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Sun Life Financial Inc
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Good morning, ladies and gentlemen. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sun Life Financial Q1 2019 Financial Results Conference Call. [Operator Instructions] The host of the call is Greg Dilworth, VP of Investor Relations. Please go ahead, Mr. Dilworth.
Thanks, Mike, and good afternoon, everyone. Welcome to Sun Life Financial's Earnings Conference Call for the First Quarter of 2019.Our earnings release and the slides for today's call are available on the Investor Relations section of our website at sunlife.com.We will begin today's presentation with an overview of our first quarter results by Dean Connor, President and Chief Executive Officer of Sun Life Financial. Following Dean's remarks, Kevin Strain, Executive Vice President and Chief Financial Officer, will present the financial results for the quarter. After the prepared remarks, we will move to the question-and-answer portion of the call. Other members of management will also be available to answer your questions on today's call.Turning to Slide 2. I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form part of this afternoon's remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events. And with that, I'll now turn things over to Dean.
Thanks, Greg, and good afternoon, everyone. Turning to Slide 4. The company reported underlying earnings of $717 million, up 9% over the first quarter of last year, excluding the impact of interest on par seed capital in Q1 of 2018. Underlying return on equity was 13.3% for the quarter. And yesterday, we announced the dividend increase of 5%, reflecting our continued earnings momentum. With a LICAT ratio of 145% at SLF and a 21.1% leverage ratio, capital remains a key strength for Sun Life as we adhere to our disciplined approach to capital allocation, including investments to grow our business organically and the repurchase of shares in the quarter. For the first time in our history, we reached $1 trillion of assets under management. It took us 147 years to reach the first $500 billion of AUM and just 7 years to add the next $500 billion. Our clients in AUM have benefited from a prolonged bull market and the positive investment returns we have generated for clients. The growth in AUM also reflects an important aspect of our 4-pillar strategy in which we favor businesses that have built-in growth, whether it be through equity markets, health care trends or the demographics in Asia. Insurance sales in the quarter were up 17% over the prior year, with double-digit growth in both Individual Insurance and Group Benefits. Wealth sales were down 10% primarily driven by lower sales in our Canadian and Asian businesses. Importantly, our value of new business, VNB, was up 14% compared to the first quarter of 2018 from higher individual life and group insurance sales and improved pricing in the U.S. Across our businesses, we continue to drive outcomes that reflect our purpose and make it easier for clients to do business with us. In Canada, we collaborated with Rise People Inc. to launch an integrated human resources platform that simplifies benefit administration for employers. This quarter, we became the first major benefits carrier to offer gender affirmation coverage in Canada, reflecting our efforts to evolve and diversify our health plans and to help meet the health needs of all Canadians. This is yet another example of innovation, an industry first at Sun Life, including virtual health care coverage and digital provider search capabilities with user ratings. And we continue to engage clients digitally. Our digital capabilities helped us to reach over 1.5 million clients in Canada in the first quarter. It's these digital efforts that, in part, help drive in-plan Wealth deposits higher by 16% over the past 12 months. Notwithstanding a challenging RRSP season for the Canadian industry, Sun Life Global Investments, our Canadian mutual fund company, generated $632 million in net inflows and crossed the $25 billion mark in AUM, a 17% increase over the prior year. Turning to the U.S. We increased our Group Benefits after-tax profit margin to 7.9% on a trailing 12-month basis, reflecting strong medical stop-loss experienced this quarter. Sales across our Group Benefits business were up by 11%, and our business in-force increased by 7% compared to Q1 of 2018. Our U.S. Group Benefits business recently launched a Sun Life + Maxwell Health digital health platform. The platform provides an intuitive digital client experience that delivers a seamless integration of all benefit plans focusing on smaller and midsized employers, many of whom don't currently have a benefits enrollment platform. Maxwell Health simplifies the benefits enrollment process for clients, helps close coverage gaps, and with Sun Life products on the platform, we aim to increase the number of products per client. Early indications are that employers using the tool will purchase multiple Sun Life products, which is one of our objectives. In asset management, we delivered strong investment performance across the global platform. Sun Life Investment Management generated positive net flows of $1.3 billion in the quarter. Assets under management ended the quarter at $67 billion, up 12% over the prior year. With the upcoming addition of GreenOak, our assets will grow to $80 billion, and we'll be able to provide clients with real estate solutions that have a wider range of returns and risk and extend our reach beyond North America to include Europe and Asia. MFS ended the quarter with assets under management of USD 473 billion. Net outflows of USD 5.9 billion were improved from last quarter and came primarily on the institutional side from rebalancing and derisking activities. Retail net flows were positive driven by U.S. retail, where MFS had record quarterly gross sales. 94%, 85% and 82% of MFS' U.S. retail fund assets were in the top half of their Lipper categories based on 10-, 5- and 3-year periods, respectively. MFS continued to show well in the annual Barron's ranking of U.S. mutual fund families for long-term performance, where they ranked in the top 10 for both 10- and 5-year performance in 9 out of the last 10 years. In Asia, insurance sales in our 7 local markets were up 24% over the prior year. Sales benefited from growth in the number of advisers in a number of our countries like the Philippines and bancassurance distribution in India, where we continued to expand our presence in HDFC's branch network. Insurance sales were down in our International High Net Worth segment as we continued to adjust to changing product preferences with new product launches. Across Asia, we're working hard to digitize the client experience and make it seamless for clients to access Sun Life when they want, where they want and how they want. In Hong Kong, Bowtie Life Insurance Company, a company we've helped launch, unveiled its first full end-to-end digital voluntary health insurance product. Through Bowtie, everything can be done online, from initial application, to online underwriting, to making a claim. No medical examinations or paper forms are required, and the application process is shortened from 3 days to as fast as 10 minutes. Our commitment to making it easier to do business with us shone brightly this quarter with awards in Hong Kong and Indonesia for our My Sun Life mobile application, which recognized our innovation, service and digitization of the client experience. And in Hong Kong, our Mandatory Provident Fund business was also recognized, receiving 12 awards at the 2019 MPF awards. Overall, we're off to a positive start in 2019, and we have good overall momentum. Our focus on clients is driving outcomes for our businesses, and we're executing on growth right across the company. We're excited about 2019 as we continue to invest in new business models, new products and new ideas to drive growth across all 4 pillars. And with that, I'll now turn the call over to Kevin Strain, who will take us through the financials.
