Sun Life Financial Inc (SLF) 2016 Q2 法說會逐字稿

Good morning. 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 Q2 2016 financial results conference call.

(Operator Instructions)

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

Thank you, Chris, and good morning, everyone. Welcome to Sun Life Financials earnings conference call for the second 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 second 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 second 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 draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form part of this morning's remarks. As noted in the slide, forward-looking statements may be rendered inaccurate by subsequent events. And with that, I'll now turn things over to Dean.

Thanks, Greg, and good morning, everyone. Turning to slide 4, the Company reported underlying net income of CAD554 million. That compares to a very strong result of CAD615 million one year ago and we reported an underlying return on equity of 11.9%. For the first six months of 2016, we've earned CAD1.1 billion in underlying earnings and generated an underlying ROE in our target range of 12% to 14%.

This quarter we continued to drive business momentum with insurance sales up 26% and wealth sales up by 3% over the same period last year. Total assets under management ended the quarter at CAD865 billion, up 7% from a year ago. Standing back from the quarter, we are confident that our four pillar strategy allows us to face low interest rates and economic uncertainty from a position of strength. A critical part of our strategy is to deepen client relationships by engaging with them more often and supporting them at key moments throughout their lifetimes.

During the quarter we made good progress on this front, including enhancing our digital and technology capabilities and finding ways to make it easier to do business with us. We think our investors are interested in hearing more about how we're increasing connections to Sun Life clients around the world and how that drives sales and client retention so we will highlight our progress in our quarterly results.

Turning to slide 5, I'll discuss a few key highlights for the quarter across our four pillars. In Canada we delivered strong top line growth with insurance and manufactured wealth sales up 14% and 37% respectively. Individual insurance sales grew 16% to CAD99 million of annualized premium with growth in both our career sales force and third party channels.

In group benefits, sales were up 12% to CAD114 million of annualized premium. Sun Life continues to be ranked the number one provider of group insurance products for the seventh year running. Our growth in this business outpaced the rest of the industry in 2015 with leading net sales in all case sizes, including the more profitable small and mid-size markets. Our client retention rate is high and we are winning new clients.

One important reason for this is service. For example, those Canadians who've downloaded the Sun Life mobile app, taken a photo of their health or dental claim, submitted it and had the money in their bank account 24 hours later are satisfied clients and this drives better retention.

In our Canadian wealth business, sales of Sun Life manufactured wealth products were up 37% from strong momentum in Sun Life Global Investment Mutual Funds and Sun Life Guaranteed Investment Funds segregated funds. Net flows in the Canadian mutual fund industry declined, down 63% in the quarter versus prior year, but SLGI continues to be a bright spot with second quarter net in-flows of CAD950 million, up over 100% from last year.

There are four key reasons for this. First, managed solutions as a category, such as our Granite funds, are growing in popularity. Second, our managed solutions four year investment performance has been strong, top [quarta]. Third, our new segregated fund products launched last year are generating good flows. And fourth, we've expanded our wholesaling team, which helps to garner an increasing share of Sun Life advisor and third party advisor sales.

Turning to our asset management pillar. MFS ended the quarter with assets under management of $425 billion and a pretax operating margin of 35%. This quarter's operating margin reflects a higher level of operating costs, some of which we do not expect to persist from quarter to quarter. And with assets under management up by roughly CAD15 billion since the end of June, we would expect to see margin improvement in subsequent quarters. Fund performance has remained very strong with 86%, 93% and 97% of fund assets ranked in the top half of their [LIBOR] category for 3, 5 and 10 year performance respectively.

Net outflows of $1 billion were largely unchanged from the first quarter but MFS generated positive net flows in retail and increased its market share in US retail. For the six months year-to-date, the US mutual fund industry had $31.2 billion in long-term retail net inflows. And of the 25 largest fund groups in the US, MFS was in the select minority of firms that were in a net inflow position over this period, capturing over 4% of the industry net flows. So notwithstanding a shift to passive investing, the absolute dollars allocated to active assets are large and increasingly concentrated in managers that can add Alpha and MFS is viewed as one of those firms.

At Sun Life Investment Management, which includes the results of Bentall Kennedy, Prime Advisors, Ryan Labs and Sun Life Institutional Investments, we generated net inflows of CAD500 million and ended the quarter at CAD49 billion in assets under management. So we're excited about the opportunities in our asset management pillar and the growth potential in both MFS and Sun Life Investment Management.

