Good morning. 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 Q1 2016 Financial Results Conference Call. [Operator Instructions] Thank you. Greg Dilworth, Vice President, Investor Relations, may begin your conference.

Thank you, Chris and good morning everyone. Welcome to Sun Life Financial's earnings conference call for the first quarter of 2016. Our earnings release and the slides for today's call are available on the Investor Relations section of our website at sunlife.com. We will begin today's presentation with an overview of our first quarter results by Dean Connor, President and Chief Executive Officer of Sun Life Financial. Following Dean’s remarks, Colm Freyne, Executive Vice President and Chief Financial Officer will present the first quarter financial results. After the prepared remarks, we will move to the question-and-answer portion of the call. Other members of management will also be available to answer your questions. Turning to Slide 2, I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form part of this afternoon’s remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events. And with that, I will now turn things over to Dean.

Thanks, Greg and good afternoon everyone. Turning to Slide 4, the company reported strong underlying net income of $582 million, up 13% from the same period last year, and an underlying return on equity of 12.4%. In a quarter characterized by volatile equity markets and low interest rates, we grew earnings across all four pillars. These results speak to the benefits of diversification both by geography and by business. They also speak to the significant de-risking we've done through business mix and product design. On the wealth side, we focused on asset management steering away from long term guarantees in products like variable annuities. And on the protection side, we've intensified our focus on group benefits and other less interest rate sensitive products. This is all reflected in ROE which was 12.4% on an underlying basis, 11.3% on an operating basis. That compares to a weighted average of around 10% for the major companies that reported in North America over the past week. Our ROE is higher in part because our asset management earnings are proportionately larger than those companies. And in part because we've managed to reduce exposure to interest sensitive businesses. We're currently at the lower end of the range of our medium term ROE objective of 12% to 14%. So we have room to move up over time. Today we also announced a $0.015 or 4% increase in our quarterly common share dividend bringing our dividends per share to $0.405 per share per quarter. This increase reflects growth in our underlying earnings, a strong capital position and our outlook for future growth. This quarter we grew insurance and wealth sales 9% and 1% respectively over the same period last year. And our total assets under management ended the quarter at $861 billion, up 6% from a year…

Thank you, Dean and good afternoon everyone. Turning to Slide 8, we take a look at some of the financial results for the first quarter of 2016. Our operating net income for the quarter was $531 million, up from $446 million in the first quarter last year. Underlying net income which excludes the net impact of market factors and assumption changes amounted to $582 million. Our underlying return on equity was 12.4%. In a quarter where we saw lower bond yields and mixed equity performance -- equity market performance, our results reflect the resiliency and diversification of our business model. First quarter adjusted premiums and deposits were $35.9 billion and assets under management ended the quarter at $861 billion. We maintained a strong capital position ending the first quarter with a minimum continuing capital and surplus requirements ratio for Sun Life Insurance Company of Canada of 216%. As a reminder, our MCCSR for Sun Life Assurance as of December 31 2015 of 240%, included approximately 20 points related to the funding of the Assurant transaction that closed on March 1. The MCCSR ratio for the holding company Sun Lie Financial Inc. ended the first quarter at a strong level of 231%. The higher ratio at SLF level largely reflects the excess cash level of approximately $1 billion held by SLF Inc. And our leverage ratio of 23.7% is below our long term target of 25%, providing us with additional financial flexibility. During the first quarter, the Office of the Superintendent of Financial Institutions released its new draft capital guideline - the Life Insurance Capital Adequacy Test. That will replace the current MCCSR framework beginning in 2018. The public consultation process is now underway and a final guideline will be issued later this year. We are working closely with OSFI and…

Thank you, Colm. To help ensure that all of our participants have an opportunity to ask questions on today's call, I would ask each of you to please limit yourselves to one or two questions and then to re-queue with any additional questions. With that, I will now ask Chris to please pull the participants for questions.

[Operator Instructions] And the first question is from Gabriel Dechaine with Canaccord Genuity.

Good afternoon. Just a quick question on the new business strain. You gave some guidance there, Colm. I wanted to just touch upon a little product announcement you made in the release. You're relaunching some of your offshore life insurance products in the US. Is that going to generate some new business gain activity for you?

