Good morning. My name is Sean and I will be your conference operator today. At this time, I would like to welcome everyone to the Sun Life Financial Q4 2016 Financial Results Conference Call. [Operator Instructions] I will now turn the conference over to Gregory Dilworth, Vice President, Investor Relations. Please go ahead.

Thank you, Sean, and good morning, everyone. Welcome to Sun Life Financial’s earnings conference call for the fourth 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 fourth-quarter and full-year 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 fourth-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 on today’s call. Turning to slide 2, I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form part of this morning’s remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events. And with that, I will turn things over to Dean.

Thanks, Greg, and good morning, everyone. Turning to slide 4, the Company reported fourth-quarter net income of $728 million, capping off a strong 2016. For the full year, reported income was $2.5 billion. Underlying net income for the fourth quarter was $560 million, and for the full year was $2.3 billion, or $3.80 per share. We generated an underlying return on equity of 12.2%, delivering within our target range of 12% to 14%. Full-year results reflect both good organic growth, as well as the benefits from the capital deployed on acquisitions over the past few years. The full-year results reflect 5% growth in expected profit, lower new business strength, strong investing gains, and favorable credit experience. Insurance sales for the year were $2.8 billion of new annualized premium, up 27% from prior year. Wealth sales totaled $138 billion, up 14% from prior year. Assets under management grew to $903 billion in 2016. We’ve executed on our strategy and allocated capital in a disciplined way, to generate strong returns for our shareholders. Over the course of 2016, we deployed a substantial amount of capital to drive long-term earnings growth and future ROE improvement, through both organic and inorganic initiatives. We also increased our quarterly common share dividend twice in the year, for a total dividend increase of 7% over prior year. This represents a dividend payout ratio of 43% of our underlying earnings in 2016, delivering within our target range of 40% to 50%. Turning to slide 5, I will discuss a few key highlights across our four pillars for the year. In SLF Canada, the investments we’ve been making in new solutions and businesses are driving growth. Wealth manufactured sales were up 33% from growth in our new segregated fund suite, as well as growth in Sun Life global investment…

Thank you, Dean, and good morning, everyone. Turning to slide 7, we take a look at some of the financial results from the fourth quarter of 2016. Our operating net income for the quarter was $728 million, up from $536 million in the fourth quarter last year. Fourth-quarter operating results benefited from strong market gains, but also reflected higher operating costs. Underlying net income, which excludes the net impact of market factors and assumption changes, amounted to $560 million, compared to a strong result of $646 million in the same quarter last year. Our underlying return on equity was 11.4% for the quarter. Fourth-quarter adjusted premiums and deposits were $43.2 billion, and assets under management ended the quarter at $903 billion. We maintained a strong capital position, ending the year with a minimum continuing capital and surplus requirements ratio for Sun Life Insurance Company of Canada at 226%. The MCCSR ratio for the holding company, Sun Life Financial Inc was also strong at 253%. The higher ratio at the SLF level largely reflects the excess cash of $1.6 billion held by SLF, Inc. Our book value per share increased 2% in the quarter, reflecting strong reported earnings, and our leverage ratio at the end of the quarter was 25.2%. We announced our intention to redeem $800 million of subordinated debt in March, and pro forma leverage would be 23%. Of course, SLF cash would be lower by $800 million and pro forma MCCSR at SLF would be 243%. Turning to slide 8, we provide details of underlying earnings by business group for the quarter. In SLF Canada, underlying earnings were solid for the quarter, reflecting new business gains from strong sales and individual life and wealth and group retirement services, and a benefit from the release of the litigation provision.…

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 yourself to one or two questions, and then to requeue with any additional questions. With that, I will now ask Sean to please poll the participants for questions.

[Operator Instructions] Your first question comes from the line of Steve Theriault with Eight Capital. Your line is now open.

