Gregory Dilworth - Vice-President of IR Dean Connor - President and Chief Executive Officer Kevin Strain - Executive Vice President and Chief Financial Officer Daniel Fishbein - President, Sun Life Financial US Michael Roberge - Chairman, MFS Mclean Budden Limited, Co-CEO of MFS Investment Management Claude Accum - President, Sun Life Financial Asia Kevin Dougherty - President, Sun Life Financial Canada.

Gabriel Dechaine - National Bank Financial Meny Grauman - Cormark Securities Stephen Theriault - Eight Capital Humphrey Lee - Dowling & Partners Sumit Malhotra - Scotia Capital Doug Young - Desjardin Capital Markets Nick Stogdill - Credit Suisse Tom MacKinnon - BMO Capital Paul Holden - CIBC.

Good morning. My name is Christa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sun Life Financial Q2 2017 Financial Results Conference Call. [Operator Instructions] Thank you. Mr. Greg Dilworth, Vice President of Investor Relations, you may begin your conference, sir..

Thank you, Christa, and good morning, everyone. Welcome to Sun Life Financial's earnings conference call for the second quarter of 2017. Our earnings release and the slides for today's call are available on the Investor Relations section of our website at sunlife.com.

We will begin today's presentation with an overview of our second quarter results by Dean Connor, President and Chief Executive Officer of Sun Life Financial. Following Dean's remarks, Kevin Strain, Executive Vice President and Chief Financial Officer, will present the second quarter financial results.

After the prepared remarks, we will move to the question-and-answer portion of the call. Other members of management will also be available to answer your question today.

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 slides, forward-looking statements may be rendered inaccurate by subsequent events. And with that, I'll now turn things over to Dean..

Thanks, Greg, and good morning, everyone. Turning to Slide 4, the company reported underlying net income of $689 million or $1.12 a share, up 24% from the same period last year with an underlying return on equity of 13.7%.

For the first 6 months of 2017, underlying earnings are up 11% to $1.3 billion, and we generated an underlying ROE of 12.6%, within our target range of 12% to 14%. These results reflect strong underlying business growth and continued execution across our 4 pillars.

Today, we announced a share repurchase program of up to 11.5 million of our common shares. This program is indicative of the strength of our capital position and supports our focus on ROE improvement while retaining flexibility for future growth opportunities.

We continue to grow at a good clip with insurance and wealth sales up by 5% and 12%, respectively, over the second quarter of last year. Over the first 6 months, insurance sales grew by 30% and wealth sales were up 13%. Assets under management ended the quarter at $944 billion, up 9% from a year ago.

Sun Life Canada had a very strong quarter with underlying earnings up 33% over prior year from good - Group Benefits' claims experience, improving margins in GRS from management actions, strong Defined Benefit Solutions sales and pricing gains and growth and expected profit emerging from strong sales growth over the past number of years.

For the eighth year in a row, our Group Benefits business ranked #1 in premium revenue in the Fraser Group Universe Report. One reason we're #1 is our technology advantage. For example, last fall, we added a provider search capability to our mobile app so that Sun Life members can search for physiotherapists and other health professionals near them.

They can see ratings provided by other Sun Life members. They can book an appointment and so on. During the second quarter, we reached 1 million ratings, which is quite remarkable, given that we just launched it last fall. In Group Retirement Services, sales increased by more than 50%, partly due to the strength of Defined Benefit Solutions sales.

DBS had a big quarter that included the largest-ever single-day annuity purchase in the Canadian market at $495 million. Assets under management and administration in GRS are now over $93 billion.

In individual insurance, sales of our updated product suite were $100 million for the quarter, flat to prior year following a very strong Q1 sales result due in part to the recent tax changes for life insurance products. Individual wealth had a strong quarter with sales up 17% across fixed products, mutual funds and segregated funds.

In Sun Life Asset Management, we ended the quarter with $655 billion in assets under management. MFS had a good quarter with net income up 26% over prior year, assets under management up 9% over -- year-over-year to US$462 billion and a pretax operating margin at 36%.

Year-to-date, MFS net income is up 19% over prior year on market growth and consistently strong margins. Gross sales were US$20 billion, and net outflows of US$4 billion improved significantly from the prior 2 quarters as retail flows move back deposit of - on lower redemption rates. So we saw lower levels of institutional rebalancing.

MFS continues to generate strong investment returns for clients with 82%, 84% and 92% of MFS U.S. retail mutual fund assets ranked in the top half of their Lipper categories based on 3-, 5- and 10-year performance, respectively. At Sun Life Investment Management, investment performance continued to be strong across all the businesses.

Net sales in the quarter were $872 million, and net sales of $3 billion in the first 6 months of 2017 have more than tripled over the prior year. Assets under management of $56 billion are up 16% over the same period last year. Turning next to the U.S.