Turning next to the US. Sales in US group benefits were up by CAD40 million over the prior year, reflecting strong contributions from the Assurant employee benefits business. Integration activities are well on track, including expense synergies and earnings targets. In June, we combined the Sun Life and Assurant sales organizations and presented our self to the market as one Company with top tier capabilities in each of the main categories in the ancillary benefits market.

Now, brokers generally prefer to buy multiple benefit products from the same carrier. So having best of breed capabilities across all of our product lines positions us well. Client reaction to the combination has been positive and we are benefiting from cross-selling opportunities as the integration of the business progresses.

Moving to Asia, we had another strong quarter. Individual insurance sales were up 28% and wealth sales up 11%. This reflects strong organic growth but also the contribution from recent buy-ups in Asia, including India, where we increased the stake in our joint venture from 26% to 49%. And last week we announced our acquisition of FWD's mandatory provident fund business in Hong Kong and an exclusive 15 year distribution agreement that will allow us to distribute pension products through FWD's agency force in Hong Kong. The transaction deepens our wealth business in the region and leverages our global expertise in pensions.

When we announced our four pillar strategy several years ago, we signaled our ambition for Asia by making it a distinct pillar of its own, a focus which has really helped us move the business forward. Over the past three years, net income has doubled, the value of new business has tripled and Asia has grown from 8% of Sun Life's earnings to nearly 14% year-to-date. While there's still a lot to do, we're excited about the opportunities that lie ahead and are confident in our ability to execute, to grow and to win in Asia.

So to conclude, I'm pleased with Sun Life's progress for the first six months of 2016. We continue to navigate this low interest rate environment and we do so well from a position of strength. It's a position of strength that allows us to focus on clients, to focus on growth and which gives us continued confidence in achieving our objectives of 8% to 10% EPS growth and 12% to 14% ROE over the medium term. And with that, I'll turn the call over to Colm Freyne who will take us through the financial results.

Thank you, Dean, and good morning, everyone. Turning to slide 7, we take a look at some of the financial results for the second quarter of 2016.

Our operating net income for the quarter was CAD474 million, down from strong results of CAD731 million in the second quarter last year. Underlying net income, which excludes the net impact of market factors and assumption changes, amounted to CAD554 million. Our underlying return on equity was 11.9%. In a quarter where we saw significantly lower bond yields, our results reflect the resiliency and diversification of our business model.

Second quarter adjusted premiums and deposits were CAD37.3 billion and assets under management ended the quarter at CAD865 billion. We maintained a strong capital position ending the quarter with a minimum continuing capital and surplus requirements ratio for Sun Life Assurance Company of Canada of 214%. The MCCSR ratio for the holding company, Sun Life Financial Inc., was a strong 225%. The higher ratio at the SLF level largely reflects the excess cash level of CAD800 million held by SLF Inc. And our leverage ratio of 23.5% is below our long term target of 25%, providing us with meaningful additional financial flexibility.

Turning to slide 8, we provide details on underlying earnings by business group for the quarter. In SLF Canada, underlying earnings were solid but were down from the strong results seen in the second quarter of 2015. Results this quarter reflect favorable investing activity while mortality, morbidity and policyholder behavior were largely in line with our best estimate assumptions.

In SLF US, underlying earnings included the addition of assurance employee benefits business and benefited from favorable mortality experience and investing activity in international. In group benefits, we experienced unfavorable morbidity results in our stop loss business from higher claims experienced related to the 2015 benefit year.

We are tracking well on our financial commitments made at the time of the Assurant acquisition and expect to provide an update by the end of this year on our progress against these targets. In SLF Asset Management, underlying results were down from the prior year. At MFS, net outflows amounted to $1 billion and operating margins declined to 35% on lower average net assets relative to the prior year and higher operating costs.

Sun Life Investment Management had solid net inflows of CAD500 million from strong sales activity at Prime Advisors and Sun Life Institutional Investments. In Asia we continued to maintain strong momentum as underlying earnings grew 20% over last year reflecting business growth across a number of markets and lower levels of new business strain.

