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Sun Life Financial Inc. (SLF) Q2 2019 Earnings Call Transcript

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Sun Life Financial Inc. (NYSE: SLF)
Q2 2019 Earnings Call
August 1, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. My name is Scott and I will be your conference operator today. At this time, I would like to welcome everyone to the Sun Life Financial Q2 2019 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

The host of the call is Leigh Chalmers, Senior Vice President, Head of Investor Relations and Capital Management. Please go ahead, Miss Chalmers.

Leigh Chalmers -- Senior Vice President, Head of Investor Relations and Capital Management

Thank you, Scott and good morning, everyone. Welcome to Sun Life Financial's earnings conference call for the second 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 second quarter results by Dean Connor, President and Chief Executive Officer of Sun Life Financial. Following Dean's remarks, Kevin Strain, Executive Vice President and Chief Financial Officer, will present the 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.

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Turning to slide two, 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. I've noted in the slides forward-looking statements may be rendered inaccurate by subsequent events.

With that, I will turn things over to Dean.

Dean Connor -- President and Chief Executive Officer

Thanks, Leigh and good morning everyone. Turning to slide four, the company reported underlying earnings of $739 million or $1.24 earnings per share, up 3% from the prior year. We generated an underlying ROE of 13.7% for the quarter, which remains at the top end of our medium-term objective of 12% to 14%.

With a strong capital ratio of 144% at SLF Inc. and a financial leverage ratio of 20.4%, we could support good organic growth, deliver a strong ROE, return excess capital to our shareholders through buybacks and maintain the flexibility to support acquisition opportunities across our four pillars.

This quarter, we saw interest rates decline again, while equity markets rose. So, we thought it was worth spending a minute on how our four-pillar strategy and balanced and diversified mix of businesses support growth in a world of low for long interest rates. About 60% of our business is from insurance and 40% is from asset management and wealth. The majority of our insurance business is either from group businesses or from Asia, which are less impacted by the decline in North American and European interest rates.

Lower interest rates this quarter did have a negative impact resulting in lower pricing gains and market impacts from interest experience also reduced reported net income. On the other hand, higher equity returns this quarter had a positive impact on our fee income at MFS at Sun Life Global Investments and group retirement services in Canada.

Interest rates and equity markets often move in opposite directions, which can provide some additional diversification benefit. This balanced approach by business mix and geography underpins the ability to achieve our medium-term objectives even in a sustained low interest rate environment.

Shifting to the quarter and starting with asset management, we had a strong quarter with sales up 22% on a constant currency basis, including record high retail sales at MFS of US $16.6 billion. Overall net outflows of US $6.1 billion MFS reflected positive net retail flows of US $2 billion offset by continued rebalancing and de-risking in institutional.

MFS AUM increased over the quarter to US $489 billion, reflecting continued strong investment results that outperformed equity market growth -- 93%, 95%, and 84% of MFS's US retail fund assets were in the top half of their categories based on 10, 5, and 3-year performance, respectively.

As Mike Roberge said at investor day, MFS continues to build out institutional fixed income and non-US retail capabilities. For example, in Italy, MFS's added resources provide local wholesaling support, which is in turn expanding our distribution with banks and driving up sales. This in part contributed to positive net flows in non-US retail in the second quarter.

In our alternative asset management business, the rebranding of Sun Life Investment Management to SLC Management and the closing of the Bentall GreenOak transaction build on a strong foundation and expand what we can deliver to clients.

Turning to Asia and under the heading of distribution excellence, we grew the number of agents in the Philippines and Hong Kong by 37% and 9%, respectively. Our bank assurance relationship with HDFC contributed to a 30% increase in insurance sales in India and we launched a new broker channel in Vietnam. Individual insurance sales in our seven local Asian markets grew by 20%. International sales were down from prior year but increased sequentially from Q1.

In Canada, insurance sales were down 27% and wealth sales were up 7% compared to the prior year. Sun Life Global Investments generated strong mutual fund net flows of $555 million in the quarter and AUM grew 16% over prior year to reach $26 billion. Canada's operating expenses were flat year over year and down 2% from the first quarter.

This was achieved while we continue to invest in our digital platforms, such as Lumino Health, where we're helping Canadians access a comprehensive range of health resources. This quarter, we reached a milestone with over 10 million cumulative user ratings of healthcare providers and usage increased to approximately 10,000 searches per day across our digital platforms.

In the US, our after-tax profit margin and group benefits remained strong at 7.3% on a trailing 12-month basis. Sales momentum continued with employee benefits and stop loss sales up 40% year over year with stop loss business increasing 22% over the second quarter of 2018.

We are placing clients squarely at the center of everything we do and in the US, that means helping to close the coverage gap for our members. During the quarter, we launched a new program to help employers auto-enroll employees in disability coverage, providing an extra layer of income protection and financial security.

We also launched the full suite of Sun Life products on the Maxwell Health digital platform that we acquired last year and the early returns are encouraging. We're seeing clients on the platform offering more lines of Sun Life benefits to their employees and generating higher average premiums.

For the company overall, we grew insurance sales by 4% and wealth sales by 20% in the quarter. That said, the value of new business was down 12% from prior year on volume and business mix that was less favorable given the impact of lower sales and international and group benefits in Canada.

Standing back after six months, we've grown underlying EPS by 7% and that adjusts for last year's seed capital income and delivered a 13.5% ROE in the top half of our 12%-14% medium term objective range. We continue to deliver on our strategy with the whole organization rallying behind our purpose of helping clients achieve lifetime financial security and live healthier lives.

