Sun Life Financial Inc. (SLF) Q2 2013 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Sun Life Financial's Q2 2013 Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded today, August 8, 2013, at 10 a.m. Eastern Time. I will now turn the presentation over to Phil Malek, Vice President of Investor Relations. Please go ahead, sir.

Thank you, John, and good morning, everyone. Welcome to Sun Life Financial's earnings conference call for the second quarter of 2013. 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 results and strategic execution by Dean Connor, President and Chief Executive Officer of Sun Life Financial. Following those remarks, Colm Freyne, Executive Vice President and Chief Financial Officer, will present the second quarter financial results. Following Colm's remarks, Dean Connor will provide an update to the company's 2015 financial objectives. Following the prepared remarks, we will have a question-and-answer session. Other members of management are also available to answer your questions on today's call. Turning to Slide 2, I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form part of 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, Phil, and good morning, everyone. Turning to Slide 4, Sun Life had a very strong quarter. Operating net income from continuing operations grew to $431 million, and ROE was 12.8%. Operating net income excluding the net impact of market factors was $384 million. Expected profit grew 18% year-over-year, and new business strain was down 73%. Both of these changes represent a significant improvement in underlying earnings power. We also had very strong top line growth in the quarter. Sales of life and health products increased 32%, and wealth sales also grew 32%, including 44% growth in non-MFS wealth sales. Adjusted premiums and deposits grew 28%, and assets under management reached $591 billion. The value of new business increased by 60% over the same period last year. This increase reflects higher sales and asset levels, as well as of the actions we've taken to improve product profitability and business mix. I'm pleased to report that we completed the sale of our U.S. Annuity business on August 2. This represents a significant transformation for our company, and we'll talk more about the impacts later in the call. Moving to Slide 5, yesterday, the company reported operating net income from continuing operations of $431 million or $0.71 per share, up from the $250 million or $0.42 per share reported last year. Our capital position remains strong, and we ended the second quarter with a minimum continuing capital and surplus requirements ratio of 217% at Sun Life Assurance Company, well above the regulatory requirements. Slide 6 shows our continued strong sales momentum. And as I noted, sales from both insurance and wealth products increased 32% over the prior year period, and sales growth was well distributed across all four pillars. Turning to Slide 7, in the second quarter of 2013, we continued to execute well on our strategy of higher growth, higher ROE and lower volatility. I'll give you a brief update on the key milestones achieved in the second quarter. And later in the call, I'll recap our progress since launching our Four Pillar strategy, and we'll update the 2015 outlook for our business. On Slide 8, Sun Life Financial Canada had another strong quarter, and we made real progress toward achieving our goal of becoming the best performing life insurer in Canada. Sales were up across the board, and profitability improved. Individual insurance sales were up 14%, with growth in both the Career Sales Force and third-party channels. Sales in Group Benefits were up 53%, with particularly strong sales in the large case market. Long-term disability claims experience continued to improve, with the incidence rate at its lowest levels since 2008. Business in-force grew to $8 billion, and we remain the #1 Group Benefits business in Canada. Sun Life also retained its first place position in the Canadian fixed annuity market, with a market share of 32%. Sun Life Global Investments had another successful quarter, with retail mutual fund sales up 53% over last year, driven by growth through both our Career Sales Force and third-party distribution channels. We retained our #1 position in Group Retirement Services, and assets under administration of $58 billion grew 12% from a year ago. Sales were very strong at $1.1 billion for the quarter, and those results included a $150 million annuity buy-in sale through our Defined Benefit Solutions business. I'm also pleased to report that Sun Life was ranked among the top 20 Canadian brands in a recent study by Canadian Business magazine, receiving the highest ranking of any insurance company. Moving to Slide 9, we continue to hit the key milestones in our U.S. group and voluntary businesses. Combined employee benefits and voluntary sales for the quarter were up 17% over the prior year, with voluntary sales up 35%. Total business in-force was up 8%, maintaining the growth rate achieved last quarter. We are building on our enrollment capabilities, expanding our profit product suite and driving growth. In the quarter, we launched our first voluntary benefits accident product, which we expect will have strong appeal to our customers. We continue to undergo a major transformation of the group business sales and service model, which we believe will improve distribution effectiveness, enhance the customer experience and increase our productivity. We also achieved significant increases in sales of our international insurance and investment products, which are aimed at high net worth customers in offshore markets, and this was driven primarily by expanded distribution. Turning to Slide 10. You can see that we had another exceptional quarter at MFS, with assets under management finishing the quarter at U.S. $354 billion. Gross sales were $25 billion for the quarter, 29% higher than the second quarter of 2012, and represented our second highest quarter ever. Net inflows were $6 billion, and reflected strong contributions across retail, insurance and institutional business lines. MFS continues its strong performance, with 97% of fund assets ranked in the top half of the Lipper category based on 5-year performance. Turning to Asia on Slide 11. Our results demonstrate strong execution in the region. Overall, individual life insurance sales increased 38% from the year-ago period to $166 million of annual premium. To put that in perspective, that compares to $66 million of sales in Canadian individual insurance. Wealth sales in Asia more than doubled. Insurance sales in the Philippines more than doubled over prior year, solidifying our #1 position in that market. In Hong Kong, we more than doubled our individual life sales as compared to the second quarter of 2012 and continued to generate strong growth in our Mandatory Provident Fund business. In Indonesia, sales were up 33% as we continue to expand our agency force, which is now over 6,000 advisors. Shariah sales continued to grow, representing 20% of total agency sales. During the quarter, Sun Life Indonesia was ranked third in the life insurance category in a survey of Indonesia's most admired companies. During the quarter, we also made good progress in our 2 new businesses in Asia. We completed our acquisition of CIMB Aviva in Malaysia, in partnership with Khazanah. We appointed a new management team there to lead the venture and successfully launched a new credit protection product with a new bancassurance partner. And in Vietnam, we obtained approval to sell 4 new products and recorded our first sales. I'll now turn the call over to Colm Freyne, who will take us through the financials.