Underlying net income was up 25% over prior year, in part reflecting improved stop-loss claims experience and the results of our pricing increases coming through in life and disability. We achieved a significant milestone in the integration of last year's U.S.

group business acquisition, rolling out a combined portfolio of employee benefit products and services that represent the best offerings from both companies under the Sun Life brand. We're tracking well on all the integration metrics disclosed at the time we announced the acquisition.

Group sales were up 2% from the second quarter of last year while sales in our International business were largely consistent with the prior year. Moving to Asia. Sales of individual insurance products were up 2%, driven by growth in India and Indonesia that was partially offset by lower sales in the Philippines and Hong Kong.

In Malaysia, we announced the telco insurance partnership with U Mobile, one of the country's fastest-growing telecom companies with over 5 million customers. This will be the first time that Malaysians will be offered insurance via a telco service, allowing them to apply and manage their life insurance coverage entirely on their mobile devices.

This is just one of many examples across Asia and the company where we're innovating and using digital capability to do more for clients. Second quarter wealth sales in Asia increased by over 65% over the prior year to $2.9 billion, driven by strong mutual fund sales in India and growth in pension sales in Hong Kong.

Year-to-date, Asia wealth sales have grown 74% to $5.9 billion and this is an important driver of our Asian growth. So to wrap up, we delivered a strong quarter, and taking stock after 6 months, we're having a good year. Underlying earnings are up 11% to $1.3 billion. Insurance and wealth sales are up 30% and 13% over the prior year, respectively.

And underlying ROE is up to 12.6% with a very strong balance sheet and excess capital. I'm happy to see all 4 pillars contributing to these strong results while investing and innovating for the future.

Our businesses are pulling together to achieve our ambition of being one of the best insurance and asset management companies globally by doing an amazing job for our clients. We're making measurable progress on being easier to do business with, on being more proactive in personnel and by solving client problems faster.

We've just combined our total operations together at our new One York location in a collaborative and energetic space, strengthening our commitment to delivering on our purpose, which is helping our clients achieve lifetime financial security and live healthier lives.

So I'll now turn the call over to Kevin Strain, who'll take us through the financials..

Thank you, Dean, and good morning, everyone. Turning to Slide 6, we take a look at some of the financial results from the second quarter of 2017. Our reported net income for the quarter was $574 million, up from $480 million in the second quarter last year.

Underlying net income, which excludes the net impact of market factors and assumption changes, was $689 million. Our underlying return on equity was 13.7% for the quarter. Underlying results reflect strong business growth, gains from investing activities on insurance contract liability and favorable credit and morbidity experience.

Second quarter adjusted premiums and deposits were $41 billion, up 5% from the second quarter of 2016, and assets under management at the end of the quarter were $944 billion. We ended the quarter with a Minimum Continuing Capital and Surplus Requirement ratio for Sun Life Assurance Company of Canada of 229%.

The MCCSR ratio for Sun Life Financial Inc. was also strong at 248%. The higher ratio at the SLF level largely reflects the excess cash of $1.4 billion held by SLF Inc., and our leverage ratio of 22.5% remains below our long-term target.

And as Dean noted earlier, we announced a share repurchase program of up to 11.5 million shares, which is reflective of our strong capital and cash position, and we continue to have cash and capital available to support our growth strategies.

We're consuming to progress towards the implementation of the new Life Insurance Capital Adequacy Testing, LICAT, capital regime that will be effective on January 1, 2018.

Sun Life has been actively involved with OSFI and the industry in discussing and helping to shape the recent changes in the LICAT guideline, and we are well prepared to implement LICAT. Turning to Slide 7, we provide details of the underlying earnings by business group for the quarter.

In SLF Canada, underlying earnings of $266 million reflects strong new business gains, business growth and margin expansion in GRS and favorable morbidity experience in Group Benefits, driven by better LTD incidence rates.

At the same time, we continue to make significant investments in Canada, including investments in digital and data analytics to support our client-focused strategy and investments in our individual wealth business.

In SLF U.S., underlying earnings were up 25% from the second quarter of 2016 on strong gains from investing activity and favorable credit and mortality experience in In-force Management and in International. Morbidity experience in Group Benefits improved from the prior year, although - still, it's below our expectations.

We are working through our - a way through the stop-loss claims related to the 2016 benefits year. In SLF Asset Management, MFS had strong underlying earnings growth over the second quarter of 2016, driven by higher average net asset. The pretax operating profit margin was 36%, and net outflows were US$4 billion for the quarter.

At Sun Life Investment Management, we had net inflows of $0.9 billion and generated net income of $6 million. In Asia, underlying earnings were lower by $4 million over a very strong Q2 2016 as business growth and gains realized on the sale of AFS assets were offset by higher new business trade.