Thanks, Dean, and good afternoon, everyone. Turning to Slide 6. We take a look at the financial results from the first quarter of 2019. We've had a good start to the year, with strong profitability, double-digit value of new business growth and continued financial strength. Reported net income of $623 million was down from $669 million in the prior year. Prior year results included the impact of interest on par seed capital in Canada and the U.S.' results, which contributed $110 million to earnings in Q1 2018. Reported net income this quarter reflected market-related impacts, which reduced earnings by $69 million after tax. Underlying earnings were $717 million, down from $770 million in the prior year. Excluding the interest on par seed capital, underlying earnings are up 9% or 11% on an earnings per share basis. Compared to prior year, underlying earnings also included favorable experience items, including investing activity gains, mortality, morbidity, lapse and policyholder behavior and expense experience. This was partly offset by unfavorable credit experience related to downgrades from indirect exposure to a single name in the U.S. utility sector, which I will discuss in more detail in a few minutes. Our underlying ROE of 13.3% was within the target range for our medium-term objective of 12% to 14%. We maintained a strong capital position, with a LICAT ratio of 145% for Sun Life Financial Inc., or SLF, and 132% for Sun Life Assurance Company of Canada. The higher ratio at the SLF level reflects the excess cash of $2.6 billion held by SLF. Our leverage ratio of 21.1% remains below our long-term target of 25% and is another potential source of capital for capital deployment. On May 13, we will redeem $250 million in subordinated debentures, which will reduce our leverage ratio by approximately 70 basis points to 20.4%. We saw good growth in our book value per share this quarter, up 7% over the prior year, reflecting income growth over the past year as well as the impact of accumulated other comprehensive income, partially offset by payments of common share dividends. We repurchased approximately 4 million common shares for $200 million in the first quarter of 2019. With additional shares repurchased in the month of April, we have now repurchased all 14 million shares under our current normal course issuer bid. Yesterday, we announced our intent to amend our existing Normal Course Issuer Bid to increase the number of shares that we can repurchase by 4 million. We also announced a 5% increase to our common share dividend to $0.525 per share. Turning to Slide 7. We provide details of underlying reported net income by business group for the quarter. In Canada, underlying net income of $237 million was down from the prior year, reflecting $75 million of interest on par seed capital recognized in Q1 2018 and unfavorable credit experience in the first quarter of 2019. This was partially offset by strong business growth across all business units as well as favorable investing activity gains, mortality and expense experience. Excluding the impact of par seed capital, underlying earnings in Canada grew by 8%. In the U.S., underlying net income was up 16% from the first quarter of 2018, reflecting favorable mortality, morbidity and lapse and policyholder behavior experience, partially offset by lower investing activity gains and unfavorable credit experience. The prior year also benefited from $35 million of interest on par seed capital. Our Group Benefits after-tax profit margin was 7.9% on a trailing 12-month basis in the quarter compared to 5.6% in the prior year driven by continued strong results in our stop-loss business. Asset management underlying earnings were $227 million, down slightly from the prior year. The impact of lower-average net assets at MFS, primarily as a result of equity market declines in the fourth quarter of 2018, was largely offset by favorable investment income, including returns on seed capital. MFS pretax net operating profit margin was 38%, in line with the prior year. Sun Life Investment Management generated underlying net income of $4 million. In Asia, underlying net income was down $6 million from last year, with growth in our core Asia businesses of 16%, offset by weakness in our international results, reflecting unfavorable credit and mortality experience and higher new business strain. Turning to the next slide, Slide 8, we provide details on our sources of earnings presentation. Expected profit of $739 million was up $5 million from the same period last year, with business growth in Canada and in the U.S. stop-loss business offset by the impact of lower-average net assets at MFS. Excluding the impact of currency and the results of asset management, expected profit grew by 2% over the prior year. We had new business strain this quarter of $11 million, reflecting higher strain in Asia as a result of lower sales in our International business segment. Experience losses of $96 million for the quarter primarily reflected net unfavorable market impacts driven by interest rate movements in the quarter, partially offset by equity market increases. Credit, lapse in policyholder behavior and other experience also had an unfavorable impact, which was partially offset by investment activity, mortality and morbidity and expense experience. The unfavorable credit experience in the first quarter of 2019 includes $57 million after-tax related to several renewable energy projects in our corporate loan portfolio related to private fixed income investments or PFIs that have contracts to sell power to Pacific Gas and Electric, PG&E. Given the bankruptcy proceeding for PG&E, we downgraded these PFIs. These downgrades reduced Canadian results by $29 million, Asia results by $19 million, mostly in the