Turning next to slide 9, we provide details on our sources of earnings presentation. Expected profit of CAD668 million decreased by CAD4 million from the same period last year. Excluding the impact of currency and the results of SLF Asset Management, expected profit was up $25 million, or 7% over last year from business growth in SLF Asia and increased contributions from the Assurant transaction and our stop loss business in the United States.

Growth in SLF US was moderated somewhat by lower levels of expected profit from our US in-force management business. New business strain was CAD37 million for the quarter, an improvement of CAD2 million over the same period a year ago. The lower level of strain this quarter reflects higher sales and the favorable mix of business in SLF Asia.

New business strain this quarter was slightly below our expected range of CAD40 million to CAD50 million and includes some favorable impacts in SLF Canada, associated with insurance sales campaigns that take place in the second and fourth quarter of each year. Experiences losses of CAD97 million reflect net unfavorable market impacts and other net experience gains of CAD25 million. Market impacts were primarily the result of interest rate movements in Canada and the United States where long-term risk free rates declined by approximately 30 basis points.

Non-market related experienced items this quarter included favorable credit on strong investing activity gains reflecting higher levels of tactical investing activity and ongoing portfolio repositioning. We experienced unfavorable morbidity results in our stop loss business in the US and expense results that included compensation costs related to long-term incentive accruals from strong relative performance of Sun Life Financial. Assumption changes and management actions resulted in a strengthening of reserves by CAD10 million.

Looking ahead, we will complete our annual review of actuarial methods and assumptions in the second half of 2016 with the majority of the changes being reflected in the third quarter. We note that our review requires that we assess assumptions across a large number of products, businesses and geographies. And it is not possible to determine the overall impact of these reviews on net income at this time.

In our management discussion and analysis for the second quarter we have disclosed our sensitivity to a decline in the ultimate reinvestment rate used in the valuation of insurance contract liabilities. In 2014, the actuarial standards board promulgated an ultimate reinvestment rate that was expected to remain fixed until 2019 but which is subject to regular review, depending on economic conditions. In light of continuing low interest rates since 2014, we expect the standards board to revisit the ultimate reinvestment rate sometime in 2017. Based on our current estimates, a 10 basis point decline in the ultimate reinvestment rate would result in a one time impact to net income of CAD75 million.

Earnings on surplus of CAD118 million were CAD8 million lower than the second quarter a year ago, which benefited from currency translation gains. Income taxes at CAD134 million represent an effective tax rate on 20.9% on operating net income. And on an underlying net income basis, the tax rate for the quarter was 23.4%. On a year-to-date basis, the effective tax rate on underlying income is 22%, which is in line with our expected range of 18% to 22%.

Slide 10 shows sales results across our insurance an wealth businesses. Total insurance sales were up 26%. On a constant currency basis, our total insurance sales were up 24% with double-digit increases in sales across our Canadian, US and Asian insurance businesses. Our sales this quarter also reflect the contributions of recent acquisitions, including the Assurant employee benefits business and our increased ownership in India. Excluding the benefit of these acquisitions, insurance sales were up 14%, demonstrating a strong balance between organic growth and the contribution from the businesses we've acquired.

Total wealth sales of $32.7 billion were higher by 3% and also benefited from currency movements. On a constant currency basis, wealth sales were lower by 1%. Higher sales at MFS and in our wealth businesses in Asia were offset by lower sales from Group Retirement Services in our Canadian operations, which benefited from one very large sale of CAD1.7 billion to UBC in the prior year.

Turning next to slide 11. We present the change in our year-to-date operating expenses over the prior year. Overall operating expenses for the first six months were $2.8 billion, up $403 million over the prior year period. 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 3.5% of the change in our total expenses as our investment in growth have been partially funded through productivity gains generated through our Brighter Way program.

To wrap up, we achieved solid results for the quarter against the continued backdrop of low interest rates. The benefits of our balanced and diversified business model have become even more apparent in this environment. We've been investing organically and through acquisitions and we're seeing the benefits of these investments in our top line growth and their contribution to our results this quarter. And with that, I'll turn the call over to Greg before the Q&A portion of the call.

Thank you, Colm. To 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'll now ask Chris to please poll the participants for questions.

(Operator Instructions)

The first question is from Meny Grauman with Cormark Securities. Your line is open.

