Good afternoon and welcome to the Sun Life First Quarter 2017 Financial Results Conference Call. [Operator Instructions] I would now like to turn the call over to Greg Dilworth, Vice President of Investor Relations. Please go ahead.

Thank you, Dan and good afternoon everyone. Welcome to Sun Life Financial’s earnings conference call for the first quarter of 2017. 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 on today’s call. Turning to Slide 2. I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form part of this afternoon’s remarks. As noted in the slides, forward-looking statements maybe 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 underlying net income of $573 million or $0.93 a share, down 2% from the same period last year and an underlying return on equity of 11.5%. Our Canadian, Asia and asset management pillars each delivered earnings growth notwithstanding continued net outflows at MFS. In our U.S. business, we saw lower results due in part to higher mortality. The integration of our U.S. employee benefits acquisition progressed well in the quarter. You will see that we announced a $0.015 increase in our common share dividend to bring our quarterly dividend to $0.0435 per share. This represents an increase of 4% and reflects our strong capital position as well as forward momentum in our businesses. We delivered strong sales growth in the quarter with insurance and wealth sales up by 58% and 13% respectively over the prior year. Assets under management ended the quarter at $927 billion, up 8% from a year ago. In Canada, individual insurance had a strong start to the year with first quarter sales that were double the prior year from tax legislation changes and the successful transition to a new product suite. Our individual wealth business also had a strong quarter, with sales up 16% across fixed products, mutual funds and segregated funds. Group benefits and group retirement services achieved strong year-over-year sales growth, primarily due to several large case sales installed in the quarter. Client retention remained very strong, further contributing growth in business in-force and assets under administration. We made good progress on making it easier for clients to do business with us. For example, our top rated mobile app in Canada was updated at the end of April and our clients are loving the convenience and functionality. Client mobile sessions are…

Thank you, Dean and good afternoon everyone. Turning to Slide 6, we take a look at some of the financial results from the first quarter of 2017. Our reported net income for the quarter was $551 million, up from $540 million in the first quarter last year. Underlying net income, which excludes the net impact of market factors and assumption changes, amounted to $573 million. Our underlying return on equity was 11.5% for the quarter. Underlying results reflected net favorable mortality experience and gains from investing activities on insurance contract liabilities that were partially offset by lapse and other policyholder behavior experience and the impact of currency translation in our foreign operations. First quarter adjusted premiums and deposits were $44.4 billion, up 15% from the first quarter of 2016 and assets under management at the end of the quarter amounted to $927 billion. We maintained a strong capital position, ending the quarter with a minimum continuing capital and surplus requirements ratio for Sun Life Assurance Company of Canada of 229%. The MCCSR ratio for Sun Life Financial Inc. was also strong at 249%. The higher ratio at the SLF level largely reflects the excess cash of $1.1 billion held by SLF Inc. And our leverage ratio of 22.6% decreased from 25.2% in the prior quarter, driven primarily by the redemption of $800 million of subordinated debt during the quarter. We continued to progress on the transition to the new LICAT capital regime that will be effective in 2018. We filed our first test run with OSFI in January based on 2015 data. And we remind you that our current risk profile and strong capital position will assist us as we implement the new regime. Turning to Slide 7, we provide details of underlying earnings by business group for the quarter.…

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 re-queue with any additional questions. With that, I will now ask Dan to please poll the participants for questions.

[Operator Instructions] Your first question comes from the line of Seth Weiss with Bank of America/Merrill Lynch. Please go ahead.

Hi, good afternoon. Thanks for taking the questions. I wanted to dive in a little bit further on MFS and on the outflows, second consecutive quarter here of record net outflows and similar to last quarter, you highlighted institutional client portfolio rebalancing as one of the drivers, could you just get into a little bit more depth of what that means and for 2 quarters in a row, is this the start of something maybe more trendable or is this something that you could point to that’s a bit more volatile and lumpy quarter-by-quarter?

Good afternoon Seth. This is Mike Roberge. If you look at it by channel in the first quarter, it really continued to look very similar to the prior quarter and that we actually had a record gross sales quarter, as 2016 was. What continues – what we continue to see in the industry is very high redemption rates. We are estimating, it’s hard to get hard data on this, near-term that redemption rates are currently running about 33% for the industry. We are running inside of that, but clearly with record sales and slightly net outflows, that had an impact on that business. We think that as I said at the Investor Day, we think some of that will normalize. That same thing continues to be true in the non-U.S. business, which looks similar to Q4. And then as you mentioned in the institutional business, again a number of re-balancings away, they are not performance related. The vast minority of – when go out to clients and poll them on reason for performance – for redemptions, it’s not performance related. We are obviously hopeful that, that’s relatively lumpy. As Dean mentioned, Q2 activity appears better than that currently. And so we believe that the retail business will normalize, some of the redemption rate will come down and we believe that the – we will be able to stabilize the institutional business and over the next couple of years, we are just going to continue with the strategy of diversifying in the blended and diversifying the fixed income offering.

Okay, great. And then both the fourth quarter and first quarter, in terms of capital market conditions, were fair to say, non-normal coming off of the U.S. election, is there an element of profit taking there on the institutional side when you talk about rebalancing or if you look at prior patterns of redemptions, do you tend to see it spike when you have these big jumps up or down in markets like we saw in both the fourth quarter and the early part of the first quarter?

You will tend to see in periods where you do have a big spike in equities, you get de-risking within the DB world and so clients will take advantage of the increase in equity values. If they can do that in a higher rate regime, they will do that as well, so it does tend to accelerate some of that. And our guess is, is when clients say they have rebalanced, we think some of that is in the de-risking category.

