Sun Life Financial's (SLF) CEO Robert Manning on Q1 2014 Results - Earnings Call Transcript

May. 7.14 | About: Sun Life (SLF)

Sun Life Financial (NYSE:SLF)

Q1 2014 Earnings Call

May 07, 2014 1:00 pm ET

Executives

Philip G. Malek - Vice President of Investor Relations

Dean A. Connor - Chief Executive Officer, President and Non-Independent Director

Colm Joseph Freyne - Chief Financial Officer and Executive Vice President

Kevin D. Strain - President of Sun Life Financial Asia

Kevin Patrick Dougherty - President of Sun Life Global Investments

Robert James Manning - Chairman of MFS Investment Management Inc and Chief Executive Officer of MFS Investment Management Inc

Larry Richard Madge - Chief Actuary and Senior Vice-President

Daniel R. Fishbein - President of Sun Life Financial United States

Stephen C. Peacher - Chief Investment Officer and President of Sun Life Investment Management

Analysts

Peter D. Routledge - National Bank Financial, Inc., Research Division

John Aiken - Barclays Capital, Research Division

Robert Sedran - CIBC World Markets Inc., Research Division

Humphrey Lee - UBS Investment Bank, Research Division

Tom MacKinnon - BMO Capital Markets Canada

Mario Mendonca - TD Securities Equity Research

Stephen Theriault - BofA Merrill Lynch, Research Division

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Darko Mihelic - RBC Capital Markets, LLC, Research Division

Operator

Good afternoon. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sun Life Financial's Q1 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to your host, Mr. Phil Malek, Vice President, Investor Relations. You may begin your conference.

Philip G. Malek

Thank you, Melissa, and good afternoon, everyone. Welcome to Sun Life Financial's earnings conference call for the first quarter of 2014. Our earnings release and the slides for today's call are available on the Investor Relations section of our website at sunlife.com. We'll begin today's presentation with an overview of our results by Dean Connor, President and Chief Executive Officer of Sun Life Financial. Following those remarks, Colm Freyne, Executive Vice President and Chief Financial Officer, will present the first quarter financial results. Following that, Kevin Strain, President, Sun Life Financial Asia, will provide an update on our businesses in Asia. 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 today's remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events. And with that, I'll now turn things over to Dean.

Dean A. Connor

Thanks, Phil, and good afternoon, everyone. Turning to Slide 4. Sun Life delivered a strong quarter. Operating net income was $454 million and operating ROE was 12%. Beginning this quarter, we are introducing a new measure, underlying net income, which excludes the net impact of market factors and assumption changes. We feel this measure will provide investors with better visibility into our business performance. For the first quarter of 2014, underlying net income was $440 million, up from $385 million in the year-ago period, and underlying ROE was 11.6%. Expected profit grew 24% year-over-year and new business strain was down 20%. Results reflect strong business growth, improving core earnings power and continued execution against our 4-pillar strategy. Top line growth was very strong, with sales of life and health products up 19% and wealth sales up 12%. Adjusted premiums and deposits were $32 billion and assets under management reached a record $671 billion.

Moving to Slide 5. Yesterday, the company reported first quarter operating net income of $454 million or $0.74 per share. Underlying net income was $440 million or $0.72 per share. Our capital position remains very strong and our Minimum Continuing Capital and Surplus Requirements ratio at Sun Life Assurance Company increased to 221% in the quarter, well above the regulatory requirements.

Slide 6 shows our continued sales momentum with growth in both insurance and wealth. As I noted, sales from insurance products increased 19%. Sales from wealth products were up 12% over the prior year. Wealth product sales, excluding MFS, were up 33%, led by individual wealth and group retirement savings in Canada. The value of new business totaled $297 million, up 13%, reflecting our strong sales growth and focus on profitability.

Turning to Slide 7. We continue to execute on our strategy, focusing on higher growth, higher ROE, lower volatility and lower cost of capital businesses across our 4 pillars of growth. On Slide 8. Canada experienced strong growth in the quarter as we continued to make progress toward our 2015 goals. We grew sales significantly across our individual businesses. Insurance sales in Q1 were up 38% from the prior year, driven primarily by strong results in the third-party channel. Our Career Sales Force continued to grow, up 130 advisors over last year, exceeding total sales power of 3,800.

First quarter individual wealth sales were up 30% over the prior year due to strong growth in sales of mutual funds and payout annuities. Supporting this was Sun Life Global Investments, which achieved retail mutual fund sales growth of 130%. We continue to extend our reach in SLGI and launched a private client offering at the end of the quarter. We extended our lead in both group businesses with Group Benefits sales up 19% and Group Retirement sales more than tripling, driven by strong defined contribution sales and pension rollover sales up by 19%. Assets under administration finished the quarter at a record $68 billion, up 20% from a year ago.

Moving to Slide 9. I'd like to take a moment to welcome Dr. Dan Fishbein, our new President of Sun Life U.S. Dan is a 25-year veteran in the employee benefits and group life industry and succeeded Wes Thompson, who announced his retirement in the first quarter. We thank Wes for his leadership and fundamentally repositioning and growing our U.S. operations over the past several years. In the quarter, we continued to generate growth in our U.S. group and voluntary businesses. Total Group Benefits sales for the quarter were up 25% over the prior year, led by voluntary benefit sales and stop loss sales. Total business in-force grew 8%.

Turning to Slide 10. We had another exceptional quarter at MFS with assets under management finishing the year at $421 billion -- finishing the quarter at $421 billion. Gross sales were $22 billion for the quarter and net sales were $3.7 billion. MFS continued its strong performance with 86% of fund assets ranked in the top half of their Lipper categories based on 3-year performance. MFS was ranked among the top 10 in Barron's Fund Family 1-, 5- and 10-year categories. Distributable earnings remained strong at over 75% of operating net income for the last 12 months. During the quarter, MFS launched a global advertising campaign that highlights the essence of MFS's investment success, and that is collaboration among professionals across geographies and across sectors.

Turning to Asia on Slide 11. We're making good progress toward our 2015 Investor Day objectives. And Kevin Strain will update us on specific actions and results later in the call.