Hi, good morning. Just wanted to ask a quick question on Bentall Kennedy -- the decision by BC Investment Management to bring in the management of their real estate. I'm wondering if there are any other -- is there any other AUM that's at risk of that? Do you see that as a one off or is this a picture of maybe a trend that's emerging in that business?

Well this is Steve Peacher. We would view it certainly as a one off and we have no expectation that there would be any -- that there's anything else like that within the Bentall Kennedy asset base. That was a -- bcIMC had a big portion of their real estate assets managed by Bentall Kennedy for over 20 years. That portfolio had performed very, very strongly.

And as you know, a number of the largest pension funds in Canada managed their real estate in-house. And Bentall Kennedy had the option to do that and decided to exercise their option to purchase subsidiaries within Bentall Kennedy that managed those assets. But that is very unusual and we think -- we don't see that across the rest of the portfolio that Bentall Kennedy manages.

Thanks for that. And then if I could just ask -- in the press release you talk about some lower sales in third party mutual fund business in Canada. And I'm just wondering if you could give us a little bit more detail on that and what the outlook [is going] forward.

Sure. It's Kevin Dougherty speaking. Overall in the quarter we saw -- overall wealth sales were down about 10%. That was really largely third party mutual funds, which were down about 40% on the quarter. If you look at Sun Life manufactured product, including mutual funds, we were up 37% on the quarter. So I think as we kind of think about that compared to what was going on in the industry of minus 63% of net flows, both of those numbers actually compare quite favorably. And I think we're well positioned as investors start now to come back into the market.

Thanks for that.

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

Good morning and thank you for taking my questions. Looking -- a question for Mike. So MFS continues to show improvement in flows, especially with mutual funds turning positive. How much do you see the improvement, that year-to-date, as a result of the new product launches that you have rolled out over the past year or so? And then also maybe can you talk about the pipeline on the institutional side for the second half of the year?

Good morning. In terms of where flows are coming from, it's actually significantly broad when you look at the number of products. I think over the last 12 months we've sold over CAD1 billion in 20 strategies at the organization. So we've seen significant breadth in the sales and much of that a result of, when you look at the performance, is the breadth of the investment performance. And so as Dean mentioned, one of the things that we are seeing is not only a move from passive to active, but a move out of active shots that haven't performed well into active shops that have. And we're seeing the benefits of that.

We have seen an uptick in some of the strategies that have been launched. Relative to total sales, they're not material enough, I think, to speak individually of. And in terms of pipeline, we don't speak to the pipeline. And the reason for that is that pipeline many times can get delayed, many times won't fund at all for a variety of reasons that clients for their own needs are engaging in and so we're not comfortable releasing a pipeline number.

Okay. Got it. And then maybe shifting gears to Asia -- so a question for Kevin Strain. So in Asia it continues to look like a good earnings growth and ROE expansion story. My understanding is that there's definitely more room for ROE improvement based on the product level ROEs and your expense base in Asia. So I remember you talked about in the past about past that it's a matter of putting on new sales. So given the [accounting] improvement today and looking a little bit ahead, how should we think about a path to an ROE that is more consistent with your product level ROE for Asia?

So, Humphrey, that's correct. You're seeing us grow income-wise in most of the countries this quarter and our expected profit was up CAD7 million and the new business strain was down CAD5 million. And that's the combination of things that you're going to see with good sales growth. You're going to see expected profit grow. You're going to see the strain come down because we're going to eat through some of the expense gaps.

I'll give you an example. So we're managing growth and also mix. Our health and accident sales were up 85% in the quarter, year-over-year. So we're getting a more positive mix and that's also having a benefit. So, over time, I think you'll get the impact of earnings growing faster than the use of capital.

And, Humphrey, it's Dean. I would just add on the ROE part of that, the -- when you look back over time you see good progress, steady progress on the ROE for Asia on an underlying ROE basis. It's moved up from 2014 to 2015. And, again, year-to-date it's moved up again. And certainly the profitability of the products we're writing, as Kevin said, is such that as we build the business and as we reduce expense gaps, you should see that ROE continued to expand.

But kind of looking at the trajectory as being steady growing but at a decent pace, but should expect a little bit more acceleration as you further grow into the expense base? Because I would assume some of the benefits are probably more back-end loaded relative to the beginning of -- relative to recent years.

