Sun Life Financial Inc

TSX:SLF

Earnings Call Transcript 2019-Q3

[Operator]

Good morning, ladies and gentlemen. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sun Life Financial Q3 2019 Financial Results Conference Call.[Operator Instructions] The host of the call is Leigh Chalmers, Senior Vice President, Head of Investor Relations and Capital Management. Please go ahead, Ms. Chalmers.

[Leigh Chalmers]

Thank you, Chris, and good morning, everyone. Welcome to Sun Life Financial's earnings conference call for the third quarter of 2019. Our earnings release shareholders' report 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 third 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 question on today's call. Turning to Slide 2, I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures which form part of today's remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events. And with that, I will now turn things over to Dean.

[Dean Arthur Connor, President, CEO & Director]

Thanks, Leigh, and good morning, everyone. Turning to Slide 4. In Q3, we delivered another quarter of growth with reported net income of $681 million and underlying net income of $809 million. Reported net income increased by 20% over the prior year. On an underlying net income basis, EPS of $1.37 grew 14% from the prior year. Excluding the resolution of certain tax matters from previous years, EPS grew 3% from the prior year. We generated an underlying ROE of 15.5% for the quarter, reflecting higher underlying net income as well as the equity impact from completion of the BentallGreenOak transaction, as previously announced. Assets under management grew to $1.1 trillion this quarter, an increase of 8% over the prior year. With a strong capital ratio of 146% at SLF Inc. and a financial leverage ratio of 22.8%, we can continue to support organic growth; deliver a strong ROE; maintain the flexibility to support acquisition opportunities across our 4 pillars; and return excess capital to our shareholders through buybacks and dividends. Yesterday, we announced a 5% dividend increase, resulting in year-to-date increases of 10%, in line with the upper end of our medium-term objective range for underlying EPS growth. Our asset management pillar delivered strong growth this quarter with gross sales up 41% across MFS and SLC management. Overall, we had net inflows of $3.2 billion, including USD 1.3 billion of net inflows at MFS, driven by a third straight quarter of strong gross and net retail flows. The retail results are consistent with our thesis that, notwithstanding the shift to passive, there will continue to be alpha-seeking and alpha-believing investors, but that they'll consolidate assets in the hands of fewer active managers, and we think MFS is one of them. MFS assets under management increased over the quarter to USD 495 billion, reflecting net inflows and strong investment results. 92%, 93% and 94% of MFS' U.S. retail fund assets were in the top half of their Lipper categories based on 10-, 5- and 3-year performance respectively. We've also continued to build out our fixed income capabilities, as Mike Roberge described at Investor Day. Over the past year, fixed income AUM has grown 11% driven by a 55% increase in institutional fixed income sales and a 35% increase in retail fixed income sales both on a year-to-date basis. In SLC management, we closed on the acquisition of a majority stake in BentallGreenOak this quarter, which broadens our global real estate capabilities, adding $12.6 billion of real estate AUM to our alternative investment business. This, along with strong net inflows of $1.5 billion, grew AUM to $83 billion at SLC management. Turning to Asia. We delivered strong top line growth in insurance and wealth. We grew insurance sales in Asia by 45% in constant currency, with particularly strong growth in Hong Kong where sales more than doubled from last year. These results were driven by growth in our agency force, by growth in third-party distribution and the launch of new products. We grew wealth sales in Asia by 31% in constant currency led by 27% growth in our Hong Kong Mandatory Provident Fund pension business, where we rank #4 based on AUM. Due to our client strategy and the focus on digital, this past quarter, we launched the Sun Access app in Malaysia, completing the rollout of mobile apps for clients across all 7 of our local markets in the region. Moving to Canada. Insurance sales were flat, and wealth sales were up 17% compared to the prior year, driven by our Group Retirement Services business. Sun Life Global Investments generated mutual fund net flows of $494 million in the quarter, and AUM grew 16% over prior year to reach $27 billion. We also experienced higher disability claims and slower return to work in our group benefits business, and Jacques Goulet and his team have initiated a series of actions to address this. We continue to invest in growth and innovation in Canada. For example, we introduced 3 new technologies to help deal with mental health. A pharmacogenomic intervention to identify the best treatment for depression, a virtual independent medical exam and online cognitive behavioral therapy. We also rolled out new features in our industry-leading My Sun Life client app, which now has over 1 million active users across Canada, up 37% over the prior year. We continue to see strong expense management in Canada, which means both investing in initiatives that will drive our continued future growth while managing expense growth to just 2% year-over-year. In the U.S., our after-tax profit margin in Group Benefits was 7.2% in the third quarter on a trailing 12-month basis. Business growth continued with a 43% increase in our medical stop-loss sales, which contributed to 9% overall growth of our U.S. Group Benefits business in-force compared to the prior year. We're seeing good progress with the rollout of our Sun Life + Maxwell Health benefits platform to clients in the U.S. To date, employers on the platform are selecting nearly 3x as many Sun Life products compared to our typical employers. By continuing to help close the coverage gap in the U.S., Sun Life + Maxwell Health is another example where we're leveraging digital data and analytics to deliver on our purpose of helping clients achieve lifetime financial security and live healthier lives. As a company overall, we grew insurance sales by 19% and wealth sales by 38% in the quarter compared to the same period last year. And value of new business was up 3%, reflecting changes in sales mix, methodology changes and the impact of lower interest rates. Overall, I'm pleased with our progress on building better experiences for clients. The investments we're making in digital solutions are touching more and more people and creating differentiated experiences. The investments we're making in data analytics and robotic process automation are paying off. And the step change around client obsession, putting clients at the center of everything we do, is in full swing. Before I turn the call over to Kevin Strain, I'd like to take a few minutes to recognize some changes in our executive team. A few months ago, we announced that Claude Accum, President of Sun Life Asia and Kevin Dougherty, Executive Vice President of Innovation and Partnerships will be retiring at the end of this year after long and successful careers at Sun Life. Claude's been with Sun Life for 36 years and has led a number of our businesses in key functions. For the past 2.5 years, he's led our Asia operations. And under his leadership, we've seen increased market share and growth in the region, adding 16,000 advisers and millions of new clients. We've also improved the client experience through digitization and new partnerships. Kevin Dougherty is retiring after 25 years with Sun Life. Prior to leading innovation and partnerships, Kevin was the President of Sun Life Canada. And under Kevin's leadership, Canada grew to the #1 market positions in group benefits, in group retirement services and individual insurance sales. He also built new businesses, including Sun Life Global Investments and champion innovations including total rewards; our industry-leading mobile app; our digital coach, Ella; and Digital Health Solutions. So a warm thank you to Claude and Kevin for the very positive impact they've had on Sun Life, and we wish them all the best as they enter a new and exciting phase of their lives.I'd also like to welcome Leo Grepin to the executive team. Leo currently serves as our ASEAN President and will succeed Claude as President of Asia starting in January. Prior to moving to Asia, Leo led our individual insurance and wealth business in Canada. And with that, I'll now turn the call over to Kevin Strain, who will take us through the financials.