Yes, Gabriel, generally speaking the international life product does have that characteristic. And you're right. We've announced that that new product has been launched. However we did not see sales from the product in the current quarter and that is partly contributing to the fact that the new business strain in the quarter was a little bit on the high side.

Right. I think you were, on an annual basis, running about 40 million or so -- 40 million, 50 million, higher than you were a couple years ago in terms of new business strain. Is that the delta you're expecting roughly, to come back down?

Yes, well, when we announced -- when we revised our guidance around the level of strain, I think it's probably a year or so ago. We did take account of exchange rates and exchange rates have been difficult to estimate, frankly there's been quite a bit of volatility in the Canadian dollar. So when we look at it all, we still feel comfortable with the 40 million to 50 million. I mean the big issue is really around business mix in a given quarter. Q1 is more of a wealth quarter in Canada. And one area where we do see new business gains is on defined benefit solutions sales and that can be -- obviously fluctuates quarter to quarter. A year ago we had some sales in that space on the longevity insurance transaction, we didn't have that this quarter. So mix is also a factor, and which quarter in the year. That 40 million to 50 million on an annualized basis is a level that we think is reasonable.

And my next question is for Dean on ROE. You talked about this quarter the 12% running at the low end of your target range, so there's upside. If I just want to play devil's advocate and look at the past few years and what's worked for you, MFS had massive growth. And that’s kind of normalizing or peaked out anyway, possibly. And that was a big ROE driver for you. In the past year, FX has been a pretty big or important ROE driver for you as well, especially since it's tied to the MFS earnings which has low capital attached to it. I'm just wondering, on a go-forward basis what are you seeing that's going to help you take that next leg up towards the 14%? Which parts of the business, what elements of the capital management strategy, acquisitions, things like that?

Well, Gabriel, thanks for your question. First of all, the investments we've been making in organic growth whether it's building out Sun Life Investment Management, building out SLGI, launching segregated funds, growing sales forces in Asia. As we look ahead we see all of those kinds of investments in organic growth really coming through and helping to lift. I mean they've been big drags on the expense line. We've -- on many calls in the past we've talked about the investments we've been making. We’re pleased to see that evolving the way we expected. SLGI is a great example of that where we're really at the breakeven spot and looking forward in the next several years it’s going to be a contributor to that lift. The second thing I’d point out is we've run the last several years as you know with a significant amount of excess capital that we have deployed. And as we've done that and particularly for the larger transactions, specifically the buy-out in India, the acquisition of Assurant, and the acquisition of Bentall Kennedy. We've disclosed for the latter two the accretion on EPS but as well ROE. And so those will help us on the ROE side. So I won’t go further than that but as we look ahead those are two critically important areas and obviously we have to keep executing on those.

And as far as the seg fund business, is there an element of running off legacy seg funds in Canada? And is that going to have a near-term impact on your ROE or is that a beyond 2018 kind of thing?

Well, I think the impact on ROE is farther out. But there is -- it's fair to say there is a run-off of the legacy seg fund book. And it's running off at a decent cliff and it’s being replaced, as I said, we had a little over $150 million of seg fund sales in the quarter of our new seg funds, the GIF funds which have much better, much superior risk and return characteristics, and so that's going to help us. But I wouldn't try to model. I wouldn't fire up your model on ROE accretion from seg fund moves over the next couple years.

The next question is from Humphrey Lee with Dowling & Partners.

Good afternoon. Maybe a question for Dean or Colm. Looking at your current dividend payout ratio, it is near the low end of your target range, even though your earnings power may not necessarily be full strength this quarter given the equity markets. So, to me the pace of the dividend increase seems to carry some level of conservativism. Is it just a timing issue because of the capital deployment that took place in the first quarter because of those acquisitions? Or should we take it as a more cautious approach from management because of the market volatility?

Humphrey, it’s Colm here. No, I don't think we'd look at it as being a cautious approach and there's many factors obviously go into the determination of an increase in the dividend. And clearly we look at the underlying earnings, we assess the growth trajectory that we see, we look at our overall capital level. We consider the macro environment. All of those factors are discussed and reviewed and the increase that we see at 4% for the quarter, for the increase, very consistent with the objectives that we have for an 8% to 10% earnings per share growth on an annual basis. Very consistent with our payout ratios that we've talked about, very consistent with our views around our strong capital position, you heard us mention our SLF capital ratio for the first time, we haven't disclosed that previously. So now we feel good about it. I think caution isn't the word but caution is obviously a factor that one would always think about in any matter related to capital. So if you mean it from that point of view, yes but if you mean it from the point of view of, are we holding back because we see a more adverse market out there, no, we don't have that view.