Turning to Slide 8, we provide details on our sources of earnings presentation. Expected profit of $718 million increased by $74 million from the same period last year with increases across all 4 pillars.

Excluding the impact of currency and the results of SLF Asset Management, expected profit was up 8%, reflecting strong business growth in Canada, the U.S. and in Asia. New business strain was $7 million for the quarter.

Lower levels of new business strain were driven primarily by pricing gains in SLF Canada from higher sale, including strong Defined Benefit Solution sales in the quarter. This was partially offset by lower pricing gains in International life in these SLF U.S. and lower sales in Hong Kong.

Experience losses of $80 million for the quarter primarily reflect the net unfavourable market impacts from changes in the interest rates and the shape of the yield curve. Last, policyholder behaviour and expenses also had an unfavourable impact.

We had favorable investing activity during the quarter and strong credit, mortality and morbidity experience. Assumption changes and management actions reduced pretax reported income by $114 million in the quarter and were largely reflected in our In-force Management and International businesses in the - in SLF U.S.

The net impacts were primarily related to certain reinsurance treaties and expected pricing gain on recapture of these treaties and the impact on actual liabilities from the resolution of tax matters in one of our U.S. subsidiaries. On an after tax basis, assumption changes and management actions, overall, increased reported net income by $11 million.

Looking ahead, we will complete our annual review of actuarial methods and assumption changes in the second half of 2017 with the majority of the changes being reflected in the third quarter.

We note that our review requires that we assess assumptions across a large number of products, businesses and geographies, and it's not possible to determine the overall impact of these reviews on a net income at this time.

We can tell you that the Actuarial Standards Board has provided an update on the promulgated ultimate reinvestment rate, the URR, indicating an expected decrease of 10 basis points. And as previously discussed, this is expected to have a negative $75 million impact on our earnings through ACMA in Q3.

Other, which amounted to $83 million in our source of earnings disclosure, includes pretax acquisitions, integration restructuring costs, the impact of hedges in SLF Canada that do not qualify for hedge accounting and fair value adjustments on MFS share-based awards.

Earnings on surplus of $134 million were $16 million higher than the second quarter last year, reflecting higher levels of investment income and mark-to-market gains on real estate on recent appraisals. Our effective tax rate on reported net income basis was negative 3.7%.

The unusually low rate this quarter primarily reflects assumption changes in management actions, which we saw favorable impacts in low tax jurisdictions and losses in higher-tax jurisdictions. On an underlying basis, which adjusts for these impacts, our effective tax rate was 18.9%, which is in line with our stated range of 18% to 22%.

Slide 9 shows sales results from our insurance and wealth businesses. Total insurance sales were up 5%. On a constant currency basis, sales were up 3%, reflecting strong sales growth primarily in our Group Benefit division in Canada. Total wealth sales of $37 billion were up 12% over the prior year.

On a constant currency basis, wealth sales were higher by 8%. Wealth sales showed growth across a number of businesses, primarily led by higher sales in SLF Canada, Sun Life Investment Management, rapid growth in our India asset management business and growth in our Hong Kong pensions business.

So to conclude, we had a strong quarter and are seeing good momentum in our business. Our earnings for the first 6 months of 2017 reflects strong execution on our medium-term financial objectives.

Our capital position remains a key area of strength as we head towards the implementation of LICAT, as evidenced by our strong solvency ratios, excess cash position and the announcement of our share repurchase program today. With that, I'll turn the call over to Greg to begin the Q&A portion of the call..

Thank you, Kevin. To ensure that all of our participants have the opportunity to ask questions on today’s call, I would ask each of you to please limit yourself to one or two questions and then re-queue with any additional questions. With that, I'll now ask Christa to please poll the participants for questions..

[Operator Instructions] Your first question comes from the line of Gabriel Dechaine with National Bank Financial. Your line is now open..

Good morning. My first question is on the NCIB. Dean, in the past, when you talked about your capital management priorities, I believe it's something along the lines of funding organic growth and M&A, and then the dividend and buyback's all the way at the bottom. So to me, it seem like you've downplayed it in the past.

I'm just wondering, is there an increase appetite for following through on the buyback program this time?.

Thanks, Gabriel. And your recollection is correct, and we have said before that buybacks continue to be a part of our thinking around capital management. I think what you take from the announcement of the NCIB is that we are confident in our capital position, both under MCCSR and under LICAT.

As we continue to do work on LICAT, we maintain that confidence in our capital position. We've got a business model that supports both a strong dividend payout ratio, as you know, 40% to 50% of earnings, and generation of excess capital.