[Kevin David Strain, Executive VP & CFO]

Thanks, Dean, and good morning, everyone. Turning to Slide 6, we take a look at the financial results from the third quarter of 2019. We delivered growth in reported and underlying net income this quarter and in reported and underlying return on equity. Underlying ROE was 15.5%, above our medium-term objective of 12% to 14%. The net impact from our third quarter actual methods and assumption review was neutral to earnings on an after-tax basis. I will discuss our actual assumption changes in my comments on the sources of earnings. Underlying net income was $809 million, up from $730 million in the prior year, translating into earnings per share of 14%. This quarter's results included favorable impacts from the resolution of tax matters from prior years, including interest related to the resolution as well as an investment income tax allocation update between the participating policyholders' account and shareholders' account. Altogether, these drove a favorable impact of $78 million in the quarter, with $58 million in the corporate segment and $20 million in Canada. Underlying net income was also reflected continued growth in the business; favorable credit experience; a gain from a mortgage investment prepayment in the U.S.; and higher AFS gains than prior year. This was offset by unfavorable morbidity in Canada and the U.S. and lower investing activity gains. We continue to maintain a strong capital position with a LICAT ratio of 146% for Sun Life Financial Inc. and 133% for Sun Life Assurance Company of Canada. I'd like to take a minute to discuss our LICAT sensitivities. This quarter, you'll notice our sensitivities for SLA are behaving differently than they have in the past. Generally, the LICAT ratio will decrease with raising interest rates and increase with declining interest rates. However, this quarter's sensitivity show LICAT reducing in both a rising or declining interest rate environment. As a result of the continued decline in interest rates during the quarter, we moved closer to a switch in the interest rate scenario for SLA applied in the LICAT formula. The LICAT formula for interest rate risk uses the most adverse of 4 different interest rate scenarios. And when you move from one scenario to another, it can create a discontinuity in results. On a net basis, if interest rates would decline by a further 50 basis points from where they ended the third quarter, our LICAT ratio would reduce by 3.5 points. While increase in interest rates of 50 basis points was a 2.5 point decrease in the LICAT ratio. Turning back to third quarter results, our cash position of $2.8 billion of the holding company is up from the prior year, mainly as a result of the issuance of a $750 million sustainability bond in August. The issuance contributed to the increase in our financial leverage ratio this quarter, along with the equity impact from BentallGreenOak acquisition. Our leverage ratio was 22.8% -- at 22.8% remains below our long-term target of 25%. We saw growth in our book value per share this quarter, up 4% over the prior year, reflecting income growth over the past 12 months and the impact of accumulated other comprehensive income partially offset by the payment of common share dividends and the impact of the BentallGreenOak acquisition. The BentallGreenOak acquisition reduced book value per share by $1.49. Excluding the acquisition impact on equity, book value per share is up 9% year-over-year. In the third quarter of 2019, we repurchased approximately 3.6 million common shares or $192 million. And year-to-date, we have repurchased approximately 11.4 million common shares for a total of $592 million. As Dean noted earlier, yesterday, we also announced a 5% increase to our common share dividend at $0.55 per share, reflecting our earnings growth and strong capital position. Turning to Slide 7, we provide details of underlying and reported net income by business group for the quarter. In Canada, underlying net income of $268 million was up from the third quarter of 2018 including $20 million from favorable impact of tax matters from the prior years, which I noted earlier. Canada's underlying net income also included favorable impacts from the growth of the business, higher available for sale gains and favorable expense experience, this was offset by unfavorable morbidity and lower new business gains. In the U.S., underlying net income was relatively in line with the prior year as favorable expense experience, continued business growth and a gain on a mortgage investment prepayment were offset by unfavorable morbidity experience in stop-loss as well as lower investing activity and lower AFS gains. Our group benefits after-tax profit margin in the U.S. was 7.2% on a trailing 12-month basis in the third quarter compared to 6.4% on a trailing 12-month basis in the prior year. This reflects continued strong results in our stop-loss business and higher margins in the employee benefits business. Asset management underlying net income of $251 million was consistent with the prior year, reflecting a consistent level of average net assets in MFS and the impact of foreign exchange. The pretax net operating profit margin for MFS was 40%, also consistent with the prior year. Underlying net income at SLC Management was $6 million lower than prior year as a result of the timing of certain fee income as well as higher expenses. In Asia, underlying net income was up 25% from the prior year, reflecting higher AFS gains, favorable credit experience and continued business growth. Turning to Slide 8. We continue -- we provide details on our sources of earnings presentation. Expected profit of $816 million was up $28 million or 4% from the same period last year. Excluding the impact of currency and the results of the asset management businesses, expected profit grew 7% over the prior year. In particular, Canada saw 11% growth in expected profit while the U.S. saw 8% growth. We had new business strain this quarter of $22 million, which was higher than strain of $8 million in the prior year. This mainly reflected lower new business gains in the individual insurance business in Canada, primarily as a result of lower interest rates. Experienced losses of $86 million pretax for the quarter reflected net unfavorable market impacts of $88 million, driven by interest rate movements in the quarter and lower mark-to-market gains on investment properties, partially offset by equity market gains. Positive experience from credit, mortality, investing activity and expenses was mostly offset by the unfavorable impacts of morbidity, policyholder behavior and other experience. Our third quarter review of assumption changes in management actions or ACMA included some large and offsetting items, resulting in a net neutral impact on an after-tax basis. This year's review included positive updates to mortality assumptions in the U.K. and our Group Retirement Services business in Canada, based on industry data and our own experience. Offsetting these items were updates to lapse and other policyholder behavior experience, primarily in our international business and other enhancements and methodology changes. The largest of which are -- were unfavorable updates to reinsurance assumptions relating to in-force management in the U.S. This quarter, we also updated the ultimate reinvestment rate assumption to the new promulgated rates issued by the Actuarial Standards Board, which resulted in a charge of $93 million in line with our disclosed estimate of $100 million. Other in our sources of earnings, which amounted to a loss of $58 million, included the fair value adjustment of MFS share-based payment awards, acquisitions, integration and other restructure costs and the impact of certain hedges in Canada that do not qualify for hedge accounting.Earnings on surplus was $137 million. This was $18 million higher than the third quarter of last year, reflecting higher AFS gains, partially offset by lower investment income. Our effective tax rate on underlying income for the quarter was 9.2%, which is below our expected range of 15% to 20%, mainly driven by the favorable resolution of Canadian tax matter. Slide 9 shows sales results across our insurance and wealth businesses. Total company insurance sales of $685 million were up 19% or 18% on a constant currency basis compared to the third quarter of 2018. Canada insurance sales were in line with the prior year, reflecting slightly lower individual insurance sales, offset by higher group benefit sales. Insurance sales in Asia were up 45% on a constant currency basis, with strong growth in 6 of our 7 local markets as well as growth in international. International sales grew 14%, driven by the new par product we launched in May of this year as well as an uptick in universal life sales. In the U.S., insurance sales were up 5% on a constant currency basis, largely driven by continued growth in our medical stop-loss business, which grew by 43% compared to the third quarter of 2018. Total company wealth sales of $41 billion were up 38% from the prior year or 37% on a constant currency basis. In Canada, the increase in wealth sales was driven by our Group Retirement Services business, which grew by 29% compared to Q3 2018. Between MFS and SLC management, our asset management gross sales increased 40% on a constant currency basis. MFS grew 48% on increased institutional sales and record high retail sales. SLC sales increased 76% as we continue to execute well on growth in our alternative asset management space, where AUM grew to $83 billion, reflecting net inflows and the BentallGreenOak transaction. In Asia, wealth sales were up 31% in constant currency. We saw an increase in money market sales in the Philippines as well as nearly 30% increased sales in our pension business in Hong Kong. This was partially offset by lower mutual fund sales in India, primarily driven by weaker market sentiment and volatility. Value of new business of $252 million was up 3% year-over-year, largely due to growth from higher sales, partially offset by changes in the sales mix and the impact of lower interest rates. Turning to Slide 10, we provide a view on expenses. Operating expenses were up 4% in the constant currency on a year-to-date basis. When removing the impact of acquisitions primarily related to the BentallGreenOak acquisition, operating expenses grew 3%. This growth is mainly driven by controllable expense growth of 3%, reflecting growth and investments in our businesses. In our experience-related items, we had an expense gain of $3 million after tax. To conclude, we delivered strong sales growth in the third quarter, strong underlying ROE and underlying EPS growth of 14%. We increased our dividend to shareholders by 5%, representing a 10% increase on a year-to-date basis. Our capital ratios remain strong, and we continue to hold significant excess cash and capital, providing us with good flexibility into the future. With that, I'll turn the call to Leigh to begin the Q&A portion of the call.