international segment, with the remainder of the impact in the U.S. The downgrades were on internal ratings we have on these PFI investments and were driven by their role as suppliers of power to PG&E. There has been no impact on cash flows for us on these investments. Assumption changes were moderately negative at $10 million in the quarter. Other in our sources of earnings, which amounted to a loss of $29 million, includes the fair value adjustments on MFS share-based awards, acquisition, integration and restructuring costs and the impact of certain hedges in SLF Canada that do not qualify for hedge accounting. Earnings on surplus of $125 million were $32 million lower than the first quarter last year, reflecting lower realized gains. Our effective tax rate on reported net income for the quarter was 11%, driven by market movements on investments with lower tax rates. On an underlying basis, our effective tax rate for the quarter was 17.8% and in line with our expected range of 15% to 20%. Slide 9 shows sales results across our insurance and wealth businesses. Total insurance sales of $780 million were up 17% or 16% on a constant currency basis compared to the first quarter of 2018. Insurance sales in Canada were up 22%, driven by large case sales in Group Benefits as well as higher Individual Insurance sales. In the U.S., sales were up 11% in U.S. dollars as a result of higher sales in stop-loss. Asia Individual Insurance sales, excluding international, were up 24% in constant currency, with double-digit growth in 6 of our 7 markets. Sales in Asia's International business segment were down from prior year, reflecting changing product preferences. Total wealth sales of $36 billion were down 10% from the prior year or 13% on a constant currency basis. Wealth sales were primarily impacted by a weaker RRSP season in Canada, institutional sales, which were lower in a few of our businesses, including MFS and Defined Benefit Solutions in Canada and in Asia, where we had lower money market sales in the Philippines and lower sales in our Indian asset management business primarily driven by market volatility. Value of new business was up 14% to $382 million, driven by strong insurance sales and improved pricing. So to conclude, we had a good first quarter. We saw strong growth in earnings and EPS after reflecting the impact of interest on par seed capital, strong growth in insurance sales and value of new business and a continuation of our strong capital generation. With that, I'll turn the call over to Greg to begin the Q&A portion of the call.
Thanks, Kevin. [Operator Instructions] With that, I'll now ask Mike to please poll the participants for questions.
[Operator Instructions] Your first question comes from Humphrey Lee from Dowling & Partners.
My first question is related to the favorable expense experience in the quarter. And I was just wondering if Kevin can provide some color in terms of was it a benefit of kind of more disciplined expense management that you highlighted at Investor Day, or was it just a timing of expenses. And if you can elaborate a little bit on the level of expense, Kevin, in the quarter, that will be helpful.
Okay. Well, thanks, Humphrey. I'll start, and Kevin Morrissey may add some -- it's Kevin Strain. Kevin Morrissey may add some comments. As we talked about at Investor Day, we've been working hard across the organization on expenses and as we called it, bending the cost curve. And on -- if you reflect the impact of currency, take the impact of currency out, we were flat year-over-year in expenses. And for our controllable expenses, we had a moderate increase of 1%. At the same time, as we were working hard on controlling our expenses, we saw the business grow both on the new business side and in the in-force, which saw us adding allowables. And the combination of those higher allowables and good work on managing the expenses resulted in the gain.
So it sounds like it's more the kind of the expense management that you talked about as opposed to timing.
I think it's -- yes, you're seeing a lot of good impacts with the expense management coming through.
Humphrey, it's Kevin Morrissey. Maybe I'll just add. You saw that we had an $11 million after-tax gain in the expense line. It is from the growth of the business and the expense management, so both of those components. We would expect to see those to be volatile moving forward quarter-to-quarter, and our outlook on that would probably be more around 0, but it was certainly a strong quarter.
Got it. And then shifting gears to U.S. Group Benefits, I think when you look at the overall strong sales and in-force premium growth in the business, especially in stop-loss, I was just wondering, from a broader perspective, have you seen any kind of market expansion in the stop-loss market, or are you just seeing maybe you and maybe some companies are taking market share.
Well, Humphrey, this is Dan Fishbein. The stop-loss market continues to grow for a few different reasons. First of all, the size of stop-loss premiums grow with medical cost trends. So that's about 6% to 8% a year. Also, more employers are self-insuring. In recent years, we get about 0.5% growth in the proportion of employers that are self-insuring versus fully insured as a percentage of the total market each year. And then we are also taking share. There's no question, we're taking share from competitors. So our very good growth is fueled by all 3 of those factors.
So do you feel like the -- and at the same time, you have very favorable underwriting results. Do you feel like that would potentially be leading to any kind of downward pressure on pricing, or just the fact that the medical cost trend and the level of additional employers looking to self-insure would more than offset that pressure?