Thanks very much. Good morning, everyone. A few questions on MFS for me, and maybe starting with taxes. We saw a nice step-down in the tax rate at MFS, so maybe Mike can comment on, or Colm can comment on to extent that’s sustainable. And maybe a discussion on corporate tax rates, with getting a lot of attention as of late. Would you expect that any benefit from tax reductions in the U.S. will drop to the bottom line in a pretty straightforward fashion? Or are there competitive forces, other things we should be aware of that would reduce the impact versus what the simple arithmetic would tell us?

Yes. Colm here. I will tackle that one. And maybe just on the second point around the impact of corporate tax rates. I know there’s a lot of discussion, obviously, about what will or what might happen in the United States. If we think about that, we certainly would see a benefit from a reduced U.S. corporate tax rate. I think the specifics over whether that would be computed away or not would be very dependent on how it came in and over what time frame, and the interactions and the impacts of competitive forces in each of the individual businesses. I think the reality is that there would be a benefit that would be seen and longer term you might see some consequential activity, but that’s not something that we would see as being concerned about in the near term. In respect with MFS, I think the right way to think about the taxes is to think about our overall tax rate at Sun Life Financial, in the 18% to 22% range. Certainly, we do break out the taxes obviously by business segment, but we don’t provide an overall level of target range for the individual segments. We do manage our overall tax affairs of the consolidated level, though I definitely would want you to keep that 18% to 22% effective tax rate in your mind. Having said all of that, we did see a lower tax rate at MFS this quarter, it was approximately 30%. If you look back over the past couple years, Steve, it has been at a higher rate, maybe the high 30s, in fact, as high as 40%. MFS itself is, of course, an international company, so it has its own complex tax management affairs to manage, and it depends on location of earnings and it depends on mix of earnings, and another driver of tax. We did see a reduction this quarter, and we do expect this to be able to sustain a lower level of MFS taxes throughout 2017, but we are not going to give you a specific number to target. One way to think of it might be to say, rather than being at the high 30%, 40% range, we’d be in the lower 30% range. However, bring it back to the total Company level of 18% to 22%, that gives you more comfort that we can operate quite comfortably in that 18% to 22% level.

Thanks, Colm, for that. That’s very helpful. Maybe just to continue with MFS but maybe turning to the margin front, Mike, last quarter, you talked about potential downside from regulatory costs, fee pressure, generally. Given the decline in margin we saw in Q4, looking forward, it would be helpful to have a sense as to how defensible you think margins are at this level now, that we a few hundred basis point decline in Q4. If markets are just okay, what is the risk we go from the high 30s to the mid-30s to the low 30s, either on the back of industry-wide challenges or some MFS specific challenges? I’d like to get a sense for the risk of that getting continually lower from here.

Yes, Steve. It’s Mike. I think it’s more related to the industry challenges as we look forward on margins. The challenges the industry faces now with the fee pressures from passive, regulatory pressures around the world, and then organic, the lack of organic growth in the industry. So I think you are going to continue to see margins pressure some of the industry. It’s hard to provide a number around that. We won’t be immune to that, but I don’t think there’s anything specific to MFS, relative to what we are going to see in the industry.

Not even on the back of continued outflows on the institutional side?

Again, if you look at the asset management industrywide, most asset managers are actually seeing negative organic outflows. In the retail channel, if you look at the retail channel last year of the top 10 active managers or sellers of mutual funds last year, we were the only firm that had positive net flows last year, to provide some context for how tough the industry is. The challenge the industry currently has isn’t a sales problem, it’s a redemption problem. We’ve seen redemptions go up pretty significant in the industry, and just for a point of context, last year we had a record growth sales year in U.S. retail for the firm at over $46 billion with a net number below 2. In 2013, we sold just under $46 billion and had $16 billion of positive net flows. Had we had that same redemption experience last year, we would have been positive flows across the organization. The industry currently has a redemption problem. We think some of that is cyclical, related to the market environment, clients trying to find return in market, the move to passive. We think once we get more volatility, you do see some more market turbulence. We think that you’ll see some of that come back into active, but we are going to have to live through some of that volatility.

Dean mentioned certain positioning in the U.S.. I noted that the performance levels did slip a little quarter to quarter. Maybe you can give us a little detail on that front as well.