Shifting gears from the quarter and in response to increased interest from investors, we have included a few slides to provide additional context on our wealth management operations. Slide 12 provides an overview of our wealth management, which represents a significant and growing part of the company. These include MFS Investment Management, our individual wealth and Group Retirement Service businesses in Canada, individual -- international investment products in Sun Life U.S. and our asset and wealth management operations in Asia. They also include Sun Life Investment Management, our newly launched third-party asset management business focused on pension plans and other institutional investors. Together, these businesses represent $559 billion in assets under management.

Slide 13 shows our continued sales momentum in our wealth businesses with average annual growth exceeding 25% since 2011. Over the last 12-month period, Sun Life has generated $1.15 billion of value of new business or VNB overall for the company. And wealth management sales have contributed 56% of that total. The demand for wealth management solutions from Sun Life comes from the 3 long-term drivers of demand that underpin our 4-pillar strategy. And that's the baby boom generation shifting from accumulation to decumulation, the downloading of responsibility to individuals and the rapid growth of middle-class savers and investors in Asia. We will continue to focus on growing these businesses with their higher ROE and lower capital requirements as we have strong capabilities and see significant opportunities.

On Slide 14, you can see this growth of fee income and assets under management for our wealth businesses. From 2011 to 2013, assets under management and fee income increased notably, driven by robust sales and rising equity markets.

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

Colm Joseph Freyne

Thank you, Dean, and good afternoon, everyone. Turning to Slide 16, we take a look at some of the financial highlights from the first quarter of 2014. As noted, we had a strong quarter, with strong top line and solid bottom line performance. Our operating net income from continuing operations was $454 million. We delivered underlying net income of $440 million, which as discussed excludes the net impact in the quarter of market factors and assumption changes. We also saw good year-over-year improvements in key lines of the sources of earnings with expected profit of in-force business increasing by $111 million over last year and new business strain improving by $9 million. In the first quarter, we experienced strong sales growth with life and health sales up 19% and wealth sales up 12% year-over-year. Adjusted premiums and deposits were $32 billion, which was flat from a year ago.

And finally, our capital positions remain strong. We ended the quarter with a Minimum Continuing Capital and Surplus Requirements ratio of 221% at Sun Life Assurance Company of Canada and with the cash level of $1.5 billion at the holding company, SLF Inc. We've redeemed $500 million of subordinated debt at the end of the first quarter of the year, which reduced our financial leverage ratio to 24.9%, consistent with our long-term target of 25%. Yesterday, we announced the planned redemption of $250 million of preferred shares on June 30. With leverage now at our target level, we expect to issue replacement securities at a more favorable rate.

As you can see on Slide 17, the net impact of market factors reduced earnings in the quarter by $26 million. This was offset by assumption changes, which increased earnings by $40 million. Underlying net income, which excludes both of these impacts, was $440 million. The negative impact from market factors was due to lowered interest rates, offset partially by stronger equity markets. As noted in our disclosure material this quarter, we expect the anticipated charge of $40 million in 2014 from the decline in the ultimate reinvestment rate to come through in the fourth quarter and to be offset at that time by the impacts of changes proposed by the Actuarial Standards Board. We have provided more detail on the impacts of market factors in the appendix. Other notable items largely offset in the first quarter with adverse experience related to mortality and morbidity, lapse and policyholder behavior and expense experience, offset by investing gains and positive credit experience.

Moving to Slide 18. We provide details on our sources of earnings presentation. Expected profit of $578 million increased by $111 million from a year ago. The year-over-year increase is largely attributable to higher income from assets under management at MFS, business growth in Canada, the U.S. and in Asia and favorable currency impacts. New business strain was $37 million, representing an improvement over the $46 million reported in the first quarter of 2013. This was mostly due to reductions at SLF U.S., across both the Group Benefits and international businesses as well as lower strain in Asia. We continue to see our normal run rate of strain going forward in the range of $20 million to $30 million per quarter with some seasonality to be expected.

The experienced losses of $46 million reflect the impact of market factors and other notable items described on the previous slide. Assumption changes amounted to $56 million before taxes, primarily from reinvestment assumption changes and modeling improvements. Earnings on surplus of $77 million were higher than the first quarter of 2013 and benefited from higher investment income and lower financing costs. Income taxes at $131 million are within our expected range for our effective tax rate of 18% to 22%. As noted in our last earnings call, we anticipate that the rate will continue at the higher end of this range in 2014.

Turning to Slide 19 and the results from our Canadian operations. SLF Canada reported earnings of $238 million, down 10% from the first quarter of 2013. Market-related impacts benefited earnings by $12 million, reflecting higher equity markets, offset partially by interest rate declines. Assumption changes had a positive impact of $16 million. Excluding these factors, underlying earnings were $210 million, up 1% from the prior year. Results also reflected investing gains, which were partially offset by negative morbidity experience in our Group Benefits long-term disability product line. Individual insurance sales were up 38% from last year, due mainly to strong demand for permanent life products in the third-party channel and from expanded distribution. Individual wealth sales increased 30%, reflecting a strong RRSP season and sales growth across all products. Group Benefits sales increased 19% due to higher activity in the large case market relative to a year ago. Group Retirement Services sales more than tripled, driven by strong defined contribution sales and retained business in the large case market.

Moving to Slide 20. Our U.S. business reported operating earnings of USD 70 million, up 8% from a year ago. Negative market-related impacts of $34 million, driven primarily by interest rates, were partially offset by a $19 million positive impact from assumption changes. Excluding these factors, underlying earnings were $85 million, up 35% from the prior year. Results also reflected gains on the sale of AFS assets and losses from mortality experience across Group Benefits and our closed life block. Total Group Benefits sales in the quarter increased 25% compared to a year ago. Within Group Benefits, voluntary benefit sales increased 73% compared to last year. Sales of international investment products declined 39%, reflecting market volatility, while sales of international life products increased 26%, driven by favorable positioning versus our competitors and by market growth.