So should I take it as it could be a little bit more frequent or proactive revisit of your dividend payout in the subsequent quarters?

Humphrey, it’s Dean. We have not specified a frequency of dividend review, it’s something that we talk about. With the Board of Directors regularly. I think that that guide post for you on that is think about the dividend payout ratio of 40% to 50% and how we are navigating our way through that, and that's probably the best guide post you can look at.

Thank you for the color. And then maybe just one question for Mike on MFS. The flows in the managed funds definitely saw a pretty good improvement in the quarter, especially when you look at the recovery in gross sales. Can you provide some color on what you're seeing in that market? And, also, can you talk about the progress of some of the new strategy that’s being rolled out in terms of traction?

If you look at our flow trends particularly in our institutional business, we've seen a significant improvement in redemption rate. Now some of this is tied to our sovereign wealth business but I think we've seen it really across the board in that business. More recently we are seeing increase in pipeline in activity within blended research which we've talked about. We're hopeful that all the work that we're doing around positioning that product in the marketplace will begin to bear fruit in the quarters ahead. We're beginning to see signs of that and we're hopeful that we've begun to see continual improvement in the institutional business. I will caution you though that that business does tend to be pretty lumpy and one of the things that we're seeing around the world is, as clients given the challenging return environment both in rate markets and equity markets we are seeing considerable movement of assets and monies within that business. And so we think that the business has gotten better, we can continue to get that better but we continue to provide caution given the lumpiness of that business.

And then in terms of the sales in this quarter, my understanding is there's no one big mending win or anything like that that affects the numbers in the quarter. So, do you feel like the gross sales for this quarter would be a decent trendable level assuming no significant outflows in the near term?

Well, as I mentioned we saw improvement on a net basis in the institutional business. On the contrary and this is what we've seen industry wide, the retail business continues to be pressured by market volatility. And so if you look in the US retail year to date, equity flows and -- equity funds, excuse me, on outflows, we've seen some modest improvement in fixed income flows but the retail business here in the US and we've seen this outside of the US as well, it's been pressured by market volatility. So while we've seen an improvement in the net -- from a net basis our institutional business, the retail business year over year is weaker given what's happening in the marketplace. Having said that we are picking up share relative to the industry within retail. So it's very hard for us to give you a sense of flows not knowing what the environment is going to be like. Our view is given uncertainty around growth around the world, Brexit, the US election we would expect that market volatility will remain relatively high. We're not expecting a significant improvement in retail flows. And so we'll just have to see where it goes from an industry perspective.

The next question is from Meny Grauman with Cormark Securities.

Hi, good afternoon. Just following up on Humphrey's question, just wondering what your sense of seasonality was in the improvement in net flows at MFS. How much of a factor was seasonality in Q1?

Yes, seasonality doesn't impact our flow – had a little bit better flows early in the year, for the DC business. But on a year over year basis that would have been there but seasonality is not a big impact on the flows.

And then just as a follow-up, in terms of your outlook on the operating margin, is there any update there in terms of what you're looking for going forward?

Yes, this is Rob. Just to take a step back. When we were around 450 billion or so in assets, we told you that you should expect the high 30 margin and that we were going to be spending down some of that in technology which we are continuing to do. And when the market takes away 50 billion of assets in a quarter which it did in the first quarter and some of that has come back, you can see the negative effects of our operating margin. Now when that happens we do have some discretionary expenses which we can pull back quickly that helps temper that. But as Mike suggested we view this year to be one that’s going to have continued volatility. And so as we move forward all you really have to do is just look at where average assets are and you can plug it into your model because you saw the margin improve as we scaled up to 450. And as you take that away from us, we have a negative effect as well. So as we sit here the math still works but we’re very uncertain about asset levels because of the market conditions.

The next question is from Robert Sedran with CIBC.

Hi, good afternoon. Dean, especially now with the India transaction I guess sapping a little bit more of the balance sheet strength or liquidity that you have, is it time to give the corporate development team a bit of a break? Or do you see other pockets that you'd still like to invest in?