I’d start by saying long-term performance continues to be strong. We compensate the teams here on long-term performance. We are not trying to chase around short-term performance in the marketplace. There was a delta on performance between Q3 and Q4. Much of that could be tied to what happened in the marketplace. Really, not just only post Trump, but also post Brexit. If you look at companies in the marketplace that have ROEs and high financial leverage and high beta, they outperform companies that we tend to invest in, which are high are ROE, low financial leverage, tend to be a little bit lower betas than the market by 10% in the second half of the year. And so the market is trading this reflation trade, with an expectation that we are going to see economic growth, a lot of regulatory reform, tax cuts, which is going to drive significantly higher economic growth and hence earnings. It is rare that eight years into a bull market to see a market do that. It tends to happen after the end of a market correction, so we are skeptical. We continue to focus on the long term, identifying those companies we think will drive high returns with low volatility for clients. Those are the stocks that tend to do well in down markets, and we are going to continue to invest that way on behalf of clients.

Thanks for that color. Appreciate it.

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

Good morning and thank you for taking my question. Just to stay on MFS, you mentioned that the institution saw the pressure that you are seeing coming from pension funds rebalancing and then some of the variable annuity play out. Can you just talk about in terms of the outflows, were they concentrated among a few clients, or was it more broadly across the board?

Yes. It was pretty broad in terms of the flows. We saw it across clients. We saw it across distribution channels. If you look at the institutional separate account relative to the insurance sub advise business. What I would say is when you look at it by purpose, we go out and we talked to those clients around why they are redeeming us. The lowest percentage of the rationale for them is performance, so it was not at all performance related. It is asset allocation, change, derisking, move to passive, clients that are moving to a different structure of their overall plan. It’s hard to anticipate this. You don’t know when they are coming. They can be lumpy at times, but it’s very much related to what clients are doing, and some of the changes that they are making in their overall portfolios.

Okay. And then maybe can you update us on the progress of some of the newer strategies that you recently launched, are introducing, and then how and in terms of their traction so far?

Yes. We talked about blended research. We did see a significant increase in blended sales last year. Fixed income is something that has a longer tail to it, in terms of the rollout, as we institutionalize that business. We are going to work hard this year to get in front of consultants and clients in fixed income, and we think, hopefully, we’ll see the fruits of that maybe next year. That was never meant to be immediate. Hopefully, we’ll begin to see that. What I would say though is we looked at 2016, we had over $1 billion in sales in 25 strategies last year, and so we are not selling one particular strategy. There is breadth of sales going on, and we believe that if the redemption rate in the business normalizes, we are very well positioned to see an improvement in flows.

Thank you. If I can sneak one more in. Just on the U.S. group benefits. The stop-loss performance you talked about a little bit underperformed in 2016, you are going through the repricing cycle. Can you talk about in terms of rate actions, have you taken any rate actions for the underperforming blocks? And then a high-level comment on the Jan 1 renewal.

Humphrey, good morning, it’s Dan. We have taken rate actions throughout the year. As you know, we started recognizing some increased morbidity in our stop-loss business during the first half of 2016. We began taking significant action at that time. That started to affect both new business and renewals as soon as approximately August. As of this point, because so much of that business renews on January 1, we repriced about 78% of that business, so that reinforces the nature of stop-loss, where it can be repriced generally in a year. We have achieved significant rate increases. Now, that business as a baseline gets a meaningful rate increase each year, but for January 1, our achieved rate increases are over 16% on the book of business that’s renewed, which is significantly higher than in prior years. We also have lapped some business as we do every year, and the performance of that business has significantly higher loss ratios than the business we are retaining. So we think we have taken fairly quick action, and we should see the impact of that as 2017 goes on.

So on the net-net basis, would you say they’ve enforced strong relative to last year levels, because of the rate actions?

No. The in-force stop-loss business will actually grow slightly, partly because of the rate increases and underlying medical cost trend, which is an underlying driver of the business. In very rough terms, our sales for 1/1 and our lapses were roughly equivalent, but then we get growth on top of that from the rate increases. Sales year over year are also relatively in line, as compared with prior years, where sales had been growing at a good pace. And that reflects the more measured approach to pricing that we took this fall.