Looking at the performance of MFS on Slide 21. Operating earnings were USD 133 million, up 33% from a year ago, driven largely by higher average net assets under management. Margins were very strong at 42%, up from 38% a year ago, due to higher average net assets. The total assets under management as of March 31 amounted to USD 421 billion compared to $413 billion at the end of 2013. The increase was primarily driven by gross sales of USD 22 billion and asset appreciation of $4 billion, partially offset by redemptions of $19 billion.

Turning next to Asia on Slide 22. Operating income was $32 million compared to income of $51 million a year ago. Market-related impacts reduced earnings by $6 million, driven by lower interest rates and partially offset by a positive equity market impact. Underlying earnings were $37 million, up 9% from the prior year quarter.

And turning to Slide 23. I would like to leave you with a few key messages for the quarter. First, Sun Life had a strong first quarter to start the year. We delivered good growth on the top line and achieved solid bottom line performance. We continued to take actions to efficiently manage our capital and our financial position is strong. And lastly, we continue to execute well on our strategy and on our 2015 objectives.

And with that, I will turn the call to Kevin Strain, who will discuss SLF Asia.

Kevin D. Strain

Thanks, Colm. Asia continues to grow profits towards achieving our $225 million Investor Day target. And for the quarter, expected profit was up 16% to $52 million and new business strain was down 24% to $16 million. Market impacts were less favorable with losses in the first quarter of this year of $6 million versus gain in the first quarter last year of $17 million. Underlying net income in the first quarter was $37 million. Included in our underlying earnings were net AFS losses of $7 million. Adjusted for this write-down, earnings for the quarter would have been $44 million.

Sales were a mixture of positive and negative for the quarter with Hong Kong and Indonesia ahead of last year and the Philippines, India and China behind last year. Hong Kong was up 13% in local currency for the quarter, led by higher agency sales. Hong Kong agency exceeded 1,400 agents, the highest number of agents since 2006. Indonesia was off to a strong start, finishing the quarter with over 7,500 agents, the highest number of agents we've ever had in Indonesia. And sales were up 36% in local currency led by agency and telemarketing. Philippines sales were down 18% in local currency after significant growth in 2012 and 2013, driven by a volatile equity market. The management team in the Philippines is confident in their ability to turn the sales growth positive again for the year. India continues to adjust to the recent regulatory changes to product which began in October 2013. And China continues to shift towards a more profitable mix of business, purposely slowing down sales of single-pay wealth management products. Malaysia and Vietnam were both off to a good start.

Hong Kong, Philippines, Indonesia and Malaysia have started implementing their health and accident plans, increasing rider attachment rates and developing new products. Health and accident sales were up almost 50% in the quarter. Wealth sales for the region were down from $2 billion last year to $1.3 billion this year. This reflects market uncertainty in the Philippines and exceptionally strong MPF sales in the first quarter of 2013 due to the introduction of the Employee Choice Arrangement plan.

Now I want to highlight the longer trend for top and bottom line performance for Asia. In the following slides, we've compared the 2009 sales and earnings to 2013. Turning to Slide 25. You can see the strong growth in 2013. In fact, 2013 was a record year for sales in Asia. At the same time, you can see the drop in sales from India and China between 2009 and 2013. India makes up the vast majority of the decline in sales. And this decline was primarily due to the changing regulatory environment, which impacted the entire industry. In China, sales grew until 2012 as the business focused on growth and scale. Starting in 2012, the company focused on profitable growth, slowing the rate of sales.

Turning to Slide 26. You see the balancing of the pie across the geographies since 2009 as well as our commitment to a multichannel distribution strategy. In the Philippines, the top line has grown at a compound annual growth rate of 40% from 2009 to 2013 with growth in both the agency and the bancassurance channel. In 2009, the Philippines had 2,500 agents, and in 2013, grew to over 6,000 agents. Bancassurance was added in 2011 with the acquisition of 49% of Grepalife and the establishment of our bancassurance distribution with RCBC Bank. Hong Kong also began to accelerate this growth in 2013 with higher agency and broker sales. Last year's acquisition in Malaysia and the establishment of our business in Vietnam are starting to have an impact on top line as well. Indonesia has grown both agency and bancassurance.

Building on the recent success in Indonesia, we announced last week a significant expansion in our agency force over the next 3 years. This investment will be aimed at creating the most respected agents in the country as well as building out our Shariah capabilities with investment in people, technology and brand. The target is to double the size of the agency to 15,000 agents over the next 3 years, and at the same time, double the productivity of the agents. With strong execution, this investment can make us a top 5 player in agency for Indonesia.

Turning to earnings on Slide 27. You can see the positive trend in earnings since 2009. Growth over this period, 2009 to 2013, has a CAGR of 18%. On Slide 28, you can see the earnings growth for this period has been led by growth in expected profit and surplus earnings and reductions in new business strain.

Fundamentally, the business across Asia generate strong VNB, which means that as we continue to grow our top line, we will see the bottom line grow. There's new business strain in the business, but new sales become profitable in the second year. Our focus is therefore finding ways to grow our distribution while holding expenses. The elimination of expense gaps from investments in the business and distribution will pay dividends and earnings with this growth. Our Asia strategy is advancing well with extensions into health and accident, our new agency strategy in Indonesia, the addition of Malaysia and Vietnam.

And with that, I'll turn the call back to Phil.

Philip G. Malek

Thanks, Kevin. We'd like to ensure that all our participants have an opportunity to ask questions today. [Operator Instructions] With that, I'll now ask Melissa to please poll the participants for their questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Peter Routledge with National Bank Financial.

Peter D. Routledge - National Bank Financial, Inc., Research Division

Just I'll start with a quick one. Big drop in the contribution from new business in Canada, I wonder if you could just tell us why you had that big a drop.

Kevin Patrick Dougherty

Sure, Peter. It's Kevin Dougherty speaking. So as you noted, lower-than-normal new business gains in Canada this quarter, driven mostly by product mix, there's some seasonality, and in particular, lower Defined Benefit Solutions sales, which tend to be lumpy from quarter-to-quarter. We have a very, very big pipeline in the DB Solutions business going forward and expect that, over the course of the year, you will see gains return to more normalized levels.