Thanks, Rob. Well, I think we've said all along that our first priority is organic growth. And we see a lot of opportunities to grow in all four pillars organically and that's exactly what we've been doing. That's our first priority. But we have also -- for years we've been in the deal flow, looking for opportunities for businesses that will give us new capabilities, for example, the Assurant transaction for more scale, or to help build out a new part of the pillar, for example, the investment management acquisitions that we've done. So we don't need to do acquisitions, we have great scale, we've got great businesses in all four pillars and we've got really strong organic growth opportunities. But at the same time we are looking for further opportunities. But I would say huge focus this year in particular on integrating Assurant, and doing it and hitting all the targets we've set for ourselves and disclosed. And making sure all the businesses we've -- the three businesses we've acquired under SLIM that we achieved the kind of revenue synergies that we are working on. And that our Asian joint ventures hit all of their targets. So a lot of focus on making sure that these things that we've done really hit the targets we've set for ourselves. But I wouldn't rule out the possibility of further M&A, we're always looking. The only other thing I would add, Rob, is the but in that is that anything we look at must clear our hurdles in terms of ROE expectations. And that takes you back to the 12% to 14% over the fullness of time.

And those, like the ROE hurdles and the expectations, I guess simplistically, people sometimes say that when there's been too much acquisition activity or a lot of acquisition activity it sort of distracts management from some of the core business. So, I guess what I'm asking more is, are you getting pickier on your acquisitions in terms of are some of those hurdles rising for the next little while as you try to carry on simultaneous integrations as you're going on?

Yeah, I mean I would say we've been picky to date and the nice thing about the transactions we have completed, or soon to complete is that they are nicely spread across all four – well three of the four pillars. And so any one group, any one pillar has sufficient bandwidth to run the existing business and to integrate the acquisitions. So that has not been a concern to date. I would say to you that we will be as continue to be very deliberate, picky, to use your words and discriminating in the way we deploy capital, and because we're very very focused on these medium term objectives of EPS growth and 12% to 14% ROE.

The next question is from Tom MacKinnon with BMO Capital.

Thanks very much. Good afternoon everyone. Just a couple of questions here, probably for Colm. With respect to the HoldCo cash, I think we started at around $990 million and ended around $1.04 billion. I know there was sub debt raised. And I don't think you've paid for Birla yet. So, maybe if you could just walk through how we should be thinking about that.

Yes, so Tom, the major movements in the cash waterfall at HoldCo with the dividends up to the HoldCo from Sun Life Assurance and from MFS, the receipt of the sub debt issuance and you're right, that closed in Q2, so the cash was downstream from SLF to SLA after the quarter end. So when you think about the $1 billion at Q1 pro forma that's transferred down to Sun Life Assurance, we were at $700 million on a pro forma basis. And then of course we have the regular income and the dividends paid to shareholders. So those were the major components. We did repay a little bit of – we took out a short term loan I mentioned that last quarter which we paid a portion of that this quarter. And there's a few other smaller movements but those will be the key items, Tom.

So then what about Birla, the payment for Birla, was that 340 million? That hasn't taken place yet. Is that coming out of the HoldCo?

Not as of March 31, so that's when I say pro forma, we move that money down to the quarter end and that payment has now happened.

Now just a question on the goodwill. It went up by about 900 million quarter over quarter. Is that all due to Assurant or is there Birla in there as well?

Birla will -- the transaction on Birla happens after the quarter end. There is a little piece related to Vietnam because that also happened in the quarter. And that's the buy -- an increase in the ownership interest there but the goodwill on Assurant is at the high side because we haven't finalized the purchase price equation. And when we finalize that and we will do that over the next quarter or two. You'll likely see some reallocation from the goodwill to intangible assets within that overall purchase price.

But how do we look at that in context to the C$1.25 billion that was spent? Are we to look at that, that around C$900 million of that is the combination of goodwill and intangibles as it stands now?

Well, the purchase price is a separate exercise and we acquired assets, we assume liabilities, the difference between what we pay and they have works as you allocate that to everything and a good portion of that payment is in respect of goodwill and intangibles for this type of business. You'll see that in the finalized purchase price equation next quarter.

And how much of the 340 million on the Birla is goodwill?

I haven't finalized that. We haven't finalized that purchase price equation yet. That happened after the quarter, so we'll have an update for you on that next quarter.