And so we're always trying to strike the right balance between putting capital to work behind organic growth, that is job one, as you've said, leaving us the capacity for acquisitions that meet our hurdle rates and strategic fit requirements, and as you know, we've deployed $2.5 billion in acquisitions over the past 4 years and continue to be in the flow for new opportunity and returning capital to shareholders.

So you should think of this NCIB as we've done it before. We've said that it's part of our toolkit, and you see us acting on that at this time..

Great. Then my next question is about the group insurance business in the U.S., and it looks like -- well, we finally had a quarter where, I guess, you're lapping some of the tougher periods from a morbidity standpoint in last year and past few quarters anyway, and the claims experience is improving from the sound of it.

Can you give me a quantification of what the negative experience has been in that business line in Q1, Q2 or, let's say, the past few quarters? And how you see that progressing over the next few? Is this going to be a material driver of growth in that business as your repricing takes hold?.

Yes, good morning. This is Dan. Qualitatively, we're definitely seeing improvement. During this particular quarter, we saw improvement especially in our group disability and life businesses, which was certainly gratifying to see. We continue to have negative experience in the stop-loss business.

We have -- but we would expect to see that beginning to improve in the second half of the year as the rate increases that we put through over the past 12 months would start to emerge in that period..

So you can't quantify that? I forget what it was in Q1 and then Q2, but stop-loss has been an issue for the past few quarters anyway..

I think if you look overall at the morbidity experience for the quarter, right, it was positive 18, which reflected part coming through Canada and part coming through the U.S., which was a significant improvement over Q2 2016, which was the low point for the stop-loss business. We haven't given guidance overall on morbidity.

I would say that it does have some vagaries in terms of what the claims experiences in the quarter. But what you're seeing is repricing in the U.S. and management actions in both the U.S. and in Canada that are coming out in the positive. But I would put this on the stronger side of what we would normally see..

And Gabriel, it's Dean. I would also take you back to the -- and Dan has talked previously about the expected -- the migration of the profit ratio profits, net income as a ratio of premium, and we've expressed the target for that.

And a big part of the improvement of that is the improvement in morbidity experience as well as the realization of all the expense gains that we're realizing through the integration work we're doing..

Okay, thanks. I'll take a look and make my own number..

And your next question comes from the line of Meny Grauman with Cormark Securities. Your line is now open..

Hi, good morning. You've been very clear about the industry-wide issues being faced by MFS.

I'm wondering, in that context, how you view the positive retail flows, how do you interpret what we saw in Q2?.

Yes. Good morning. This is Mike.

Yes, I think - we talked about in the last quarter is we saw flow that were -- net flows that were relatively weak, and we spoke to much of the issue being the redemption rate, which we saw really spike in Q4 and Q1, both for us, some of it being our institutional business in the closed book that we have for many of our strategies.

In addition, we just saw a big spike in the redemption rate in retail. What really helped net flows in Q2 was a decline in the redemption rates. So as per expectations, we saw redemption rates come down. And we continue to see more normal levels of redemption rates, and that obviously will help us in our retail business.

We will continue to be somewhat challenged in our managed business because a fair amount of the book continues to be closed.

And while we've seen some outflows there, and the obvious question is does that create new capacity to go sell, market liquidity has come down pretty dramatically, trading volumes in the market, which means it's harder to actually sell positions into the marketplace.

So with our assets are coming down, liquidity is coming down, that doesn't create net new capacity for strategies that we've historically closed. The most important thing that we can do is manage performance on behalf of clients.

And so by ensuring that the asset pools are appropriate so we can continue to trade the pools and put up good long-term performance for clients is going to maximize the long-term value of the firm, and we continue to be focused on that..

And just to follow up on the institutional side.

Is there anything notable in terms of redemptions this past quarter in terms of particularly large single client moves or sovereign wealth fund activity?.

No. I mean, if you look at it again by -- as we look at reason for termination, very little of its performance -- and you can see that, given the relative performance. And it is clients derisking, clients doing asset allocation changes, changes with staff at some of the clients in a pivot to new strategies within those clients.

And so it's a variety of things that are not related to MFS but very much what's going on with a particular client..

Thank you..

Our next question comes from the line of Stephen Theriault with Eight Capital. Your line is now open..

Thanks very much. Mike, while we have you, I know you give the long-duration metrics.

But just quickly, can you remind us or tell us what percent of AUM is above the Lipper average on a 1-year basis?.

Let me pull that out. On a 1-year basis, I believe it's 21% on a 1-year basis. So when you look at -- I mean, clearly, optically, when you look at it, the 1 year sticks out from a relative performance perspective.

What I would say is we don't spend a whole lot of time evaluating 1 year performance because we think about -- and we've built long-term discipline. We think about and, actually, we evaluate our managers and analysts over 3, 5 and 10 years, and so we stay very focused on that long-term performance.