[Leigh Chalmers]

Thank you, Kevin. [Operator Instructions] With that, I will now ask Chris to please poll the participants for questions.

[Operator]

[Operator Instructions] Your first question comes from Humphrey Lee of Dowling & Partners.

[Humphrey Lee, Research Analyst]

A question really about MFS flows, which definitely were very good this quarter. I was just wondering if you can talk about some of the driving force for all the strong retail flows as well as the improvement in institutional flows. And then also, if you can comment on the outlook for flows in the near term?

[Michael William Roberge, Chairman of MFS Mclean Budden Limited & Co]

Humphrey, it's Mike Roberge. What we've seen over the last several quarters is pretty good underlying trends in retail flows, particularly in the U.S. market. If you look across most of our largest distributors, sales are up year-on-year. And I think the backdrop associated with that, U.S. equity mutual funds are in outflows this year, and yet we are in net inflows with a fair majority of that being in equities. So it appears that we're gaining shelf space on many of the platforms that we're on. So we feel pretty comfortable with the trends that we're seeing on the retail side, on the institutional side, very lumpy in terms of what we see from an activity perspective, with the equity market making new highs, we do continue to see de-risking happen. So as equities rise and DB plans will derisk and move from equities into fixed income. So to the extent the equity markets continue to stay where they are, we would expect to see more of that. So I think as we think about flows on a go-forward basis, we feel pretty comfortable with what we're seeing on the retail side, and it's really hard to know on the institutional side.

[Humphrey Lee, Research Analyst]

Okay. I appreciate the color. And then shifting gear to Asia sales, again, were very good this quarter. I think this has been a while since you see this level of sales growth, do you think the current pace is sustainable in the near term? Or is there anything that is kind of one-off due to product changes or things like that, that drove the really strong performance in the quarter?