Okay. Got it. Thank you.

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

Hi, good morning. Positive net interest and equity market impacts certainly stand out, given what we’ve seen across North America with your peers. Just wondering if you could walk us through some of your actions, in terms of managing your hedging program, how you think about it, and specifically if there’s anything unusual that you did in the quarter, or maybe something that would have implications going forward that would be notable? That would be appreciated.

Yes, Meny. It’s Kevin Morrissey speaking. The net interest gain in Q4 was $130 million after-tax. This was higher than implied by our note sensitivities. The credit spreads and swap spread components were right in line with our sensitivities. About two-thirds of that positive variance I would call out as being from normal sources, specifically which rates changed, and how quickly they changed. When you look at the yield curve shift in our note sensitivity, there is a parallel shift embedded in that. We benefited from the fact that longer-term rates in North America went up by more than the shorter-term rates. We also benefited from rebalancing in the period, so we have a number of different hedging programs. Some of those are quite dynamic. They look at factors every day and rebalance. To the extent rates move more slowly than implied in our note sensitivity, which is uniform over five days, we get gains. For example, rates went up more slowly. We rebalanced each day, and we mitigated our losses in that regard. That contributed about two-thirds of the positive variance. About one-third of the positive variance was more one-time in nature. We were in the midst of transitioning one of our hedge programs into a more dynamic program, and so we had taken what I would call more opportunistic actions, that resulted in a tactical position that generated some additional gains as well. That’s something that I would call out as unusual and specific to the quarter.

Thank you very much.

Your next question comes from the line of John Aiken with Barclays. Your line is now open.

Colm, are you willing to let us know what the value of the litigation reserve release was within Canada?

John, that’s the type of detail that we would not normally enter into, as you can imagine. These types of things have sensitivity associated with them. I can point you to the other notable item, line item in our disclosures. I can let you know that the litigation release went through that line item, so I think that would give you a sense of where the majority of that would be represented.

Great. Thank you very much. That’s why I classified it as willing. And then, Colm, within the MD&A, you talk about the investment in businesses that’s ongoing, and in your prepared commentary, you talked about that in Canada and Asia. Is this, particularly for Asia, are these expenses that are going over and above the internal run rate you are getting from the acquisitions?

Yes. I will just maybe say a word on that and then Kevin Strain will probably want to add a few words, but we called out Asia and Canada particularly because in that line item on the notable items on the expense side, when you back out the incentive compensation costs, et cetera, you have an expense variance of $30 million. About one-third of that relates to Asia, and primarily, it relates to our ongoing investments in distribution in Asia. We have a program in place around Indonesia at the moment. We’ve got ongoing investments and initiatives in digital and telecom, initiatives. So that might account for that, but Kevin, you might want to add to that.

For Asia, the primary increase in the expense growth was due to contractual volumes and distribution costs and commissions, so that was the biggest increase to the 274 in the supp pack. We also did consolidate Vietnam, and we consolidated VSL which was also a significant factor in the increase. There’s a small amount of currency, and then Colm points out the additional investments we’ve been making, plus the AIT. If you look at the overall expense gap, it actually went down quarter over quarter, so despite the fact the expenses went up, though the sales were providing additional allowables. I look at it and say it’s fairly normal increase due to volumes and the acquisition work alongside some investments we are making for future growth in digital and other things.

Great. Thank you very much.

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

Thanks, good morning. I just want to go back to Mike with MFS. Let me tie in some of the tax question. Think about this more from a business perspective, if we were to see a significant corporate tax reduction in the U.S., as has been discussed, we look at the numbers and as was said, we can do the math there. But do you think in your business in particular, given the competition for asset growth, and especially with what’s happening with flows right now, is your business, one, maybe counter to the underlying insurance business, where that tax benefit would be harder to keep, as far as margins are concerned? What is your view on that?

Colm, I’m going to punt that one to you.