I think you're seeing -- you're seeing a bunch of things. One, you're seeing us make additional investments as well. We've made investments in our brand position. We've made investments in our digital footprint. We've made investments in terms of acquisitions. What I would say is that there's room for growth. We saw broad-based growth in our sales in multiple countries in agency and bank assurance and telemarketing. We've got a telecom distribution in India, Malaysia and in the Philippines.

So there's lots of room for growth and there's lots of investment that's happening. And I think what you're going to see is continued expansion. I think Dean talked about earlier that the earnings has doubled in the last couple years. I think that's pretty decent growth. I expect we'll continue to see that happen as we build the sales, we build the expected profit base and we start to see the new business strain come in.

So I'm not suggesting it's going to be a hockey stick. I think we're going to continue to focus on executing well, focus on executing quality on the distribution side and in getting that continued steady growth and growth in both the ROE, but also in the [B&B] and the embedded value.

Okay. Got it. Thank you.

The next question is from Sumit Malhotra with Scotia Capital. Your line is open.

Thanks. Good morning. Just want to go back to a couple things that you mentioned in regards to the review. So thank you for the update on the URR. But just want to make sure I understand the logic on timing. At least one of your peers has indicated that they will likely include an update for their URR assumption next quarter. Is there anything specifically that prevents you from taking what I think is a conservative approach and going ahead and doing that as well? Or is this just position on your part to wait until there's an official update?

Yes, Sumit, it's Colm here. I'll say a few words and Larry will add to it. But I think I would suggest that it's not really a question of conservative or not conservative. The actuarial standards board has indicated it will provide guidance but it has not actually submitted anything in written form yet for us to evaluate.

And as I mentioned in my remarks, back in 2014 when the guidance came out, the industry was engaged with the standards board at that time around how that process should work. I would fully expect that we would be similarly engaged this time around. So we would like to he see the final guidance. We will participate in that.

We will work through all of the implications of that and we will take the action at the appropriate time. We've indicated what a 10 basis point change would look like. I think everybody can see that interest rates have declined since 2014. So obviously not unexpected that they would take this approach. But with that, I'll ask Larry to add anything he would like to say.

Well I think the only thing that I would add to that is at CAD75 million per 10 basis points, certainly the organization has the capacity to handle that at the time that it comes.

Yes. I don't think it's a comment that you can't handle it. It's just if this is in the pipeline and you have the ability to do it, it seems reasonable that you could go ahead and take that action. Maybe -- I'll just tag that in on the actuarial review on the whole.

I know the last few years, from an aggregate perspective, this has been a financial non-event for Sun Life. But going back a few years it still brings up some scary memories. So that's probably why we always ask about it. Is there any specific parts of the portfolio -- of your aggregate portfolio that are being reviewed this year that you can specify for us?

At this point, there's nothing that's notable of the kind size that you're thinking about in terms of some of the past reviews. Of course, there's still volatility there in the review just because so many different items are reviewed. So, at this point there's still some potential volatility there but nothing where we would point out a certain direction or a certain number at this point.

If I could add to that, Sumit, clearly at this stage in the process we've undertaken a lot of work. So we're not just starting out. But if we were aware of anything that was large and material that we felt we were sufficiently progressed on, we would, of course, bring it to investors attention. So the fact that we've not indicated any amount, it would suggest to you that it's a lot of items across the piece, as Larry said, that are being worked through.

I hear you there. Last one is for Mike on the MFS margins. So given the trend you had here, it certainly seems like 35% in margins is a negative outlier. And you've given us some commentary here that the -- there's some seasonality in the share-based comp. Just want to make sure I'm thinking about this correctly because when I look at Q2 a year ago, it actually was -- ended up being a credit to earnings. So if you could just give me or gives us some detail here on -- was this the main factor that impacted your margin? And if so, if there's seasonality, why are the numbers so different on a year-over-year basis?

A few things. One is there was -- the seasonality is the deferral accrual -- the accrual of deferred comp was higher this year than last year. So there is some difference in accrual year-on-year. As Dean mentioned, if the market stays where it is as we look into the second half, we would expect that you're going to see higher margin in the second half. You're going to see a higher margin for the year in terms of what we print for the year.