[Claude Alam Accum, President of Sun Life Financial Asia]

Humphrey, Claude Accum here. The contribution actually came across the board for most of our local markets. And we also saw a nice rebound in international. To give you a flavor of it, maybe I can just give you a sense of what the 3 biggest lifts were. So one of the biggest lifts was in the Hong Kong sales, which were up 100%. And I believe that's a resilient and robust and continues. We had strong sales in both agency and broker. On agency, we had some strong products, a voluntary health insurance scheme, a qualified deferred annuity policy. These are driven by tax incentives by the government in Hong Kong and that continues. In China, we saw sales up as significantly as we built out a relationship with a new online platform, and that garnered 40% of sales. And so as we work with that partner and do these pilots, that could continue. And then in international, we saw a 20% growth in sales from prior year, and that was driven by a rebound in UL sales, driven by a short rates dropping that continues as long as premium financing rates are lower, we could book and continue to see strength in those sales. And we also had sales campaigns in international as that will continue through to the end of the year. And so I think there's some durability to that.

[Humphrey Lee, Research Analyst]

Got it. And congratulations on your pending retirement.

[Claude Alam Accum, President of Sun Life Financial Asia]

Thank you very much.

[Operator]

Your next question comes from Steve Theriault of Eight Capital.

[Stephen Gordon Theriault, Principal & Head of Research]

First question on the reserve changes. It's a second -- a net neutral, but this is the second quarter we've seen the in-force management business have a significant reserve strengthening. Can we get a bit of a refresh here? And any sort of optimism around a second strengthening? Will that get experience in better shape? Any comments on profitability going forward?

[Kevin George Morrissey, Chief Actuary & Senior VP]

Thanks for the question, Steve. This is Kevin Morrissey. So this year is quite different from last year. I think last year, you're referring to the strengthening in the in-force. That was related to lapse and policyholder behavior. We took quite a significant strengthening last year. As you will probably have observed, that was quite successful, and our experience has been quite favorable and close to 0 since then. So that's right in line with what we had expected from that reserve strengthening. So that's worked out about as well as you could have expected. So we're not looking at anything further on that front. This year's change was related predominantly to reinsurance. So we looked at strengthening of our risk provisions and reinsurance. One of the updates was related to Scottish Re and the receivership with state of Delaware. We also did a more broad review of all our risk provisions of all our existing in-force treaties. I would say that, that review was quite comprehensive, and we're comfortable with where we have landed and are not expecting any further changes on that front.

[Stephen Gordon Theriault, Principal & Head of Research]

Okay. And second question, Dean, it's been almost 2 years since you've had an ROE below the midpoint of your target range. So I guess at what point do you think about reconsidering that range, especially given the substantial excess capital you have and that we all expect to be -- to put to use over time?

[Dean Arthur Connor, President, CEO & Director]

Thanks, Steve. It's Dean. You're right to call out -- I mean our ROE, underlying ROE year-to-date at 14.1% is just a tick over the top end of the range, the 12% to 14% medium-term objective range that we've put out there. I mean I'd say that these are medium-term objectives, we do review them from time to time. They're meant to last for some period of time. And I think that's consistent with the way other financial institutions approach them. You don't see them being changed on a yearly basis at all. So it's something we'll keep looking at. I think we feel good about that ROE. We think we're -- and you're right to point out that we're generating that with excess capital on the balance sheet at the same time. And it's something that we'll be coming back to probably next year.

[Stephen Gordon Theriault, Principal & Head of Research]

Next year in terms of leading into Q4 or next year a little bit late in the year? I'm not sure if you've got an Investor Day planned or not next year.

[Dean Arthur Connor, President, CEO & Director]

We don't have an Investor Day planned, but we don't need an Investor Day. We can always -- we're always looking at the medium-term objectives. We don't need an Investor Day to -- if we decide to update them, we don't need to circle that around or center that around an Investor Day.

[Operator]

Your next question comes from Meny Grauman of Cormark Securities.

[Meny Grauman, MD & Head of Institutional Equity Research]

Question on the Q3 assumption review. One of the details, if I look at investment returns, seeing more than the URR charge more than being offset, I'm just wondering what that offset is being driven by?

[Kevin George Morrissey, Chief Actuary & Senior VP]

Thanks, Meny. This is Kevin Morrissey. You're right, the total investment changes were slightly positive for the year, and we did take that $93 million URR charge largely in Canada. We saw positives related to investment strategy reviews in a number of different geographies. We also had a reduction in some of the risk provisions for reinvestment risks on variable universal life policies in Asia. Putting all those together, we ended up with a small positive in that category.

[Meny Grauman, MD & Head of Institutional Equity Research]

And then Mike, appreciate the color you've given, maybe just a little bit more detail on some of the dynamics you're seeing on the retail side in terms of flows. And really, the battle between passive and active. And I think in the past, you've talked about how you laid out a scenario where in a down market, we would have an opportunity to see active outperform passive. I'm wondering, just given the current market dynamics, what's really going on here on the retail side, if there's a real change in terms of investors' perceptions of active versus passive and value versus momentum.

[Michael William Roberge, Chairman of MFS Mclean Budden Limited & Co]

Yes, Meny, I think, clearly, we continue to see the trend out of active products and equities into passive products at a rate that's lower than what we saw several years back. And it looks like what's happening in the marketplace is the market's bifurcating on the active side, is there are firms, and we're one of those firms that are taking in net flows. That's true in both fixed as well as in equities. And then there are other firms that are redeeming at pretty high rates, where I believe some of the platforms have lost some confidence in them. And so as Dean mentioned earlier, our view has always been that active is going to continue to have a place in retail portfolios. And those firms that do have something that -- a platform like us -- ours is stable and can generate returns through a cycle like we have are going to continue to do fine. And I think we're starting to see that play out in the marketplace now.

[Meny Grauman, MD & Head of Institutional Equity Research]

And just as a follow-up, I mean, I'm trying to figure out what's changed. Is it just all the good things that you've been talking about doing had suddenly come together? Or is there something specific that you can point to that has changed out there in the market that makes people realize that there's real value there in your offering?

[Michael William Roberge, Chairman of MFS Mclean Budden Limited & Co]

Yes, I think it's hard to point to anything specifically. What I would say is investment performance is obviously really strong. That helps a lot. In addition, as Dean mentioned, is our fixed income sales were up over 30% as well. And so it's a combination of both. The platform that we've built, the performance that we have, I think, convincing clients that it's sustainable over a longer period of time. And the uptake in fixed income is helping as well.