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

Kevin Strain -- Executive Vice President and Chief Financial Officer

Thanks, Dean and good morning, everyone. Turning to slide six, we take a look at the financial results from the second quarter of 2019. We delivered growth in underlying net income, strong topline growth in most of our wealth businesses and maintained our strong capital position. Reported net income of $595 million was down from $706 million in the prior year, primarily reflecting unfavorable market related impacts driven by declining interest rates and a flattening of the yield curve. Underlying earnings were $739 million, up from $729 million in the prior year, translating to earnings-per-share growth of 3%.

Excluding the interest on par seed capital from the first quarter of 2018, year to date underlying earnings were up 5% or 7% on an EPS basis. Compared to the prior year, underlying earnings included a 7% increase in expected profit as well as favorable experience items, including expense experience, credit, and last [inaudible] behavior, while investing activity was relatively flat. This was primarily offset by unfavorable morbidity experience in Canada group benefits and the US stop loss business and new business streams in international high-net worth business in Asia.

Our underlying return on equity of 13.7% was at the top end of the target range for our medium-term objectives of 12% to 14%. We maintained a strong capital position with a LICAT ratio of 144% for Sun Life Financial Inc. or SLF and 133% for Sun Life Insurance Company of Canada. A higher ratio at the SLF level reflects the excess cash and other liquid assets of $2.2 billion held by SLF.

Our cash position is slightly down from the prior quarter as a result of the redemption of $250 million in subordinated debentures in the second quarter. Redemption also had an impact on our financial leverage ratio, which lowered by 70 basis points to 20.4% at the end of the second quarter, which was well below our long-term target of 25%. This provides the company with another potential source of cash for capital deployment.

We saw growth in our book value per share this quarter, up 5% 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.

As Dean mentioned, at the start of the third quarter, we closed on the Bentall GreenOak transaction on July 1st. As a result of the acquisition in Q3, we will have a reduction of retained earnings of approximately $850 million, driven by the recognition of our liability to accounts with anticipated of our future ownership in Bentall GreenOak. This is higher than the $730 million approximation we provided in December of last year, mostly due to lower discount rate as interest rates have come down since that time.

In the second quarter of 2019, we repurchased approximately 3.7 million common shares for $200 million and year to date, we repurchased $7.8 million common shares for a total of $400 million. Yesterday, we announced our new [inaudible] bid, which would allow for the repurchase of up to 15 million common shares subject to regulatory approval.

Turning to slide seven, we provide details of underlying reported net income by the business group for the quarter. In Canada, underlying net income of $243 million was slightly down from the prior quarter, driven by unfavorable morbidity and credit experience. This was mostly offset by continued business growth across all business units, translating to strong expected profit growth as well as favorable expense experience compared to the prior year.

In the US, underlying net income was down $50 million from the second quarter of 2018, reflecting less favorable morbidity experience and lower gains from available for sale assets. This was partially offset by improved laps and other policyholder behavior experience in our IFM business and continued business growth in stop loss, where business in force increased 22% in constant currency over the prior year. The after-tax prior margin for group benefits was 7.8% on a trailing 12-month basis in the quarter, compared to 6.5% in the prior year.

Asset management underlying net income was $245 million, up 13% over the prior year. The increase was driven by higher investment income, including returns on seed capital and strong expense management. The pre-tax net operating profit margin for MFS was 37%, slightly higher than the prior year.

SLC management generated underlying net income of $9 million. In Asia, underlying net income was in line with last year with 19% earnings growth in our seven local markets offset by international results reflecting higher new business drain and unfavorable mortality experience, partially offset by favorable credit and expense experience and continued business growth.

Turning next to slide eight, we provide details on our sources of earnings presentation. Expected profit of $784 million was up $52 million or 7% from the same period last year, with business growth across all our pillars. Some particular strengths over the prior year are the US, with 10% expected profit growth, Canada, with 9% growth, and asset management, with 8% growth. When excluding the impact of currency and results of asset management, expected profit grew 5% over the prior year.

We had new business strain this quarter of $5 million, reflecting higher strain in Asia as a result of lower sales in our international business. We experienced losses of $128 million pre-tax for the quarter, reflecting net unfavorable market impact of $144 million from interest rate movement in the quarter and lower marked to market gains on investment properties partially offset by equity market increases.

Positive experience from investing activity gains, credit, and expense experience was partially offset by negative morbidity, policyholder behavior, and other experience. Assumption changes and management actions were negative $27 million pre-tax in the quarter. Other in our source of earnings, which amounted to a loss of $42 million, includes the fair value adjustment of MFS share-based payment awards, acquisition, integration, and other restructuring costs and the impact of certain hedges in Canada that do not qualify for hedge counting.

Earnings on surplus of $123 million were $30 million lower than the second quarter of last year reflecting lower AFS gains and lower marked to market gains on our investment properties. Our effective tax rate on reported net income for the quarter was 11.9%, driven by market movements on investments of lower tax rates. On an underlying basis, our effective tax rate for the quarter was 15.6% and in line with our expected range of 15% to 20%.

Slide nine shows sales results across our insurance and wealth businesses. Total insurance sales of $657 million were up 4% or 2% on a constant currency basis compared to the second quarter of 2018. Insurance sales in Canada were down 27%, mostly driven by lower sales and group benefits. You recall that last quarter, we noted that we had some large case sales across the benefits.