Thank you, Dean, and good morning, everyone. Turning to Slide 13, we take a look at some of the financial highlights from the second quarter of 2013. As noted, we had a strong quarter, with both top and bottom line growth. We reported operating net income from continuing operations of $431 million, which is up from $250 million a year ago. We delivered operating net income excluding market factors of $384 million, and I will go into more detail on some of those factors on the following slide. We also experienced strong growth in the top line, with adjusted premiums and deposits up by 28%. In the second quarter, we saw good year-over-year improvements in key lines of the sources of earnings, with expected profit on in-force business increasing by $73 million over last year and new business strain improving by $41 million. As you can see on Slide 14, the net impact of market factors on continuing operations contributed $47 million to earnings in the quarter. Operating net income excluding the impact of market factors was $384 million. Positive impact from market factors in the quarter was primarily due to higher interest rates, which contributed $57 million, including the previously disclosed charge of $49 million due to a decline in the ultimate reinvestment rate, or URR. This was partially offset by unfavorable equity market experience of $14 million, including $3 million from positive basis risk. We have provided more detail on the impacts of market factors in the Appendix. The expected future impact of declines in the URR lessened due to the increase in interest rates in the quarter. Based on the level of interest rates at the end of the second quarter, we expect a $50 million charge in Q4 of 2013, a $100 million charge in 2014 and a further $50 million charge in 2015. This represents a $100 million reduction from our previous disclosure in the first quarter of 2013. Note that changes under consideration by the Actuarial Standards Board may remove some of the future expected impacts. Other notable items contributed $2 million to earnings in the quarter and included positive credits in mortality and morbidity experience, partially offset by negative impacts from other experience, lapse experience and expenses. This slide also shows the net impact of market factors and other notable items for the combined operations of the company, which includes the results from our discontinued operations. You can see that the impact of market factors for the combined operations was more significant, in line with the higher sensitivities of the business being sold, contributing $66 million to earnings for the quarter. Moving to Slide 15, we provide details on our sources of earnings for continuing operations. Expected profit of $482 million increased by $73 million from a year ago. The year-over-year increase is largely attributable to higher income from assets under management at MFS. New business strain was $15 million, representing a significant improvement over the $56 million reported in the second quarter of 2012 and the $46 million reported in the first quarter of this year. This improvement was mostly due to impacts from actions at SLF Canada, specifically product repricing and design changes in individual insurance and investments and gains on higher yielding assets supporting new business in Defined Benefit Solutions. The experience gains of $60 million reflects the impact of market factors and other notable items described on the previous slide. Assumption changes and management actions resulted in reserve releases of $15 million before taxes. These relate primarily to updates and refinements to actuarial models. Earnings on surplus of $59 million were lower than the second quarter of 2012 due to the unusually high levels of pretax gains on available-for-sale securities we realized a year ago in response to declining interest rates at that time. The level of earnings on surplus this quarter is more representative of a normal run rate. Income taxes at $130 million are within the expected range for our effective tax rate of 18% to 22%. Turning next to Slide 16 and the results from our Canadian operations. SLF Canada reported operating earnings of $210 million, a 13% increase from the second quarter of 2012. Earnings in the quarter benefited from positive morbidity experience in Group Benefits and gains on higher yielding assets supporting new business in Defined Benefit Solutions. Individual insurance sales were up 14% relative to the second quarter of last year due mainly to strong demand for permanent life products. Individual wealth sales increased 2%, as higher fixed products and mutual fund sales were offset by lower segregated fund sales, following our actions to deemphasize sales of segregated funds. Group Benefits sales were up by a substantial 53%, primarily due to an increase in sales in the large case market. Sales in Group Retirement Services increased 58%, driven primarily by new sales in Defined Benefit Solutions, and we would note that these sales can vary significantly quarter-to-quarter. Moving to Slide 17, our U.S. continuing operations reported earnings of $122 million compared to earnings of $8 million a year ago. Earnings in the second quarter last year were impacted by declining rates, whereas interest rates increases benefited the current quarter. This was partially offset by unfavorable mortality experience within group life in EBG. Total EBG sales in the quarter increased 17% compared to a year ago. Within EBG, voluntary benefits sales increased 35% compared to last year. Sales of international investment and life products increased 64% and 100%, respectively, compared to the second quarter of a year ago driven by expanded distribution. Looking next at the performance at MFS on Slide 18. Operating earnings were USD 101 million, up from USD 67 million a year ago, driven largely by higher average net assets under management. Margins were strong at 37% and up from 32% a year ago due to higher average net assets. Total assets under management as of June 30 were $354 billion compared to USD 323 billion at the end of 2012. The increase was primarily driven by year-to-date gross sales of $48 billion and asset appreciation of $19 billion, partially offset by redemptions of $36 billion. Slide 19 highlights the performance of our Asian business for the second quarter. Operating income from our Asian operations was $46 million compared to income of $15 million in the second quarter of last year. Net income in the quarter reflected the favorable impact from market conditions, as well as overall business growth. Total individual life sales in the quarter increased 38% from a year ago as higher sales in the Philippines, Hong Kong and Indonesia were partially offset by lower sales in India. Sales in the Philippines grew 131% due to Asian agency expansion on bancassurance and favorable market conditions. Sales in Hong Kong increased 118% driven by strong performance in the broker channel. Sales in Indonesia were up 33% year-over-year due to increases in the sales force and continued positive momentum in the Shariah market. Wealth sales in Asia were up 162% due primarily to increased Mandatory Provident Fund sales in Hong Kong. On Slide 20, we provide the details on the sale of our U.S. annuity business, which closed on August 2. This sale includes 100% of the shares of Sun Life Assurance Company of Canada U.S. and represents a complete transfer of risk. The total book value loss on the sale of the business is expected to be approximately $1.1 billion, in line with the updated loss estimate we provided at the end of the first quarter. We estimate a cash level of $1.95 billion at the holding company following the close, which is up slightly from the $1.9 billion we disclosed in December 2012. Total cash proceeds amounted to the agreed purchase price of USD 1.35 billion plus payments under the estimated purchase price adjustment of USD 177 million. I'll now turn the call back over to Dean.