Peter D. Routledge - National Bank Financial, Inc., Research Division

Okay. And then maybe a broader question for Dean. On Page 12 and 13, you've given us a picture of your wealth management business. It's broad numbers because I'm sure you don't want to disclose the precise numbers. What percent of Sun Life's earnings comes from the wealth management businesses on Page 12? And then 3 or 5 years from today, what would you like that percentage to be?

Dean A. Connor

Well, Peter, thanks for the question. And I'm sure it's triggered in part by noting that the share of VNB that comes from the wealth businesses is in the mid-50s. And right now, the share of net income that comes from the wealth businesses is in the mid-40s. And so -- and part of that reflects the investments we're making in Sun Life Global Investments and building out Sun Life Investment Management and other parts of the wealth business. But where will it be over time? It has to catch up with VNB at some point, as a starter. But the one thing I would -- so we expect it to be larger. And I won't actually put a pin in it and specify a number. The one thing I will say is that the sort of the foundation of our 4-pillar strategy, which is around a balanced and diversified business model, will continue to be an important part of the mix. So you should expect to see wealth playing a larger part, but it won't be the only part of the company.

Operator

Your next question comes from the line of John Aiken with Barclays Capital.

John Aiken - Barclays Capital, Research Division

Kevin, a quick question for you. In your commentary, you talked about new business strain within your segment and talking about how the sales do generate new business strain. We've seen a market decline from 2009 to 2013. Based on your commentary, can we assume that we've essentially flattened out and new business strain is probably going to uptick from these levels as you increase sales going forward?

Kevin D. Strain

Yes. The biggest impact in the shift between last year and this year was Malaysia. So the addition of Malaysia had a big impact. Overall, as we continued to build the scale of the business, it should have a positive impact on the new business strain, but that will take some time as we build it out. So the single biggest impact between last year and this year was Malaysia.

John Aiken - Barclays Capital, Research Division

And then Kevin, if I can just continue to pick on you. Bancassurance within the region, you've been successful in rolling that out. But the -- can you discuss the economics between bancassurance and the agency force and how much you may want to increase going forward your level of bancassurance business coming in through the channels?

Kevin D. Strain

Yes. So we strongly believe in a multichannel distribution model. So we have agency in all the countries except for one and bancassurance in all the countries except for one, building out telemarketing and building out group. So we believe you have to be good at all of them. Bancassurance is very important for scale in many of the markets and, of course, is our primary distribution model in Malaysia. The profitability of bancassurance is in line with the profitability of agency. And so we don't see a big difference between the different distribution channels. So our goal would be to continue to grow both at the same time and finding ways to do that. We have a great partnership with CIMB Bank in Malaysia and CIMB Niaga in Indonesia and strong relationship, of course, with Everbright Bank in China. So those would be some of the sort of key bancassurance. We also have bancassurance relationships in -- RCBC, of course, in the Philippines as well. So we've got some strong bank partners. We want to continue to see that grow. The structure where we've built them with a joint venture with a bank is actually quite effective because it keeps the bank interested in the result of the organization, keeps them interested in growth and growing profitably. And so we found that to be a good model. And it's a model that we've run in all 4 of those locations with RCBC, Everbright, CIMB Niaga and CIMB. So we like the bancassurance business. We like it in the structure that we've put it in and we want to continue to see it grow.

Operator

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

Robert Sedran - CIBC World Markets Inc., Research Division

I'd like to better understand the sequential decline at MFS in terms of the earnings. And I gather -- and maybe I should have asked this question last quarter, but I didn't realize that the comp item in Q4 was quite as large as it appears to have been, so was it indeed a comp reversal, like an accrual reversal? And I can't imagine MFS could have had a better year last year than it actually had. So what would have led to the reversal of a comp accrual in Q4 of last year? And is this kind of something that happens annually.

Robert James Manning

Robert, it's Rob Manning. It was basically increasing bonus deferrals for our investment teams. And so we had done it probably 5 or 6 years ago. And we decided to increase that deferral from a retention point of view. And we benchmark how we pay our people and what percentage of the pay should be deferred versus cash. And so it was just truing up and working with the Management Resources Committee on the Sun Life board to appropriately pay people and benchmark them versus the industry. So I wouldn't expect a comp reversal like this in the next year or 2 certainly on the investment side of the firm.

Robert Sedran - CIBC World Markets Inc., Research Division

So Rob, that comp is due to the employees, it's just not due last year. It will be coming in the coming years, I guess.

Robert James Manning

Yes. It vests over time. So basically, what happens is you get the benefit in 1 year or 1 quarter, and then it smooths out as time goes by because you have old deferrals that are vesting and it catches up.

Robert Sedran - CIBC World Markets Inc., Research Division

Okay. And just a second one related to the upcoming changes to the actuarial standards on reinvestment risk. I guess, the -- you have noted in your materials that the interest rate sensitivity is going to go up as a result of these changes. And I know you don't quantify it yet. But my question is, is this the kind of thing that will require remedial action to return those sensitivities to where they are today? And might that carry a cost to earnings power if you were to do that?

Colm Joseph Freyne

Yes. It's Colm here, Rob. So we don't see the underlying sensitivity as having changed. It's more of how we portray the sensitivity and it depends, of course, on the modeling required under the new version of the standards that we'll be implementing. So it's not the type of action that would require us to take remedial action. We're more focused on the economics here. And we feel we have a good grasp on the underlying nature of the sensitivities today, regardless of how they're portrayed in the reporting. But of course, we will take a look at it as we finalize the standard. But at this stage, we're not signaling that we'll need to take further remedial action.

Robert Sedran - CIBC World Markets Inc., Research Division

So it might create a little bit more volatility in the headline numbers. But you're comfortable with the risk profile of the firm, so you aren't going to anything about that. Is that the right way to characterize it?

Colm Joseph Freyne

That's correct.

Operator

Your next question comes from the line of Humphrey Lee with UBS.

Humphrey Lee - UBS Investment Bank, Research Division

A question for Rob. For MFS, the managed fund net outflows of $1.5 billion was a little bit worse than expected. I understand the institutional flows can be lumpy. But I was just wondering if you can provide some color on the quarter's outflow. And also can you comment on the institutional pipeline?

