have occasionally run that through the expense loss line. The buildout in individual wealth in Canada was an example like that. And you're seeing that trend better now. So, there have been exceptions, but typically we're putting all the expenses into new business gain or expected profit.

So the divisions essentially have to eat all the expenses, other than those odd occasions when you are in investing aggressively in a new business, like SLGI.

Yes.

Let me just clarify one other thing you said. You said sometimes divisions will run expense gap to help drive performance in the business. When you say drive performance in the business, you just mean better sales?

No. Actually, what I really mean is, by saying here is the expense levels that we need in order to compete in this marketplace at scale and with the best in the business, we need to get our expenses to this level of unit cost. So, they use it to work with their teams to get the expenses down to the units they need to be competitive and to be the strongest in their markets.

That covers it. Thanks for your help.

The next question is from Doug Young with Desjardins Bank Capital Markets.

Good afternoon. My first question is for Kevin Dougherty. I just wanted to focus in on the group insurance line and what you're seeing in this quarter from a morbidity experience, specifically on the disability side and also from a pricing side. I know there has been some pressure over the last little while. Is the competitive forces tempered down here? And is the market moving in more of a rational direction?

Sure, Doug. What you've seen on the disability side this quarter was, really, right through each quarter last year I think you saw improvement in our results in disability. So, we're seeing that both in incidents of disability claims and also in recovery rates. We've done a lot in our disability claims management model to really improve that and, I think you're seeing that in the numbers.

Also in that line would be improvements in our underwriting gains around the drugs, some of the high-cost drugs. And we pushed through a lot of price increases through last year. I think we were one of the first companies to really get at it and push the market, and led the way. Initially, there was quite a bit of resistance but we worked through it with a lot of options with clients and have been successful in repricing and retaining business at a very good rate.

So, I think we've had good success there. The market is always quite intensely competitive. Overall, I think it's possible that you could say that it's improving. All business is hotly contested, as you would expect.

From our point of view, we try to really pivot away from price as the driver for decisions. We never lead with price and sometimes don't have to get as close as maybe others. We use things like total benefits, like our digital applications around, for example, submission of claims, you can do it on your cell phone now, you can either take a picture or you can submit it. It's paid instantly, the money is in your bank account tomorrow morning.

These kinds of things are extremely attractive to different segments of the market. We try to lead with that and follow on price just as far as we need to.

Just a clarification, the group disability claims experience, was it favorable in the quarter or was it just a wash, essentially, in line with expectations, or was it negative?

It was slightly favorable to expectations. Returned to normal levels and then a little bit more.

So you're not having or seen any pressure from the economic environment out West?

At this point we haven't seen any. The oil and gas sector is only about 3% of our premium business in force and group. So, so it's not a large exposure on the disability side but it is something we're watching very closely. At this point we're seeing the same incidents in recovery rates as in the rest of our blocks.

That's helpful. And then just, Rob, on MFS, you talked about the investments that you're making in the business, and it seems like you've done a good job managing expenses. Is there any lumpy expenses coming through related to those investments? Or is this quarter indicative of your ability to manage expenses as the environment continues to be a bit challenging?

The way I would describe it is it's going to rise very slowly over the next few quarters. We have two very big projects. One is on our order entry and compliance systems for all of trading, which is the biggest piece, and then a CRM system. The way the projects work is you spend money up front to project what you're going to do, and then when you implement it the people costs come in and that's going to scale up over the next few quarters. It's not going to be dramatic but it will slightly rise.

Perfect, thank you.

The next question is from Darko Mihelic with RBC Capital Markets.

Hi, thank you. Just a modeling question here. Earnings on surplus, it's relatively volatile in Canada. I'm assuming it's available for sale gains. Why is that occurring in Canada and not anywhere else? And maybe you can provide some high level commentary on the gains that were taken in the quarter and whether or not we should view this quarter's earnings and surplus as more normalized?

Yes, Darko, it's Colm here. A couple points there. First of all, the level of available for sale security gains was high this quarter. And that reflected, as you'll recall, as we headed into the quarter, a very low interest rate environment. And we decided that we would make a somewhat higher level of gains than we would normally take.

Normally we take somewhere in the CAD25 million, CAD30 million pretax, and this quarter it was just a little bit over CAD50 million pretax that ended up in available for sale gains. We manage it at the total Company level. So, we don't have a target for each of the business segments.

The gains can be disproportionate in any one business segment in a given quarter. It did break a little bit more towards Canada this quarter. So, that's one way to think about it, that somewhat elevated gains overall and a portion of that related to Canada.

Okay, that's helpful. Thanks, Colm.

I'm showing no further questions at this time. I'll turn the call back over to Mr. Dilworth for any closing remarks.

Great, thank you, Chris. I would like to thank all of our participants today. And 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 afternoon.

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