Thanks, Colm. And before we begin the 2015 financial objectives update, I'd just like to leave you with a few key messages for the quarter. First, Sun Life had a very strong quarter. We continue to deliver strong top line growth, as demonstrated by momentum in both premiums and deposits and in sales. Our underlying earnings power has improved as we've grown our businesses and improve both product profitability and sales mix. And lastly, we continue to execute well on our strategy. And now for our financial objectives update, starting on Slide 22. We first introduced our 2015 objectives at our March 2012 Investor Day. We are now updating these midterm objectives to take into account developments since that time, with the most significant one being the sale of our U.S. annuity business. On Slide 23, you can see our updated objective for 2015. Net income is $1.85 billion compared to $2 billion previously. Our objective for operating ROE is 12% to 13%. We see these objectives as ambitious but achievable. Turning to Slide 24. Canada has generated strong sales growth while making excellent strides in reducing the strain on new business. We've achieved significant growth at Sun Life Global Investments, with client assets under management exceeding $6 billion. In the U.S., we've achieved significant growth in the group business, and the voluntary benefits buildout is on track and delivering results. MFS continues to deliver industry-leading results, with strong performance driving significant assets and earnings growth. And in Asia, we are growing sales and have expanded our geographic footprint through the acquisition of our Malaysian business and our startup in Vietnam. Overall, insurance sales grew 9% in 2012 and 17% in the first half of 2013, and wealth sales were up 45% in 2012 and 24% in the first half of 2013. We have significantly improved our value of new business, driven both by increased sales and product profitability changes. We are also making good progress in driving the productivity improvements outlined at our 2012 Investor Day and are reinvesting those gains to drive growth. Moving now to Slide 25, you'll see more detail on our updated financial objectives. We've adjusted our earnings objective at SLF U.S., primarily to account for the sale of the annuity business. Net income at MFS has been increased to reflect its strong performance over the past year. The objective for our business in Canada has remained the same, with headwinds and tailwinds balancing against each other. And in Asia, our objective has come down somewhat to reflect a longer ramp-up period and investments in growth. On Slide 26, we highlight potential uses of the proceeds from the sale of our U.S. annuity business. And as Colm said, we estimate a pro forma cash level of $1.95 billion after the close of the transaction. Options for capital management include redemption of additional debt. As you know, we target a leverage ratio of about 25%. Greater retention of mortality and morbidity risk on our balance sheet, investments in higher yielding assets, and increased funding for business growth, both organic and potential acquisitions. We estimate organic annual capital generation of about $500 million in 2015, supported by the planned growth of our businesses. We have not included share buybacks in the projections for now, given the uncertainty of the capital roadmap work underway by our Chief Regulator. On Slide 27, we show the key initiatives that will drive continued growth in Canada. First, to capture the retirement market opportunity, we continue to invest in building our Career Sales Force. We are expanding retirement distribution, for example, the number of wealth wholesalers has grown from 8 2 years ago to 22 people today. And we will grow Sun Life Global Investments, as well as our unique Defined Benefit Solutions business. In group pensions and benefits, we are investing to take our leading total benefits capabilities and mobile services up to the next level, aimed at differentiating the plan sponsor and member experience. And finally, in client solutions, we are deepening, retaining and growing our relationships with plan members at the work site in order to realize additional asset gathering and insurance opportunities. Going to Slide 28, this year, we are making extensive changes in the employee benefits organization in the U.S. and in the way the work gets done. These changes will make the business more scalable and will deliver better service to brokers, employers and plan members. We will grow our product suite, involuntary benefits, and differentiate through enhanced enrollment, distribution and technology. The industry continues to consider responses to the Affordable Care Act, and we will remain agile to take advantage of the opportunities that are created. In our international life and investments business that serves high net worth offshore customers, we plan to reduce the volatility and grow our market positions. Moving to Slide 29. MFS is focused on initiatives to enhance its global research platform and to continue to drive strong investment performance. MFS will broaden its global presence through expanded product offerings and distribution footprint. MFS is also stepping up its investment in client relationships, with the goal of deepening those relationships and further improving the client retention rate. And on Slide 30, we outline key initiatives for continued growth in Asia. Distribution remains key to continued growth. We are growing our agency force across all Asian markets and improving their productivity. As well, we plan to grow in alternative channels, particularly bancassurance. We intend to grow our ventures in Vietnam and Malaysia and make a major push in growing accident and health benefits. We're also very focused in working with our partners in China and India to grow sales while reducing the expense gaps that still exist at these businesses. We plan to further develop our wealth management businesses across Asia, specifically asset management in the Philippines and pension in Hong Kong while continuing to explore wealth management opportunities in other markets. Before we open the call to questions, I'd like to just recap the key takeaways from our 2015 objectives update. We will continue to pursue the Four Pillar growth strategy that we introduced nearly 2 years ago. We see attractive opportunities to grow in every one of our businesses, driven by the 3 long-term drivers of demand for what Sun Life does. That's baby boomers approaching retirement, the downloading of responsibility from governments and employers to individuals, and the growth of the middle class in Asia. We have been investing in growth to seize these opportunities and we'll continue to do so. We remain committed to generating growth from lower risk and higher ROE businesses, and we'll take a disciplined approach to deploying capital towards those opportunities that meet our requirements for growth, risk and return. So finally, we're on track to meet our financial objectives, which, again, I would note as being ambitious and achievable. And with that, I'll turn it back over to Phil for the Q&A.

Thank you, Dean. [Operator Instructions] With that, I'll now ask John to please pool the participants for their questions.