Robert James Manning

Yes, I think I heard most of that question. It was a little bit muffled. But if the answer was in our managed fund sales, what's going on there, which is basically our global institutional book, I think as I've mentioned, we have restricted the capacity in many of the strategies that we have had success selling over the last few years. So that business is retooling to sell a new suite of products that we do have capacity in, like our quantitative business as well as some domestic and regional equity strategies. So that business this calendar year will be in transition, which is why both the gross and the net sales have sequentially declined. We're very fortunate that our retail business is offsetting that, which is what we had hoped and expected. But our institutional book of business going forward is going to grow at a slower rate certainly than it has in the past, but we also expect it to grow slower than our retail book.

Humphrey Lee - UBS Investment Bank, Research Division

So we should expect further pressure for at least a few more quarters as you kind of retool the capacity?

Robert James Manning

Yes, I would expect that business to not have any surprises, either positively or negative, for this calendar year.

Humphrey Lee - UBS Investment Bank, Research Division

Okay. And then, a question for Dean. So now you have achieved your 2015 leverage ratio targets, so was that -- how would you think about any incremental capital management going forward? Does it change kind of on your list of priorities?

Dean A. Connor

Well, thanks for the question, Humphrey. The -- I'll just remind you that the sale of our U.S. Annuity business closed just 9 months ago. It seems like longer, but it's just 9 months ago. And we have been actively deploying capital since then in a pretty methodical way. And just to remind you that we restructured our U.S. reinsurance arrangements in the fourth quarter and applied $250 million of capital to that. We redeemed $500 million of debt at the end of the first quarter. And as you note, our leverage is in good shape. We launched Sun Life Investment Management and put some $250 million of cash into that to support the ceding of new products for that business. So we've actually -- we've been actively deploying capital. We see many opportunities to continue to invest capital to drive organic growth. Everywhere we look, we see growth opportunities. And if you listen to or read the remarks from today's Annual General Meeting, you'll see a good list of those or a good reminder of those growth engines. We continue to look at acquisition opportunities and as I've said before, we continue to consider potential future share buybacks. So all of those are in the mix. And we'll continue to work on this in a very sort of planful and methodical way.

Operator

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

Tom MacKinnon - BMO Capital Markets Canada

Maybe a question, then maybe a comment, if you'll take this one and I have a follow-up. The last couple of quarters, we've seen some kind of unfavorable policyholder experience losses. How is this quarter unlike the last quarter we had where we had sizable policyholder experienced losses? And what can you do to help us understand what's driving this, and do you feel it's a trend?

Dean A. Connor

Yes, so obviously, we're taking a very close look at our policyholder experience. And we haven't discerned any fundamental underlying trend that would cause Larry, our chief Actuary, to want to take any action at this point, but we are taking a look at it. If you look at the lapse experience this quarter, for example, $19 million, it was spread across a number of businesses. And we took a close look at that. Obviously, against experiences we've seen previously to see if there was continuing trend. And -- but at this stage, I think we'd feel that it's just under watch, but no particular issue to flag for you, Tom.

Dean A. Connor

I might ask Larry to just add a few words.

Larry Richard Madge

Sure. So I guess, if you look at the experience over the last couple of quarters since we last made assumption changes in 2013, you saw that the Q4 experience that was from segregated funds in a particular item that we've talked about last -- at the last call. And then, this time around, we saw experience, again, across different businesses. We saw low universal life lapses in both Canada and the U.S. And we also saw some high annuitization rates in the U.K. So it seems to be coming from a variety of different sources, all small. So we've got our eye on it. But as Colm said, at this point, no particular trends.

Colm Joseph Freyne

I would just add, on the other item, is the morbidity experience in Canada that was negative. And that primarily occurred at the early part of the quarter. And I think Kevin might want to add a few remarks around that. But again, we don't see that as necessarily persistent. We see some improvement.

Kevin D. Strain

Sure. I can give a little more color on that, Tom. Morbidity results, obviously, were a little bit lower in Canada than expected. As we look at it, we don't see it as a systemic issue or a secular trend. And it's really within the bounds of normal fluctuations. I think you've seen experience go the other way in previous quarters. So we expect it to normalize through the year.

Tom MacKinnon - BMO Capital Markets Canada

And with respect to morbidity in the U.S., if it was in the voluntary space or the EBG, what's the -- what will be driving that and how would you help us -- feeling that as you really grow the top line here, you're not being aggressive?

Colm Joseph Freyne

Yes, so maybe I can just make a comment there, overall. Mortality, morbidity overall was negative $22 million. The -- but $15 million of that was in respect of Canada. The U.S. experience was more on the mortality side and it was spread across a couple of businesses, but perhaps Dan might want to comment a bit more on that?

Daniel R. Fishbein

This is Dan Fishbein. Overall, we had some unfavorable mortality experience in the in-force Life business, as well as in group life business, some morbidity, unfavorable experience and disability. But that was largely offset by favorable experience in the stop-loss business during the quarter.

Tom MacKinnon - BMO Capital Markets Canada

Okay. And then, the follow-up is really just with respect to expense growth in the, overall, in the company. It was up maybe 13%, excluding MFS, and maybe some of that might have been currency related. But still then, up solidly double-digit, excluding the impact of currency. Dean, is there any need to have a closer look at the expense growth within the organization? Is there an objective to rein this? And what's been driving it to probably grow almost in par with earnings growth, where it's -- if the earnings growth, excluding MFS, has not been growing this fast, so there's like a sort of, to some extent, a little bit of declining operational leverage here. So if you can help us understand what you have to do in order to improve that.