Well, historically, if you look back over the past 10 years or so, the stop-loss business has been somewhat cyclical. There have been times of expanding margins and then increasing competition that's led to compressing margins. We're not seeing that phenomenon right now, although we've been in the good part of the cycle for about 2.5 years now. From our own perspective, what we can say is that we're still selling and renewing our business at or above our targeted pricing. So at the moment, we're not seeing irrational or aggressive market behavior.
Your next question comes from Meny Grauman from Cormark Securities.
I just wanted to start with the Asia segment. It was noted that there was a favorable joint venture experience in that segment. So I'm just wondering if you could provide a little bit more detail of what's driving that experience, what geographies, is this primarily bancassurance-driven.
We'll ask Claude Accum to take that call -- or that question, sorry.
Hey, Meny, it's Claude Accum here. I'm not sure which particular item that you're seeing. I actually see joint venture experience going the other direction. Can you give me where you get your question from?
I just -- in the MD&A, I thought there was a reference to positive joint venture experience in Asia. But let me see. Anyway...
Meny, it's Kevin. We did -- so we have 2 large joint ventures. Of course, we have a joint venture in Malaysia, which we manage, but that comes through the joint venture piece, which is India and China. We did have some gains in China in that segment. But overall, I think Claude's talking about sort of you're focusing on one piece and Claude's talking about the overall joint venture experience. So the 2 do tie in, but just, that's how they do.
Okay. And just moving on, just in terms of MFS, just wondering about that institutional flow, and if there's anything unusual there that you would highlight. Or are we just seeing the trends that we've been talking about for a while just continuing? Or if there's anything just that you would call out in the quarter in terms of influencing those flows.
Good afternoon, Meny. This is Mike Roberge. Yes, it really is the same themes that we discussed, derisking, rebalancing. It's not been performance-related, and so the same themes that we've talked about over a number of quarters were true in Q1 as well.
Your next question comes from Gabriel Dechaine from National Bank Financial.
First question is on the buybacks. And yes, just trying to figure out what your -- what that says about your M&A ambition. I know you're notionally looking at something in Asia or bulking up the U.S. group business. Does the decision to upside the buyback mean there's nothing really imminent on any of those files? Or is it really just an expression that, overall, you could do that, plus accommodate more buybacks?
Gabriel, it's Dean. It's the latter. So we have, as you know, a very strong balance sheet, lots of excess cash at the holdco, lots of leverage capability. And so this extension of the buyback, which is not big in dollar terms, just gives us some more flexibility as we run through to the end of this particular NCIB period. We're pleased that we've been able to fully execute on the previous NCIB that we launched last August. We'd actually hear on that over the first 9 months. And this just gives us a little bit more flexibility. As you know, we're getting close to closing soon on the GreenOak transaction. That will be a deployment of around $200 million when that transaction closes. So we've got the capital to do things like that to give us the flexibility to do more NCIB, but also, to do acquisitions, small, medium and large.
I might just add to that, Gabriel. As we discussed at the Investor Day, the company is generating, after dividends, $800 million in capital each year. And we've been running on the buyback close to $200 million a quarter, which is kind of keeping us at the excess capital position we've been at.
Okay. And is there a heat meter on the M&A file that I can see anywhere? No. I'm joking. But if you answer that, that would be great. My real second question, now I tend to kind of disregard the macro factors. I shouldn't probably, but this quarter, the interest rate impact is pretty large, larger than what I would have got -- what I did get to using your sensitivity guidance. And I'm just wondering if there's an element of the flat yield curve we saw during the quarter inverted for a bit that may have been a factor there, or perhaps maybe another explanation as to why it was large. And if it's just, Gabe, your math is wrong, then that's fine.
Gabriel, it's Kevin Morrissey. Thanks for that question. No, you are right, that it was larger than would be implied by our sensitivity, which are very simple stylized sensitivities based on parallel movement in yield curves. And as you noted, we had a bit of a flattening in the yield curve. And for Sun Life, that does cause us some merger losses. So probably about 60% of the incremental loss would have been from flattening of the yield curve. We also had some losses related to derivatives that we used to hedge some of the interest rate risk, and the market-implied volatility changed a bit, which reduced the value of those derivatives. So that's something again that wouldn't be in the simple sensitivities we disclosed.
Was that 60% of the deviation, was that...
So if you look at the markets broadly, they were down about 30 basis points. So based on our sensitivity, that would imply about a $60 million drop. We saw about twice that. So the variance would have been about a $60 million incremental loss, so a $35 million ballpark additional loss from the flattening of the yield curve.
Your next question comes from Doug Young from Desjardins Capital.
Just maybe starting, Kevin, with you on the lapse side. It's -- obviously, you made some adjustments from the actuarial side recently. But it keeps persistently being negative. I just wanted to get an update what it was this quarter and what you're seeing.
Doug, thanks. It's Kevin Morrissey again. So on the last -- what we did see in the quarter, we saw a loss of $8 million. It was from various sources across a number of business groups, all quite small, and I'd say, relatively benign. So as you noted, we had some historically large losses related to the U.S. in-force business. We took significant strengthening in Q3, and we've been pleased with the results that have been very small gains and losses since then. So we're very satisfied with the action that we took relative to those historical losses, and we see the result this quarter, the small loss, being kind of in the range of normal volatility.