And just squeeze one quick one here, the Assurant, I think you'd talked about US $100 million pretax in terms of synergies by 2019. How should we look at that for 2016 and 2017?

Well, maybe I can just make a comment about that and then perhaps I'll have Dan to amplify it. So obviously early days in terms of that overall program spend, there's a lot of pieces to that. We just closed on the transaction but we’re underway with respect to that work, and Dan, did you want to add a few comments?

Yes, we will see a bigger portion of that in years one and two, than in year three, it’s not completely smooth. And at this point, although it is early days we still feel confident in the number that we committed to and we have increasingly detailed plans in place to achieve the synergies. And we've already started some of that work. For example, since March 1 we've integrated our sales organizations, account management and underwriting, and as part of that realized the synergies that we planned for those areas.

Just to add a comment around that too, I mean when we put out the information with respect to Assurant, we talked about the accretion that we would anticipate in the current year and then it grows over the next couple of years. And we see the results of Assurant for the one month and together with our views around the amounts that we’ll need to incur to realize those synergies, we're still comfortable with that accretion guidance that we provided at the time of the transaction, and if you recall that was $0.08 for the full year.

That's right. So, we look at it as $0.06 -- or a little over $0.06 -- because it was a March 1 close? Is that the way we should be looking at that?

Yes, you would think that's exactly, it’s not a full year –

And the transaction integration cost of US $150 million pretax are they largely in the 2016 and 2017 as well?

It is more front end loaded into ’16 and ’17 but it does also extend into 2018.

Okay, that's great. The disclosure is good, but if we had a wish list I'd like the notable items kind of split into the divisions, both pre and post tax. And any tax rates on what you're putting in for the underlying earnings by division, that would be great, too. But you've got a lot of other things to work on but that's my wish list. Thanks.

The next question is from Peter Routledge with National Bank Financial.

Hi, thanks. A question on the Canadian division. See seven consecutive quarters of declining expected profit but general fund assets and AUM are rising. So, what's behind that?

Hi Peter, it's Kevin Dougherty speaking. Yeah, as you point out AUM is rising, we've got really excellent traction on flows relating to various components of our new wealth initiatives in retail and group, and so you’re seeing it on that line. That's very much giving us the confidence to press on with investing in these initiatives. So what you're seeing are essentially investments in future growth. By picking a part of it for you, the new seg fund platform, for example, didn't exist at this time last year, it's a brand new line of business. We're off to a great start but we're still less than a year old in that business, doing a lot of work on the dealer to help our advisors consolidate and grow their assets. So investment is there and considerable investments in digital, you would have seen in September, we announced the launch of the Digital Benefits Assistant which is a very significant differentiator in our group and GRS business. It will show up I think in wins there, the GRS digital enrollment that MAX my Money that Dean mentioned in his remarks is going to help us in two ways; one, win more GRS business but also increase contributions that are being left on the table. And also digital investments in our total benefits platform which has been a big differentiator and a big part of our growth story in those core businesses. So these are important news areas to increase our leadership in the digital space in particular. Previous investments are now coming on stream, you would see that in the inflection of our SLGI business which is moving out of the investment phase into the contribution phase. Defined benefit solutions business where we continue to build a platform, you didn't see much impact on earnings this quarter. Q1 tends to be quiet but you would have seen through last year significant contribution to new business gains through the year. So I think we're at different phases with these different investments. At the same time – and so that's what's flowing through –

That's what's causing the decline in expected profit –

Yes, it’s showing through that line, at the same time it's all kind of a big balancing act to get to our overall earnings growth targets and we have really many tools and paths such as pricing gains and investment gains, underwriting gains and group, you’ve seen, continue to improve and we have ambitions around that, timing of investment. So I think, hopefully that gives you some color on what's flowing through that particular line but we’re committed overall to continue to grow the earnings while we invest in these important areas that will pay off in future quarters.

How much of the decline, or flatness, let's call it, in expected profit is just related to the simple fact that as interest rates stayed this low for a lot longer than anyone thought, at least five years ago, that the return on whatever measure of business volume you want to use, whether gross measure, whether it's assets, or whether it's the liability, that the return on your historic, your in-force business is just lower, and that just permanently is going to blunt earnings growth and ROE accretion in this business. That's the concern. Maybe you can address that.