Dean A. Connor

Sure, Tom. The -- you're right. Your instincts are right to parse it among the different components, and Colm will do that in a second and give you the breakdown. And when you split out currency and when you look at investments we're making in growth. And then, what you're left with is residual sort of inflation-linked growth in expenses. The 2 areas -- I'm sorry, there's another category in there, which are volume-related. So some of the expense growth is volume-related, that's not in commissions, but is in controllable expenses. And expenses that relates to wholesaler bonuses and fees for some advisor fees for assets under management. That all comes through that expense line. So some of that is good expense growth, and we get -- we expect to see more of that as we grow the business. Some of it is investment, importantly, investment in growth, investment in businesses. You've heard us talking about building out distribution in Asia, we've been building out distribution in the U.S., we've been building wealth distribution in Canada and building our Defined Benefit Solutions business. So these things all do take investments. And we're monitoring those investments and the payback on those very tightly. The other thing I'd say is we have a significant program underway in the company called The Brighter Way, which is a LEAN SixSigma program, which is all about helping to do it -- do the work better and cheaper and faster for our customers and segregating, identifying the gains that come from that and for the most part, reinvesting those gains in growth. And so that's very much tracked carefully and closely and it's part of our operating system. But Colm, you can comment further.

Colm Joseph Freyne

Yes, Tom, just a quick couple of highlights. So you're absolutely right, year-over-year, x MFS, x currency, the growth is about $70 million or 11.5%. And the volume type of growth that Dean referred to would account for $31 million or 5% of that. And growth initiatives would account for $21 million or 3%. And inflation would account for $15 million or 2.5%, so that pretty well accounts for the growth x currency, x MFS. And the growth initiatives, as Dean referred to them, include distribution in Canada, technology developments, Sun Life Global Investment buildouts, Sun Life Investment Management buildout and a bit of growth in Asia. So looking at it year-over-year, substantial, but again, very tightly linked to the initiatives that we have that are driving top line and are driving profitable sales.

Tom MacKinnon - BMO Capital Markets Canada

Okay. And then, just a follow-up with that. You took another expense experience loss. And in which one of those buckets would that have been related to? And how this -- what do we -- what should we be seeing for that going forward?

Colm Joseph Freyne

Yes, there was an expense experience loss for the quarter, and a portion of that related to an expense accrual. It was recorded in the first quarter, around $10 million, which really relates to the prior year, but for a variety of reasons. The decision around that doesn't get finalized until the first quarter, and that's a large portion of the piece that's coming through the expense experience in the first quarter. I think the expense experience, overall, for the quarter was $14 million negative, so that would account for a good portion of that and a piece relates to the buildout of distribution, et cetera, in Canada. But in terms of what are the impacts and what should we think about that for Q3 when we do our annual assumption changes, I'll ask Larry to say a few words.

Larry Richard Madge

Sure. So the expense experience loss, as Colm said, was probably a one-time item, so that piece, we wouldn't see going forward. And the remainder was related to the investment in growth in individual wealth in Canada. And those are 2 items that don't impact the maintenance unit costs, which is what we reserved for in the actuarial liabilities. So they won't really impact our view of future maintenance costs, and to the extent we continue throughout the remainder of 2014 to invest in growth, there could be a little bit of a continued expense loss there, but it would be something that we wouldn't be intending to reserve for in the actuarial liabilities.

Operator

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

Mario Mendonca - TD Securities Equity Research

The direction Tom was going was the same sort of thing I was thinking about, and if I could just take it a little further. The -- are you suggesting that because the investment spending isn't maintenance, it doesn't -- it's not booked on the reserve. So any kind of investment spending going forward would always appear than as an experience loss. Is that a fair characterization?

Dean A. Connor

Well, there can be a couple of different places that we could put it. So if we saw it as continuing on for a long period of time, I think we would need to consider putting it up in expected profit. But to the extent that we see it as a temporary phenomenon that's going to run down, we are okay with having that in the experience loss category.

Mario Mendonca - TD Securities Equity Research

So can I -- sorry, but by virtue of being then in experience loss category, can we assume that the expense experience losses would end at the end of 2014?

Dean A. Connor

At this point, we've looked as far as the end of 2014. As we do our planning, we'll review that assumption again and decide both in terms of how much investment continues, but also where it would be appropriately categorized.

Colm Joseph Freyne

And Mario, it's Colm here, maybe I could just add a point. We have invested quite significantly in quite a variety of initiatives as we've embarked on the 4-pillar strategy that we laid out, March, Investor Day 2012. So we don't expect that piece of spend to continue at the level that we've seen. And as Dean mentioned, we have initiatives underway that are focused on customer focus, productivity, The Brighter Way initiative that he mentioned. So I think what we're going through is a period of repositioning the enterprise as we dispose of certain businesses, reemphasize other business, so we feel that we have a pretty good handle on how we're shifting and moving here and we'll obviously keep you informed as to how that's playing out.

Mario Mendonca - TD Securities Equity Research

Yet the challenges, just trying to assess what real earnings power is, and it kind of depends on how long these things persist. If I could just get one other thing in. The Q4 seemed to have an especially large expense experience loss. What is it about the Q4s that would cause those expense experience losses to be so significant?

Dean A. Connor

Well, testing my memory a little bit here with Q4. But what does tend to happen is if you have a particularly strong year, as we did last year, that there are certain incentive comp accruals that will be firmed up in the fourth quarter because they depend on the full year performance. So that would be one factor. And I think there's also a bit of an inevitable drift in expenses toward the end of the year, where projects that might be underway get a burst of energy to try to conclude them before the end of the year, and so there's a bit of that as well. So I think it's a feature I've seen with other companies, and I don't think we're unique in that regard.

Operator

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

Stephen Theriault - BofA Merrill Lynch, Research Division

Maybe just turning back -- going back to Rob. Rob, are you in a bit of a better position now? You said expenses will be higher in the second half of this year. Could you give us now maybe a better sense of the magnitude? And just to be clear, should we think of this as a temporary increase in half 2? Or is the run rate spend affected longer term? And I ask that because I think some of this is compliance-related, and, I wonder if it might be a little bit sticky.