I know I touched on this, and I think some of, just a couple thoughts around this. First of all, we have to see some tax reform before we can really speculate on the second order effect as to whether it would be competed away. I think, you know, there will be a lot of attention given to what is the nature of the reform. Will it be a robbing of the tax base? Will there be other border adjustments in place? What exactly will transpire here? I think when we see all the details of that and we see how different entities deal with that, we will then be able to assess whether it’s sustainable or whether if it is going to be, over some period of time, competed away. I think we are getting into a second order of speculation around competing away something that hasn’t actually happened yet. We are just a little cautious to get into that discussion at this point.

Yes, and to be candid, the reason I asked it to Mike, it is more of a business related instead of tax related. With taxes we can all do the math. It’s not exactly the same business, but if I look at the retail brokerage or the discount brokerage space, we had one of the larger players there cut pricing by a decent amount. Maybe you can tie that to their margin improvement, that comes from potential tax benefits, maybe you can’t. That’s why I was just curious whether at asset management, given the competitive environment we’re seeing in the us, whether it would be harder to keep the benefits there in particular.

Yes. This is Mike. I think that what’s different about the asset management business than many of those other businesses is, clients don’t shop on price, and so we lower our fees 20% tomorrow, we don’t bring in more business. We got to convince clients we have an alpha platform that works for them, and they’ve got to be comfortable with that, and they are willing to pay a reasonable fee for that, if, in fact, they believe you can provide an after fee turn to them. And so I do not believe it gets competed away. I think what happens is, and which is why you are seeing margins come down in this business over time, is that move to passive focuses more people on the cost of management, and that’s pressuring all of us to gradually bring the fee down. I don’t think it would have anything to do with what’s going to happen on the tax front.

That’s fair. Thank you.

If I can sneak in the last word on this. I would also say that if tax reform does happen, and if it does translate into greater business activity and greater profitability in firms, presumably that has a knock on effect to economic activity. It’s just so many things that one has to consider in this analysis. You may have some margin compression happening, but you might have some greater activity levels that are causing outputs to rise.

I hear you. I know this is a complicated issue, so I appreciate that. Sometimes it’s easy for me to go to the model and change a 35% tax rate for MFS to 20% and enjoy the benefits, but I have a feeling it won’t be quite that easy. I will leave this last question for Dean. LICAT, you have given us a little bit of color a few months ago that you didn’t think this was going to have a major change to how Sun Life thinks about their capital position. We have gotten some more information in the subsequent few months that maybe you are going to give us a little more color at your investor day. Just was hoping for an update from you as to how you are thinking about the LICAT methodology affecting Sun Life’s capital position. More importantly, Sun Life capital deployment. You were quite active in 2015 with a number of acquisitions. It’s been a little quieter of late. I just want to get an update from you on how capital adequacy and deployment are sitting in your mind?

Thanks. First of all, on LICAT, as you know, we are still working through with OSFI and the industry all the details. As you would appreciate it, a tremendous effort to get ready for January 1, 2018, so all hands are on deck. Lots of work being done to model this out. Not just to get the capital positions set, but also to figure out the impact on product and business, product mix and business growth. Lots of work underway. It’s too soon to say exactly what the impact will be. I come back to the more general point around LICAT being a more risk-based system. As you know, we’ve done a lot to reposition Sun Life away from longer tail capital-intensive businesses, and so I think as we look ahead, we think that will get reflected through the LICAT process. Exactly what it means, again, it’s too early to say. Does it change our thinking on capital allocation? No. Our first priority is organic growth, and we’ve got lots of things that you know in the hopper and lots of investment in organic growth. And seeing the fruits of that coming through. Sun Life global investments broke even last year and is positioned to make a profit this year, as one example of that. The second focus is around M&A. First of all, integrating the acquisitions that we have made, and that’s moving ahead well, but there’s still lots of work to do there. We do not need to do acquisitions, to achieve our medium-term financial objectives, but we, of course, continue to be in the deal flow, as Colm noted and as I noted, we have a very strong opening position, a current position on the balance sheet before you consider LICAT, so we think we are in good shape there. And last but not least under the heading of capital allocation, it’s worth mentioning share buybacks. We have done those before and they continue to be among, the things that we have at our disposal in terms of capital allocation. All of that is focused on driving ROE towards our 12%. We are in the 12% to 14% band, and the focus is how do we move up to the mid- and the higher end of that band?