The last thing I would say is you think about -- is we look at year on year is the challenges facing the business now, what we see happening from a competitive perspective, is we see competitors actually cutting back. We're seeing headcount cuts. We seeing cuts across discretionary spending. We're actually doing the opposite now. We see this as an opportunity to invest in the business. We're investing and we've mentioned previously in our global fixed income capability and buildout globally. We're investing in technology infrastructure, all to the benefit of our clients, which we think in the long run are going to pay off. And so we're going a little bit against the grain relative to the industry. And we have taken operating expenses up year-on-year. But as we said, we would expect, all else being equal, the margin to be higher in the back half.

Thanks for your time.

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

Yes, hello. Question about some of the interest rate outlook in lapse. Let's assume rates stay where they are for the next five years. You've done all right on assumption changes for the last few years but within that are gross charges for lapse, pretax of about CAD1 billion. So do you have a significant vulnerability to assumption changes, maybe not this year but for the next couple years in this rate environment?

Well the rate environment certainly does impact the lapse assumption. Some of our lapse in policyholder behavior assumptions are already dynamic assumptions in that as rates move, the lapse assumption automatically moves. But others are not.

And we continue to track and trend the policyholder behavior as we go. And I do think that the low rates has had an impact on us. At this point, though, we did a deep dive last year and I think we tried to get ahead of it. But certainly it is one of those assumptions that is hard to know for certain what's going to happen. So we will continue to monitor it and there may be some vulnerability there but I think we've really tried to get ahead of that over the last few years.

So, it's reasonable to assume policyholder behavior and the evolution of interest rates -- there's a correlation there?

There is an impact in the sense that policy holders who have policies that were purchased at higher interest rate environments have value that they couldn't get by going into the market to purchase a new policy today. So they're wise to hold on to them. And we have seen them do that.

Okay. Quick one on the US. At least as I measure core, looks like a step change up in US earnings contribution. How much is that coming from Assurant and how much is organic?

Hi. This is Dan Fishbein. Essentially the increase that you would see in core in Q2 was due to the addition of the Assurant business. Q2 was the first full quarter where we reported that business. And that's the primary factor in what you're seeing there.

Okay. Can you give us a little bit more color on the morbidity charge there?

Sure. What I'm sure you're referring to is the stop-loss business.

Stop-loss, yes, thank you.

We saw higher claims experience during the second quarter in stop-loss. And that was after five straight quarters of very strong results in that line of business, including, notably, a very strong first quarter of this year. So year-to-date stop-loss earnings are substantial.

The higher morbidity we saw in the second quarter is largely from 2015. It's concentrated both in certain client cohorts and also we've seen some increase in pharmacy claims experience. The entire stop loss business is priced annually, most of it on January 1. So we're watching the emerging experience very closely and we will, and can, take action very promptly if it continues.

But right now looks more random event than a systemic issue.

Well we are seeing, as I mentioned, certain customer cohorts that are having higher than expected experience and higher pharmacy claims. So those are the two particular areas we need to watch quite closely.

Okay. Thanks for that.

The next question is from Doug Young with Desjardins Capital. Your line is open.

Hi, Dan. Maybe just to continue along with the question on the morbidity or the US stop-loss business. Can you talk about -- because I think you've talked about price increases you've put through on the group benefits side but you haven't talked as much about price increases that you put through in the stop-loss. And I understand that it's January 1 that prices went through -- price increases went through. But what, on average, was the price increase going into this year that you put through on the stop-loss business?

So the stop-loss business generally has more significant built in price increases due to the fact that it's a medical business and, therefore, medical trend drives the cost structure up each year. And we've generally not had challenges putting through the right increases there. So we won't necessarily give very specifics on our price increases. But that is a business, because of underlying medical trend, where you generally see 10% to 15% increases annually.

And so you're just getting -- the increase is just related to the medical cost inflation. Are you able to push through additional price increases at these margins or is this just a pass-through?

Well the price increases obviously are very closely tied to the experience of the cases, which is driven by the underlying medical trend and claims experience. Typically, the way this works is clients will look at the price increase and they may make a benefit change, for example, take a larger deductible.

So there is usually some difference between the gross increase and the net. But because of the order of magnitude of the size of the annual increases, if we needed to make a modest adjustment in pricing, for example, that's quite possible for us to do because any such adjustments would be small compared to the medical trend.