Robert James Manning

Yes, good question. Al -- the one caveat I will say is this is all dependent upon what happens to the market. So let's just assume our asset levels stay where they are and things pace along in a normal fashion, you should expect to see our margin, which is around 42%, slip down to 40%. So there's going to be a 200 basis point impact in the second half of the year on spend, and that spend is multiyear. So a lot of the things that we're spending on, particularly branding, software and upgrading our systems and our client-driven operations that we're building here at the firm will have not only permanent people attached to them, but ongoing maintenance and costs associated with running those. And we think that running a 40% pretax margin is really the sweet spot for our firm, given where we are and the future growth opportunities of the company. It's a balancing act where you want to make sure that the margins are high enough so that we're generating good returns and we can pay all of our people and keep the talents at the company. But you don't want the margins, obviously, to go too high because that means you're not reinvesting in the business and investing in the infrastructure around the company.

Stephen Theriault - BofA Merrill Lynch, Research Division

Okay, that's helpful. I was hoping you would put it in the context of margins, perfect. And then just another quick follow-up on MFS, and maybe this is for Colm. I noticed the tax rate, I think, was quite a bit lower, like in the range of 500 to 700 basis points lower. And I know segmented tax rates are a little tricky, but that have been quite stable. So is there any tax gains may be coming through that line this quarter that we haven't flagged?

Colm Joseph Freyne

No. The tax rate is at the total company level, and that is the best way to think of it is remarkably stable. On an underlying basis, our effective tax rate was 22%. And we've signaled that, that is the range you should expect it to be in and at top end of our previously disclosed range. And I think with the mix of business, with the strong performance of MFS, and the U.S. of course being a higher tax jurisdiction, we do expect it to continue at that higher end of the range.

Stephen Theriault - BofA Merrill Lynch, Research Division

And then, maybe just lastly, Colm, while I have you. The growth in the U.S. on underlying earnings are very strong, even in U.S. dollar terms, up over 30%. Could you give me a sense how that growth splits versus employee benefits, international and the in-force runoff?

Colm Joseph Freyne

Yes, I think you're right to call out the strong growth on the underlying. And you know at $85 million, up 35% from a year ago. We would consider that to be a little bit bonused by some factors. I mean, the underlying earnings is a great construct, but it doesn't adjust for all notable items. And when you think of the available-for-sale security gains at the total company level, they're managed to a certain level. They can appear in different segments, and that can have a bit of an impact. So I think the underlying at $85 million is running a little bit hot if you adjust for some of those items. When you think about where that was, I think the in-force management was particularly strong in the quarter. And I think you see the segmented, the disclosure we provide at the business unit level. So I think we feel pretty good about the trajectory on the international business, both life and investment products. And I don't really have any additional color other than that.

Operator

Your next question comes from the line of Joanne Smith with Scotia Capital.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Most of my questions have been asked and answered, but I do have a couple of follow-ups. The first one was you said that there was a bit of a mortality issue in the U.S. And as we've seen that it's been across the industry this quarter, was it a frequency issue or was it a severity issue?

Dean A. Connor

The mortality issues are more of a frequency issue than a severity issue this quarter.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

Okay. And then, just for Kevin, just on the India distribution system. I was wondering, when I spoke to you last, we were talking about the fact that you were trying to change some of the characteristics of the distribution. And I was wondering where you were in that endeavor. And just give us a little bit more color on what's going on in India and when you expect things to really improve?

Kevin D. Strain

Yes. India underwent quite a bit of regulatory change in the last year. In fact, every product had to be redone by regulatory requirements. Ours were done at the end of October. A lot of the industry was done at the end of December. So first quarter, the whole industry was adjusting to the new product suite. And we started to see some better results in March. It is a bit seasonal there. March is their year end, and so we often get a sort of a tick-up in March. But we did start to see some better things happening. We put a new CEO in place about 4 months ago, and a very distribution-focused guy, a very agency distribution-focused guy, and has the same attitudes towards distribution that we do of improving the quality of our agents and improving the training, improving the activity ratios. And it gives us a fair bit of confidence that, going forward, we'll start to see this get a little better as the agents get used to the new products as he rolls out some changes inside of the distribution system, that should really help. We did lose Citibank as a partner on the bancassurance side. So that will have an impact probably midyear. As you know, AIA won the Citibank business in the region and Citibank was one of our key bancassurance partners in India. So that will work a little bit against us as we see the agency hopefully start to come back up next year.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

And what about initiatives to improve agent productivity?

Kevin D. Strain

They're undertaking a number of initiatives on the productivity and the quality side, including better training, some better tools. They just put out a new tool that does a point-of-sale system on a mobile app that has combination products, to give you an example. So there's a number of examples that give me confidence on the agency side as they adjust to the new products. It should be positive.

Dean A. Connor

Joanne, it's Dean. Just one other thing around bancassurance rules in India. The regulator, or the insurance regulator has been discussing changing the bancassurance distribution rules to require banks to use multiple insurance company partners, which I think, net-net, would benefit our business. And it's not, obviously, as with many things in India, it's by no means certain and it will take time as this works its way through. But if that does come to bear or come to pass, that would be a positive development for the business.

Joanne A. Smith - Scotiabank Global Banking and Markets, Research Division

And that just reminded me, I have one follow-up question, I'm sorry. Just on the bancassurance deal that you're doing in Asia. And I know that there's going to be a difference between those that are exclusive and those that are just getting on the shelf. What is the break -- the average breakeven period for one of those deals?

Kevin D. Strain

It's -- well, I can give you Malaysia as a perfect example because we're 12 months in and we're making profit in Malaysia. And that's not what all of the deals are, and there's some plus or minuses. Some of them can take a few years to become profitable. But at this point in time, Malaysia is -- it's off to a good start and we like the way it's developing. So that gives you an example of one that's probably come on the quick side. And the others can -- it obviously depends on the deal. It can take 2 to 3 years, to start to turn a profit if you're sort of pushing it out.

Operator

Your next question comes from the line of Darko Mihelic with RBC Capital Markets.

Darko Mihelic - RBC Capital Markets, LLC, Research Division

I thought I'd also continue to on the line of the discussion with Kevin Strain on Asia. I'm interested in 2 things that you said during your remarks. The first is you're making progress towards $225 million target. And at the end, you talked about doubling your agency force, doubling the efficiency. Wondering how the 2 of those can actually happen. And maybe -- so maybe perhaps you can provide a little more color on what you intend to do -- just more broadly speaking, with the entire agency force in Asia and how you go about doubling the size and doubling the efficiency, which presumably takes cost and somehow get close to your $225 million target.