Okay. And then just one very quick one related, you give the 3-year, 5-year and 10-year fund performance levels, if we look at a 1-year performance basis, just curious what that looks like over the trailing 12 months in terms of the percentage of funds beating Lipper averages?

Yes, you have got it. You have got it in the deck or maybe you don’t have it. So it’s – on 1-year basis as of the quarter, it was 44%. One of the things that we – surprisingly, if you go back a year ago, we had – we were coming up to the Brexit vote. We had that, it went the wrong way. I think people were certainly concerned about Trump here in the U.S. That went the wrong way for a lot of people in terms of their thoughts and what it meant for the market. Even with that as a backdrop, volatility has stayed low. We saw a massive increase in the market, a rotation into lower quality, high data stocks. That had an impact on 1-year performance. What I would say is year-to-date, is we have seen a rotation. Even though the market is up, we have seen a rotation out of that reflation trade back into higher quality parts of the market, which is our investment style. So year-to-date performance is significantly better than the 1-year number and we will need to roll through a couple of quarters to improve the 1-year. But what we focus on is 3-year, 5-year and 10-year performance here, that’s how we incent and compensate the team and we continue to generate strong performance across the platform for clients.

Great. Thanks so much.

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

Good afternoon. The quarter really looks like a variety of issues or the miss, I guess, this quarter is primarily attributable to what went on in the U.S, and let’s focus in on the group business a bit. Can we – you just tell me what’s going on there? Stop loss is experiencing some problems. What led to those problems? When do we expect that to be fixed? And when you say Assurant is progressing well, I believe you. It’s just hard to tell that from the numbers. Since the deal closed, growth in that segment has been negative. So, I am wondering how you can breakdown what’s going on in the legacy business versus what’s going on in Assurant?

Okay, sure. Let me first answer the first part of the question and I will break it down into three parts, stop-loss, disability and life, because there are different things going on in each component. The stop loss business, as we shared last year, had some adverse experience. That peaked in the second quarter. We have had significantly better results in the third and fourth quarter last year and the first quarter results were in line with the fourth quarter. So that continued to be at an improved level, but still depressed from where we’d like to see it. We took significant pricing action in the stop-loss business. Most of the business renews January 1. We have now re-priced over 80% of the business. And our achieved January 1 renewal rate increases were about 17%, which was in line or even a little better than what we targeted. So that accounts for medical trend and any movement that we needed in the rates there. In the first quarter, 97% of the stop loss claims are still from 2016. So, the experience you see in the first quarter is largely indicative of what happened prior to those January 1 renewals and the way we do our reserving, you see not just the claims emerge, but some of the associated premium emerges when those claims show up. In the second quarter, it will still be mostly 2016 claims, but in the third and fourth quarters, you will see the ‘17 claims. There is obviously a slope going in both directions for both years. So the point is that we have gotten substantial price increases and we will see the benefits of that in future quarters. So we are pleased with how that’s progressing. The disability business and that of course is the…

So if you could break down the profit between the legacy business and Assurant, did Assurant make money presumably and the rest didn’t?

It’s not as simple as that, because there is multiple components including on the legacy side. So, the legacy side, we have disability, we have life, we have stop-loss, but it is safe to say that the variance we saw in the quarter was largely on the Sun Life legacy side. As I mentioned, somewhat in the stop-loss business and on the life side, the Assurant businesses performed well with the exception that we did also see some adverse mortality on the life business there.

Okay. I am sure others will have questions about this. So, I will move on to expenses. And the expense overrun, the negative expense experience, wasn’t a big number this quarter, it was around about $7 million after-tax, $6 million, something like that. It was a lot bigger in Q4. But we have seen expense overruns or negative expense experience every quarter, I think over the past 20 in a row plus. It was easier to accept that when MFS was growing at 15% a year whatever and the businesses generally were growing faster. But as MFS is the only one with outflows, there is some softer earnings performance in the U.S., call it that and the macro is fine, it is not flawless. Are you looking at those numbers and maybe taking a sharper pencil to your expense base? And maybe there is some action that needs to be taken there, because it has been a very consistent trend.

Gabriel, it’s Dean. I think the expenses always get a sharp look and a sharp pencil here. And if you looked at and you peel this back and we have put these numbers out there in the past, but when you adjust for volume-related expenses and those are things like higher sub-advisor fees because you have sold a lot of GRS business or your MPF business is growing in Hong Kong and higher producer volumes when you sell a lot of – we had very strong insurance sales in the first quarter and the fourth quarter. When you adjust for those and you adjust for currency and you adjust for acquisitions, because we have done a lot as you know in the acquisition front, our controllable expenses grew 3% in 2015, 3% in 2016 and 4% in the first quarter of 2017. So the expense growth you see when you just look at the total expenses that we report does, in fact, I will flip it around and say does in fact represent very strong sales growth. So we have grown our GRS business, that’s driven up sub-advisor fees. We had enormous sales in the insurance business here in Canada in Q1 and Q4 for reasons we know and that has generated additional expense around wholesaler bonuses and wholesaler compensation. And frankly, those are expenses we like. Those are expenses that are growing the business. We continue to drive the Brighter Way, which is our Lean Six Sigma productivity machine further and further throughout the organization. It’s having real impact on cutting out waste and doing the work better and cheaper and faster and it’s producing real productivity gains. And we continue to invest in growth in our business. I mean, as we have said before, the SOE lens on expenses is not a helpful lens, because it really shows you the residual expense that doesn’t emerge from balance sheet liabilities that have expenses built into them. So, we produce it, because it’s needed by the SOE lens. But in fact, the better lens I think is to look at controllable expenses and on that basis, we think we have got – we are producing good value. The last thing I would say is that, just to underscore, expenses are subject of intense focus in the company, because we realize we have to invest in future growth, invest in technology and the technology lead that we have built in our businesses, particularly in Canada, is a lead that makes a real difference to selling business. It’s a lead we are proud of. It makes a difference in winning in the market. It’s a decision point for clients and it’s an area where we will continue to invest to preserve that lead and in fact put more daylight between us and the other guys.