What I would say in the 1-year number, 2 of our very large strategies, International value and large-cap value, U.S.

large-cap value, represent about 35% of assets, have underperformed on a 1 year basis and given the -- what has happened over the last year post-Brexit, which is in the 1-year number, as well as the Trump rally that we saw in Q4, the S&P at the end of June's up 18%, Russell 1000 Growth 20%, the IPA up 20%, a big concentration of FANG, stock and other narrow parts of the market.

So the 1 year environment has been a little bit tougher. What I would say of those 2 strategies, those 2 large strategies that I mentioned, is they significantly outperform over 3, 5 and 10 years. And so irrespective of what has been a tougher 1 year number, the long-term numbers continue to be strong.

And we're not at risk in the very near term of rolling out of a tough 3 -- or of a strong 3- and 5-year numbers. So the focus is on long-term performance. We think it's the right thing for our clients. We believe it allows us to consistently put up long-term performance, and that's how we're evaluating the managers..

Okay. Thanks for all the color. I was going to ask if it was – some it was a narrow breadth, but you addressed that well. Thanks a lot..

And your next question comes from the line of Humphrey Lee with Dowling & Partners. Your line is now open..

Good morning. And thank you for taking my questions. Just to follow up on MFS a little further. So the institutional flow is definitely seeing some improvement in the quarter.

I'm just wondering how much of that was benefit from kind of reopening some of the previously closed strategies versus a kind of a slowdown in the rebalancing activities by the clients?.

Yes. We -- it did help some. And so depending on the strategy -- there are various levels of restrictions that we will put on strategies, depending on whether they're institutional or primarily retail strategies, whether they're separate accounts relative to co-mingled vehicles.

And so I think what we've seen is by loosening some of the restrictions on strategies that had some benefit to the overall net number quarter-on-quarter, but we don't believe, as we look forward, it's going to have a dramatic impact on the net flows of the organization..

But would you say that the impact for this quarter is more because of the slowdown in rebalancing activities by your institutional clients, more than that of reopening the strategies?.

I mean, if you look at it on -- if you look at it across channel, I mean, that contributed modestly. When you look at it across channel, what happened quarter-on-quarter, as I mentioned, is the redemption rate across our business came down pretty dramatically. That is not just related to restricted strategies.

And so the restricted strategies had a modest contribution relative. It really was redemption rates, which normalized for us in the industry in the second quarter..

Okay, got it. And then just kind of follow up on the kind of more recently launched products, those fixed income and the hybrid -- the blended research products that now currently have kind of the 3- to 5-year track record.

Like where do those strategies rank in terms of the Lipper rating?.

I don't have that. I mean, the fixed income products, you can see the performance of fixed income continues to be very strong with almost 90% over 10 years -- or 86% over 10 years and high 70s to 80s overall period.

So the relative performance in fixed income continues to be strong, and our blended products, relative to benchmark, have good long-term numbers as well..

Okay. Got it. Thank you..

Your next question comes from the line of Sumit Malhotra of Scotia Capital. Your line is now open..

Thanks, good morning. My question is for Claude and the Asia business. It's been a long time since we've seen underlying earnings in this business post the decline, and a couple of metrics stand out to me. Your individual insurance sales certainly seem to be decelerating after the strong growth you've had.

I know the Hong Kong issues with -- or the issues in Mainland China are affecting a large portion of that.

But wanted to get your view on the growth outlook for individual insurance and, specifically, how that's leading into the expected profit line in this business?.

Okay. Thanks, Sumit. Claude here. So if we look at underlying earnings, you're right to call out that it's down from $85 million a year ago down to $81 million. Last year was actually the highest we've seen in quite some time, and so I'd look to expect the profit to try and pick out the trend.

Expected profit last year was $82 million, its $86 million this year, so it's up 5%. If you break out the components of that, the business growth across the region was actually quite strong, a lot of pension growth in the Hong Kong business. And so the business growth was stronger than that plus 5%.

And then we saw some of the expected profit was offset by higher investment expenses in the regional offices. We build out our digital expenditure. And if we look at some of the component pieces, some of the businesses had a particularly strong expected profit a year ago.

China, in short-term products, there's been some regulatory changes, and so they've rotated away from those products to other opportunities. And so some of those earnings have gone down, but we expect them to replace that. If we look at insurance sales, which you also mentioned, they are flat year-over-year, a 2% growth.

If you back out currency, it's closer to flat. But the businesses are quite resilient. They're in 7 countries, multiple channels, and if you look at wealth sales, wealth sales are up 66% over the year. So you need some mechanism to blend them to try and detect or observe the growth, and the best way we have to blend it is to look at VNB.