Your first question on the line today comes from Gabriel Dechaine with Credit Suisse. Gabriel Dechaine - Crédit Suisse AG, Research Division: Dean, just the first question on the 2015 targets here, but the capital -- the management component. Can you confirm that there's no special capital deployment implied in that $1.85 billion? And then if not, like -- but the items that you list as potential capital deployment strategies, what would your appetite be for something like a more aggressive debt reduction than what we've seen so far? Because it looks like you've got a lot of excess capital generating more over the next couple of years. There's $1.6 billion of higher cost debt in press for redemption over the next 2 years. Could we see that repaid outright or would you more -- lean more towards refinancing?

Gabriel, I'll ask Colm Freyne to respond to that.

Yes. So, Gabriel, in terms of the actual model for the $1.85 billion earnings in 2015, what we have modeled in that is an assumption that we achieve a 25% leverage ratio at the end of 2015. And that -- it would bring us down from our current debt level. We do take account every time we have an opportunity to redeem or to refinance. We do look at our overall capital position. So we wouldn't lock ourselves in at this point by saying we'll definitely take all those actions, but that's how we're modeling it. And, of course, actual decisions at that time will depend on what other opportunities present themselves. We are comfortable with our current overall leverage ratio, but we do see an opportunity here to bring it down to a lower level. Gabriel Dechaine - Crédit Suisse AG, Research Division: Okay. And then just to talk a little bit more indirectly about the $1.85 billion, and how will the expense management factors into that? Because I see the operating expenses for the company are -- were $989 million for the quarter, up 20% year-over-year. I guess, the Malaysia acquisition bumped that up a bit, but still up quite substantially. What kind of run rate expense level should we kind of bake into our models for -- by the time 2015 comes around, when you're pulling back on the group -- voluntary group initiative, when you're pulling back on investments in MFS and a few other factors?

Yes, I think the overall expense discussion is somewhat nuanced and a little bit complex at the moment because while we're obviously reducing in regard to the business that we've just sold, we also have significant investments taking place in order to drive earnings and capitalize on opportunities that we see today. And when you think about the overall expense increase in the quarter compared to a year ago, you're quite right, it is up significantly. I have about 18% when I adjust for the stock-based compensation at MFS. And that increase breaks down, Gabriel, between increases at MFS, which are very much volume-related and related to the very strong performance there, and then other -- and that's about 7% of that 18% increase. Other volume-related is about 3% of the increase, and that's pretty broad-based between Asia, Canada, et cetera. And then we have investments in expansion and investments in our initiatives. The U.S. voluntary initiative in Canada with respect to wealth, with respect to Sun Life Global Investments. We've got investments in Asia, and Vietnam is coming onstream. As you quite directly pointed out, Malaysia came onstream in the quarter. That amounts to about 3%. And then, in total for the expansion, we have a couple of one-time items in the quarter that amounted to about 2%. And you've got the regular overall increase in expenses. So we are keeping a very close eye, as you can tell from my detailed commentary. We do have expense initiatives. Dean mentioned those in his comments, as we look to drive productivity gains, which can then be recycled to achieve the expenses. I do find -- to achieve the earnings objectives in 2015. I do find that it's often better to talk about individual business groups or units when we think about expenses as opposed to the broad-based commentary because there's a different story with respect to each of the businesses. Gabriel Dechaine - Crédit Suisse AG, Research Division: All right. And if I just throw one last in there, just -- you mentioned Asia. And as a component of the 2015 target, the updated one, it's gone down -- I don't know the percentage off the top of my head here. I'm just wondering what drove that decline, if Kevin's on the phone. Because -- what hasn't worked as well as -- than you were expect -- because you have made an acquisition since then.

Yes, so maybe -- Kevin is on the phone. And I'll maybe just say a couple of quick words, and then Kevin can add some additional color around that. We took, obviously, a pretty hard look at the components in Asia. We've got 7 businesses there, and you don't have all of them firing on all cylinders at the same time. So that was one factor. India, we've talked about previously, with some of the regulatory changes, was a factor in the reduction. And then interestingly in India, the deterioration in the currency, the Indian rupee, has also been a factor. And while we didn't generally adjust for currency, the notable decline in the Indian currency was a factor in the reduction. But, Kevin, I'm sure you have additional comments.

I think, Colm, you've covered it quite well. But half was due to the currency primarily in India, and about half was due to India underperforming, mainly due to the regulatory changes and still working their way through some of those. And also Indonesia being a little bit underperforming. We're seeing some signs of growth in Indonesia. You saw it in the sales in the quarter, but it's a little behind where we thought that would be in 2015. The rest of the businesses remained pretty much in line with where we expected them to be.

Your next question on the line comes from Andre Hardy with RBC Capital Markets.

Two questions. The first is a quick one on the $1.95 billion estimated cash level at Sun Life Financial at closing. What, in your mind, Colm, is the right amount of cash to hold at Sun Life Financial or the right range, if you will?

Yes, it's a topic that we're obviously addressing because we've operated with a higher level of cash at SLF in regards to the buffer for potentially funding investments in Sun Life U.S. In the past, we tended to have $500 million of cash for general corporate purposes at SLF, and we tended to have another $500 million or so that we kept in reserve in the event that we needed to fund SLF at Sun Life U.S. in order to maintain its risk-based capital ratio. So we were -- tended to be in that $1 billion range in previous quarters. It did fluctuate, but it was around that level. So we think today that $500 million might be the appropriate level to maintain at SLF given the much simplified corporate structure we have now. Because essentially, SLF has an investment in Sun Life Assurance. It has an investment in MFS. It doesn't need to hold cash to fund any activities within MFS, which, of course, is self-funding. And so we think around $500 million, and that gives us some thought as to where we might find ourselves out by 2015.

And the other question is on the financial objectives for MFS, and there's something I don't understand in there. In the first half of this year, MFS made $205 million excluding the fair valuing of the compensation. So if you multiply that by 2, the run rate is $410 million for 2013 and you only expect to make $450 million in 2015. Net sales are strong. Performance is strong. I'm guessing you're assuming equity markets will go up 8% a year. There's something that doesn't add up, unless you're expecting margin compression. What am I missing in my numbers?