So you're not seeing any particular trend in any one business? This seems to be a shotgun, and your U.S. experience on the lapse side seems to be normal. Is that fair?
That's fair. Yes.
Okay. I'm actually going to go at the buyback a little differently. I mean you increased your buyback 4 million shares. Again, it's 220 million. If you're generating $800 million of capital, excess capital a year, and you're buying back 200 million, you've given yourself another quarter of buyback room. Look, why not increase it more? Why not double the buyback and give yourself more flexibility? Or am I doing the math wrong or missing something?
No, Doug, we did -- this is an amendment to our current NCIB, which would end in August, and at that time, we would look at whether we renew it or not. This gave us the most flexibility.
Your next question comes from Sumit Malhotra from Scotiabank.
Can you hear me?
Yes.
We can hear you, Sumit.
Okay. Good. I was having some phone problems, just making sure everything's okay. Just on the -- on a couple of the moving parts on the book value that are upcoming, so this is likely for Kevin Strain. So you gave us -- or you reconfirmed the URR sensitivity, and that would be, I think you told us about $100 million, if the 15 basis point reduction is enacted. Are you expecting that to be in the actuarial review in Q3?
Yes. Sumit, this is Kevin Morrissey. We are expecting that. So as you're probably aware, the Actuarial Standards Board did release their initial standard, and it is a 15 basis point reduction in the long-term URR, which is the one that we're sensitive to. And so our estimate of that is $100 million after-tax reduction. We are planning to do that in Q3. That's similar to what we had done the last time this came around in 2017.
Okay. So we'll see that then. As then far as GreenOak is concerned, when that transaction was announced in December, it was stated that the impact on shareholders' equity on merging the 2 entities, GreenOak and Bentall Kennedy, would be $730 million. Is that, Kevin, still a good accurate number? And are we likely to see that before the end of June?
Well, the -- we're -- I'll let Steve talk about the timing of the transaction. But in terms of the accounting impact, that's roughly what we're still expecting.
And in terms of timing and transaction, it's been -- it's taken a while because we've had to get regulatory approval in a number of jurisdictions. Those are going quite well. In fact, we just got one more approval today. We would expect this to close right around the end of the quarter, maybe July 1, as opposed to June 30, but we're on track for closing in over the next couple of months.
And to the extent we talked about this transaction, Steve, over the last few months, a lot of it has been on the potential diversification for the business with respect to geography and frankly, strategy in terms of how the respective real estate portfolios are managed, maybe the right time to ask it in a quarter where Sun Life had positive expense experience for the first time in a few years, at least the way you report it. You're putting together 2 entities here that get you to close to $40 billion in assets. Is there anything we should expect from an expense synergy's perspective? Or with this franchise being more in growth mode, is expenses not really a big part of the story in the near term?
I mean I think that as we -- as these 2 entities come together, we're going to find some efficiencies from an operating standpoint. That really was not the driver of the deal. The driver of the deal, as you mentioned, was about the -- an expanded range of capabilities on the real estate side, which allows us -- there's a trend in the market of institutions wanting to reduce the number of real estate managers. This gives us a broader platform, with a high-growth entity with exceptional returns. So it was -- the transaction was really about broadening our positioning. I do expect, with the margin, we're going to find some efficiencies, but it wasn't the priority, it wasn't the driver of the transaction.
Last one for me, and I'm going to say it's going to be Kevin or Claude. I just wanted to circle back on Asia. I know, obviously, you've got the, let's call it, the credit provision in the quarter, or the credit downgrade in the quarter had an impact on the earnings in the segment. But when we look at expected profit, where I don't think that would have factored in, the growth rate was about 2%. Kevin, in your comments, you seem to be distinguishing between what was happening in the core insurance and wealth part of the business and then international. I feel like we haven't had to talk too much about the international piece of late. Maybe just a little bit of color from you to reiterate what exactly drove the contribution from the international piece down this quarter. And are there factors that were one-offish in nature? Or is this something where we should see a lower run rate from international in the near term?
So I'll start, and then maybe Claude can jump in. It's Kevin Strain. So on the international, there was -- there were 3 big impacts to international. International took the -- almost the entire PG&E impact that I talked about in Asia, so the downgrades to these, the investments, the PFIs we had. The second is international, it's the first time this has happened in a long time and you do get some volatility here, had bad mortality experience. And then with the lower sales, it had some more new business strain than international. So if you looked at the earnings impact to Asia, international was a significant piece of the decline in underlying earnings, and with each of those 3 components and in order that I mentioned, the credit, the mortality and then the new business strain. If you looked at Asia, expected profit from the core sort of 7 local businesses, as Dean called them earlier, we did see some -- the expected profit there grew but more moderately than you would expect. There was an impact on our fee income from equity market declines in 6 of our 7 markets in Asia, and that impacted the fee income there. So you've got the combination of a couple of different things happening in Asia.
And just the fee income piece, I would think that, that has a lot to do with where you started the quarter in terms of AUM as opposed to where you ended it.
Yes. That's right. It's really to do with the sort of the equity market performance and where the quarter started and what happens. You've got a lot of impact in Asia to -- related to China and the China economy and those types of things as well.