[Operator]

Your next question comes from the line of Gabriel Dechaine with National Bank Financial.

[Gabriel Dechaine, Analyst]

So the group business, I really want to delve into that because both in Canada and the U.S., we had morbidity issues this quarter and second quarter in a row for both businesses. Can you explain what's going on with long-term disability in Canada [ of ] stop-loss in the U.S.? When did these problems first appear? Where are we in the repricing process? And how long does it take for you to restore margins because it could be an extended headwind.

[Jacques Goulet, President of Sun Life Financial Canada]

Gabriel, thank you for your question. This is Jacques. I'll go first, and then Dan can follow-up. You're right, it is unfavorable this quarter, morbidity experience. The key driver is really an increasing volume of long-term visibility cases in Group Benefits business combined with slower recoveries. And we have taken action, Gabriel. We've done 2 things where we've put in already price increases, and we've increased our workforce or the staff that is dealing with this increasing volume. And if you look at it in terms of the book, the renewals are such as they're spread out throughout the year, but the highest volume of renewals are January 1. So in terms of your point on timing, we expect the majority of the impact on earnings to be done in 2020, with some of it in 2021. And what I would say to you, Gabriel, is we're quite confident that between the price increases and the increasing in staff, we'll return the experience to where it's been. I might take the opportunity, if you don't mind, to talk a little bit about what we see in the industry. The drivers of the increasing volume of long-term visibility are really mental health. They're growing much faster than the rest. Our account executives, those are managing client relationships, are in the market every day. They're talking to clients, they're talking to prospects, they're talking to peers in the industry. Our sense is that this is an industry phenomenon and the fundamental health, in particular. And our view is that, that supports the kind of environment that you should expect price increases. Last comment I'll make and maybe refer to something Dean said, anything we do here at Sun Life is done from the lens of the client for life approach. So our view is that mental health, in particular, has the potential impact to negatively impact on workforce and business results and our clients. And between us, the plan sponsor and the plan member, we have aligned interest in getting people back to work productively as quickly as possible. So Dean mentioned a few things. One, I will single out is pharmacogenomics. It's about using a genetic test to ultimately bring to patients a medication that's more appropriate and can act faster. So all in all, I think we're doing a lot of good things, Gabriel. The experience is unfavorable, of course, but we have it in hand, we have already taken action, and we're confident that we'll return it back to expected experience in 2020. Dan?

[Daniel Richard Fishbein, President of Sun Life Financial]

Thanks, Jacques and thanks, Gabriel, this is Dan Fishbein. Just a few comments on that. First of all, the morbidity experience, negative variance in Q3 in the U.S. was about 1/4 of the total that you see on the company level. And then that was roughly divided equally between the stop-loss business, the group business and our Fullscope business. So when you break it down into those pieces, the dollars are actually relatively small compared to the total results. I'd also note, over the last 8 quarters, morbidity's been a net positive contribution to the U.S. overall. And we expect experience would revert to positive or neutral in due course. There's been some attention around the stop-loss morbidity. And I would note that we had a very favorable first quarter in stop-loss experience. And in fact, the stop-loss morbidity is still meaningfully favorable year-to-date. It's natural after that kind of a first quarter result that we would get some quarter-to-quarter volatility to follow on that. Year-to-date in stop-loss, we continue to exceed our margin targets for pricing in our stop-loss business. So we're comfortable with where the stop-loss business is right now.

[Gabriel Dechaine, Analyst]

Timing, this is not an issue of restoring margins by next year or year after or anything like that?

[Daniel Richard Fishbein, President of Sun Life Financial]

I'm sorry, could you repeat that? I didn't quite hear that.

[Gabriel Dechaine, Analyst]

No. I'll leave it at that as I don't want to abuse the 2 question limit here.

[Leigh Chalmers]

Okay. Why don't we move on then, and you can come back and follow-up after even if you want, Gabe.

[Operator]

Your next question comes from the line of David Motemaden from Evercore.

[David Kenneth Motemaden, Research Analyst]

Just a question for Dan on M&A and just specifically in Asia. And just wanted to get a sense of whether you prefer more of an agency business or bancassurance business in that market. And how you're thinking about that. Because there is a trade-off where potentially higher growth in bancassurance versus higher margins in agency.

[Dean Arthur Connor, President, CEO & Director]

Yes, David, it's Dean. I'll take that question. I think our strategy in Asia is a strategy around multichannel distribution. We want to have agency in every market in which we operate, and we do. And because, as you know, bancassurance relationships can change over time. So the cornerstone of the business, and as you allude, the margins are stronger in agency sales. And it's -- so that's kind of a bedrock foundation, a cornerstone of our distribution strategy. At the same time, we also want to have bancassurance distribution for a number of reasons. It attaches to, in some cases, different types of clients or sets of clients. It's able to bring our solutions to a wider range of people in the markets in which we operate. Obviously, helps to cover fixed expenses to a greater extent. And as well helps, including in that, not just fixed expenses but fixed expenses around digital innovation as well. So our strategy is, one, not of banca or agency but -- banca and agency but agents starting with agency and building high-quality agency across all 7 markets. And I would add a third channel to that, which is, as you know, we're investing in and innovating around alternative distribution channels and telecoms and other forms of distribution. Early days on those, but that's the third leg of the stool.

[David Kenneth Motemaden, Research Analyst]

Got it. Great. And also just a follow-up. Just on the ACMA, just all of the changes that were made as well as the URR reduction, is there any go-forward impact to earnings power from the changes?

[Kevin George Morrissey, Chief Actuary & Senior VP]

Thanks for the question, Dave. It's Kevin Morrissey. Overall, across Sun Life, we expect the Q3 ACMA impact to be modestly positive on underlying income going forward. Most of that you'll see coming through either new business or lapse experience.

[David Kenneth Motemaden, Research Analyst]

Got it. And should that be really in Asia is where most of that will come through?