And just the word lead is an interesting one. It implies, at least to my ears that you are not in need of a catch-up expense, because you have under invested. So restructuring charges, we have seen them, plenty of them from the banks, started to emerge in the life insurance space. Is that something that we should contemplate or not for Sun Life?

Well, we are not planning a major project on that front. When you think about our major technology platforms when we integrated with Clarica many years ago, we bit that bullet upfront and integrated all the back office systems and made those investments in the platform and that’s helped driven – to drive our Total Benefits offering. It’s made all the mobile tools at the front end possible, because you are hanging them off of just one back end system. So I think where our investment is focused around technology going forward isn’t so much catch up, it’s building the next generation of tools including digital, predictive models, AI driven tools to help drive business growth to do a better job for our clients.

Thanks Dean and thanks Dan.

Your next question comes from the line of Meny Grauman with Cormark Securities. Please go ahead.

Hi, good afternoon. I want to ask a question about expected profit and we are seeing growth there decelerate for a number of quarters now, I think if I caught you, you were explaining that it’s really driven by SLF asset management, so I just want to confirm that. And then just ask a forward-looking question in terms of when you overlay your outlook for SLF asset management, specifically for MFS, what does that indicate about where expected profit or the rate of growth of expected profit is going to move over the next little while?

Hi Meny, it’s Colm here. So yes, on the expected profit line, you will have seen that the growth was modest on the expected profit, the total number is $651 million a year ago to $666 million in the current quarter. However, when you adjust for asset management and we will come back to asset management and you adjust for currency, you saw a much stronger growth and you have seen good growth in Canada and that’s driven from growth in their group offerings on the group benefits side, the group retirement side – group retirement services, good growth in the U.S. and again taking account of currency adjusting for that and the Assurant acquisition, good growth in Asia. And if you think about the asset management side, from a modeling perspective, it’s less. I mean we fit the asset management into the source of earnings lens of course, because we report on a consolidated basis, but asset management is really driven by the factors that we have talked about previously, which is of course the rate of growth in the assets under management driven by both the equity market performance, but also our particular performance, our out-performance as Mike has mentioned, over long periods of time. And again assumptions around the rate of flows, which are difficult as we have commented on to predict, so I think on the insurance side, you can expect to see us continue to drive growth in the expected profit there because of the activities that we have been taking and we have got good momentum. You saw that in very good sales numbers in the quarter and we have no reason to believe that we won’t maintain good momentum on the sales side for the various reasons we have talked about. So that’s how we would see that. We don’t see particular issue with the expected profit. Clearly, where there are expense investments and Dean mentioned some of those around technology, they do tend to pull down the expected profit because some of that investment is going to go into that expected profit line. Gabriel previously mentioned the negative expense experience in the quarter, which was a relatively small number, but we do remind you that ongoing investment in new initiatives, if it’s going to continue for a period of time, it does emerge into the expected profit, so that’s also a factor. But no, we take all those things into account and we have a view that we should be able to continue to drive forward on that line.

Thanks. And then if I can just ask a question on the stop loss business, the balance between pricing and sales always a consideration. Looking at just the sales results for the stop loss business and wondering that that balance, when you look at those kinds of sales numbers, is there any concern you have in terms of pricing, in terms of the plan for pricing, is there anything in those sales numbers that gives you a little bit of concern that maybe you are going too far in terms of addressing the pricing issue?

Sure. We have continued to have strong sales in stop loss, although obviously, they are somewhat moderated now that we have taken pricing action. The first quarter is not a significant quarter for stop loss sales. It’s a pretty small percentage of the annual total, so not a great deal could be gleaned from the first quarter results. But if we look back on a trailing 12 months basis, the business in-force has continued to grow, it’s up by about 4% versus the same time this year. So we think we have hit the right balance there of getting the rates we need by continuing to grow the business.

Thank you.

Your next question comes from the line of Sumit Malhotra with Scotia Capital. Please go ahead.

Thanks. Good afternoon. I want to go back to Dan and I just want to start with the Assurant business, so it seems like in talking about the experience challenges the group business is having, you are drawing a line between SLF legacy business and the acquired franchise, can you tell us, as you work through this integration over the last year plus, is there anything in respect to the Assurant – the acquired business, that you had to adjust in a significant way, either from a pricing perspective or in terms of, let’s call it, underwriting quality that you weren’t comfortable with?

There really is not. I mean that business came over to us in very good condition and we have been pleased with it and its performance and especially the people that came with it who have stayed with us and continued to manage that business. They are very different businesses. We have to recognize that although they fit together in a complementary way. The acquired business was mostly in the small group segment, mostly employees, fewer than 100 employees and that business has some different and unique characteristics and they had built an infrastructure designed around that, which we are obviously continuing. It also has a dental business, which was not something that we had in any significant way inside the legacy Sun Life organization. But at the same time, the Sun Life business is quite different in that a very significant portion of the total is stop loss. So it’s a little hard to draw precise comparisons. But to your specific question, we have not had to make any significant changes to manage that business.

Well, maybe it’s just whatever the opposite of stars aligning is this quarter because mortality in in-force and group policyholder behavior and international morbidity and stop loss, it seems like everything from a policyholder experience perspective went against your business this quarter, so without giving you too much of a softball here, is this bad luck that hurt the quarter or in your view, is it going to take some time for some of these changes that you have implemented in terms of pricing to improve experience over the course of 2017?