And just to be clear and I will leave it here, if I’ve got you right, LICAT and the transition isn’t really a major impediment to Sun Life deploying capital through external needs here, like a buyback or an acquisition. You could do that right now if you wanted. It’s nothing to do waiting for a final blessing on LICAT?

That’s right.

Thank you for your time.

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

Thank you. Good morning. That last discussion might be a bit of a good segue to my first question, which pertains to Sun Life Canada, specifically. As we think about the levers of growth there, and you have in the size of the business year over year, we think about additional expenditures on technology, et cetera, that you’re putting into that business, how should we think about the growth run rate for SLF Canada, specifically going forward on an underlying income basis?

It’s Kevin Dougherty speaking. I would say a couple things. I’d take you to expected profit was up was $16 million on the quarter, 9% year over year, and that’s really reflective of the momentum in the business and growing business volumes, both sales and excellent retention rates, in the group businesses in particular. I think we have strong sales momentum, really across all of our major lines of business. And in the newer businesses in particular, are picking up more and more momentum. Whether it’s SLGI or DB solutions or client solutions. Some of these new growth engines that we have been investing in, so defined benefit solutions, client solutions, SLGI, individual wealth are starting to mature and come online, and you will see that happening more and more over 2017, 2018, and through 2020. The investments we are making in Canada, are starting to come on stream. I don’t see an uptick from the current levels. The goal in SLF Canada is to be able to be in that 8% to 10% range that the Company has set for itself, and so that is really growth from the core, 4% or 5%, and then these new businesses taking us into that higher range.

Perfect. Really what I was trying to get at there is the size of business growth, and the size is enough to overcome investment expense growth, and it sounds like the answer is yes, so that’s good. Moving on quickly. U.S. group. When I put together repricing, potential cost synergies, growth on the size of that business, including voluntary benefit sales. Looks to me like there is potential for earnings from that business to double or even more. Am I in the ballpark there? Does that make sense?

Well, I won’t necessarily speculate on an amount, but our biggest opportunities as we have talked about over the past of couple years is from our Firm continuing to improve the margins in that business. We have made quite a bit of progress on that the past two years, but there’s still lots of opportunity there. A few points. As you know, we are improving our situation in stop-loss and we should see some of that start to occur in the short-term. We have been going through a three-year program of improving the performance in the legacy Sun Life business that, a lot of that has been completed, but not all of it. There is still opportunity there. And then we layer on top of that the synergies related to the Assurant employee benefits acquisition, which we really only began in 2016. When you put those things together, there’s still quite a bit of opportunity with the levers that we are pulling, to continue improving the margins of the group benefits business.

Paul, it’s Dean. We will be shining a brighter light on that at investor day on March 9.

Okay. Thank you. Just one final quick one, if I may. On MFS, were there any portfolio management departures in the last six to nine months? If there were, can you give us a sense of how much AUM they may have managed?

Yes. We have one announcement midyear this year of a retirement, Dave Mannheim. He is going to stay at the firm for the next one to two years, depending on how the succession progress goes. We have been out in front with clients on that over that period of time. He is part of a team that manages around $70 billion. We have historically seen very little, we had one the prior year. We have seen no loss of assets on that particular book of business. We have seen very little loss of assets on the global equity book at this point in time. We are actively managing the process with clients.

Thank you.

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

Thanks very much, good morning everyone. A question for Colm. You had mentioned you had a lower level of gains, AFS gains, in the earnings on surplus, in response to some positioning as a result of the rate movement in the quarter. Just trying to get a feeling if you can quantify that to any extent, just to help us model what the earnings on surplus might look like going forward?