[Kevin George Morrissey, Chief Actuary & Senior VP]

Yes. That's where you'll see it. I noted for, you would have seen in our disclosures around the strengthening of the lapse assumptions in the international block, Universal Life Business. So we feel that we've adequately dealt with that problem. So we don't expect to see that experienced loss persist into the future.

[Operator]

Your next question comes from the line of Sumit Malhotra from Scotiabank.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

First question is for Claude and specifically in respect to Hong Kong. You had indicated to us that the international business was likely going to rebound. We certainly saw that this quarter. But it doesn't look like there was any detrimental impact on at least your sales trends as far as Hong Kong is concerned. Obviously, we've all seen the situation over there the last few months. Can you give us any high-level thoughts on how Sun Life is thinking about the business outlook in the interim with respect to Hong Kong? And what that means for your Asian franchise?

[Claude Alam Accum, President of Sun Life Financial Asia]

Claude Accum here. Thank you, Sumit. It's regarding the situation in Hong Kong, there has been an impact on the insurance sector. And where it shows up is there's a slowdown in mainland Chinese visitors coming to Hong Kong. And when they see the demonstrations on TV, they're reluctant to come to Hong Kong to do their medicals and buy insurance. The impact on our business actually has been quite modest. Our sales have been quite resilient, actually up 115%. And so why is that? In the current configuration, 2/3 of our sales are agency, and agencies actually sold 96% to local Hong Kongers who are already there. And they're buying products based on local tax incentives. And so we think that's resilient. If you look at our exposure to out of country visitors in Hong Kong, about 20% of our sales come from out of country visitors but less than half of that is exposure to China. About 60% of those visitors are still visiting Hong Kong from Taiwan, from Singapore, from the Philippines. And so we think we'll see some short-term slowdown, but we're not seeing any long-term diminution to our growth prospects in Hong Kong.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

And to your point, I mean, if anything, aggregate sales, individual insurance sales seemed to accelerate in the quarter.

[Claude Alam Accum, President of Sun Life Financial Asia]

Because we've had some really strong local tax incentives driven by the government to sell voluntary health schemes. They give a tax advantage to people to buy those, those launched this year. And they also launched a qualified deferred annuity plan with tax incentives. And again, those products came out this year. As you've seen those 2 lifts helping us.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

All right. Next question is for Kevin Strain. We usually don't talk very much about the corporate segment because there's more interesting stuff going on most of the time. I just wanted to make sure I understand the numbers here. Ex of the tax recovery, your loss in the corporate segment underlying basis would have been around $40 million, which is one of the larger numbers we've seen in that unit. And at least from some of your commentary, your prepared remarks here, it seems to be expenses that are the area. And coming off at Investor Day where there was a number of references to bending the cost curve and perhaps having gotten to a -- more of a run rate level with respect to technology spend. I'm surprised to see cost as a factor pushing earnings in that segment down. Anything you can offer there on that number on the whole? And whether it is, in fact, expenses that are the key factor?

[Kevin David Strain, Executive VP & CFO]

Yes, Sumit, thanks for the question. And you've got the math right. Typically, we see the corporate segment run between $10 million and $20 million positive. And of course, the corporate segment does also include the U.K. and our run-off reinsurance basis -- business. But the difference in the quarter, largely as expenses, and some of those are sort of more onetime or sort of volatile in nature. We had some additional long-term share-based compensation on the share price going up. And some other compensation costs that came through in the quarter. There was also a slightly higher run rate on some projects. IFRS '17 is an example of a project that's included in the corporate segment. And that drove it to be higher than sort of your typical $10 million to $20 million. If you think longer term, the U.K. is a closed block, and you can expect to see the U.K. underlying earnings gradually decline. And they had a big positive ACMA this quarter, and so that would suggest sort of lower underlying earning rates in that segment. But the U.K. does continue to perform really well, being an important provider of earnings, of cash flow, of dividends to us and having an attractive ROE. So the U.K. is performing well. But as a closed block, you'd expect those earnings to sort of slow down over time. So I would say the big delta in the quarter does relate to some onetime expenses around long-term incentive comp and some other compensation items. But there is a slightly higher run rate in some project costs and then a slightly lower run rate in the U.K. income. Yes. Maybe more broadly on expenses, since I've got the [ share on this one ]. We are really focused on expense costs. And you saw that the controllable expenses are up 3%, but this is a much lower percentage growth than what you're seeing in our business growth and our sales growth and sort of overall metrics of growth. And I see good expense discipline in corporate and in each of the business groups, and it's something we look at and talk about a lot. And in fact, we're seeing the expense improvements and expense gap and some of those types of things. So I think there's a lot of focus on expenses, and you can expect to see that continue.

[Sumit Malhotra, Managing Director of Canadian Financial Services]

And last one, I'll try to keep this one very brief for Dean. Sun Life has been, in my opinion, the most consistent company that I cover anyway with respect to its capital deployment strategy. Share repurchases have been to the point that your share count, I think, is down something like 3% or 4% year-over-year. Is there a level valuation-wise that the company considers when allocating capital to the buyback? Or candidly, are you in such a strong position in excess that you think continuing to buy 3 million to 4 million shares a quarter, irrespective of relative or absolute valuation, is just a strategy you want to continue to follow?

[Dean Arthur Connor, President, CEO & Director]

Sumit, it's Dean. Thanks for the question. Obviously, we would not comment on the forward view of our plans for the NCIB. Like most firms, we have modeled out intrinsic value of the stock. That's one of the inputs into our thought process on buybacks. It is -- I'll just remind everyone, it's just one way to deploy capital. And alongside other things like M&A and reinsurance recapture and so on that we've talked about before. So I'm not going to give you a -- probably a very satisfactory answer to your question but except to say, yes, we do have a view of the intrinsic value of the stock. And it's one of our inputs as we think about how we employ the buybacks.

[Operator]

Your next question comes from the line of Doug Young with Desjardins Capital Markets.