On a year to date basis, Canada group sales were slightly up from the prior year. In the US, sales were up 40% in US dollars, mostly on higher sales in stop loss and a 7% increase in employee benefit sales. Asia individual insurance sales, excluding international, were up 20%, with double-digit growth in five or seven local markets. Sales in Asia's international business unit were down from the prior year, but we saw improvements compared to Q1 of this year as a result of the new par product launch and some recovery in universal life sales. Total wealth sales of $37 billion were up 20% for the prior year or 16% a constant currency basis.

In Canada, wealth sales were up 7%, driven by our group retirement services business. Between MFS and SLC management, our asset management sales increased 22% on a constant currency basis, mostly reflecting record high sales in MFS and almost 40% growth in SLC sales. In Asia, we had lower mutual fund sales in our India business, primarily driven by weaker market sentiments. [Inaudible] business was down 12% year over year to $235 million, largely as a result of lower sales in international and lower group benefit sales in Canada, partly offset by higher group benefit volumes in the US.

Turning to slide ten, we showed strong expense management while continuing to invest in the business and drive growth. Operating expenses are up 1% on a year to date basis, driven by expense discipline and productivity gains. In our experience related items, we had an expense gain of $13 million after tax.

To conclude, our second quarter results showed continued momentum across our medium-term objectives. Year to date, underlying EPS growth was 7%, excluding the impact on interest on par seed capital in the prior year. The second quarter's underlying ROE year to date was strong at 13.5% and our dividend payout ratio was within our target range.

We are focused on good expense management, holding expense growth year to date at 1% on a constant currency basis. We also grew our topline measures, including strong wealth sales and asset management. Finally, our capital generation and LICAT ratios remain strong, allowing for the renewal of our share buyback program, which we see the tool to return capital to our shareholders while maintaining flexibility for our potential capital deployment.

With that, I'll turn the call over to Leigh to begin the Q&A portion of the call.

Questions and Answers:

Leigh Chalmers -- Senior Vice President, Head of Investor Relations and Capital Management

Thank you, Kevin. To help ensure that all of our participants have an ability to ask questions on today's call, I would ask each of you to please limit yourself to one or two questions and then to requeue with any additional questions. With that, I will now ask Scott to please poll the participants for questions.

Operator

To ask a question during this time please press * then the number 1 on your telephone keypad. Your first question comes from the line of Meny Grauman with Cormark Securities. Your line is open.

Meny Grauman -- Cormark Securities -- Analyst

Good morning. I'm wondering how your current economic outlook is impacting your M&A strategy. In other words, are you waiting for a market downturn to transact? Is that part of the explanation for the low leverage ratio and cash balance? Is it a defensive position?

Dean Connor -- President and Chief Executive Officer

Meny, it's Dean Connor. I would say no to that question. Our acquisition efforts, which we've talked about before, span all four pillars and it's difficult to time acquisitions. What we're more focused on are strategic alignment, opportunities that bring us new capabilities, opportunities that can help us grow faster.

Opportunities, not only do they bring something to Sun Life. Sun Life brings something to the business beyond just a checkbook. And of course, which clears our economic hurdles over the lifetime of the deal, which is a long-term perspective. So, we don't try to time these around economic cycles. I would say we continue to be very active in looking for opportunities that tick all those boxes I just mentioned.

Meny Grauman -- Cormark Securities -- Analyst

Thanks for that. Maybe just as a follow-up, more broadly, you have a lot of businesses in a lot of different areas. How do you see the economic outlook right now? Are we closer to the end than to the beginning in terms of credit? I'm curious on your thoughts?

Dean Connor -- President and Chief Executive Officer

Well, clearly, economic growth is slowing. It has been slowing. Witness the central banks easing, including yesterday's Fed announcement, and slowing for a number of reasons including a trade war between China and the US and uncertainty around Brexit and so on. What's interesting about that is not withstanding that, we see continued growth in Asian markets.

Even as China slows down, it has had some impact on Asian growth. One thing to think about is last year, Asian GDP grew at 5.2%-5.3%, This year, the expectation is just a shade under 5%. By any measure, that kind of GDP growth is attractive. So, yeah, we see some slowdown in global economic growth.

Back to the balance and diversified model -- that's an advantage. One thing that we're interested to watch is how India might benefit from that. India, there's an argument that India could actually be a beneficiary of trade wars and finding an opportunity to bring more manufacturing to India. Of course, that would ultimately in the long-term affect our business.

As for the credit cycle, it's very difficult to call. I know a number of market participants have felt like we were in the later innings, but that conversation has been going on for several years. I would say that we're appropriately cautious. We've been bringing our credit quality up over time. We've got lots of dry powder on the balance sheet to take advantage.

Back to investor day, we talked about a strong defense and a strong offense and one element of strong offense in addition to M&A is also investment dry powder. Not a very specific answer to your question, Meny, but that's some of the things that we're thinking about.

Operator

Your next question comes from the line of Steve Theriault with Eight Capital. Your line is open.

Steve Theriault -- Eight Capital -- Analyst

Thanks very much. A couple of questions from me -- first on Asia and Asia International, it was nice to see the beginning of a rebuild of the sales momentum. Can you talk about where you're at in terms of the index UL, the new par products, and anything else that's in the harbor for replacing that traditional UL product?

Also, last quarter you talked about these products being less capital intensive. So, now that you're starting to roll them out, I'm wondering if there's any outlook or view on these are less capital intensive, could we see a shift in the strain line of Asia over time as momentum builds?

Claude Accum -- President of Sun Life Financial Asia

Yeah, Steve. Thank you very much for that. We did see a really nice rebound in Q2 on international. Sales were $14 million Canadian. That's about three to four times what we saw in the low points in Q1. A couple of factors that are helping that rebound. We did launch a new par product. It was only launched in the middle of the quarter, mid-May. So, we got about one and a half months of sales out of that. Already, it's contributed to about 30% of the sales in Q2.