And the competitive environment in the stop-loss business, has it been overly aggressive? I know you're one of the bigger players. Have the other players been more aggressive in pricing or has it been relatively rational over the last year to two years?

Generally we find this market to be relatively rational. But I will say over the past two years we've seen increasing price competition, particularly around that January 1 season. So there has been a little pressure over the past two seasons.

And you're not concerned that the experience that you saw this quarter has anything to do with your pricing issues?

We don't have any reason to believe that we have broad-based pricing challenges. As I said, there are a couple of client cohorts that we're looking at closely as well as the pharmacy claims.

Okay. And then just maybe like on MFS, the margin question has been asked, but I'm curious how much of your assets are capped? Because I think some of your competitors in the US have talked about capping funds and the percentage of their assets that are capped. So I'm just trying to think of that relative to MFS and how much of your product is capped. And obviously some of these mandates assets have come down given the market conditions. Any thoughts of reopening these or is that still on the sideline for now?

We've currently got about 12 strategies in some form of restriction. If you look at the asset base it represents under half of the total assets of the firm. We obviously scale these up significantly post financial crisis. But if you look at them on a net basis relative to over the last couple of years, because performance has been so strong, you will see some natural redemptions, clients reallocate pensions, spend down.

But we've actually seen a lot of stability in the asset base of the restrictions given the performance of the products. And so we don't believe there would be any scope in the near term to expect that some of these strategies would reopen because the asset bases continue to be pretty high.

Okay. So it's just under half of the assets have some form of restriction on it.

Yes, it's somewhere in the 40% -- 40%s, in the 40%s.

Okay. Great. Thank you very much.

The next question is from Tom MacKinnon with BMO Capital. Your line is open.

Thanks very much. Just a question with respect to the US group business. Two things there. I noticed that the business in-force was down 8% quarter-over-quarter. And maybe just a bit more color on what's driving that.

And if we look at the expected profit in all of the US, you had mentioned that in-force management businesses, you got lower levels of expected profit. But despite taking on -- now we've three months of Assurant business versus only one month in the first quarter but the expected profit kind of only went from CAD105 million if the first quarter to CAD112 million in the second quarter.

I would have thought the benefit of the Assurant would have been higher. So maybe you if can elaborate on that as well. Thanks.

Okay, Tom. It's Dan. I'll take the first question on the BIF and then Larry will address the expected profit. On the reduction in BIF, that was primarily due to the lapsation of one client relationship in our disability RMS business, which is one of the businesses that we acquired as part of the Assurant transaction.

Disability RMS is a business that partners with other insurance companies, generally in a shared risk arrangement and then disability RMS does the administration, underwriting, et cetera, for that business. They had one unique relationship, which was a block reinsurance arrangement only. That's not really consistent with our business strategy and that client relationship was in a loss position.

So, we decided to let that relationship go. And that's really what you're seeing in the BIF there. Without that, we did have small reductions in BIF year-over-year in the group businesses, both AB and Sun Life and then an increase in BIF in stop-loss. So the group benefits BIF without the RMS was relatively stable. The change you're seeing was with that one customer in DRMS.

And does that change the -- how would that influence any of your accretion estimates going forward? Is that taken into -- was that factored into your accretion estimates when you got Assurant or does it have a material impact?

Yes. The overall revenue in BIF that we're seeing is very much in line with our expectation. It's a small amount but the lapsation of that one client in DRMS actually will be helpful because that was in a loss position. But overall, we are on target for our accretion expectations.

Okay. And then on the expected profit?

Hi, Tom, it's Larry here. So expected profit -- and I think you were most focused on the quarter-over-quarter number and expressing the expected profit in US dollars.

Yes.

So, US dollars going from $105 million to $112 million. Actually, 12 -- there was 12 increases related to the Assurant acquisition. And that's in line with expectations, recognizing that we're early in the integration at this point. But it was offset by a reduction in the original Sun Life business. And we see some seasonality in the group business because we find out about the sales for 1/1 early but we don't always find out about the terminations until part way through the first quarter.

So what we actually see is the first quarter is seasonally high for expected profit and then it comes back down in the second quarter. And you see that regularly each year. So it's not an indication of trend but rather some seasonality. And you do see the full $12 million of AEB impact as we had expected.