The next question comes from Steve Theriault from Eight Capital.
To start, if I could just follow up a bit on the Asia International. PG&E, I understand that was split across divisions. But just going into the sales, and probably for Claude. Claude, last quarter, you talked about new product launches, rate volatility extending the selling cycle and how sales are getting pushed into this year, but the Q1 sales were pretty modest. Can you update us on just the confidence level around getting sales back to the prior run rate and how quickly we should expect to see that?
Yes, Steve, it's Claude Accum here. And we've seen this 2 quarters now. So starting in Q4, we did see a shift in market preferences for certain products away from the traditional Universal Life product that has been very successful for us for the last decade. And as you pointed out, that shift away from UL continued in Q1 in the High Net Worth space. So how we responded is we're focusing on products that operate better in a low interest rate environment and offer equity market participation, so that the 2 products we're focused on are indexed Universal Life and par whole life. It was actually already launched, the indexed Universal Life High Net Worth product offshore, and we've also successfully launched the High Net Worth par product onshore in Hong Kong. And that product's gaining quite a bit of traction. It's driving some of the strong sales that you're seeing in Hong Kong. And so we're going to continue that progress. And this week, this month, we're going to be launching a competitive High Net Worth par product into the offshore market. So we'll have 2 products out there in the space, and we're looking for that product to garner some good sales trends -- traction in the second half.
In the second half. And then just one last thing on that. As you're migrating away from that traditional UL product, that was a good support item in the context of the strain line. Will these new products have -- like will they have similar propensity to help that line item in the source of earnings?
This product would have similar strength to the UL product. It's an interesting product in that it's -- through the cycle, ultimately, it's a very capital-, low capital-intensive product. So we think that could be quite favorable.
Okay. And then the last thing for me was also in Asia but on the wealth side. I think Kevin, you mentioned in your opening remarks about was it Philippines money market. But the last few quarters, the sales have been more like $2 billion versus $3 billion when you look back to prior run rates. I think that's right anyway. How much of that is the -- is that sort of money market noise that's not all that impactful to the margin? How much of it is potentially just slower wealth sales that have been offset by some strong insurance sales over the last little bit?
It's Claude Accum. Yes, I'll be happy to go with that first. So as you pointed out, wealth sales are down in Q1. They're down by $1.9 billion. About $1.3 billion of that is actually coming from India and about $300 million from the Philippines. So in India, what you're seeing is industry sales are actually down about 50%, and that's similar to us. And that's due to the India markets, where mid-cap is down 3%, small-cap is down 14%. And so that's impacting the India markets. In the Philippines, the $300 million decrease was mainly in money market sales, and that was more in the institutional space due to a large institutional sale in the prior year. So that's not retail. And so our wealth sales are basically following what's happening in the equity markets. As Kevin has indicated, 6 of our 8 countries are down significantly year-over-year. But as the market rebounded, and we saw that in Q1, we did see an uptick in March. And so we think our wealth sales will follow the equity markets cycle.
Your next question comes from Tom MacKinnon from BMO Capital Markets.
Yes. I was wondering if you might be able to split out what the expected profit is in Asia between Asia kind of proper, I'll say, and in international because it's kind of different stories. One's a complete high net worth, and the other's kind of a growth in the emerging middle class. So would you be able to share with us proportionately how the expected profit might split between those 2?
We haven't separated those 2 out, Tom. It's -- we can think of that sort of going forward and how we want to disclose these. But we've included just sort of the one item on the source of earnings. I think if you thought about my sort of broader comments, you can think about the sort of local markets in Asia focused on growth and getting the growth up, and what really impacted them this time was the fee income on the markets. And then on the -- in terms of the expected profit in international, the sales don't have a significant impact on changing that. That's over a longer term that, that would sort of impact those pieces. But we're not -- we haven't separated out the 2.
Okay. Then if I go to the U.S. employee benefits or sort of the U.S. Group Benefits, the margin obviously better, probably -- at 7.9%, probably helped by the great mortality and morbidity experience you had in the quarter. In your 6.5% target, what is the -- are there policyholder experience gains like mortality or morbidity gains in that 6.5%? And if so, how much do you need in order to hit that?
So we -- Tom, this is Dan Fishbein. We recently updated our target to 7-plus percent. And we don't assume explicit morbidity or mortality gains in order to achieve that. We price for the margins that we're seeking to achieve. And as I mentioned earlier, in stop-loss, for example, we've been able to be very successful pricing for those margins. The margin in the first quarter, if on a trailing 12 months basis, was obviously very much benefited by favorable morbidity experience in the stop-loss business.
Okay. That's great. So you assume 0. And then the final thing. With respect to Canada, years ago, we had a Career Sales Force that was probably growing, I don't know, modestly. And now if you look over the last several years, it's -- this Career Sales Force continues to decline. So strategically, it used to be sort of a good par sales and maybe a mutual fund sales machine. What -- strategically, what's happening here with the Sun Life Career Sales Force down 8% in 2017; 8%, 2018; and then another 5% year-over-year?