The other two factors we've seen that are helping is there's a return to UL sales. So, our traditional core UL sales product has rebounded an come back. The fact that it's helping there is the dropping of short rates across the globe. When short rates drop, a lot of these products are high net worth products like premium finance. It makes the premium financing more favorable.

So, with that, that's helped the UL sales and premium financing. Those two factors will continue to build and continue into Q3 and Q4. So, interest rates look to come down further. So, that can help. And in Q3, Q4, our par product will be out there a full three months each of sales. So, that could help build sales.

Then we do have a large number of campaigns to work with our brokers on promoting and understanding and illustrating these products. That's also helping to build momentum. We feel quite good about that. You commented on strain. The international product is very strongly priced when it sells. It actually does not have strain. When it sells in a normal course, it actually generates new business gains. We're not quite back to that level yet, but when we see slightly more sales in international, the product actually will generate new business gains.

Steve Theriault -- Eight Capital -- Analyst

Dean, in your opening remarks, you brought up the recent decline in rates and the defensiveness of your earnings mix. I guess a follow-up to that -- I'm wondering if despite your mix, do you think that the recent decline in rates could make it tough to get to the low end of your medium-term EPS growth rate target for this year?

Dean Connor -- President and Chief Executive Officer

I think first of all, Steve, those medium-term objectives are medium-term. We don't attach them to any one specific year. We think about them over a three, four, five-year period. I think as I said, notwithstanding lower interest rates, we have a balance in diversified mix of businesses. You could see that coming through in, as Kevin mentioned, good expected profit growth. We're working hard on improving the disability experience in Canada. We had stop loss morbidity experience in the second quarter that kind of offset the first quarter.

Hopefully, as we look ahead, the stop loss experience will kind of carry back to the mean. The improvement in US disability experience, hopefully, that will continue. The team has done a really good job on that. If you think about continued growth in asset management from market growth and some improvement in retail flows at MFS, good SLC flows, addition of earnings from GreenOak that are coming on stream this quarter.

Claude talked about international insurance sales and the goal of getting those sales back track and starting to push a pricing strain into a pricing gain at some point. Kevin talked about expense management, the continued share buybacks and hopefully further deployment of excess capital. Put all those things together and we think we've got a good growth story that supports our medium-term objectives of growing EPS by 8% to 10% as well as the ROE and the dividend payout ratio.

Steve Theriault -- Eight Capital -- Analyst

I guess forgetting the targets, another way to think about it, we think about the second derivative impact from lower rates and I think that's sort of that you were addressing in your opening remarks. It doesn't sound like you think that's going to be a major theme for the back-half of the year. The lower rates of the last few months shouldn't weigh too much. Is that fair?

Dean Connor -- President and Chief Executive Officer

I think that's a fair comment. Just to be clear, lower rates are net-net a negative, but we think we've got relative to other insurance companies in asset management businesses around the world, we think we've got a business mix that puts us in a preferred position. Thank you.

Kevin Strain -- Executive Vice President and Chief Financial Officer

It's Kevin Strain. Maybe to add to that, we've seen lower rates and a flattening over the yield curve over seven of the last nine quarters. You can see the impact that had in reported results. That gets entirely reflected each quarter. So, if there are additional movements down, that will come down as you've seen. What's happened up to the end of this quarter is reflected in the results at that point in time. I think that's what helps to address it.

Maybe sort of offsetting that, we've seen positive equity market experience in seven of the last nine quarters. They don't exactly line up, but you get the sense of how our asset management businesses can interact with our protection businesses.

Operator

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

Gabriel Dechaine -- National Bank Financial -- Analyst

Good morning. Something I've observed with MFS here and you guys have been doing a really good job tightening up on expenses there, but I'm just wondering what's going on with the commission line, which seems to be flat to down. You're seeing a good ramp up in gross sales, but the commissions are actually heading in the opposite direction or not rising in sync. Is that because you're backing the commissions and we're going to maybe see that commission line perk up in the next while as we move further away from the period of low rales or is it something else?

Michael Roberge -- Chief Executive Officer, MFS Investment Management

Good morning, Gabriel, it's Mike Roberge. With the change in GAAP, we used to show revenues that would come in from dealer commissions and we'd net that relative so you wouldn't see that line. We now have to grow set up. So, we show the revenue coming in. We show the expenses going on. One of the things that's happening in the industry is you go from brokerage to advisory.

We are not selling as many A-shares that have a dealer trail associated with them. So, you're seeing the revenue associated with that come down. So, it's just a function of the mix of our business. That portion of our business that has trails and that portion that no longer has trails. That's just a wash relative. That doesn't give you any sense of the underlying strength of the business.

Gabriel Dechaine -- National Bank Financial -- Analyst

Can you walk me through that again?

Michael Roberge -- Chief Executive Officer, MFS Investment Management

Yeah. Historically with GAAP, the trail commissions that would come in -- so, we would sell an A-share that has a 25-basis point trail, that revenue comes in, that revenue goes out as we pay it out to the brokerage firm. That would be netted because it's just a wash through the financial statements. GAAP now requires us to gross that up.

So, we've got to show the revenue and show the corresponding expense associated with that. So, what you'll see on the revenue line is you're going to see revenues declining as we're doing fewer of those share classes given the move to advisory. You'll see the same thing on the expense line, where that number is lower on the expense line. It's just a wash of the revenues that come through the P&L.