Yes. Well, I think over recent quarters you've seen a decline in interest rates and very poor performance in the Canadian markets and so that means assets inside of those particular products are quite profitable, have been growing at a slower rate than they would have otherwise. And maybe, Larry, you might want to add something to that?

Not much to add to that other than some of the business that is where we have funds on deposits, some of those margins are little bit creeping on the lower interest rate as well.

And then just a quick question, maybe for Colm. Can you explain the difference, if possible, briefly between the effective tax rate for underlying and the effective tax rate for operating? Why is there that gap this quarter?

Yes. So it's a bit of an unusual feature this quarter in terms of the t size. It has been featured before but it’s a little amplified this quarter. And we have a bit of a certain assets that back our liabilities, that those assets are tax exempt and the interest rate hedging that we do on those assets is performed on an after tax basis. So if you only look at the results pretax, you’re going to get an unusually low tax rate in a quarter such as this. But when you adjust for the impact of the interest rates on the liability side, you see that it comes back in line. So it’s probably best to look that on the Slide 15 and you see that the after tax amount with add back on the interest rates is quite low at $19 million on that $69 million pretax. So that's really the offset to the tax line. So when you adjust for those, you get back to a 20.9% which is right in line with that range. It's not a new feature around our tax structure, it just happens to be a little amplified given interest rate movements and their impact on this portfolio that we had this quarter.

Was it the interest rates or was it swap spreads?

It was interest rate.

The next question is from Dan Bergman with UBS.

Good afternoon. US group benefit sales were up pretty sharply in the quarter. I wanted to see if there's any additional color you could provide on what drove the sales strength. And maybe any sense on how much was due to the contribution from the Assurant acquisition versus organic growth. And then maybe more big picture, any color you can provide on the feedback or response you're getting from clients in terms of that acquisition and the impact it's having on your sales and renewal discussion. Thanks.

So in the first quarter there definitely was some impact from AEB sales in March, we just had one month of sales. But that's part of why you're seeing the big quarter over comparable quarter increase there. If you take out the AEB sales, group and voluntary sales were up by 17% and stop loss was up by 20%, so not quite as dramatic as if you look at the total. But we are getting some good momentum with our sales now. As you know we've been going through a repricing effort the past two years. As we're much further into that process we're starting to see improved results, improved sales effectiveness and improved close ratios. As to your second question, as to the reaction we're getting, so far it's been very positive. A couple of points there. On both the Sun Life and AEB side, we've seen no decrease in sales as I just said in fact on Sun Life legacy we're seeing an increase in sales, and Assurant had very good sales through really all of last year when it was well known that they were for sale and continuing into the first quarter. We're looking forward to June 1 which we characterized as opening day. And that's the first day that we will face the market together with the combined product suite under the Sun Life brand. And there's quite a bit of excitement from our own sales people as well as from the brokers we're talking to about that launch point and being able to offer the stronger combined suite of products.

That's very helpful. And maybe just staying with US group benefits, it looked like there was some favorable morbidity in that line this quarter. Just want to see if you could give a little more color on what drove that result in the first quarter, and how much of an impact you're seeing from your repricing actions and how those are progressing. Thanks.

Sure. Most of the favorable morbidity that we saw in the first quarter, in this particular quarter was due to favorable stop loss results. Disability results were in line with our expectations and somewhat unfavourable mortality in life. We had a very favorable first quarter 2015 in disability, so we're comparing it to an unusually good quarter there. But most of the favorability this quarter was in stop loss. But overall we're continuing to see good results from the repricing, and probably most significantly the business we're retaining is significantly better performing than the business that we're last seeing [ph].

The next question is from Mario Mendonca with TD Securities.

Good afternoon. A question probably for Steve Peacher. Is Steve Peacher on the line?

Yes.

The last couple of quarters, the investment, or what we refer to as the yield enhancement gains, have been stronger than what you'd anticipate. What would be helpful to understand is what sort of investing activity is driving this, and really, it would be helpful to understand it from the context of its sustainability.