Yes, so I think what you're probably thinking there is that we have extrapolated out in respect of all of the businesses the same type of growth rates. With MFS, we've clearly had very strong sales performance. And while we believe our investment performance will continue to drive strong sales performance, we're not projecting or extrapolating the same level of sales out over the future period. So there's a little bit of caution built into the MFS projections because they clearly will be very market dependent. And when you think about headwinds and tailwinds in the overall earnings for 2015 -- and these are objectives. These are not forecasts. I think you can consider whether you believe there's a tailwind with respect to the MFS earnings. I don't know if Rob -- Rob is on the line, if you'd have anything additional to add?

The only thing I would add is it's a conservative number. And if the markets stay healthy, we should be able to do better than that.

Okay. Maybe a better way to ask it is, I can make my own assumptions on sales and market returns. Is there any reason for margins to decline between now and 2015, unless assets go down?

No.

Your next question on the line comes from Robert Sedran with CIBC.

Actually, maybe just to follow up on Andre's question. Is there any impact in the targeting for the MFS from the stock-based comp that is -- might bleed in over time going forward? I mean, is that one of the factors that might be holding back the earnings growth even if the asset growth and margin hang in?

No, Rob, there's no adjustment for that. We're very comfortable that that is the appropriate way to view the earnings power of MFS and we have not made any further adjustments.

Okay. And then just to revisit your explanation on the strain issue, Colm, the -- I guess, there were 2 components of it. One of them was product repositioning and repricing. I think we can probably assume that that one is a sustainable benefit since it's all been done. The other one was on investment benefits, and I guess I'm paraphrasing, but investment benefits on strain. Is that something that was specific to the quarter, or is that just we've got higher interest rates and finding better opportunities to deploy, and therefore, strain is at a sustainably lower level, and the number we saw this quarter is something that we should consider normal?

No, I think the right way to think of it is that strain was lower this quarter, and we wouldn't expect it to be at the same low level in Q3, Q4. We think that the trajectory is heading towards a lower level. So if you look at year-over-year and if you look at quarter-over-quarter, you can see the decline. But this level in this quarter was bonused by investing gains related to sales. And, as you know, investing gains typically come through on the in-force. And I believe last quarter, I mentioned that -- we see sustainable investing gains in the $10 million to $20 million. You might have noted that for the in-force on the experience line, it was actually quite modest this quarter at $2 million, and where you saw the benefit of the investing gains come through was on strain. So it comes through, whether it's in strain or investing gains. We think that source is a good recurring source of ongoing income. But the new business strain was unusually low this quarter. There are seasonal factors, Rob, as well so that Q4 in Canada and the Career Sales Force tends to be generally quite a good quarter, so strain can be a little bit lower. But you could expect to see a tick-up in Q3. And maybe if you think of it over the balance of the year, it might be in the $30 million to $40 million range for the total company.

Okay. I don't know if this is a question to take offline or if it's an easy answer, but is there a reason why it would show up in strain one quarter and in expected profit another?

Yes, it generally depends on the type of and size of the sales. So if you have larger, lumpy sales in the quarter, it could have an impact. So there's a little bit of -- there are factors related to the size of the sales that are driving it and the placement of assets relative to sales.

Your next question comes from Doug Young with TD Securities.

First question, Dean, I just wanted to get a sense of how you think Canada has performed relative to what you would have thought a year ago. And where I'm going with this is within your objectives, you didn't make any change to Canada, but on Slide 24, you kind of highlighted some really positive things that have happened in Canada over the last year, and I'm just trying to connect the two.

Well, Doug, I'm -- we're pleased with Canada's performance. We highlighted, and I won't repeat, a number of the achievements in Canada. It is a competitive market, though. And to rise above competition, to grow sales, it requires lots of investment, which we're doing, building out sales power, wholesalers, tools, technology, mobile, branding, you name it. So there's a fairly significant investment to grow the business. I think the -- if you triangulate from the earnings, if you did the same thing that Andre did on MFS for Canada and you try to extrapolate from the first half of this year, you would want to remember that the first half has been flattered by market conditions. So I think we still see $900 million as a great target for Canada, and ambitious but achievable. And we'd be thrilled to pieces if Kevin blows past that, but I would say they're making great progress and on track to achieve that.

And what is that -- I mean, maybe you won't go into the detail, but what does that extrapolate in terms of an ROE for the Canadian division? And if you don't want to give a number, would that be above the 12% to 13% that you're targeting for the company overall?

Well, perhaps, I can jump in there. So certainly, on the new business where we're achieving returns above that, but the impact of the in-force is still quite significant and the impact of lower interest rates on required capital. And it is interesting, Doug, that this quarter, we did see a little bit of an improvement in capital ratios at Sun Life Assurance as interest rates ticked up. So I would say that to achieve that higher ROE, we need to continue to work hard at managing that in-force and we need a little bit of an uplift in terms of interest rates. And we saw a little bit of that come through in the quarter and that helped us in terms of our MCCSR capital.

And Doug, sorry, I'd add one more thing. On the question of the ROE for the insurance businesses, the 2015 objective of 12% to 13% reflects obviously the mix of the insurance businesses in MFS in there. I would say to you that we have more work to do on the insurance businesses, that we're -- the 12% to 13% reflects our current plan and planning, but -- and actions, but I would say to you there's more work to do there. Because I think, as Colm noted, as interest rates come up, but -- as well as the capital roadmap unfolds and as we work harder and do more to look at where capital is deployed and the models we use to set aside required capital, we're working hard on that file. I'll put it that way. We're working very hard on that file.

Okay. And then just secondly, the Q3 typically is when you do your reserve adjustments, and in the press release, it noted that that's the case, but didn't give any specifics as to whether there may be positives or negatives that you'd see given the work that you've done so far. And so could you update us on what you're thinking?