And if you look at VNB growth for Asia, we see it's up 13% Q2 this year over Q2 last year. And year-to-date is actually up 17%. And so we're still observing some significant growth, good growth in Asia centered around 15% or higher, and we are seeing some of that. When you look at the business earnings, it is dropping into expected profit..

I hear you on the wealth trends, which you're right, continue to be very good.

But to the extent this Hong Kong issue is something you're going to have to deal with in the interim, is there enough going on in the rest of the insurance business in your Asia components that life insurance sales are going to be able to stay in a positive trajectory? Or are you in a period of consolidation here in the foreseeable future?.

I think the Hong Kong-Mainland China visitor business, those sales will be down. We have an opportunity to offset probably half of it in Hong Kong alone. They have a good opportunity to boost agency sales in Hong Kong.

They have the opportunity to get stronger wealth sales, which I called out, and they have the opportunity to introduce new products, high-end medical, and obtain high net worth individual from other countries other than Mainland Chinese visitors. So we think Hong Kong will find ways to offset a good part of it.

Where we're seeing particular strength is some of the other businesses. India is very strong on life sales. Indonesia is showing tremendous growth, and even Vietnam is showing growth. And so we're seeing there's an opportunity for the other countries to pick it up, and you'll see good insurance sales in Asia..

I'm going to close with one for Mike. Mike, if I go back to your presentation at the Investor Day in March, one topic I don't think we spoke too much about was the potential impact on margins of MiFID II. I know certainly on our side of the street, we've been focusing a lot more on how that's going to potentially affect business.

When it comes to margins of MFS, this quarter, pretty good result, 36% and in line with where you've been.

Do you feel that some of the effects of MiFID II, intended or unintended, are going to have a meaningfully detrimental impact to margins at MFS? Or are there offsets that -- the business has in place?.

Yes, good question. I would say with MiFID II comes into effect on January 1, I think the industry is still trying to grapple with exactly what needs to be done and how we're actually going to comply with the regulation.

And frankly, given the various differences in regulations around the world, trying to get some harmonization across geographies so that we can ensure that we are in compliance in multiple geographies, so a little unclear as we sit here today.

What I would say is when you say material, I don't think it will be materially detrimental to the industry, but it's not clear exactly what -- how the research cost will actually get paid. The mechanism today is that we do it through a commission-sharing agreement.

It's going to -- the regulators in Europe are going to make us specifically set it by client, set aside money and accounts where it will be very transparent what we're paying for research.

So I think the challenge in the industry longer time is whether we move away from soft dollars, and the industry has to actually take this cost on their income statement over time. Again, not clear at the moment. The regulators are going to have to provide a lot of clarity.

But I don't think, at the end, it will be material to margins, but it will have some detrimental impact on margins..

Thanks..

Our next question comes from the line of Doug Young with Desjardin Capital Markets. Your line is now open..

Hi, good morning. I guess my question is for Dan. Just going back to the U.S. group business, and I know that you've had some rollover claims from 2016 as weighed on the first half results. How much is left to come through from a claims perspective? And this is I guess, to be the clear, on the stop-loss business.

How much is left to come through on that 2016 business? Or is that all done now?.

In the first half of the year, as we've said before, most of the claims that we see in, specifically, the stop-loss business, which is what you are referring to, are from the prior year. Just to give you a couple of stats on that. In Q2, about 64% of the claims that we saw were still from 2016.

That drops to about 40% is our expectation in Q3 and then drops further from there in Q4. So starting in Q3, most of the experience that we would be seeing would come from 2017 policies, and we have significantly repriced the block over the past year. Our rate increases year-to-date are averaging over 17%.

So as the effect of the current year starts to phase in, in the third and fourth quarters, we should see some significant impact on that..

And how much of the block has been repriced? I think it was 80% at the end of Q1? Are we closer to 100% now that it's been repriced?.

Yes. We began that process last September 1. So at this point, we're virtually done with that process, because the entire block of business or virtually the entire block is 1 year contracts..

Okay. And then I guess -- and Dean's remarks mentioned that this is the first quarter where you brought together the Sun Life and the Assurant business in one common platform, and I guess this is for Dan or for Dean. But I just noticed that the Employee Benefits sales did decline 2% to 3% year-over-year.

Just wondering if there's anything to read into that.

Was there -- was more so the focus as a result of merging the organizations and less on sales? How worried should I be about that?.

Yes. And what we're referring to in saying we're bringing the platforms together is really forward-looking. So that began at the end of June and was not really in place for all of Q2. But the way I would look at Q2, that's actually one of the smallest sales quarters of the year. Only about 15% of our sales happen in the second quarter.