Gabriel Dechaine -- National Bank Financial -- Analyst

That explains it. My next question is on the negative morbidity experience in stop loss. It seems to be a one-quarter issue. I haven't come across that yet. I'm just wondering how you see it, especially in light of the big ramp up in sales we've seen from stop loss, like 40% in 2017, 50% last year, and 65% this year. That's great, but sometimes when you sell group insurance products too fast or aggressively you run into some margin issues and you have to into one of these repricing cycles that can take some time.

Daniel Fishbein -- President of Sun Life Financial United States

Thanks, Gabriel. This is Dan Fishbein. First, on the experience in the quarter, as you recall, the first quarter, we really had outsized favorable results in the stop loss business, very favorable morbidity and not surprisingly, we saw some reversion to the mean in the second quarter. On a year to date basis, we still have significantly favorable morbidity in the stop loss business. We look at what happened in the second quarter there as not at all surprising. Also, stop loss does tend to have some volatility associated with it. You're dealing with a relatively small number of large events. So, by nature, quarter to quarter, there will likely be some volatility there.

One other thing I would point out is last year, the second quarter was the outsized quarter for stop loss. That was the best quarter of the year. This year, the first quarter was exceptional. We also have an issue of comparable quarters there, which quarter happens to be the best. As far as your question about pricing, we obviously watch that very closely. You can see our VNB is improving.

We also track other metrics like our sold to formula, our close ratios, and all of those point toward our pricing being strong and sufficient. We do watch those things very carefully but we believe the growth we're achieving and increase in sales are due to fundamental delivery in the business than they are to any sort of price discounting. So, the other metrics support our being the right place going forward.

Operator

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

Douglas Young -- Desjardins Capital -- Analyst

Good morning. Dan, maybe just sticking with the stop loss, what I'm trying to get a sense of -- you don't provide your underlying earnings for this division in which the margins are based. I'm just curious -- I do rough calculations and I still get the margin for the quarter -- I know the LTM is down a bit, but the margin is about mid-6%.

I'm trying to get a sense of whether I'm way off. I get a sense that the year to date underlying profit is up nicely. I want a little more detail because I know you've talked in the past about stop loss morbidity margins being much higher, probably reverting down a little bit and then the group employee benefit margin being below your target but reverting back up toward what your target is. I'm trying to get a sense of that. Thank you.

Daniel Fishbein -- President of Sun Life Financial United States

Thanks, Doug. In terms of the margin, obviously, the reason we decided to do a trailing 12-month is that quarter by quarter, it does have some volatility in it. So, as you noted, we were at 7.9% after the first quarter on a trailing 12-month basis and 7.3% this quarter. So, you can infer that the margin in the stand-alone quarter was lower, but if we think about our year to date margin as well as that trailing 12 months, we're still above the 7% target that we sent at investor day. We tend to look a little bit more at the two quarters together than one quarter by itself.

As far as the interplay between the group benefits or the employee benefits, meaning group life, disability, dental, and where we are with stop loss in the quarter, we did, as has been noted, see the claims revert to the mean in stop loss in the quarter, but we also had good results in our life and disability business in the quarter, particularly in our long-term disability business, which has been an area of great focus. So, we're pleased to see the improvement there. That's a business within the whole of this that got better in the second quarter. That did counteract some of the reversion to the mean and the stop loss business in the quarter.

Douglas Young -- Desjardins Capital -- Analyst

Is it fair to assume the stop loss probably still has room to divert down and employee benefit still has room to move higher? Is that still the way you see this unfolding over the next few years?

Daniel Fishbein -- President of Sun Life Financial United States

First of all, on stop loss, more than anything, we can't really count on experience that's favorable to our pricing targets long-term, but what we are seeing is the size of the business is growing. We've been seeing growth in that business for the last three years in that general neighborhood. That should continue to give us confidence that the contribution of stop loss from an earnings perspective is going to continue to go up. We really should think of it more on that basis than some unusual claim experience on a long-term basis.

As far as the group life and disability business, there is still room for improvement there. We've been working on that, as you know, and it continues. We were based in the second quarter that we had some improvement there and there's still room for us to improve that business further.

Operator

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

Sumit Malhotra -- Scotiabank -- Analyst

Thanks. Good morning. The first question is for Kevin Strain. Kevin, there are a couple of references in the call this morning and in the remarks to the negative morbidity experience that the company experienced in CD and the US quarter, but when I look at your slide 13 in which you give us some detail on the experience related items, it doesn't look like it's a particularly sizable amount. Was there an offset in Asia relative to what happened in Canada and the US or is the commentary more reflective on where things trend this quarter relative to a year ago?

Kevin Strain -- Executive Vice President and Chief Financial Officer

Sumit, the waiver that we write the MDNA and the ENR is that's the delta year over year. The actual morbidity experience, as you point out, was a relatively small negative for the quarter. It's more how it reacted versus the prior year, Q2 2012.

Sumit Malhotra -- Scotiabank -- Analyst

That's the way I was looking at it because obviously, this isn't a big number and maybe this time of year as we're getting ready for the actuarial assumptions review, you take any experienced commentary with a little bit more importance. Maybe to that point, for Kevin Morrissey -- I know the standard write-up is too soon to tell in terms of some of the factors being reviewed. I will say I think last year, some of us were caught off guard by the size of the lapse adjustment that was undertaken. Whether it's morbidity or anything else, can you give us any flavor on what are the parameters under review for this process and maybe any other early indications you might have?