Well, thank you for enumerating it that way. That is similar to how we are looking at this. It is a diversified portfolio of businesses. And there is quite a few components in the business. And the advantage of a diversified portfolio is that quite often some things break your way and some things don’t break your way. This does seem to be a quarter where virtually everything, except maybe for one item, broke in the same direction. So we certainly would hope that wouldn’t happen too often. The probabilities of that seem low. At the same time, we wouldn’t say everything is bad luck. We can’t be that complacent. So obviously, we are making sure that we are taking action wherever we can. For example, we are going to be very judicious about expenses for the rest of the year and we are taking some actions there. Certainly, I mentioned earlier we have made some adjustments to our life pricing as we think that’s prudent at the moment. So we have selectively taken some actions, but I think your characterization is a reasonable one.

And last one and maybe just a little bit more numbers based, we missed you directly at the Investor Day, we obviously heard from your colleagues, the margin improvement that Sun Life has targeted for the group business from 3.5% up to closer to 6%, in your view, what’s the key variable that gets that margin moving in the right direction?

Well, it’s clearly getting all three things right; pricing, claims management and expenses and that’s how we get to the right margin. In the U.S. group benefits business, it’s intensely competitive. There are many, many players. And you have to get a lot of little things right in order to get to the right margins. So we are focused on all three of those things, like we have talked a lot already today about pricing. Obviously, we are quite focused on that. We continue to leverage expenses, including through the synergies that we will get from the integration. And we also have been investing in claims management, particularly in the areas where we can have some real influence over that, for example, getting people back to work in our long-term disability business. And we are making good progress there, we are pleased with the progress, but we have to fully execute on all 3 of those and then we will get to that target margin.

Thanks for that.

Your next question comes from the line of Humphrey Lee with Dowling & Partners. Please go ahead.

Hi good afternoon and thank you for taking my questions. I just want to follow up on the MFS flows. So in Mike’s response to Seth earlier mentioning there’s a mix between de-risking and the ongoing active to passive trend for the institutional outflows, I was just wondering if you can provide a little bit of color in terms of the mix between the two or at least based on your estimate.

Humphrey, it’s Mike. It’s hard to drill down and get too granular there because we reach out to clients, they generally will put it in broader buckets. Hence we try to get them very specific and you tend to get rebalancing. So when we look at and we go out to clients and try and allocate it across a number of dimensions, most of it falls in the reallocation category. So the vast majority of those outflows are reallocation. That can, again, be de-risking, it can be moved to passive. It can be – and we have seen this recently is, if you perform well in a certain strategy, they are rebalancing you down to reduce your exposure – their exposure to you and so very hard to get really granular. I think most importantly, what I would say is when we look at it, far less than 10% of the rationale for the redemptions is performance. That’s where we would be much more concerned around it.

Yes, I guess my question is more thinking along the line that if it is for a de-risking reason, given your fixed income products or the recently introduced fixed income products, that could be a potential area that you can use to retain some of the assets, and if it’s – because of active to passive then it’s deployed and researched. So maybe help us to kind of better understand in terms of some of the discussions that you have with your clients when they indicated they would like to pull assets out of MFS and what you would do in order to retain some of the assets. Maybe share some of the discussions or kind of feedback that you have got.

Yes, great question. So midyear last year, we created a new group we call the Client Solutions Group reporting into Karl Jeremiah who runs Distribution for us. That group is – their job is to get out to clients and obviously be in front of clients all the time. But where we begin to have the discussion with clients, where our client-facing person is talking to a client about de-risking, that group will get in front of the client to try and understand what they are doing, why they are doing it, are there ways in which as assets are going to move from MFS that we can actually position a product alongside that. So that is an effort that very recently we put in place to go at exactly that, which is how do we understand what clients are doing from an allocation de-risking perspective, how do we then diversify the offering that we can – and the product set that we can sell into those particular clients. So that is actually an issue that we are currently working through.

So I guess, at the end of the day, so you are looking at kind of the quality date, the outflow situation is better than the same time during the first quarter. How should we think about, I guess, where you are seeing now versus the same time during the first quarter, how much better are we talking about?

Well, we are not going to give that number. That’s not information we are going to make public. I think as we think about it over a longer period of time, because we are not managing this business for the second quarter, so as we think it over a little period of time, we think the redemption rate in retail will normalize some. We think it is at a level that is far too high to make sense through the cycle. We think that will normalize, that will drive positive flows in retail. We think the non-U. S. business has a little bit of sales issue, which we think normalizes and the redemption rate comes down, which we can get that back into positive flows. We do think that you will see stabilization in the institutional business as we broaden and diversify the offering to fixed income. We think that we can get that back into positive flows over a period of time as well. The challenge with all of that in terms of predicting quarters is we are generating lots of sales, but we are seeing our clients do a lot of things on the redemption side. We need that to slow down. We cannot predict when that’s going to happen and what clients are going to do quarter-to-quarter, so we try to give people a little bit of – a little help to think about it through an entire cycle.

Okay thank you.

Your next question comes from the line of Steve Theriault with Eight Capital. Please go ahead.

Thanks so much. First, I have a couple of questions on Asia. Sorry, but first, just to follow up for Dan, if I could. And then thanks for all the color around the stop-loss. Am I right then in interpreting that as in we are going to see one more quarter likely of negative morbidity experience before 2017 starts to drive the bus?

So the second quarter would still be dominated by 2016 experience. Of course, we can’t necessarily predict what that experience will be. All we can say is that quarter will be mostly reflective of 2016. And then we should see the effect of 2017, both claims and the rate increases in the third and fourth quarters.