Yes, Tom, I think the point I was getting at here is that in a period of declining interest rates, which we saw the early part of 2016, we did trigger additional AFS gains, and that was, I think an effective response to low interest rates, when we were able to capture some gains. As we saw the year unfold, and particularly with the strong increase in interest rates in the fourth quarter, we expected our operating results to come in strong. We saw that it did, as a result of the uptick in interest rates. We said, well, we will dial back a little bit. We don’t need to be quite as active on the available for sale securities. 2016 was kind of a mixed period, because you had that effective start of the year and you had the change at the end of the year. Let’s go back to say the prior year. Typically, it had AFS gains of around $30 million per quarter as being a run rate that people had in their mind. That got changed, as I said, a little bit over the course of 2016, but that’s probably not a bad number to have in your mind. And last quarter we did Q4 $20 million, relative to that $30 million. That would give you a bit of a sense of the difference.

Okay, and that’s pretax?

That’s pretax. The earnings on surplus is where we tend to talk about this item.

As the second question maybe for Kevin or Colm as well, if you look at the strain in Canada, a big tailwind in the quarter, but that has to be attributable to some extent to the fact that your individual sales, individual insurance sales were exceptionally strong, and you’d probably view the sales level that we had in the quarter to be a bit more of a one time thing as a result of the tax change coming. So I’m trying to get a feel as to if the sales were half, if the individual insurance sales were half the level they were in the quarter, what would the strain have been in Canada?

Tom, just maybe I will take the first part of that around the overall level of strain. Certainly, in the fourth quarter, we do see that seasonal impact where the fourth quarter strain tends to be on the low side, relative to that $40 million to $50 million that we previously communicated. So in Canada, you saw a benefit over the course of the year of about $7 million in respect to strain. Certainly, a good portion of that relates to the higher levels of sales. But it can be impacted by other areas, such as sales and defined benefit solutions. But I would also point out that Asia also contributed to the overall decline in strain, so it’s not just in respect to Canada. As I mentioned earlier, that is also impacted by the economics at the start of the quarter, so we do expect to see some impact on strain this year based on the higher interest rates that we are currently experiencing. We will be updating for that. Maybe I would just ask Kevin to say a word on the sales achievement in the fourth quarter.

Yes. Hi, Tom. So I think you are right. We had a nice uptick in strain in the quarter due to individual sales, which were right over $200 million, but we didn’t do the same amount of uptick that we would normally see from places like defined benefit solutions. These benefits can come from different areas of the organization, as well as, Colm pointed out, we calculate this based on values at the beginning of the quarter, so really the full effect you don’t really see in the quarter. At the same time, I think we’ve got very strong underlying sales momentum in our retail life business in Canada. When you take sort of the spike affect out, it’s been growing in the 10% to 12% range for the last two or three years, on the strength of growing career sales force, growing penetration, and individual channels. So we see that as continuing. We have got a strong pipeline going into Q1, so we will see some continued effect from tax over and above that in 2017. And then maybe the last thing I would mention to you is, you know, we are probably the only provider in Canada that took the opportunity of the tax changes to effectively relaunch our entire life insurance product line. So rather than just tweak it for tax or decommission some products, we really relaunched everything, new underwriting rules, new features, new illustration software, newly targeted at markets like small business and the Asian market. The feedback has been very, very positive. We were very optimistic about 2017 and how our product line is positioned to sell in what will be, hopefully, a better underlying interest rate environment as well.

Thank you.

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

Hi good morning. My first question is for Mike. Just back to the outflows. I think there was $7.3 billion on the institutional side. You mentioned insurance being one area, and I guess that’s the BA side. Curious, was there an outsize redemption from the book that you sold to a third party from which you still managed the money, or was that one of many? Can you give a little color? What is the size of that BA insurance book that you still manage?

If you look at, we had $1 billion redemption out of one sub advise relationship in the quarter that went from active products to entirely passive products, as a way to more easily hedge the risk associated with that book. If you take that redemption, though and look at our entire insurance sub advise business, which is $36 billion, the redemption rate on the book last year was actually slightly lower than our retail rate. And so while you are seeing redemptions within the book of business, it actually was running a little bit below the retail business last year, even including that one big redemption in the fourth quarter.