Thanks for the question, Tom. This is Jacques. You're right, 5% this last time. I'll take you back perhaps 18 to 24 months because we changed our focus a little bit, one from, I would say, just recruiting more advisers, to one of improving the overall client and adviser experience, right? And that's meant a lot of changes in terms of the digital experience that we're delivering, so that, ultimately, our advisers can work more effectively with their clients, deliver better quality product and so on. And so the other thing I would say is -- it's not shown in the numbers, but because of the increased focus on quality, Tom, we've been putting the bar higher on a number of recruits. And so we're recruiting quite a few less than we used to. And those that we do, it's kind of the fail-pass process in a way. We tend to recognize faster if they're going to make it or not. But if you would split the number of advisers into 2 buckets, you would find -- and let's say, you define these buckets as more experienced advisers versus newer, more developing advisers, you would find that, actually, we're kind of flat on the experienced advisers that sort of support the strategy that I was telling you about. Strategically speaking, I'll remind you that we are focused on 2 different channels. Career Sales Force is very strategic for us, but so is the third party. The sales continue to be good. If you go back 7 or 8 quarters, we're either #1 or #2. We were #1 for the full year of 2018. When we look out, we had said that at Investor Day, if you remember, but we have a point of view, generally, that Canadians are insufficiently insured. So we think the model we have is a pretty good one. And in terms of the CSF, as I said, very focused on digital and technology and bringing tools to our advisers, and it's stabilizing. So we think that you'll see decreasing numbers there in terms of a headcount decrease.
And our last question at this time is from Mario Mendonca from TD Securities.
Can we just go back to the U.S. expected profit? And I'm referring -- and let's exclude MFS for a moment. It does look like on a U.S. dollar basis, it was flat year-over-year. And I'm trying to sort of piece together what we're seeing here because it doesn't look like it's a margin story necessarily. It looks maybe like it's more around the asset growth side. And the reason I'm sort of going at this is because the -- what we are instead seeing, instead of the expected profit growth, we're seeing the experience gains emerge so strongly. And is that really where you would guide us, that we really should be piecing those 2 together?
I might be able to start, and like because I've got the detailed thing in front of me, and I'll give Dan a chance to talk about the other piece. But you have to remember, Mario, there's a couple of other pieces inside of the U.S., including Individual Insurance, which is a runoff business, so you see the expected profit sort of come down a little bit over time. And there was a small negative in business group capital. So it may be a little counterintuitive because it doesn't relate directly back to the Group Benefits piece. In the Group Benefits piece, we saw growth in stop-loss that really supported the overall growth in Group Benefits' expected profit.
And you'll see some additional growth in expected profit in the second quarter because the way we record this is in the quarter when business is effective, it's recorded as new business gains, and then it transitions over to expected profit in the subsequent quarter. So with such large stop-loss sales this past January 1, which was part of the first quarter, you're seeing that phenomenon, and we'll see some of that switch over next quarter.
Okay. I think that sort of clarifies it for me. If we could think a little bit about experience then, and just on a total company basis, there were a few items there that threw me off. First, the other, the minus $35 million. I think last year, you gave us -- or last quarter, rather, you gave us a good understanding of what was in the positive 38. Have you spoken yet to the minus 35? And I may have missed it, I'm not sure.
Yes, Mario, this is Kevin Morrissey. I'll talk a bit about the other. So our -- we had losses this quarter of $18 million. And so that's more in line with what we would expect kind of on a going-forward basis, and that's similar to what I had said a couple of quarters ago. What we're seeing in that line are some of the shorter-term strategy, cost buildout of our wealth strategy and digital projects in Canada. Some of that in the U.S. is related to Maxwell Health. And in the corporate line, we also had some project spend related to the IFRS 17 project. And so that -- those totals of both minus 18, that's more in line with what we expect kind of in a normal quarter.
So those are minus 18. So there was just other stuff going on that got you to minus 35 then?
Yes, the -- yes?
Sorry, I just don't follow. You were offering me an explanation of how it got to minus 18, but the number is minus 35. Is there anything else...
The minus 18 is the after-tax number, Mario.
Yes. Minus 18 is the after-tax for the quarter.
Okay. I totally understand now. And the investment activities were also very strong. Was there something -- is this just a number that we'll see bounce around based on the opportunities to invest the proceeds of sales or new business essentially?
Yes, I think that's a way to think about that, Mario. It's run a little -- that's a little higher than our sort of typical run rate. But we were able to deploy some PFI investments with higher spreads against some of our liability segments, and that drove the gains.
Yes. And Mario, it's Kevin Morrissey. Maybe just to add to that. You are right that it's going to bounce around a bit with the volume of new business sales as well. And so where we have big annuity sales in a quarter, you might expect to see that a little lighter in the in-force. And -- but we continue to source good volumes with good spreads to put against the liabilities.
If you looked at the total of experienced notables, $57 million in the quarter, the last 8 quarters have averaged around $42 million. So it is a little higher in total despite the fact that we had the PG&E impact in the quarter.
Your next question comes from Darko Mihelic from RBC Capital Markets.