Kevin Morrissey -- Senior Vice President and Chief Actuary

Sure. This is Kevin. Thanks for the question, Sumit. As you know, a majority of our assumptions are happening Q3. I can't tell you a lot about that. I can tell you we're doing a complete review. I'm sure you can appreciate this point -- we're deep into the process but we do still have a long way to go before we complete our review.

We do see both positive and negative items at this point. It really is too early to have a clear outlook and the overall net income impact will provide any guidance there. I will note that in our disclosures, we do include UR change. So, the long-term UR is moving down 15 bps from 3.2% to 3.05%, as we've disclosed that, it will cost us about $100 million. We do expect our final numbers to come in close to that estimate.

You did mention lapse in particular. That was one of the items that was the biggest strengthening we did last year. That was related predominately to the US enforce business. We've been very pleased with the experience since that point. Subsequent to the strengthening over the last year, over the last three quarters, we've seen very small gains and losses. In fact, this quarter, it was gain on zero and the cumulative gain and loss has been about zero as well. We're very comfortable with the outcome of that review.

Sumit Malhotra -- Scotiabank -- Analyst

To go back to the first part, the morbidity commentary this quarter, it seems like it's more year over year than you guys telling us things aren't trending well and this might be one of the issues that gets strengthened next quarter in this review.

Kevin Morrissey -- Senior Vice President and Chief Actuary

So, morbidity will certainly be part of our review. As Dan noted, when we look at the morbidity in the US, we had quite a bit of volatility. I will emphasize two points. First, the morbidity for the quarter is positive in total for the US. When we look year to date, it's positive for both the group business and the stop loss business in the US. So, not a significant concern there. We do highlight in our commentary about the morbidity in Canada. That was off a bit in the quarter. From an ACMA perspective, the group business is fairly short-term. I think the more pertinent question is related to pricing and the pricing actions. We will invite Jacques to comment on that point.

Jacques Goulet -- President of Sun Life Financial Canada

Thank you, Kevin. Sumit, indeed it's unfavorable this quarter on morbidity. As you have picked up, Q2 last year was a favorable one. So, you have a compounding impact here. What I'll say is that it bounces around a bit quarter to quarter. It's something that we watch very closely. The data we're looking at right now is that what is happening is an increase in the volume of visibility cases in the group business, as Kevin has said.

We're seeing that, by the way, both in our own data as well as data that is provided by reinsurers on the industrywide basis. As Kevin was alluding to, one feature of the group business, as you know, is you get to revise it over relatively short periods of time. What I can tell you is we've already taken action in some parts of the portfolio where we thought this would be appropriate. That's the story on the morbidity in Canada.

Kevin Strain -- Executive Vice President and Chief Financial Officer

It's Kevin Strain again. I'd like to reiterate the point we've been making. The same page you're looking at, 2018 had positive morbidity at 43 million. You heard Dan talk about the really good results in stop loss last quarter and you heard Jacques now talk about the group benefits and then it was a minus 3. That's a delta of $46 million between the two quarters. As we explain in the earnings, that's the approach we take to explain the earnings.

Sumit Malhotra -- Scotiabank -- Analyst

I'm going to try one more, Kevin Strain. I'll try to keep it to you. Interesting to have Dean talk about interest rates at the beginning of the call because compared to some of your peers, we don't always view you as the most macro-sensitive company. One of the things I've noticed is there has been a larger interest rate impact on a reported basis. I know we all play ball with the underlying for the most part, but there has been a larger delta between your reported and underlying numbers over the last little while, including this quarter.

I see your interest rate exposure up modestly on the way you disclose it. Is there anything in your view, Kevin, that's changed about the aggregate sensitivity of Sun Life to whether it's treasuries or credit spread swaps that has made that differentiation wider of late? It is something I've observed.

Kevin Strain -- Executive Vice President and Chief Financial Officer

I don't think anything has changed in the mix of purpose business or in our approach for the asset liability management. It's really to view a flattening of the yield curve. You've seen the declining at the low end, but even declining more at the longer end. Where we have the most sensitivity is at the longer end and it relates back to our longer-term businesses with guarantees like individual insurance in Canada. But really, what you're seeing is just that the shift in interest rates, particularly at the long-end and the flattening of the curve.

Kevin Morrissey -- Senior Vice President and Chief Actuary

Sumit, it's Kevin Morrissey. Maybe just to add to that, we have been tracking what the analyst expectations have been versus our internal estimates. We've estimated, probably going back about the last nine or ten quarters, probably three quarters of the variance has been related to that yield curve flattening. We really are focused in terms of the majority of our exposure in Canada. So, if you look at that yield curve flattening in Canada, it's been almost every quarter for the last ten quarters. I think that's really the phenomena that you're seeing repeating.

Kevin Strain -- Executive Vice President and Chief Financial Officer

I might add that we've been preparing for lower interest rates for a long time and we've certainly seen a long run of lower interest rates. The de-risking we did back in 2011 and 2012 and the work we've done in terms of positioning ourselves for that, but the interest rates are at -- it's been a long time shift downwards in terms of interest rates. Who knows where we're going to end up? We've tried to predict that and position ourselves for that, but the lower interest rates have impact on new business strain and on the reinvestment of assets.

Operator

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

David Motemaden -- Evercore ISI -- Analyst

Thank you. I just have a question on MFS. Obviously, very good flows there on the retail side offset by institutional. I'm just wondering if I can get a bit more color on what was driving the outflows in institutional and what the outlook is there going forward.