[Doug Young, Diversified Financials and Insurance Analyst]

Dan, back to you. Just on the U.S. Group Benefits side, looks like there was a net loss in that. And maybe for Kevin, was there a reserve charge or something part of ACMA that hit the group business? And I apologize if you mentioned it, but I didn't -- I don't recall that, but I just want some clarity on that first.

[Kevin George Morrissey, Chief Actuary & Senior VP]

Yes. Doug, it's Kevin Morrissey. I'll take that one. So there was a charge in the group related to the ACMA this quarter. So we looked at the stop-loss reserving methodology, and we've made some changes that included some strengthening. Going forward, we expect to see, as a result of that, the stop-loss morbidity experience to be less volatile than it has been in the past. But that was where some of the impact was that you're seeing.

[Daniel Richard Fishbein, President of Sun Life Financial]

And, Kevin, I would add that it's more of a timing issue, that the way we were recognizing liabilities, we historically had recognized them once they started to come in versus once we started to collect premiums. So this really is -- accelerates the recognition of losses versus changing the amount of the losses.

[Doug Young, Diversified Financials and Insurance Analyst]

So does that impact -- positively impact, I guess, the future earnings power of the company or of the division?

[Kevin George Morrissey, Chief Actuary & Senior VP]

Doug, this is Kevin again. I would say no. I think, as Dan said, it's really related more to timing, and we would expect to see less volatility but not an overall change in the experience looking forward.

[Doug Young, Diversified Financials and Insurance Analyst]

So this was an issue with pricing, or it wasn't an issue with underlying experience. This was just -- as Dan, you said it was just a timing change?

[Daniel Richard Fishbein, President of Sun Life Financial]

That's right. Yes.

[Doug Young, Diversified Financials and Insurance Analyst]

Okay. And then just, Dan, 43% increase in medical stop-loss just seems outsized. And so is that a function of -- or maybe you can just talk a bit about what's driving that? As one of your competitors point out, just hoping for a little bit more detail on that.

[Daniel Richard Fishbein, President of Sun Life Financial]

Yes, I remind you that the third quarter and the first quarter are our smallest sales quarters of the year. Most of the sales are concentrated in the fourth quarter as we lead up to the 1/1 date. So we don't want to put too much weight on to that. However, what I would say is our stop-loss sales year-to-date and really, over the past 3 years have been terrific and growing at a good pace. And what I would say is we really feel we're executing well. We have the strongest sales organization, really good products, reliable underwriting and excellent partnerships with our broker distributors. And that's bringing more and more of the market to us. We continue to see what we would describe as a rational pricing environment competitively. And in fact, we continue to exceed our pricing targets year-to-date on both new sales and renewals. So we're happy to keep adding market share at those levels.

[Doug Young, Diversified Financials and Insurance Analyst]

And is it still fair to say the stop-loss business, the margin is above your 7% target and on your group employee plan business, it's still below, and there's going to be a convergence? I know that's something you've kind of talked about in the past. Is that still the case here?

[Daniel Richard Fishbein, President of Sun Life Financial]

Yes, I think you've got that right. Within that, our stop-loss business is performing really strongly. I would say, this quarter, though, the group business made a significantly bigger contribution to the total. So maybe we're seeing some of that convergence. Over time, we would not expect the stop-loss business to be able to always overperform its pricing targets. That's just inevitable. It should come back towards the pricing targets. But at the same time, the group business margins continue to improve. And we are starting to see and should continue to see a better balance between the 2.

[Operator]

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

[Tom MacKinnon, MD & Analyst]

Yes. I want to a talk about the impact of new business in Canada and in Asia. The impact of new business in Canada, just $13 million, certainly a lot lower year-over-year. And you just -- sales, I guess, overall, are relatively flat, but you just say it's related to interest rate. So are you just going to reprice your products? Or if rates just kind of hang low, you're just going to suffer with lower new business gains? Talk -- can you tell us what your actions are here?

[Jacques Goulet, President of Sun Life Financial Canada]

Yes, Tom, this is Jacques. Thanks for the question. I'll go first, and maybe you can do Asia. So it's really the driver this quarter is indeed the individual insurance business. It's economics, as you point out, but it's also, I would say, some of it is lower volumes. You're right to point out the broader sale. We have an increase, for example, in GB sales, but the mix was more in terms of what we call our ASO business versus the fully insured business. So that -- those are some of the drivers. In terms of what we might do on repricing, at this stage, this is something I would say we review regularly. We think about it. We look at the competitiveness of our product versus others. And of course, our profitability targets. I won't say at this stage where we might go. But, Tom, this is something that we obviously review on an ongoing basis.

[Tom MacKinnon, MD & Analyst]

I would assume that like at least half your products will be par. And I wouldn't anticipate that they get significantly impact in terms of strain by lower interest rates. Is that correct?

[Jacques Goulet, President of Sun Life Financial Canada]

That's true. Although when you say it's mostly par, remember that we sell mostly par in our third-party channel. There's a bit more diversified in our own network of [ Career Sale advisor ].

[Tom MacKinnon, MD & Analyst]

And then maybe Claude Accum. With respect to Asia, and everybody's talking about these great sales year-over-year and certainly acknowledge that. But the -- you actually had -- higher strain is even more negative now so -- or a negative impact on earnings. So what's happening here? Is this business -- is it more costly to put this new business on than it was in the past? Or is there certain issues with respect to some products in various countries? I did notice that the Asia expenses are up significantly year-over-year as well, like they're up something in the area of about 20%. So is there anything else that's driving the fact that you're still getting the same kind of negative impact from strain despite the higher sales?