Well, I would say it's -- every quarter it's a mix of some of the same things but then some onetime opportunities that present themselves in a particular quarter. So if you look at what some of the basic underlying drivers of that number are is relative value trading in our corporate bond portfolio and that can be dependent upon market conditions. It's -- our ability to invest in private fixed income securities or commercial mortgages which give rise to those gains depending on how they are placed behind liability segments. From time to time there can be ALM activities which give rise to investing gains which are more onetime in nature based on changes in how we're structuring the assets behind the liabilities. So I think the last few quarters have been -- they've given us opportunities that I think are on the high side higher than we would say as sustainable. Because every quarter there have been a few things which we'd say gee that was kind of unique to that quarter and isn't necessarily recurring. What is recurring I think we've always demonstrated an ability to generate some relative value trading gains and to put non-marketable assets on the books at attractive spreads.

Is there -- these yield enhancement gains, they arise from the trading activity you're talking about. And presumably you make assumptions about what these assets will generate over time. Is there any risk that the assumptions behind these invested assets will not be realized and ultimately result in this going the other way one day, where we actually have charges – sort of the opposite of yield enhancement gain?

So I think, obviously some of the things we are going on a relative value side that give rise to these gains, and if we can find bonds for instance in the market that have higher yields, higher spreads for a given rating than something we'd sell, that's going to give rise to a trading gain. There's always the risk that you pick the wrong security, you end up with credit issues or that you end up selling a bond at a lower price and a wider spread and have to reinvest at a lower spread and that would work against you. So that’s just the risk of being in the bond markets. But we've been able to avoid that for the most part –

So, the assumed returns are generally -- you are really confident in those assumed returns because you're not talking about any special asset classes where you have to make very long-term assumptions about those returns.

No, return assumptions are really baked into the kind of securities we’re buying, so we’re buying the long dated fixed income investment grade securities where the returns are based on the contractual interest rate which is generally a fixed rate. And the amount that’s due to us at maturity, so there's very little guesswork in projecting the returns on these kind of investment grade securities that we’re investing in.

That's helpful. Let me drive on to another topic, and this one perhaps for Colm. The expense experience, and I have seen how -- there was a modest loss this quarter, and I do – I recall how Q4, that expense experience does become somewhat higher, or the loss that is. I was a little surprised to see how modest these expense experience losses are emerging, because it's my understanding that a life Insurance company can't help but have some kind of expense gap. So, what would be helpful to understand from you is why does Sun Life not appear to have much of an expense gap? And if there is one, where? Where would the expense gap normally reside?

Yes, so maybe just sort of a comment about our overall expense management and then maybe I will ask Larry to comment on the expense gap and where it appears, the sources of earnings. But clearly for the reasons that Kevin Dougherty and others have outlined, we're investing in growth and we have an approach. When we set our targets our budgets each year that we would say look we're going to have somewhat elevated expense levels. But over time we expect that to get down to a flat position and we expect it to be covered within the product side. So during that period you can have an elevated negative expense experience and you've seen that in over the last couple of years and particular quarters. Now I would caution against focusing on the quarter, Q4 for the reasons we've talked about previously, Mario, there can be sometimes a bit of an expense bulge in the fourth quarter but in general, yes, there has been a negative expense experience. But that's a little different from an expense gap, sort of paradigm. But clearly that expense experience is something we track very carefully and by being quite open about it, we’re putting I think appropriate spotlight on the fact that we are investing. And we would expect – and you're right to ask us, what is the trajectory to see that come down. In a big organization like ours there is always going to be initiatives across the organization and it could be in Canada at a particular time or it could be in Asia, could be elsewhere. But that is a number we track quite carefully but on the expense gap topic, Larry, I’ll ask you to say a few words.

Sure. So our business leaders often do set expense targets which would be lower than the current levels that they are achieving and that help them drive performance in the business. But from a source of earnings perspective, we generally allocate the full expenses to either new business gain, if it’s more distribution related or to effective profit if it’s other types of expenses. So typically you wouldn't see the expense gap showing up in the experience gain and loss line rather the expense gap would be something that would be an internal measure that the business leaders are using to drive performance. Now there have been a couple of exceptions and, Colm talked about one of them, so where we have a large spend that is temporary in nature, we have occasionally run that through the expense loss line and the buildout in individual wealth in Canada was an example like that, and you’re seeing that come trend better now. So there have been exceptions but typically we're putting all the expenses into new business gains, or expected profit.

So the divisions essentially have to eat all the expenses, other than those odd occasions when you are in investing aggressively in a new business, like SLGI.

Yes.

So let me just clarify one other thing you said. You said sometimes divisions will run expense gap to help drive performance in the business. When you say drive performance in the business, you just mean better sales?