Okay thanks for that. And then skipping to Asia for Kevin, a couple of things, first, just some color on the sales. The India sales were the standout, I think, at 40 million, they are double or more than double what we have ever seen. So maybe just to start a bit of color there, what’s going on in that geography insurance-wise?

Yes, thanks, Steve. Well, there’s 2 things, our buy-up in India. So we went from 26% to 49% so that comes during the quarter. But they have also been investing a lot into the agency and the quality of the agency and we are seeing some of the – reaping some of the benefit of those investments and the agency is starting to perform quite strongly there. So we are very happy with the buy up and how it’s progressing on the life side. And I think those sales, you should continue to see us build out on the agency side. And we have just signed some additional bank assurance agreements, including an agreement with DBS in India and also a bank assurance agreement with HDFC, we are going to become an additional provider for HDFC in India.

Okay, that’s great. Sorry, I hadn’t realized – I thought we had – we would already had a quarter under our belts, but I guess that just closed. Then the second question around ROE. The ROE was – it’s been 7.5% in 2015, same in ‘16, same this quarter. In the past, we have talked about getting that ROE higher and eventually getting that, I think, to double-digit levels. Maybe just if you could talk a bit around why we haven’t seen more momentum in the near term and how long until that starts to march a little bit higher?

I should just point out on the earnings side, we did have a currency headwind in the quarter. It cost us about CAD 5 million, so that growth would have been substantially higher if you went on a constant-currency basis. We continue to see our sales grow quite well in our VNB. And as I said in the past that the way to grow in Asia is to continue to invest in distribution, continue to build the business, continue to sell profitable products, so get the mix right, get the VNB right and that will start to come into income. And you have seen that in the growth in expected profit. We had a significant growth in expected profit in the quarter. You can see that in the growth in earnings. And over time, that ROE is going to continue to grow on a fairly regular basis. We are going to be also looking at sort of the capital and the capital regime.

Okay I may follow up thank you.

Your next question comes from the line of Nick Stogdill with Credit Suisse. Please go ahead.

Hi good afternoon. Just going back to the U.S., is it possible to get a breakdown of the negative experience by business line in the U.S., maybe just order of magnitude, how much was in stop-loss versus Group versus the In-force?

Yes. Hi Nick this is Kevin Morrissey. So when I look at the breakdown across those different contingencies, maybe I will just start with morbidity. Most of that, I think as Dan mentioned, is on the stop-loss side. So we actually had favorable morbidity across all the other lines within the U.S., so stop-loss is really the key there. When I look at the mortality side, when I break that down, it’s more the In-force management where we saw some of the higher claims, and this is a normal seasonal pattern that we see in terms of mortality. In developed countries, normally we do see higher claims in the winter months and so where SLF does business, and especially in the U.S., that would be Q1 we often see 10% to 20% higher claims. And it’s especially higher when we look at older ages, so that’s starting in both the 60s and then going up through ages 70s and 80s, it gets significantly higher. And when we look at the in-force management business because it reminds everybody that is a run-off block and so the average age in that block is going to start increasing and so we did see kind of what we would expect as a normal – normally higher mortality claims in the quarter. So that was mainly where we saw the morbidity side. Maybe lastly, I will talk a bit about the policyholder behavior. We saw some lapse losses on the in-force management that we have called out, as well as international life. On the in-force management side, it was lower lapses on some of the NLG business in the U.S. For the international life, it’s more the early duration lapses where we saw a bit of losses, fairly marginal, but a bit of negative experience there as well.

Thanks. If we just take the experience gains and assumption changes in the U.S. business though and then try and allocate that roughly to the various lines, is it – how much is for stop-loss or can you give us a sense there, I am just trying to get a sense that when this improves – if this improves next quarter in the back half of the year, how much might be there to fall away?

Yes. It’s Colm here, Nick. I mean I think Dan really addressed the point around stop-loss earlier in a fair bit of detail. We don’t provide that level of granular P&L by each of the subsets of our business.

Okay. Thank you. Just my next one on the investing gains, I know the expectation was for a bit more of a normal run rate compared to last year, but could you just maybe give us an outlook and then again refresh us on what’s really changed relative to what we saw throughout most of 2016 where the investment gains were around $50 million a quarter?

Yes. It’s Colm here again. And I think on the investing gains, we have pointed out in the past that somewhere in the $10 million to $20 million we would consider to be on a net of tax basis, a level that we are comfortable with from a sustainability perspective. Now clearly, in 2015 and ‘16, we had quarters that were significantly higher. And during those quarters, we did speak to some of the drivers behind the higher amounts. And it is a bit lumpy, so it can happen that there is a particular activity, ALM activity, asset liability management activity in the quarter that might drive it higher. One way to think of it is to think of it in the context of overall investments including, for example, our credit experience. And I think you will note that this quarter, if you look at the investing gains, it was within the range we targeted, but our credit experience was certainly lower than trend. And again, we think that there were a couple of items that were specific to the quarter around credit that don’t necessarily portend to give a signal as to what might happen in the next quarter. So I think investing gains, including credit were a little bit on the low side and but within the range certainly on the investing gains.

Okay. Thanks. The credit looks like it’s a bit seasonal, I believe the Q1 ‘16 and ‘15 were both kind of on the low side, is that fair it’s a seasonal factor or…?

Hi. This is Randy Brown. The – no, it’s not really seasonal. This was really two particular one-off situations. It’s not really representative of the broader portfolio, where in general, we had a quite benign credit experience. So as Colm said, net credit experience was still positive, despite these two particulars, but I would not call it seasonal, rather one-off situations.