Kevin Patrick Dougherty

So to be clear, the double the size and the double the efficiency was specifically talking about Indonesia, where we've undertaken a strategic initiative, where over the next 3 years, we will be investing in Indonesia and trying to go from 7,500 agents that we have today to 15,000 and doubling the activity ratio and doubling the productivity of those agents. And that's an investment in branding. It's an investment in people. It's an investment in product. It's an investment in technology. But we made the investment with the awareness that we still had to achieve our $225 million. So that was top of our mind and we knew how much investment we could make and still have confidence in achieving the $225 million. So they're separate things. One of the reasons I called out the underlying earnings is to give you a sense of where we're at on that perspective. So when you hear me talk about the $37 million underlying net income and the net AFS losses of $7 million, puts us at $44 million. So that gives you a perspective on the quarter.

Darko Mihelic - RBC Capital Markets, LLC, Research Division

Okay, that's very -- I missed the Indonesia part, so that's very explanatory. And maybe, perhaps, then on the same line, is there any other work that you need to do with any other sales forces in the region?

Kevin Patrick Dougherty

So the -- by and large, the sales forces are doing well. So in Indonesia, the agency force -- I told you, the total for Indonesia on a local currency basis was 36%. The agency force was up close to 70%. And so doing quite well inside of that. The agency force in Hong Kong was up 28% in local currency for the quarter. Only in the Philippines was it down, and it was only down 10%, and it was a bit to do with the volatility of the equity markets there. And that team has been growing like crazy the last 2 years. And so they have full confidence that they'll see that turn around. So I really like what we're seeing in Hong Kong, Indonesia and in the Philippines on the agency side. We're building out a nice agency force in Vietnam. And as we were speaking earlier with Joanne, we're seeing some good momentum and some good initiatives in India, which should really help on agency. So I'm quite bullish on what we're seeing on agency. It's a distribution system that we understand. We know how to make it work and we're seeing some good progress there. We are taking the attitude of having the most respected agents in each of the countries. And so we're focusing on the quality of the agents as much as the number of agents. And I think that defines the type of experience our customers get and the type of agents we want. And that message is resonating with agents in each of the countries, and we're attracting people to join us, as you see with the growth in the number of agents at Hong Kong, number of agents in Indonesia and the number of agents in the Philippines.

Operator

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

Mario Mendonca - TD Securities Equity Research

Colm, quickly on the impact of investing activities on insurance. Or maybe this is for Peacher as well. The number, $36 million in the quarter, and the numbers have been high in some quarters. Have you ever offered us a sort of a bogey there, a threshold, over which you'd consider that to be a little bit on the high side? Or it's just the company not looking at it that way?

Colm Joseph Freyne

Well, we do look at it that way, Mario. And we have said that we think of it as being $10 million to $20 million per quarter, but we recognize that it's better to look at that over the course of the year, as opposed to being too caught up with it in any given quarter. So this quarter was a little on the higher side and Steve might want to comment on some the reasons why we availed of opportunities to drive that. But I think we'd still stay with sort of a $10 million to $20 million on a quarterly basis, recognizing it's going to be a bit lumpy.

Stephen C. Peacher

Mario, I would just reiterate that we have had a consistency there. It does fluctuate quarter-to-quarter based on relative value trading opportunities that we see in the public markets and opportunities we see in the private markets. So it will bounce around a bit. I don't think there's anything too unusual this quarter. And I do expect that we can generate positive numbers in the future. I think the range that Colm gives is obviously the range we feel comfortable with, and it will be -- it will move around that based on opportunities.

Mario Mendonca - TD Securities Equity Research

And Colm, maybe just take a stab at one other thing on the tax rate. The -- x MFS tax rate, around 8%, is it possible to discuss that number? Or is it just too integrated with the consolidated tax return that you can't really...

Colm Joseph Freyne

Yes, it's absolutely integrated in the U.S. We file a consolidated tax return, and it's been done that way for many years and will continue to be done that way. So it really is very much part of our overall tax profile that we do it like that.

Mario Mendonca - TD Securities Equity Research

Do you see any tax risk here? Like the Canadian banks are facing a little bit from the last budget. Does your tax department sort of see any risks here on that tax rate?

Colm Joseph Freyne

Yes, I think our tax department is paid to keep an eye for all sorts of risks, tax risks, budgetry challenges, et cetera, but we don't see anything in particular that we would call out. We think we have a -- we've a got a fairly clear explanation of our tax profile and I think it's been fairly consistent.

Operator

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

Tom MacKinnon - BMO Capital Markets Canada

Yes. Just following up on the impact of the investment activity on insurance contract liabilities. When you combine that with credit, $52 million in the quarter. Sort of looking at a trend if that thing, over the last, I don't know, 8 quarters, it certainly averaged about $30 million, $35 million, so higher than the $10 million to $20 million bogey you've been talking about. And obviously, those boys up on Bay Street have included a portion of this stuff in there, what they deem to be core earnings. Presumably, you had some discussion as to whether some portion of this, which you've given as $10 million to $20 million as a bogey, could be sustainable. Why not have a included that in your underlying earnings?

Colm Joseph Freyne

Well, Tom, I mean, I think we've recognized that there will be a number of notable items that we'll want to call out every quarter and we'll continue to do that. The other example is new business strain. We've said that we might expect that to be in that $20 million to $30 million. But this quarter, it came in at a higher level. So it's inevitable, I think, that there's going to be some pluses and minuses. And underlying earnings, I think, is definitely a good advance over what we were reporting previously to give a lens into the business. But we do feel we'll need to continue to give you some supplemental. And we wouldn't be as comfortable to say, "Here's the bogey for investing gains," because in some quarters it'll be on the low side, others, on the higher side. It's not really how we think about it.

Operator

There are no further questions in queue at this time. I'll turn the call back over to Mr. Phil Malek.

Philip G. Malek

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

Operator

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

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