And can you talk a bit about – I mean, on the institutional and the retail side, what you are seeing in Q1? I know you don’t want to give numbers, but just any qualitative. There’s a lot of uncertainty in Q4, a lot of volatility. Have you seen the stability in your pipeline on the sales side?

Yes. All I’ll do is say if you look at January retail flows in the industry, they didn’t look dissimilar from last year without providing specific context around our clients. So I think you should expect the industry to continue to be challenged. As I said earlier, we think that while there is a secular component to this, given the move to passive and smart beta and some of the other alternatives clients have, we think some of this is cyclical. We have been now eight years into a market that have gone nothing but up. As active managers, clients want liquidity. We’re sitting on cash that’s a drag in a big up market. Volatility has been exceptionally low during this period of time. Stock dispersion has been exceptionally low during this period of time. Those are periods that are very difficult for active management. The minute we get volatility, dispersion, and we think downside in the market, active managers will do well. We think that we will do better in that environment, and we think that you will see more normal redemption rates on the other side of that particular cycle. What we don’t know, obviously, is when that’s going to happen.

Okay. Dan, on the U.S. group insurance side, I think the net margin this quarter was 3.6%. I think you’ve talked about taking this up towards the 5% plus range. I don’t want to put words in your mouth, but I believe that’s been thrown out there before. How long does it take you to get there?

Doug, we will talk more about that on investor day but you are right. The margin is up significantly, especially over the past two years, and we should see further improvement in that in 2017, and in future years. But will provide more detail and color on that at investor day.

Okay. And then maybe just lastly on the international business, obviously, a lot of volatility. Can you talk to what was going on in the quarter in that business?

There are a number of different elements. We did have some one-time expenses related to the runoff of the international wealth business. Year-over-year sales are up, although Q4 sales in international life were about equal to Q3. Obviously, there’s also some impacts of investing gains, but overall in the underlying fundamentals, it was a solid quarter, and we’re continue to see some good sales momentum in the international life business.

I may follow up with you on that. Thank you. That’s all I got. Thank you very much.

Sean, it’s Greg Dilworth here. We have time for one more question before we end today’s call.

Thank you and your final question comes from the line of Nick Stogdill with Credit Suisse. Your line is now open.

Just on the notable items this year, I was hoping you would comment on what the contribution could like next year. It was $0.14 in 2016, although we did see investment gains on the high side. I’m just trying to tie this to the 8% to 10% objective return.

Yes, Nick. It’s Colm here. The notable items are difficult to forecast, because they include insurance activity and other items that are going to have a random fluctuation aspect to them, in addition to an underlying trend. So, clearly, we wouldn’t be in the position to forecast future mortality or morbidity, it can vary quarter to quarter. What you can take away I think is that we’ve had strong investing gains over not just one quarter but over a number of quarters. In fact, over the past couple years, the number has been quite strong. We believe that there’s potential to continue to capitalize on investment gains. We’ve had strong credit experience over the last couple of years. You know, we don’t know when the credit cycle will turn, but we don’t see anything immediate on the horizon that says we don’t expect to have good results overall in some of these metrics as we go into 2017. But we wouldn’t come up with a forecast for you.

Thank you. And just one more quick one on the balance sheet flexibility, and maybe provide an update in March. At the 2015 investor day, you targeted a leverage ratio below 30%. Is that still the right number to use as a benchmark? Is there a buyback in place currently?

No, we do not have a buyback in place currently. In terms of the leverage ratio, our long-term ratio that we target is 25%, so as I mentioned earlier, pro forma the debt redemption in March will be 2 points below that. Clearly, that gives you a sense of a lot of flexibility, and we are comfortable to be above the 25%, up to the 30% level and that would, again, depend on what we are deploying capital against, acquisitions and the like. So we have a lot of flexibility, and we think that’s one of the hallmarks of the Company at this time.

Thank you.

And there are no further questions. I will turn the conference back to Greg Dilworth for closing remarks.

Thank you, Sean. 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 wish to listen to the rebroadcast, it will be available on our website, later this afternoon. Thank you, and have a good day.

And this concludes today’s conference. You may now disconnect.