Okay. And then one final question is, just with respect to strain, I think, Colm, back in the third quarter call of 2015 you had increased your strain from CAD30 million to CAD40 million, to CAD40 million to CAD50 million, as a result of the lower interest rate environment. Rates are a lot lower now than they were then. Do you still feel comfortable with the CAD40 million to CAD50 million in the strain? Albeit, I know in the first quarter was impacted by a sales campaign with respect to Canada that made the strain a little bit better.

Yes, You're right, Tom. CAD40 million to CAD50 million was really reflecting the interest rates and, indeed, currency because US currency was stronger. So we were reflecting all of that. I think we still feel that is the right amount to think about on a quarterly basis.

But, again, with the caveat that you really need to think about it annualized because in any given quarter, because of sales campaigns, because of sales mix, et cetera, you can get a different result. So last quarter we were a little above that. This quarter we're a little below it.

So that would suggest to you the CAD40 million to CAD50 million still makes sense. Another area that can be a bit lumpy, we've talked about before, is in Canada on defined benefit solutions. These sales are large but they're episodic. So we didn't see much of an impact in the current quarter on that front. So overall, yes, we're comfortable with the CAD40 million to CAD50 million.

Okay. Thank you. We move on to the next caller who is Mario Mendonca with TD Securities. Your line is open.

Good morning. Just a couple quick questions on the experience items. First on the yield enhancement, the number was a little high -- higher than I was expecting. And it's noteworthy because we're seeing a little pressure from your peers. So, could you talk about where it came from and what your outlook is for yield enhancement going forward?

Yes. It's Colm here. Maybe I'll say a quick word in terms of where it came from and in terms how it's expected to play out. Steve will amplify on that. So you're right, a little bit on the high side relative to where we've typically been but we've had a number of good quarters with investing gains. And it's primarily Canada. And maybe out of the CAD40 million, maybe around two-thirds of it would be Canada, a portion in the US would be the other larger part. Over to Steve.

Mario, in the investment gains are driven by a couple factors quarter-to-quarter. One is just ongoing tactical trading in the bond markets. Another source is investing in asset classes like private debt and commercial mortgages where we can source some attractive spreads. And then from time to time there are asset liability management moves that lead to investing gains.

And I think that we've had a consistent experience in generating those quarter-to-quarter. Markets are uncertain, of course, and can change. And so it's -- we've been running probably a little higher than I would be willing to commit that we could run to on an ongoing basis. But we do find every quarter that we -- generally that we can, through tactical trading or through those asset classes, generate some gains. But it will vary because the markets vary.

And do you feel that the outlook, notwithstanding the stronger result this quarter, that the outlook would be for lower yield enhancement gains than we've seen, say, in the last four quarters?

I don't know if I have a reason to have an outlook that they would necessarily be lower. But there are -- obviously yields in the market are lower. There is a press among investors to find yields, which makes some of these asset classes more competitive in order to find the kind of investments that we like to make. So I wouldn't say definitively that we would expect them to be lower but the markets are competitive. And quarter-to-quarter they will fluctuate.

Okay. If we could drive on to the expense experience losses in the quarter, that surprised me. It's not something I'm used to seeing in Q2. I would have thought it'd be in Q4 -- the normal quarter for it. Can you talk about why it played out in Q2 and what your outlook is for Q4 then?

Yes. So it was a little on the high side, certainly relative to Q1 and the expense experience at CAD18 million versus Q1 we had CAD6 million. And, again, a couple of drivers there.

In the corporate segment we did take an accrual in respect of long-term incentive comp, as the Sun Life Financial share outperformed relative to peers. And there's a performance factor in the overall comp. So that's an accrual rate. We don't know what that will be. It will depend on where we land at the end of the year. But we thought it would be prudent to adjust for that. That's about CAD6 million.

Well, we take that now, Mario, because by the end of the year we don't want to have an expense bulge on that item if we can avoid it. And then the other piece was really around Canada. And, again, I think a number of the factors that we've talked about there in terms of wealth sales being on the lower side in the non-Sun Life manufactured wealth sales, that would be a factor. So, again, we wouldn't feel that's necessarily something that's going to persist. We'll have to see how markets play out.

All right. Thank you.

Showing no further questions at this time. I'll turn the call back to the presenters.

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

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