Thank you.

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

Hi, good afternoon. I guess a question for Dan, if I back of the envelope into what your net margin on the group business would have been after normalizing mortality, morbidity and stop-loss and then the restructuring charge, I think I get the 3% to 3.5%, you can correct me if I am wrong and obviously you have targeted 5% to 6% and I guess my question is do you have everything in the system in terms of pricing, in terms of expense reductions to make up that gap or what else needs to happen to make up that gap and is this more of a 2018-2019 target, is that when we should expect to move in that direction, just some color would be helpful?

Sure. You are referring to some of the commentary from Investor Day where we said our long-term target for the group business is 5% to 6% after-tax margins, so that was not meant to be a 2017 target. Your math sounds reasonable. It’s certainly close to what we would think about. So what – we think we have taken all the steps necessary. As I mentioned earlier, we have recently pulled some additional levers. But we think we are on a path to get to that level of margin. What’s necessary is it obviously will take some more time as we go through all of these steps the integration, the synergies, the continued impact of claims management and our pricing actions. It will just take a little more time to get there. We are obviously at a margin that’s quite a bit higher than where we were when we started this 2.5 years to 3 years ago, but we still have ways to go.

And so the pricing actions you have taken as you look out on your plan, are you pricing with the 5% to 6% margin in mind or is that – or do you have to step – take gentle steps with your price increases so that you don’t disrupt the in-force?

No, we are pricing with that long-term margin in mind, absolutely. We know what we are targeting in terms of margins and ROE as well. You don’t always get 100% of what you are targeting. So sometimes, it does take more than one renewal to get to full target. But certainly, our pricing is designed to achieve those margins?

Okay. And then Dean, just you talked about strong capital position, you increased the dividend because of your confidence in the outlook and the business, yet you don’t have an NCIB in place and so, in days like today when your stock gets hit, just wondering if any further thoughts to putting an NCIB in place or why not?

Doug, thanks for the question. As you know on capital, our first priority is to fund organic growth and we have certainly been doing that. And our second priority is to fund acquisitions, but acquisitions that number one, fit our strategy and number two, bring us capabilities that allow us to grow faster than we could otherwise grow on our own and three as well, must clear our economic hurdles. So those criteria for acquisitions, which we have applied over the $2.5 billion we have deployed in the last 3 years or so, those criteria continue to apply. And then we turn our minds to share buybacks. We as you know, have we done them in the past. We will likely do them in the future. I think combined with the dividend payout ratio we have had a healthy return of capital to shareholders. As Colm noted and as I noted, we are in a very strong capital position and so this – buybacks will continue to be part of our thinking in the future.

Is the – I mean the movement in 2018 to the LICAT model, does that give you any pause to put a buyback in place or is this just internal thinking?

Our thinking around the buyback is not limited to or constrained by LICAT.

Okay, thank you.

And your next question comes from the line of Paul Holden with CIBC. Please go ahead.

Thank you. Good afternoon. So Dean, you made that first point there that your first priority is organic growth and you have invested heavily in Canada over the last few years in terms of technology capabilities, it seems to be translating into a very strong sales growth both on the group and individual side, so wondering if you or Kevin or someone else could just talk about progress in terms of market share gains, if any within Canada, again both on group and individual?

Sure. Paul, it’s Kevin Dougherty speaking. If you look really across the board in Canada, we have been making progress on market share. So in the group benefits business, went back 4 years or 5 years ago, we would have been quite – just behind Great-West, then Manulife did their acquisition. We passed both of them and now somewhere around 23%. I think they would be around 21.5% in terms of overall market share. In GRS, despite our – we have got a very, very large market share there. We have increased that from 40% to I think 41.5% market share over the last 2 years and have really tremendous momentum in that business. Individual insurance, if you take a slightly longer view, maybe 4 or 5 years, we have moved from 12% of new sales to now around 21% of new sales in the market and displaced the #2 – or kind of reversed places with the #2 player, so good progress there. And if you went into specific businesses like Defined Benefit Solutions, we are somewhere around 45% to 50% market share of that business. And finally, growing and picking up nice momentum in Sun Life Global Investments, so we are significant market share over – when we are really just – we are just really 12, 15 months into having 5-year track records and are in the top 5 in net flow. So I think we are making very good progress and all of that is related to investments in technology in some cases, in distribution in other cases and I just think the team is executing really, really well.

Good. And then a big picture question probably for Dean. Your overall ROE the last two quarters has fallen below the 12% to 14% target. I realize it’s not a quarterly target, but it’s kind of trending below. So what do you view as the most direct or simple path to get back to that target? And don’t need to know all the levels, but again maybe the most direct or simple path to getting back to target.

Well, thanks for your question, Paul. There’s obviously a numerator and a denominator to that question, blinding glimpse of the obvious. On the numerator, we – I think, as we said, we continue to be committed to our medium-term goals, 8% to 10% EPS growth. And just to link that back to your prior question on Canada, you would have noted we talked about this at Investor Day that the underlying earnings in Canada have grown at 4.5% CAGR over the last 3 or 4 years. And as we look ahead, we would expect to see that number pick up to a higher number, closer to 8%. And I think all of the investments that we have made in Canada, they are showing up in sales growth and starting to punch through in terms of net income will help deliver that. So in terms of growing the numerator of ROE, I think we have – we have set the table nicely. We have got lots of levers. And as we see progress in the U.S. business, U.S. re-pricing and other changes that Dan’s making, continued growth in Asia and growth in Asset Management. We grew our earnings in Asset Management pillar again this quarter and that should help on the numerator side. The denominator, clearly, we have a fair bit of excess capital and that has grown over the last year. And that is one of the headwinds on ROE. And we have been there before. When we sold the VA business in the U.S., we were carrying a substantial plug of additional capital on the denominator and that had a headwind effect on the ROE. And I think we got good support from investors as we deployed that, thought about how to deploy it in a disciplined way. And I think we will continue to do that as we think about our excess capital position today.