Yes, so, Doug, it's Colm here, and maybe I'll ask Larry Madge, our Chief Actuary to say a few words. But we obviously review the wording in the press release very carefully because we take account of information that we have at the time of preparing our news release. And at the time of preparing the news release, we were not in a position where we had a bias, either negative or positive, with respect to the work that's been done. So the wording was simply to advice that we are -- that we'd go through that big exercise in the third quarter. But perhaps, Larry, you might want to add a couple of comments?

Sure. Doug, yes, not a whole lot to add relative to what Colm just said. We're currently in the process of reviewing our assumption changes and management actions for the third quarter. We're going to have some positives and negatives, but at this point, we don't see a bias one way or the other.

And, Larry, is there any particular business that you're doing a deeper dive on this year?

No. Normal process, and we're working through all the businesses together.

Doug, one business -- of course, this is a blinding glimpse of the obvious, but one business we're not reviewing is the U.S. VA business.

Your next question comes from Mario Mendonca with Canaccord.

Just a quick follow-up question first. The lower strain in the quarter, Colm, it went to -- it related, I suspect, to that GRS sale, that $150 million sale. First of all, do I have that right?

Well, a part of it related to that, and then the ongoing improvements in the individual insurance in Canada was the other part. So you're right that a portion of it related to the larger sales in GRS.

Could you put a number on that, the extent to which there was a gain? And the gain, you referred to it as an investment gain. Is it just simply that you're able to source assets that generate returns better than what you've committed to the fund -- to the pension fund?

Yes, I think the way I'd rather answer that, Mario, is to say that last quarter, I indicated sustainable $10 million to $20 million of investment gains, and we see that as still being relevant. So the fact that we had a lower amount in the experience and we would see the overall number as still being in that range when you take the combination of new business gains and the experience gains on the in-force.

Okay, and then a more broad question. Expected profit, up a fair bit. But when you take out MFS, expected profit's essentially flat year-over-year. And I want to reconcile that with all the progress that's being made across the company, GRS specifically, voluntary benefits, the growth in P&D in Asia. At some point, I figure all those positives have to translate into expected profit growth. But what I don't understand right now is why that hasn't emerged yet. And is there some mechanism we could look forward to that would drive that?

Yes, so on the expected profit, when you back out -- when you look at the year-over-year expected profit of increase of $73 million, $64 million of that related to MFS. So the balance spread across Canada, the U.S., Asia. But you also have to recall that the U.K. expected profit is lower as that business is a runoff business and declining. And we've had -- in our corporate segment, we've had a higher planned level of expenses as we continue to invest. So there's some offsets there. So we are pleased that year-over-year, we did see increases in Canada, the U.S. and Asia, albeit quite small increases in Canada and the U.S. And it is somewhat of a slow journey, but we believe we're on the right trajectory and we'll continue to make progress.

But is there any way to reconcile all the positives you're referring to in terms of in-force business growth P&D? And the numbers you're referring to are huge in terms of both. Why hasn't that played out yet in terms of the expected profit growth in Canada and -- or Asia or otherwise?

Well, I think there are ongoing pressures in some of our businesses from competitive factors. So while the assets under management and assets under administration can grow, the ongoing competitive factors can result in margin pressure, et cetera. But we do believe that you will see the progression through the value of new business. You will see that coming through and improve the expected profit over time.

Your next question on the line comes from Peter Rutledge with National Bank Financial.

Dean, thank for your comments on share repurchases. I like to go into that issue a little bit. If I look at -- excluding out the $500 million you talked about earlier in cash you'd need on a run rate basis for the holdco, you're still at about $1.4 billion in excess capital. And you add to that all of the capital that MFS throws up, it seems to me like you're in a pretty robust capital position. And your MCCSR ratio, although quite strong, is -- probably understates your capital strength. And you referred to OSFI and the roadmap as a reason to sort of defer on the capital -- or the share purchase decision. Is there an effective ban on share repurchases right now pending the capital roadmap? Is that the right way to think of this?

Well, I think you've covered a few moving parts, Peter, in your introduction. It's Colm here. And I think one point that -- we have a very strong cash position, obviously, pro forma the close of the transaction. But as we say, as we look out to 2015, we're thinking about our overall leverage ratio. So if you look out to 2015, we would expect to have excess cash and capital at the SLF level, as I mentioned previously, relative to the $500 million that we might think of as being the more normal level to hold. And there are a number of moving parts before we could commit to the best deployment of that. The capital roadmap is one item, but obviously, we've just closed the transaction. We're evaluating the various alternatives that Dean spoke about earlier. But I would agree with you that the SLA capital, the 217%, does understate the overall capital in the firm, pro forma the transaction because we now have cash and capital at SLF that's substantial. So the right way to think of it is now more on that combined basis. And we'll continue to update you on how we plan to deploy that.

I'll try another way to ask the question. If there wasn't a roadmap in place, on Page 26, would one of the options be share repurchases?

Doug, it's Dean -- excuse me, Peter, it's Dean. I think the company has, as you know, done share repurchases before, and we have talked about our -- when asked about the dividend, we have talked about the combination of dividend and share repurchases returning circa 50% of earnings to our investors. And we still think of it that way, and we would -- so we would still think of share repurchases as part of our future. And it's just -- it's a question that we won't be specific today as to when and what that might look like and under what circumstances we would actually consider it, but we still consider it as part of the toolkit to manage capital and manage shareholder returns.

Okay. And just a quick one for Kevin Dougherty. Individual life insurance sales, you actually had growth year-over-year. I think that makes you the only Canadian life co to have positive growth in sales. Is that price, product design, what's driving it?

Yes, that's right, we're the only Canadian life co that showed growth in Q2. I think there's a lot of things going on there. The first thing is the Career Sales Force is really, really firing in all cylinders and had a very, very good, strong spring campaign. So that's what you saw coming through there. On the third-party side, there's still lots of room for us to grow. As you know, we're -- we've been in that channel now for a number of years, but we still have lots of upside. And we're just executing on kind of growing those relationships and trying to realize that potential.