75% of sales happen in third and fourth quarters. But if you look at year-to-date, just combine Q1 and Q2, we're actually up 12% in Employee Benefits year-over-year. So I don't read a great deal into the -- that single quarter result.

I would comment we are seeing some pressure on our dental sales specifically, and that seems to be an industry wide phenomena at this point.

There was a lot of focus during the first half of the year amongst employee benefits' decision makers on what might happen to their health plans with changes potentially occurring to the Affordable Care Act, and that seems to put a little pressure on just leaving dental business where it was.

Although with those efforts failing in Congress to change the Affordable Care Act, we don't expect to see that trend continuing in the second half of the year..

Okay, great. Thank you very much..

Your next question comes from the line of Nick Stogdill, Credit Suisse. Your line is now open..

Hi, good morning. My question is on the new business gains in Canada. Maybe could you -- I know there's 2 things go on this quarter, obviously, the big sale in GRS and then obviously some actions taken in individual.

Could you maybe try and separate how much was coming from the GRS sale versus the changes in individual? Just trying to get a better sense of maybe the sustainability of the pickup in the gains this quarter?.

Yes. So it's Kevin Dougherty speaking. Thanks, Nick. It was a very good quarter in terms of new business gains, and what you are seeing are really both those items, mainly the DB Solutions sales as well as the retail insurance sales.

And as we -- really, we took the opportunity to re-launch the entire retail life insurance product line with the tax changes. I think if you -- I think I should come back with that number.

I'm not sure if you have it, Kevin?.

I can talk about the total company level, Nick. If you look at the total company, we're still expecting new business strain in the neighbourhood of $10 million to $20 million. So we were a little under that this quarter on the positive gains for DBS, which was the majority of the additional piece this quarter.

The mix in individual was a little bit smaller than the DBS overall. And then we had a negative in Hong Kong of about $10 million on the lower sales and a little bit of a negative in our International business that came through as well in the quarter.

But if you think about it on a quarterly basis, on a run rate, our expectation remains around the $10 million to $20 million of strain..

And Nick, I actually have the number here. On....

You do?.

Yes. For the GRS, the uptick was about $11 million from -- related to increase in sales..

Okay. So $11 million of the $25 million year-over-year was the....

Yes. After tax, yes..

And the rest would be sort of the individual and maybe other things going on..

Exactly..

Great. And then just a second question for Mike on MFS, just going back to the Lipper rankings. On the 10-year ranking, it's been fairly steady in the high 90s for the past 3 or 4 years, and it dropped to the low 90s this quarter. And I'm sure it's maybe just a blip or an aberration.

But at what point should we care -- or at what point would you look at -- take a closer look at the changes in those ratings on a 10-year performance?.

Yes. I mean, we've sustained 90-plus percent 10-year numbers for a very long period of time, very hard to do. And so I'm pleased with where it is. And if it's going to move around a couple of percentage points, it's certainly nothing we're going to worry about..

Sure. So just maybe a blip this quarter. I mean, it's been -- yes, again, high 90s for 3 or 4 years, and so maybe just nothing to call it this quarter..

Yes. I mean, 4% of over $200 billion of assets, no, it's nothing that we'd be worried about..

Okay. Thank you. .

Your next question comes from the line of Tom MacKinnon with BMO Capital. Your line is now open..

Yes. Thanks very much. Just looking here at the expected profit growth in the U.S. It was up $10 million in U.S. dollars pretax year-over-year. Now I think you had talked about $100 million in cost synergies from the Assurant deal and that you had realized 40% of those. So if that's $40 million, that'd be $10 million a quarter.

So would the math then suggest that the only increase you got year-over-year in expected profit was really just due to the cost synergies from the Assurant deal? What -- how should we be looking at growth and expected profit in this business going forward as more of these Assurant-type cost saves begin to get realized, because it doesn't look like there's much organic growth in this business..

Yes. I think the -- when we look at expected profit, of course, we're looking at that for the entire SLF U.S. business. And there's a lot of different components in there. But certainly, the expense synergies are one of the significant components, but there's also the volume changes in each business.

We have two run-off businesses, the individual IFM life business and international wealth business, so that had some impact. This currency change impacts a number of different things. So I think we're looking at the product of all of those.

What I would say about the synergies is we're very much on target for the $100 million to achieve, as we stated originally by 2019, and we fully expect to see that impact emerge in the business.

At the same time, we should see other impacts emerging into the results, including the repricing of the group business, other expense efficiencies and our overall improvements in claims management. So I think that we'll all be there over time, but I can reiterate that we're very much on target with the expense synergies as well..

Okay. And then a question for Mike with respect to MFS margins. It's 36% this quarter. I think at the Investor Day, you had said fees were down -- fee rates are down 6% the last 4 years, and you could see them down another 6% the next 4 years. I think MFS continues to have some investment expense as well.