Great, thank you.

Your next question comes from the line of Mario Mendonca with TD Securities. Please go ahead.

Good afternoon. If we can go back to the In-force business in the U.S., I don’t know how important the experience losses were to the quarter and I understand why you haven’t disclosed that, but maybe what will be helpful is it’s a big business. The in-force business has got about a $4.5 billion account value and the International approaching $12 billion. So what I am trying to understand is, this business, are these experience losses the sort of thing that you would adjust for or you would account for with reserve adjustments, say, in a Q3 or – because presumably, you can’t price your way out of this like you could in some of the group disability or stop-loss businesses. So how do you address a period of experience losses like this, probably for Kevin?

Yes, thanks for the question, Mario. This is Kevin Morrissey. So just to remind everybody, as you mentioned, this is the closed block in the in-force management, so it is in run-off. We continue to monitor it as well as the In-force on the International business where we are still selling. When I think about the experience this quarter, maybe I will just break it down into a couple of the details. First, on the mortality side, I did mention the seasonality of mortality and higher death claims and so when I look at the In-force Management where we had some loss, overall in the company it was positive, but the In-force Management was a loss. We have had elevated mortality losses for the last 2 quarters, but when I look back over the last 5 or 6 quarters, I am not really seeing a trend there. So at this point, that’s not something that really concerns me. When I look at on the lapse side, the loss was – it was about, I think, about $7 million on the in-force Management side, so not a huge number after tax. It is still early in the year and it is certainly something that we will continue to monitor. And it will certainly be part of our Q3 assumption and asset review. So it’s on the list with a number of other items and we have to follow the data. We will complete our full experience studies, which will be over a longer time horizon and you will hear more from us back in Q3 on that.

And on the international side, would the lapse experience there be similarly modest?

Yes, it was even more modest, that’s right.

Okay. So ultimately, if this persists for any period of time, despite the size of the account value, we are not looking at large numbers here, if you had to adjust reserves?

Yes, if we had to adjust. At this point, based on the trends we have seen, we wouldn’t be looking at something that would be that big. That’s right.

That’s helpful thank you.

Your next question comes from the line of Tom MacKinnon with BMO Capital Markets. Please go ahead.

Thanks so much good afternoon. A question for Colm about the corporate segment. The expected profit in the corporate segment was a loss of $39 million. And if we add that with the earnings on the surplus, we get a loss of $23 million. Now that $23 million loss generally compares to numbers that jump around between like a positive 4 and negative 4. So there’s something funny going on in the quarter, maybe you can elaborate on that. I don’t think it was expense-related because the corporate expenses are, in fact, down year-over-year and generally flat probably if we include the impact of currency. So maybe you can elaborate on what’s driving that in the quarter and how we should be looking at that going forward, especially given the fact that you just redeemed some debt as well.

Yes. So no, I think the debt piece, I kind of leave that to one side. It wasn’t a driver in terms of the impact in the quarter. On the expected profit, I didn’t quite catch all the numbers you quoted on the corporate side.

Loss of $39 million, expected profit.

Yes, that includes the UK, so in that sources of earnings view that we provide for corporate, you have to recall that there’s – the UK is in there as well. So the increase year-over-year in the expected profit/loss, that particular line item is $22 million. So the UK would account for half of that. And the corporate expenses are higher, there’s a few project costs that are going through in the first quarter. And I would remind you that we have got a lot of project activity underway. So for example, getting ready for LICAT is an example of something that does cause us to run with a somewhat higher expense base. We are also mindful that when we have fourth quarter, we have had some higher expenses in the past and we have looked at our accrual rates, so we are accruing a little bit higher in respect of some items, so that would come through in the corporate segment, so nothing unusual. We have looked at it pretty carefully. We look at the overall corporate segment excluding the UK in terms of the net loss in the quarter and that loss, as you know, covers things like our governance cost, etcetera, we didn’t really see anything in there that would cause us yet to be concerned. And just on that point around the UK, why did the UK decline by approximately $10 million? Well, FX was a big factor. I think a lot of people sort of forget that while the UK is not a separate pillar for us, but it does generate strong earnings, with the decline in sterling year-over-year, that had a $6 million impact, for example, on that line alone.

Okay. But your corporate expenses were $61 million and the last year they were $74 million. So this is the lowest level I see for corporate expenses in a quarter over the last 9 quarters. So you talk about elevated corporate expenses, I can’t see that in the disclosures that you have.

Yes, so Tom, I mean I may need to take this one offline with you because I’m not quite following your point. I hear your point, but as I said, there is no particular reason – no particular concern on our end around corporate expenses in the quarter.

Okay. And then just a quick one for Dan, I know you guys talked, when you got Assurant, of $100 million in terms of cost saves and at two-thirds of the accretion you were going to get what’s going to be through cost saves and it was $0.17 accretion from the acquisition by 2019, is there any way you can update us as to how you are progressing on these targets, we are about a year through Assurant right now?

Sure. We first of all, on the expense portion of that, we had divided that up into 3 years ‘16, ‘17 and ‘18 primarily. And in ‘16, we achieved the portion of the saves that we planned to, which was significant. And then we believe we are still on target to achieve the accretion goals that we set out.

Okay, thank you.

And your next question comes from the line of Darko Mihelic with RBC Capital Markets. Please go ahead.