No, actually what I really mean is by saying here's the expense level that we need in order to compete in this marketplace at scale and with the best in the business, we need to get our expenses to this level of unit costs and so they use this to work with their teams to get the expenses down to the units that they need to be competitive, and to be the strongest in their market. Operator The next question is from Doug Young with Desjardins Capital Markets.

Good afternoon. I guess, my first question is for Kevin Dougherty. Just wanted to kind of focus in on the group insurance line and what you're seeing in this quarter from a morbidity experience, specifically on the disability side and also from a pricing side. I know there has been some pressure over the last little while. Is the competitive forces kind of tempered down here? And is the market moving in more of a rational direction?

Sure, Doug. Well, what you've seen on the disability side this quarter was, really right through each quarter last year I think you saw improvement in our results in disability. So we're seeing that both in incidents disability claims and also recovery rates. And we've done a lot in our disability claims management model to really improve that. And I think you’re seeing that in the numbers. Also in that line would be improvements in our underwriting gains around the drugs and some of the high cost drugs and we pushed through a lot of price increases through last year. I think we were one of the first companies to really get at it and pushed the market and kind of led the way. And initially there was quite a bit of resistance but we’ve worked through it with lot of options with clients and have been successful in repricing and retaining business at a very very good rate. So I think we've had good success there. The market is always quite intensely competitive. Overall I think it is possible that you could say it's improving. All business is hotly contested as you would expect. From our point of view we try to really pivot away from price as kind of the driver of decision maker -- for decision, we never lead with price and sometimes don't have to get as close as maybe others. And we use things like total benefits, like our digital applications around -- for example, around submission of claims, you can do it on your cell phone now. You can either take a picture or you can submit it, it’s paid instantly. The money is in your bank account tomorrow morning. These kinds of things are extremely attractive to different segments of the market. And we try to lead with that and follow on price just as far as we need to.

Just a clarification, the group disability claims experience, was it favorable in the quarter or was it just a wash essentially, in line with expectations, or was it negative?

It was slightly favorable. Slightly favorable to expectations. So it's kind of return to normal levels and then a little bit more.

So you're not having or seen any pressure from the economic environment out West?

At this point we haven't seen any. The oil and gas sector is only about 3% of our premium business in force and group, so it's not – it’s not a large exposure on the disability side but it’s something we're watching very closely. At this point we're seeing the same incidents in recovery rates as in the rest of our block.

That's helpful. And then just, Rob, on MFS, you talked about the investments that you're making in the business, and it seems like you've done a good job managing expenses. Is there any lumpy expenses coming through related to those investments? Or is this quarter indicative of your ability to manage expenses as the environment continues to be a bit challenging?

The way I would describe it is that it’s sort of going to rise very slowly over the next few quarters. We have two very very big projects. One is in our order entry and compliance systems for all of trading which is the biggest piece, and then CRM system, and the way the projects work is you spend money upfront, and to project what you're going to do and then when you implement it, the people costs come in and that's going to scale up over the next few quarters. But it's not going to be dramatic but it will slowly rise.

The next question is from Darko Mihelic with RBC Capital Markets.

Hi, thank you. Just a modeling question here. Earnings on surplus, why is it so – I mean it's relatively volatile in Canada. I'm assuming it's available for sale gains. Why is that occurring in Canada and not anywhere else? And maybe you can provide some high level commentary on the gains that were taken in the quarter and whether or not we should view this quarter's earnings and surplus as more normalized?

Yes, Darko, it’s Colm here. So a couple of points there. So first of all, the level of available for sale security gains was high this quarter. And that reflected, as you recall that we had a dip in the quarter, a very low interest rate environment and we decided that we would take a somewhat higher level of gains than we would normally take. Normally we take somewhere in the 25 million to 30 million pretax. In this quarter it was just a little bit over 50 million pretax and that ended up in available for sale gains. And we’ve managed it at the total company level. So we don't have a target for each of the business segments. The gains can be disproportionate in any one business segments in a given quarter. So it did break a little bit more towards Canada this quarter. So that's one way to think about it. That’s somewhat elevated gains in overall and of course that’s related to Canada. End of Q&A

Showing no further questions at this time, I'll turn the call back over to Mr. Dilworth for any closing remarks.

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

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