I just wanted to look for a little more color on the indirect exposure to PG&E. It surprised me a little bit in the quarter. And I guess what I mean by color is I don't really understand where you sit today. So in other words, you downgraded some of these credits by how much? What happens next quarter? Do they go up? Do they go back down again? What is the prospect for more hits coming from this? And then I guess because I have to go back all the way to Q1 '10 to find credit experience of this magnitude for Sun Life. And so on a broader question, I guess the question is, should I be tracking bankruptcies for further sort of downgrades and credit experience? And I guess essentially, what I'm asking is the upgrade to downgrade kind of ratio that you had this quarter, how far off from normal is it? And maybe I'll just stop talking there and you can provide us with a little more color on this so that I can better prepare for the future.
Sure. It's Randy. Thank you for the question. So we have, as you know, no direct exposure to Pacific Gas and Electric, but rather these indirect exposures in that corporate loan book. So these are renewable energy power agreements where they are the -- they purchased the power coming off these production units. So we downgraded them internally based upon the public bankruptcy of Pacific Gas and Electric. And the reason we do that is the rating methodology that we've used is standard, and it is a combination of expected loss and probability of default. So while we feel, economically, we have many levels of protection we'd have to burn through because we are very quite secured in these cash flows, the probability of default rose, which led to an internal downgrade and therefore, a strengthening of the reserve. If you were to exclude this one name, we actually had more upgrade than downgrade and had one of our best credit quarters in quite a long time. So it is fairly idiosyncratic in nature.
Given that there was a bankruptcy that caused this, I mean, is this -- are these -- is this credit now considered also in default even though it's current? Is there a further downside possibility? I mean what happens next if we go through the bankruptcy proceedings? Does it come back to haunt you later on? Or does it actually get upgraded? I mean I'm just curious on where we sit today with respect to this credit.
Sure. So as we -- from where we sit today, it's definitely a complicated workout which we think will take several years. We -- PG&E is current in all their payments on these contracts, and our holdings are all current. And so that's why you're seeing no impairments on these. In terms of the future path, as I said, there are multiple layers of protection in a bankruptcy. And in certain states, in particular, anything can happen. But we think that the probable course is a fairly protracted workout where we think, economically, we should recover. So if that's the case, you would see these be written up over time. If, for some reason, things turn materially negative, which again is not what we expect, there is potentially downside on them. Remember, they are producing energy, and California needs energy, so that's not going away. They're producing renewable energy, and California has mandated 33% of all of their energy in state will be provided by renewables by 2020, moving up to 100% by 2045. Remember, these are long-dated projects, so they're not going away. So if -- so -- and then the payments are being passed through to the -- the cost to the ratepayers, so it's a complicated situation. But based on every piece of analysis we've done to date, we think that it should work out favorably.
Darko, it's Kevin. I think it might help if Kevin Morrissey talks about how the downgrade impacts the liabilities because this ends up being a significant portion of the investment as well.
Sure. Thanks. Darko, this is Kevin Morrissey here. When the securities are downgraded, the actual reserves pick up an increased risk margin. And these provisions in the future, as Randy noted, they're quite long-term securities, so the reserving impacts the present valuing of this extra-risk margin over extended periods of time. And so that's part of what's contributing to the severity of the impact in the quarter.
Okay. But I guess I don't want to keep beating this dead horse too much longer, but it was just a one-notch downgrade. I mean I don't know. It sounds like it must be a large exposure, and I guess what's the ultimate worst-case scenario?
It's Randy, Darko. No, it was -- internally, we had a multiple-notch downgrade that we did. We have a standard methodology, and that's what came out of the probability of default and the expected loss calculation. There's a wide range of potential outcomes within any rating, as we said. So it's not that the position itself was, in any way, particularly outsized for our balance sheet, it was the multiple-notch downgrade given the duration and the reserving methodology.
Your next question comes from Tom MacKinnon from BMO Capital Markets.
Yes. Just a quick follow-up. I think just to confirm, I think you talked about a target LICAT at SLA of 120% and maybe a leveraged target of 25%. And of the $2.5 billion at the holdco, how -- if you can confirm those. And at the $2.5 billion at the holdco, how much would you be prepared to take that down to, like to $500 million at the lowest level?
So Tom, it's Kevin. Yes, we've talked about a leveraged target of 25%. That's correct. And we've talked about keeping $500 million sort of cash buffer. So that's -- the second part's also correct. We haven't given our LICAT target ratio. There are a lot of assumptions out there, and that I know different analysts have been making, but we have not given a specific target around that, but we have given the cash, which is how we look at our capital position at the holdco. And we've also talked at Investor Day how much additional cash we'd get from going to our target of 25% leverage and then how much in addition to that we could get if we went up to 30%. So we have significant capital flexibility. And the other thing we look at, when we think about capital, we look at our capital sensitivity. And the strength of the capital in terms of sensitivities improved significantly with the movement to LICAT, and that also gives us confidence in different scenarios. So we look at the -- I think the right way to look at it is that the cash at the holdco, $2.5 billion, and thinking about $500 million to be held as a buffer and then the leverage position we can move up on the cash.
And that was our last question at this time. I will turn the call back over to Greg Dilworth for closing remarks.
Thanks, Mike. I would like to thank all of our participants on the call. And if there are any additional questions, we will be available after the call. Should you wish to listen to the rebroadcast, it will be available on our website later this afternoon. Thanks, and have a great day.
This concludes today's conference call. You may now disconnect.