Hi. Thank you. A question with respect to, again MFS and outflows and the perspective that was given to me by a couple of my clients is that what if these outflows don’t stop, what if we continue to have quarter-after-quarter very large outflows, what would your plan B be?

Good afternoon. Well, I would say given the investment performance, if the outflows don’t stop, you have got a greater industry problem that continues to persist. And so our strategy is built around what our clients were ultimately going to need. When we look – our expectation of global equity returns in the next 10 years is returns are going to be about 4% a year and equity is given starting valuation levels. When we look at global fixed income markets, we think returns are going to be 3%. You take a blended return for balanced clients, which current – returns are going to be 4%. And so if you can add a couple of hundred basis points of outflow to a client in a 4% return environment, they are going to pay for that. They are going to need that because indexed returns aren’t going to provide enough return for clients to meet their investment goals. So I think you are talking about the basic thesis of the business, the active business. We continue to think that the active business will continue to be demand for the active business and our strategy is to stay focused on providing return for clients, building really strong relationships with our clients, going deeper with our clients. And we believe that active is still relevant and we believe if we continue to do that through a cycle you can generate flows in this business.

So there would be nothing done on the fee side passive side, it would be effectively just run the business as is now?

Well, there isn’t anything you could do on the passive side, that business is won. So today, you have got three big players – it’s really two big players and State Street today. So you have got BlackRock, Vanguard, State Street to do that business. No one really can get into that business. It’s a scale business. Those firms have scale. They have got mass investments in that business. And frankly given the fees, you wouldn’t want to even be getting to get in that business today from scratch and so that business has been won. I do believe and you have seen it with some competitors that fees will continue to come down in the active space. We do – particularly institutional sub-advisor clients continue to come at us pretty hard on fees and this is – and I think you will continue to see fees come down. If you go over the last 4 years, active fees have come down 6%, so we are not seeing a collapse in pricing in the business, but you are seeing some degradation of fees. But you would contrast that with what’s gone on in the passive space, fees have come down 25% in that particular space. So this is a – through this cycle, you get revenue growth in this business because markets go up. If you control and drive some organic growth, you can grow earnings, its capital light, it generates high returns and net income converts to cash. And so our focus on the business is protecting the book of business, diversifying the business and ensuring that we can continue to perform well for clients through the cycle.

Okay. Thanks for taking my question.

And your final question comes from the line of Gabriel Dechaine with National Bank Financial. Please go ahead.

Hey, I just didn’t – I wanted to follow-up on the group, there was one element on my question that we didn’t get a chance to go over, but what was the – I guess what was the cause behind the deterioration in the stop loss margins, I assume it’s – you went pretty aggressively after sales, that’s usually the pattern. And then if I take that to what’s going on in the business today and I see group insurance sales in Canada doubled year-over-year, there is a large case sale in there and I know it’s a different geography, but how can I be comfortable with that type of growth?

So this is Dan, let me take the stop loss portion of the question. We have talked about this in previous quarters as well. We really saw adverse claims experience, higher claims than were expected. Now very likely there is some component to that of pricing. But we also have seen an increase in large and very large claims, the number of large claims as well as the size of them. Some of that is actually attributable to a change that was made in the Affordable Care Act about 6.5 years ago that eliminated annual and lifetime caps on benefits in employer based plans in the U.S. And that helped facilitate a lot of investment in specialty drug companies and investment in new drugs. And it takes a while obviously for that to work its way through the pipeline and through the system. But some of the large claims that we have been seeing, indeed are from specialty drugs, including multi-million dollar drug claims, which is kind of remarkable. So we have done two things there. One is obviously make sure we are reflecting that experience in our pricing, but also we are taking actions to better manage and influence those claims. And then overall, obviously we have adjusted our pricing to make sure that we have got adequate pricing to cover all experience, regardless of what that is. And I will let Kevin handle the Canada question.

Sure. Gabriel, it’s Kevin speaking. So yes, we had some good new business in the group benefits business in Q1. It was driven largely by – the largest account in that group was when – I know for sure we – it wasn’t won on price, it was won on capabilities in partnership with a third-party administrator and so we feel very good about the quality of that business. Coming back to the growth in the GB and GRS business overall, if you really look at our story, it’s not so much about sales volumes, but about customer – client retention over many years. So we have got a lapse rate in group benefits and GRS that are really the best in the industry. And if you – it’s easy to underestimate the impact of that, but we are basically 2% below, around 3.5%, competitors around 5%, 5.5% lapse rate. So a $10 billion block, that’s $200 million you can think of as another $200 million of sales that they are not achieving. Over 5 years, that’s $1 billion of revenue on a $10 billion business. And that’s really the story in both group benefits and GRS. In GRS our client retention rate is 99%. So we feel good about that growth. And the reality is, in this business, the existing clients are well more profitable than new business. And so we feel good about how we are growing the business by really focusing on the clients that we have and building from there and bringing on new business at a good clip, but not outsized.

And it’s Dean Connor here. Before we wrap up the call, I just wanted to acknowledge the leadership changes that we announced in the quarter and in particular, to acknowledge that this is Colm Freyne’s last earnings call as the Chief Financial Officer of Sun Life Financial. I think it’s been 32 quarters, 8 years, started in the teeth of the financial crisis and has done a tremendous job, I think on behalf of the company, but also on behalf of investors in supporting analysts and investors in better understanding how this company works. So Colm, thank you to you. And Kevin Strain, we welcome you. Kevin will be on the call for the second quarter call. And with that…

Great. Thanks Dean. I would like to thank all the participants on the call today. 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.

Thank you to everyone for attending. This will conclude today’s conference call. You may now disconnect.