Michael Roberge -- Chief Executive Officer, MFS Investment Management

Hey, David. It's Mike. Maybe I'll start on the retail side. We've certainly seen significant improvement year on year both in US retail and non-US retail. On the retail side, the industry continues to see outflows in equity products and mutual funds, gross sales year to date, US retail for us are 75% equities, 25% fixed. Yet, we're in positive flows.

So clearly, we're gaining share in equities in the US and I think the underlying trends continue to be favorable there. On the non-US side, Dean mentioned what we're doing in Italy, which is clearly having an impact in sales. We're seeing an improvement year on year in non-US retail as well. On the institutional side, we had one large outflow at the end of the quarter, it was a sub-advise relationship where the sponsor was acquired. They internalized the management. We had run the asset for a very long period of time.

It was really good performance. It was something that caught us off guard in the quarter, but the underlying trends we're seeing institutional are better year over year as well. We are seeing some traction in fixed income and some wins on the fixed income side. I would say overall, the trends that we're seeing year on year are better and we're hopeful that we'll continue to see that on a go forward basis.

David Motemaden -- Evercore ISI -- Analyst

Just in terms of the size of that sub-advisory relationship that you guys lost, any numbers you can put around that?

Michael Roberge -- Chief Executive Officer, MFS Investment Management

Yeah. We don't talk about individual clients or particular size of those clients. But hopefully, you'll see something in Q3 that looks better than what we saw in the quarter.

David Motemaden -- Evercore ISI -- Analyst

Then just a follow-up question for Dan on margins and group benefits. I just wanted to get a sense of where you are on repricing the employee benefits business, what the margin of that business is today and where you think that's going to go going forward. What's the target that you have there? Thank you.

Daniel Fishbein -- President of Sun Life Financial United States

Yeah, David. This is Dan. We don't disclose the margins in that granular way. What I can say is we've had some repricing going on in the group life and disability business over the past few years. That's largely complete at this point. So, we'll see the impact of that is starting to faze into the business and you'll see that more over the next year or so.

What I would say is when we set the overall margin target of 7% or more, we did have a view to what the margin could be for the like and disability business. We're not there yet and we think with all the actions that we've been taking on claims management, expense management, and pricing, that we're well on our way to getting there, but we still have opportunity to get those margins up further.

David Motemaden -- Evercore ISI -- Analyst

Then if I could just sneak one more in just for Dean in terms of M&A and specifically in Asia -- I'm just curious if you guys would be partial to doing a bank assurance deal or are you more interested in buying an entire business in that region?

Dean Connor -- President and Chief Executive Officer

Well, David, I think if you look historically at what we've done, you can bucket our M&A activity in Asia into three buckets. The first is we bought businesses outright like the business in Malaysia. Second, we've invested in banca distribution relationships in different markets. Thirdly, we've acquired larger shares of JVs that we already know and love. So, we're still thinking about all three of those categories.

Operator

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

Paul Holden -- CIBC World Markets -- Analyst

Thanks. Good morning. Continuing with the theme of low rates and the success you've had in group business, both in the US and Canada, I'm wondering if there were any opportunities to build a group business outside of North America, whether that's in Asia, which you have some experience operating in different lines of business in. I guess is there a group benefits business case in Asia?

Claude Accum -- President of Sun Life Financial Asia

Hi, Paul. It's Claude here. We actually do have a group as a component in many of your businesses. It's a big factor in India, in the Philippines, and we have quite a big group business in Hong Kong. The group markets are not as large and developed as what you see in North America. As those markets develop, you will see those group businesses grow to be something bigger. There are opportunities where we could look at other group businesses that are available in the marketplace. That would be another way we could grow those.

Paul Holden -- CIBC World Markets -- Analyst

The second question is with respect to expense experience. So, it has been positive in each of the last two quarters, but was negative in each of the prior eight quarters. I'd appreciate your comments on dialing it up on looking at expense efficiencies, but clearly something has changed more recently. So, what is it that in your view has changed? Is it expenses toward IT maybe have plateaued or it really is truly you're working hard to get expense efficiencies out of various business lines?

Kevin Strain -- Executive Vice President and Chief Financial Officer

It's Kevin Strain. I'll start and then let Kevin Morrissey add to it. Expense management has been a big theme in the company. We've had initiatives to improve -- you've heard Jacques talk about the owner's mindset and you've heard Dan talk about expenses, but in a little bit of growth mode. So, expenses are important there, but he's looking at growing his expenses slower than he's growing his topline. If you look at the corporate office, we've been managing expenses very closely as well. That's where you're seeing the momentum and expense growth has definitely slowed in our organization and that's part of what's going through these numbers.

Kevin Morrissey -- Senior Vice President and Chief Actuary

Paul, it's Kevin Morrissey. Maybe I'll just add to that. In addition to the expense discipline, we are seeing that growth in the business, especially in Canada in the group businesses, both GRS and group benefits are adding capacity. So, when you put those two together, we are seeing strong performance the last couple of quarters.

Operator

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

Thomas MacKinnon -- BMO Capital Markets -- Analyst

Thanks very much. Good morning. Dean, I think you've talked about $800 million in excess capital you generated annually. I assume that still holds the case despite all this chatter about a low interest rate environment. Can you reiterate that?

Dean Connor -- President and Chief Executive Officer

Yeah, Tom. That number is still the amount of excess capital that we're generating. As we've said before, that's roughly how we've sized our NCIB.

Thomas MacKinnon -- BMO Capital Markets -- Analyst

And should we over the last 12 months, it seems you've put that money to work in terms of an NCIB and renewed it again 2.5%. Quick math would assume $800 million would buy back about that amount. Again, is this sort of an ongoing tool now to augment growth? Is that the way we should be looking at the NCIB?