Your next question on the line comes from Tom MacKinnon with BMO Capital Markets.

A question about the organic capital generation, the $500 million per year by 2015. It seems to be a little bit better than I would have anticipated. And I'm wondering if you might be able to share with us some -- any further color with respect to that number. How much would be included in there as a result of the curtailing the U.S. domestic life business? How much is there just as a result of -- generally, I think, Canada probably is a significant chunk of that. How much is Canada? And actually, is there any -- is this net of anything? Are you putting capital into any operations? And here, I'm thinking of Asia.

Yes. So the organic capital generation, I think, is a very important question as we think about sustainability of the business model. And over the past few years, Tom, it's clearly being challenged for a variety of factors. And not least of which have been changes resulting from IFRS implementation, which impacted us over the phase-in period, and indeed, that continues to be a piece that's being phased in. And then we also had significant regulatory changes in respect to seg funds, capital requirements that also had phase-in aspects associated with them. So we haven't had -- over the past number of years, we haven't seen that capital generation that we aim for. And I think by 2015, what we're saying is that we're back to that capital generation that's consistent with our business model of generating cash and capital that can be deployed, whether it's back to shareholders by buybacks as previously discussed, or whether it's redeployed into business opportunities. So a number of moving parts there. The $500 million that we talk about is a net number. It's net of the capital required on new sales and net of the capital that's freed up on existing and in-force business. It's pretty hard to dissect it on this call because it goes through all of our businesses across the organization. But importantly, we feel that we've taken a lot of products and strategic decisions that's head us in the direction where we have a -- we now have a capital generation that's significant and sustainable.

Okay. And when you -- just a follow-up. When you put out your 2015 objectives in March of last year, you talked about -- you sort of split it out between things called momentum growth and then growth initiatives and product and expense initiatives. And it looks like the momentum growth was responsible sort of for 60% of the growth; and then the growth initiatives, 30%; and product and expense initiatives, 10%. I don't know if you can share if you've gone through that exercise this time. Presumably, you must have, rather than just pulled some number out. But -- and I know -- and I can assume these things would vary by lines, but are we really looking at generally the same kind of breakdown in those things, or is there anything you can share with respect to that?

Yes. I could comment a little bit on that. And I think the exercise that we went through last year -- first of all, every time you go through an exercise of this nature, it has its own aspects to it and you don't follow exactly the same way as you went about it last year. So last year was the culmination of the fairly intense strategic planning process. We put out the objectives. We set out the Four Pillar strategy. In this year, of course, we're updating in respect of the transaction and the sale. So we didn't go through exactly the same kind of a process. But I think in terms of where you can see that momentum and where you can see that transformational piece, I think it continues to be very much in the United States, with the build out in the voluntary continues to be in Asia with respect to the initiatives there. And we've already talked about MFS and how one might view the earnings objectives there. It's, again, a different way of looking at that. And I think, in Canada, we didn't change the objectives. So I would say the fundamental underlying aspects are the same, but we didn't update those pieces.

Presumably the momentum growth, at least in terms of MFS in Asia, would be better just given the sales levels are probably better than what has been anticipated. [indiscernible]

Yes, it's interesting if you go back and you look at some of the macro factors that would drive us. So on the S&P, if you compare to the -- when we did the Investor Update in March of last year, the S&P, we were basing it on assumptions that were based on December 31, 2011. The S&P was quite a bit lower at that point. So clearly, current S&P levels, which drive assets under management and strong performance at MFS, are a positive. And interest rates interestingly at that time, they came down at December '12. When we updated, we used that as our starting point for the current exercise. And they had come down, although now recently, they've recovered again. So we think on interest rates, the push and the pull, they're probably roughly in the same place and the forward yield curve, a little bit higher today relative to when we were doing the strategic update. But the number of basis points differentials are not all that significant and indeed quite similar to when we did the Investor Day material a year ago. So we've looked at all of that, Tom, and we really haven't said we need to do some fundamental rejigging of the targets. We felt a better way to come at it was what did we say last time and where are the key areas that we should update.

So if I understood correctly, this was done assuming the forward curve at December of 2012?

Yes, we looked at interest rates at December '12, which were lower. But, of course, they've now moved up. So unless they -- the same impacts will apply. If they move up in any given quarter, we'll see a benefit. But the actual longer-term view of interest rates still continues to be quite low.

Okay. So the updated objective assumes a forward curve from December 2012?

Yes, so the benefit that we would have seen a year ago in terms of the forward curve is actually quite similar to what we have today. So the structure hasn't changed.

Okay. And then you've talked about retaining more risk. Is -- does that mean that you would look to reinsure less new business going forward? Would you look at recapturing some reinsurance treaties? Are there any that you can think of that are on the radar screen there? And I wonder if you could share with us any of those potential options for capital management.

Tom, it's Dean. We would like to retain more mortality and morbidity risk on our balance sheet. And when we look at our risk appetite framework, that's one area where we're under-risked. And we think we can make good money for shareholders taking those risks, selecting those risks, managing those risks. So we would like to retain more. And as to the specifics of how we do it, as you note, some of it is through reinsurance arrangements on new sales. And then we would -- we always look at -- and I won't call out any specific treaties, but we always look at in-force treaties and ask ourselves are there any treaties that make sense to bring back in to the company. And during the financial crisis, you will recall that we went the other way and we put some reinsurance out, and it freed up capital. It was a relatively low cost way to raise capital. And, of course, in this world, where we have a much stronger balance sheet, and we fundamentally restructured the business model, we'd look at opportunities to go the other way. So that -- I won't get anymore specific as to particular treaties, but that's how we're thinking about it.