[Claude Alam Accum, President of Sun Life Financial Asia]

Thank you, Tom. Claude Accum here. The new business gain picture is actually an amalgam of 8 different countries, right? And so you need to look at where each of those are in their business development. As you point out, new business gains are down at $2 million so $2 million unfavorable. The strong parts are the mature businesses. So if you look at international, $25 million of sales, up 20%. If you look at our other big driver of high net worth sales in Hong Kong, our high net worth sales are actually double year-over-year. And so where that shows up in new business gain. If you look at Hong Kong and you look at international, their new business gains are actually up $5 million. They're up 30%. And so you're seeing that driver, that connection that you're looking for, that strong sales drives profitability, business gains in those 2 mature businesses. Two other businesses are in different cycles. So in China, we're growing our relationship with a new online provider and as we build out that relationship, we've gotten very strong sales, but that will drive expense gaps. So higher expense gaps in China. And similarly, in India, you've seen amazing sales results in India with the new HDFC bancassurance deal. And as we invest and bring on that capacity, it does create some strain in sales, but it's got a nice future value down the road. And so those businesses are in different cycles. And -- but I think the aggregate result is as I would expect when you put together those different pictures.

[Tom MacKinnon, MD & Analyst]

That's great, Claude. And congrats on your retirement.

[Claude Alam Accum, President of Sun Life Financial Asia]

Thank you, Tom.

[Operator]

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

[Mario Mendonca, MD & Research Analyst]

Just a very quick question. Back to these tax incentives in Hong Kong. They sound very temporary in nature. Is there an expectation that these go away sometime soon?

[Claude Alam Accum, President of Sun Life Financial Asia]

Mario, it's Claude here. The voluntary health scheme is a long-term program by the government to try and get people to buy more health insurance schemes to self-insure themselves. And so that can only work if they continue that for a while. And they also want to drive people to invest in their own private savings programs, and that's the Q debt. And so we're not seeing those as short-term programs.

[Mario Mendonca, MD & Research Analyst]

So no expectation that either one will be pulled in the near term?

[Claude Alam Accum, President of Sun Life Financial Asia]

They were just launched this year. And so that -- we're not even thinking about them being pulled.

[Dean Arthur Connor, President, CEO & Director]

Mario, it's Dean. If I could just jump in here. I think this is a great example of one of the drivers of demand that we see for our business around the world, is downloading of responsibility, governments can't afford health care in most markets. And they're asking their citizens to step up and pay for it. And there's -- same with retirement savings, inadequate retirement saving systems in most of the markets in which we operate. And again, they're trying to, through tax incentives, find ways for people to save for retirement because these countries know they've got a serious issue.

[Mario Mendonca, MD & Research Analyst]

So it just sounds like an example of the demographic pressures that you've been -- you've all been talking about for some time, playing out in real time.

[Dean Arthur Connor, President, CEO & Director]

Exactly.

[Operator]

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

[Darko Mihelic, MD & Equity Analyst]

A question for Kevin. You mentioned the LICAT ratio basically losing now under any interest rate scenario. I'm interested in what happens if -- I mean does it get worse? What if rates do fall by 50 basis points? You have a decrease in the LICAT ratio. What happens then, do the scenarios, do other scenarios crop up? And is this possibly why LICAT ratios are so high, just because, like, we don't understand the second order effects after another drop. Maybe you can just address that if you can.

[Kevin George Morrissey, Chief Actuary & Senior VP]

Darko, thanks for that question. This is Kevin Morrissey. I'll take that one. So this discontinuity that we see in capital for Sun Life, it's about 5 points. This is really -- is a onetime event, although it could go back, but it's not as if there's a series of discontinuity. So after we would see that one point, that change from the scenario switch, we would expect to go back to our normal pattern of seeing an improvement in our LICAT ratio as interest rates would go down further.

[Dean Arthur Connor, President, CEO & Director]

Darko -- and I want to just add to that. And I think Kevin makes that quite clear, that it's -- the scenario switch, and then we go back to sort of the more normal rate. But what we're talking about relates to SLA, right? And the potential for sales switch at SLA. If we had seen that same -- if we'd seen interest rates go down a little bit where we had, had the scenario switch, that would not have applied to SLF, in our case, in this quarter, if that had happened. And so I like to also focus on SLF, where we have the $2.8 billion of cash and the -- and a really strong LICAT ratio there as well. And that's the sort of true financial strength of the entire company, is at the SLF level.

[Operator]

Your next question comes from the line of Nigel D'Souza from Veritas Investment Research.

[Nigel R. D'Souza, Investment Analyst]

I want to just quickly -- just had a few follow-ups regarding the favorable impact you have on the resolution of tax matters from prior years. And apologies if you've already elaborated or answered this, but could you provide some more color on what exactly those tax matters were and if we should expect a favorable impact from those tax-related items in future quarters? And building off that, am I right to assume that your approximately 9% effective tax rate, underlying net income was mainly driven by those items? And an extension of that question, what should we think in terms of the go-forward rate for your effective tax rate underlying net income in future quarters?

[Dean Arthur Connor, President, CEO & Director]

Well, thanks for the question, Nigel. And yes, you're -- we had 2 large tax issues that were resolved in a favorable way in the quarter. They were both related to prior tax years where there were audits or appeals that were still open. And it's not unusual for us to have tax issues from prior years that get resolved in the quarter. And we typically take these, as we did in this case, through underlying earnings. And we do this whether the issues are positive or negative. So that's -- when we look at these, we have other issues that are related to prior years that sort of happened. This time, it just happened to be that there were 2 positive ones that were unusually large that came through. They make up the majority of the $70 million that you saw we talked about. And we would expect that these would have a positive impact on earnings going forward. And the positive impact, you can think roughly in the neighborhood of $0.03 a share kind of thing for the year. So we don't see this changing our range of 15% to 20%, we're still in a -- we still see a range of 15% to 20%. It was what -- it's certainly what drove us below the range was the resolution of these 2 issues.

[Nigel R. D'Souza, Investment Analyst]

And just a clarification question, that 15% to 20%, that's on a go-forward basis, not the expectation for the entire fiscal year of 2019. Is that right?

[Dean Arthur Connor, President, CEO & Director]

Oh, yes, yes, not for this year. So that's for sort of a go-forward basis on a kind of a run rate basis. These -- we would continue to see the same impact of that $78 million on a year-to-date basis by the end of the year.

[Operator]

And there are no further questions at this time. I'd like to turn the call back over to Mrs. Chalmers for some closing remarks.

[Leigh Chalmers]

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

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.