Dean Connor -- President and Chief Executive Officer

I think we said this before that it is important to have flexibility to allocate capital in buybacks. It's one of the ways, not the only way, but one of the ways that we deploy capital and we've got lots of capital and we're generating lots of capital, which is a fantastic position to be in. So, it's important to have buybacks as part of the toolkit, but it's just one way. We've talked about funding organic growth. We've talked about M&A. We've talked about potential reinsurance recapture at different points in the cycle. It's just one way but it's an important way. We've shown over the last year our ability to use it to get effect.

Thomas MacKinnon -- BMO Capital Markets -- Analyst

Then finally, with respect to Canada here, expected profit up nicely, 9% year over year. We hear all this talk about the digital platform in Canada. I'm wondering how that will translate into earnings growth. Do you think that it is contributing to this better than expected growth and expected profit we get in Canada? How should we be thinking about this good digital platform you have in Canada impacting the bottom line?

Jacques Goulet -- President of Sun Life Financial Canada

Thanks, Tom. I'm glad you see we have a good digital platform. That's great. The expected profit is up 9%, as you point out. That's largely the growth in the business. We're growing our business. We're growing our assets under management. As Kevin has pointed out, also what's contributing to that is good discipline on expenses. So, the digital platforms, Lumino and Ella, digital benefit assistance, are still relatively small.

Lumino is something we launched last year. Really, the value proposition here is what I would say, bending the healthcare cost for both employers and employees and plan members. When we do that -- by the way, we've started demonstrating that. Some have stayed with us where we have fully insured clients. For other clients where it's on an ASO basis, we pass it on to them.

One of the things that's great about that, of course, is that makes us a more attractive position in the market and we're winning more business. We said at investor day, if you remember that what we hear from clients when we get feedback is that our technology is really ahead and that is contributing to us increasing our market share. All in all I think it's a good value proposition. It's going to take a little while, of course, before it contributes in a material way to our earnings of course.

Thomas MacKinnon -- BMO Capital Markets -- Analyst

Okay. Then while I have you, the last one is just on the individual insurance sales in Canada. It seemed to be down year over year. The second quarter last year was a pretty good year and down quite a bit in the third-party. Anything in particular there? How should we be looking at that going forward?

Jacques Goulet -- President of Sun Life Financial Canada

Thanks, Tom. The decline this quarter over Q2 '18 is driven entirely by the third parties. Just as a quick reminder, as you know, we have two distribution channels. We have our own advisors and the third party. They're actually operating in different parts of the market. Our own advisors are more mass and the third party is in high net worth and ultra-high net worth. In the third party, because of the market we target, you're talking about large face amount policies and that can be lumpy.

As you pointed out, we had very strong growth in Q1. It was lumpy positive and this time, it's lumpy negative, I would say. We maintain, obviously, very good relationships with advisors in that channel. We continue to get good feedback on our products. They're attractive. They're competitive. We have a strong pipeline there. Nothing to be concerned about.

You asked me before about the career salesforce and you probably saw this quarter the sales are flat. Our focus the last few years has been on raising the quality and enabling the advisors with better tools and better technology so that they can deliver ultimately a better client experience for their clients, but also to be more productive. With the decline on the advisor count, you can see that we're starting to see early signs there of productivity going up, which is great.

The last thing I'll say, Tom, which people sometimes are a little bit surprised because they don't expect that is the makeup of our career salesforce. It's quite diverse. 37% of our advisors are women. Sometimes people are surprise to hear the average age of our advisor is 46 and 40% of them are millennials. We think that aligns well with what is the Canadian market and the fact that we are a leader to go back eight quarters or so. So, all in all, we feel pretty good where we are.

Kevin Strain -- Executive Vice President and Chief Financial Officer

Operator, given that we're passed our hour on the call, I would suggest that we can take additional calls afterwards. I'll be around and Leigh and we're open to take those calls.

Operator

We can take the questions now, if you prefer to take them afterwards, it's up to you.

Kevin Strain -- Executive Vice President and Chief Financial Officer

We're OK. We're well passed the house. I think that's fine. We can pick those up after the call.

Operator

Okay. Sorry about the technical difficulty. I will turn the call over to Leigh Chalmers for closing remarks.

Leigh Chalmers -- Senior Vice President, Head of Investor Relations and Capital Management

Thank you. I would like to thank all of our participants today and as Kevin mentioned, 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. Thank you and have a good day.

Duration: 68 minutes

Call participants:

Leigh Chalmers -- Senior Vice President, Head of Investor Relations and Capital Management

Dean Connor -- President and Chief Executive Officer

Kevin Strain -- Executive Vice President and Chief Financial Officer

Claude Accum -- President of Sun Life Financial Asia

Michael Roberge -- Chief Executive Officer, MFS Investment Management

Daniel Fishbein -- President of Sun Life Financial United States

Kevin Morrissey -- Senior Vice President and Chief Actuary

Jacques Goulet -- President of Sun Life Financial Canada

Meny Grauman -- Cormark Securities -- Analyst

Steve Theriault -- Eight Capital -- Analyst

Gabriel Dechaine -- National Bank Financial -- Analyst

Douglas Young -- Desjardins Capital -- Analyst

Sumit Malhotra -- Scotiabank -- Analyst

David Motemaden -- Evercore ISI -- Analyst

Paul Holden -- CIBC World Markets -- Analyst

Thomas MacKinnon -- BMO Capital Markets -- Analyst

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