And the final question, if I may, is with respect to the U.K. business. I mean, that's in runoff. Is there any trapped capital there? Are there any -- can you give us an indication as to how much, if not -- if there is a trap capital, how much is actually kind of repatriated? And what would that look like under whatever is proposed for Solvency II whenever we get it?

Well, I think, Tom, maybe you've summed it up quite nicely there. It's a little difficult to know. But I think one aspect about the U.K., the results were on the weak side this quarter at $7 million. And I know we've had a couple of questions offline about that. But I think the way we see the U.K. is that it continues to be a very good source of earnings and capital for us, and we still are confident that that's a business that will continue to operate well over many years. And so while there is capital there, we do take dividends and capital back from the U.K. on a periodic basis, and that will continue. So we're still very comfortable with that picture.

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

First, a couple of quick follow-ups on capital management. Colm, you said earlier, and it's in your -- on your slide there, about taking down the leverage somewhat proactively. So I'm just wondering, when I look at -- not that I'd stack my model up to yours, Colm, but when I look at my model, the leverage sort of naturally declines to around 25% towards the end of 2015 without you having to do very much. So I'm curious as to why you might give up some leverage, which in some ways is a good thing, more proactively than rather just letting nature take its course here.

Yes, well, that's exactly what we may well do. So we're not proposing to take any uneconomic steps here. And I have to be a little bit cautious around capital because the leverage that we have is capital qualifying. So it is part of our capital structure or regulatory capital structure. So we can model out various scenarios, but before we actually take decisions, we have to look at a variety of factors. But I think you're looking at it the right way.

Would it be fair to say it's sort of low on the pecking order in terms of things you consider near-term?

Well, I think any aggressive actions would be low on our order of priorities. We're comfortable that we're on a trajectory and a path that's laid out in our discussion.

Okay. And I did want to just quickly follow up on Tom's question. I was going to ask about reinsurance as well. Are there any enforced treaties that are coming up for renewal soon, whether it's the one that you mentioned, Dean, that could have a more meaningful impact on the P&L than -- rather than something just sort of fairly modest?

Yes, I think I can answer that one, Steve. And the answer is no. I mean, we have a lot of reinsurance arrangements across the organization. We look at all of them. And we have to obviously think about the risk aspect as well. There's risk transfer involved in these arrangements, so there's risk capacity issues. So it's complex. But no, there's nothing, nothing significant that we'd be looking at.

Okay. And last one for Wes, if I could. Wes, I think this is the -- I think this is the second consecutive quarter you've noted negative mortality in U.S. group, unless I'm mistaken. Are you seeing any troubling or persistent trends there? Or are we just seeing some noise in the last and the first half of this year?

Yes, Steve, actually, what we've been seeing in 2012 was higher negative experience in our LTD business. In our group life business, it has tended to fluctuate quarter-to-quarter over a fairly long period of time. So we don't see the variance this quarter as anything systemic. That said, we are following our normal annual rate study. We will be increasing prices in our group business, in group life LTD and STD, some modestly, but quite targeted in key areas.

And those price changes will be effective towards the end of the year?

Yes, they will be. We'll be effecting them at the end of Q3.

Your next question on the line comes from Michael Goldberg with Desjardins Securities.

My first question is about the change in your U.S. earnings objective. I'm just wondering if you can give me a bit of a breakdown. How much of it is due to the sale of the annuity business? How much is due to the change in EBG expectations? And how much is due to changes in any other U.S. legacy business?

Yes, so, Michael, it's Colm here. So let me have a go at breaking down those components. So the overall decrease in the earnings objective for the U.S. is $180 million. And at the time we announced the sale of the business, we indicated that the net run rate impact for the enterprise would be $0.22 or approximately $135 million, so that leaves $45 million to explain. And about $20 million of that has been modeled elsewhere in the earnings objectives because the benefits come elsewhere. The debt repayment of $350 million that we already undertook in the quarter and investing the cash proceeds very conservatively in short-term instruments, that's been factored in. That's about $20 million, and that -- so that benefit is elsewhere in the earnings objective. That comes out of the U.S. And then we've also reduced the U.S. run rate for 2015 by about $20 million, and that relates to ongoing investments in EBG and in international. You'll have seen that the international sales in the quarter were very strong, up year-over-year, and that's individual -- international investments, international life, and we see continued opportunities there. So those were the major components that would take you to that $180 million. But perhaps, Wes, if you wanted to add anything on any of that?

No, I think you've captured it. I think it is worthy of mentioning that, historically, the U.S. business has been very focused on investing in the individual side of the business. And as we looked to really bringing greater management focus to our group and international business, we've recognized the need to catch up in some areas. And so the broader numbers that Colm highlighted do reflect some of those investments that we're making in the broader EBG and our international platform.

So has there been any adverse impact in this change in expectations that's due to sort of the impact of losing the distribution channels that you had with the annuity business that might have contributed to other U.S. legacy business that you're retaining?

No, there has not been. In fact, we are really pleased with the continued build out and growth of our Domestic Group Insurance business and the distribution component of that, particularly. As Dean talked about, a lot of the transformation work that we are doing for the group business is focused on extending and growing the productivity of our Group Insurance operation. In fact, this second quarter, we saw about a 12% productivity improvement within our group insurance wholesale distribution arm.

Okay. And my other question relates to Slide 27, your strategy in Canada. There's no mention of a retail insurance strategy. Can you elaborate?

Sure, Michael. It's Kevin Dougherty speaking. And so there's a lot of things going on in Canada, and that slide was just meant to highlight a few of them. But obviously, the retail insurance business continues to be a core part of our foundation, and you would see the emphasis on that in our growth in sales. At the same time, we see the retirement market as a big opportunity for us. And to put that in context, the life insurance and health insurance business is very, very much a part of our retirement market strategy. So you might think of it more as investment products only, but products like par insurance and long-term care health insurance are all very, very important parts of retirement plans. And so it really all comes together under that banner.

And we have no further questions at this time. I'll turn the call back over to management for any closing comments.

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

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation. You may now disconnect your lines.