So how should we be looking at margins going forward for this block, given the context of those statements?.

Yes.

I think I've said the last couple of quarters, and I'll -- and I couch it in industry context is given the continued fee pressures that -- and by the way, you look at the last year, fees have -- across the industry have come down about that 1% to 1.5%, which I think is probably a reasonable estimation to use on a go forward basis, is fees will continue to come down in the industry.

I think there will continue to be costs, regulatory cost and others that will force firms to have to invest in the businesses well, and I think you'll see industry margins creep down. We're not immune from that. But I would say is year-on-year, if you look at our results in the quarter is one of the things that we did well is control expenses.

So those discretionary items that we have control of over, we're being very careful with. We are investing in the business where we need to. But I think industry margins come down some. We're doing everything we can to control discretionary expenses here, and we're pretty pleased with how we ended up in the quarter..

Okay. Thanks for your comments..

Your next question comes from the line of Paul Holden with CIBC. Your line is now open..

Thank you. Good morning. So just want to ask a question on the Canadian operations, so very good results year-to-date, underlying earnings up 18%. Maybe you can walk us through some of those factors that you think are sustainable in terms of producing what I would say above-industry earnings growth..

Okay. Paul, its Kevin Dougherty. Yes, very, very strong quarter. And I think if you look through to the fundamentals, there's some very good things going on inside virtually all of the businesses. I think GRS, in particular, made a significant contribution to the growth and expected profit.

What you saw - I think Dean mentioned AUM - or AUA has now just crossed over $93 billion, so continued growth there and expansion of margins and great momentum the -- in the business. SLGI has grown from $14 billion last year to over $18 billion at this point. So it's now breaking into profitability. So you're seeing that.

On the Group Benefits side, we've seen continued good experience in both disability and the health care book of business. And it was maybe exceptional this quarter, but very strong and continue to be very strong, and we see that going forward.

The new -- we mentioned the repricing of the individual life insurance business and the pricing gains coming out of there, but actually, sales were flat year-over-year. But you'll notice from looking across the industry, most were down quite a bit year-over-year.

So we've got really great momentum in that part of the business, even during sort of this kind of - this pause or slowdown. And I think that's a reflection of, really, some excellent improvements in the product that are capturing the attention of advisers and new advisers and, ultimately, for clients.

So we see good quality inside this lift, and we'll keep working hard at it..

Okay. And then Kevin, maybe you can drill down on one of the comments you made, and that relates to the Group Benefits business. And the positive experience this quarter, you pointed out a little bit abnormal, but you expect positive experience, generally, to continue. Maybe you can just explain why that is..

Yes. So we saw -- in the Group Benefits this quarter, we saw both a slight decline in incidence rates and an improvement in recovery rates. And incidence rates do move around from quarter-to-quarter. So that -- over time, you can count on that every quarter, but we saw both happening this quarter.

So I think the Group business is moving to another level, and you're going to see it in the numbers. But the uptick was a little bit outsized. So I kind of brought on halfway maybe..

It's Kevin Strain. If I look at it, I'd say very strong morbidity and credit experience. And when you look at the notable items for the total company, Canada is a big part of those. And we talked about the new business gains in the quarter, which were strong on the DBS sales and some other factors.

So you can -- I would say that was a -- these were driven by management actions. You may not see that level of positive every quarter. So I think Kevin was a big benefiter of those.

But you will see that there was very good growth and expected profit in Canada of $19 million as well So as Kevin said, there's a lot of things firing in the right direction for Canada. And a lot of the normal items that they benefited from were from management actions, but you may not see that level of notable items every quarter..

Understood, that's helpful. Thank you. One final quick one is going back to U.S. group.

Do you have an update on the profit margin you're realizing 2017 year-to-date versus the, I think, it was a 3.5% number you provided for 2016? My guess would be it's somewhere running around -- somewhere around the same level and some more -- most of the expected margin opportunity is still ahead of you.

Is that accurate?.

Yes. I don't have the exact number in front of me for the whole Group Benefits business, but you're -- we are making progress. Let me just take a look at what we've got here. Yes, we're running, on an underlying basis so far year to date, between 3.5% and 4% profit margin. So we're certainly making good progress.

Obviously, what we talked about at the Investor Day was ultimately getting to 5% to 6%. Not there yet, but certainly in the -- heading in that direction..

Great. Thank you..

And there are no further questions at this time. We'll turn the call over to Greg..

Great. Thanks, Christa. I would like to thank all of our participants today. And if there are any additional questions, we will be available after the call. If you wish to listen to the rebroadcast, it will be available on our website later this afternoon. Thanks very much, and have a great day..

This concludes today's conference call. You may now disconnect..